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, 2006
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
ANNUAL REPORT
FOR THE YEAR ENDED MAY 31, 2006
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TABLE OF CONTENTS
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND (FCM)
MAY 31, 2006
Shareholder Letter.......................................................... 1
Portfolio Commentary ....................................................... 2
Portfolio Components ....................................................... 5
Portfolio of Investments.................................................... 6
Statement of Assets and Liabilities......................................... 14
Statement of Operations..................................................... 15
Statements of Changes in Net Assets......................................... 16
Statement of Cash Flows..................................................... 17
Financial Highlights........................................................ 18
Notes to Financial Statements............................................... 19
Report of Independent Registered Public Accounting Firm..................... 23
Additional Information...................................................... 24
Dividend Reinvestment Plan
Proxy Voting Policies and Procedures
Portfolio Holdings
By-Law Amendments
Advisory Agreement
Board of Trustees and Officers.............................................. 27
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. (the "Advisor") and/or Four Corners Capital
Management, LLC ("Four Corners") 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 First Trust/Four Corners Senior Floating Rate
Income Fund's (the "Fund") 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 the
Advisor and/or Four Corners and their respective representatives only as of the
date hereof. We undertake no obligation to publicly revise or update these
forward-looking statements to reflect events and circumstances that arise after
the date hereof.
HOW TO READ THIS REPORT
This report contains information that can help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the letter from the Fund's President, James A. Bowen, together with
the portfolio commentary by Michael P. McAdams and Robert I. Bernstein of Four
Corners, the Fund's sub-advisor, you will obtain an understanding of how the
market environment affected the Fund's performance. The statistical information
that follows can help you understand the Fund's performance compared to that of
relevant market benchmarks.
It is important to keep in mind that the opinions expressed by Mr. Bowen,
personnel of the Advisor and Four Corners are just that: informed opinions. They
should not be considered to be promises or advice. The opinions, like the
statistics, cover the period through the date on the cover of this report. 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, 2006
Dear Shareholders:
We are pleased to present this annual report of the First Trust/Four Corners
Senior Floating Rate Income Fund (the "Fund") (AMEX Symbol: FCM). The Fund
performed strongly during the one-year period covered by this report, benefiting
from a positive market environment as well as diligent portfolio management.
Well constructed sector allocations also contributed to the positive performance
of the Fund. Most importantly, the Fund experienced low net asset value
volatility because there were no defaults among the Fund's portfolio securities
and very few distressed sales over the one-year period ended May 31, 2006.
The Fund, composed primarily of senior secured floating-rate corporate loans
("Senior Loans"), seeks to provide a high level of current income. As a
secondary objective, the Fund attempts to preserve capital. For the twelve
months ended May 31, 2006, the market continued to favor Senior Loans. A growing
U.S. economy, rising short-term interest rates, and strong investor demand for
the Senior Loan asset class contributed to an attractive credit environment,
which also benefited the Fund.
Four Corners Capital Management, LLC is a leading asset management firm that
specializes in the sub-investment grade and structured finance markets. I
encourage you to read the portfolio commentary found on the following pages,
which includes more details about the Fund's performance and the management
strategy.
We value our relationship with our shareholders and thank you for your continued
confidence.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of the First Trust/Four Corners Senior Floating Rate Income Fund
July 14, 2006
Page 1
MICHAEL P. MCADAMS
PRESIDENT AND CHIEF EXECUTIVE OFFICER, FOUR CORNERS CAPITAL MANAGEMENT, LLC
CO-PORTFOLIO MANAGER, FIRST TRUST FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
(FCM)
Mr. McAdams is responsible for overseeing the investment and distribution
activities of Four Corners Capital Management, LLC ("Four Corners") and is
Co-Portfolio Manager of FCM. He has over 26 years of experience in investment
management and banking, all of which has been spent in leveraged finance. Prior
to founding Four Corners, Mr. McAdams was with ING Capital Advisors, LLC,
("ICA") from 1995 to 2001. Mr. McAdams was a founder of ICA and held the titles
of President, Chief Executive Officer and Chief Investment Officer. Under his
leadership, ICA completed over one dozen structured transactions and had over $7
billion in assets under management. Prior to ICA, Mr. McAdams established the
first retail senior floating rate loan fund, the Pilgrim Prime Rate Trust
(NYSE:PPR), which he managed from its inception in 1988 through 1995. Mr.
McAdams was previously employed by National Bank of Canada, where he was a
member of one of the first teams to manage a non-originated U.S. corporate loan
portfolio. Mr. McAdams began his banking career at Manufacturers Hanover Trust
Company. Mr. McAdams received an MBA in Finance/Accounting from the University
of California Los Angeles and dual BAs in Finance/Accounting and Eastern
European Studies from California State University at Fullerton. Mr. McAdams is
one of the initial members of the Loan Syndication and Trading Association and
was its Chairman in 2001, its Vice Chairman in 2002 and has been a Board Member
since 1998. Mr. McAdams received the 2006 Credit Investment News Outstanding
Contribution award in the U.S. Loan Market.
ROBERT I. BERNSTEIN
CHIEF INVESTMENT OFFICER, FOUR CORNERS CAPITAL MANAGEMENT, LLC
CO-PORTFOLIO MANAGER, FIRST TRUST FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
(FCM)
Mr. Bernstein is responsible for managing the investment process of Four Corners
and is Co-Portfolio Manager of FCM. He has nearly 15 years of experience in
leveraged finance including senior secured loans, high-yield bonds and private
equity investments. Mr. Bernstein was most recently a partner of The Yucaipa
Companies, a Los Angeles-based private equity firm, where he completed merger
and acquisition transactions and leveraged financings valued in excess of $4
billion. Previously, Mr. Bernstein was a Vice President in Bankers Trust's
leveraged finance group, where he arranged senior loan and high yield bond
financings for financial sponsors and corporate issuers. He also worked in GE
Capital's restructuring group, where he focused primarily on asset-based loans
to distressed borrowers. Mr. Bernstein received an MBA in Finance from the
University of Chicago and a BBA in Finance magna cum laude from Hofstra
University. He also served as an infantry officer in the U.S. Marine Corps.
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PORTFOLIO COMMENTARY
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OVERVIEW
The First Trust/Four Corners Senior Floating Rate Income Fund ("FCM" or the
"Fund") generated a market price total return of 6.1%, including distributions,
for the year ended May 31, 2006 ("Fiscal 2006"). The Fund's net asset value
("NAV") total return was 8.1% over the same period. During Fiscal 2006, the Fund
paid distributions totaling $1.4059 per share compared to $1.1089 per share in
the prior year. Based on its May dividend, FCM paid a yield of 8.0% calculated
on the Fund's share price and 7.4% based on the Fund's NAV as of May 31, 2006.
ECONOMIC AND MARKET ENVIRONMENT
Fiscal 2006 continued to be a positive environment for senior, secured,
floating-rate loan ("Senior Loan") investing. In our opinion the Fund benefited
from three key trends that were favorable to Senior Loan investing. These trends
include an attractive credit environment primarily due to a growing U.S.
economy, rising short term interest rates, and strong investor demand for the
Senior Loan asset class due to its appealing risk-adjusted returns relative to
other investment opportunities.
Gross Domestic Product ("GDP") year over year growth as of March 31, 2006,
continued to expand, averaging 3.7%. Strong corporate earnings growth during
Fiscal 2006 was reflected in the GDP growth and in the credit statistics of the
companies in which the Fund invested. Healthy earnings make these companies more
able to service their debt. As a result, default rates and credit statistics for
Senior Loans remained very favorable relative to historical averages.
The robust economy led the Federal Reserve to raise interest rates 16
consecutive times to the current level of 5.0% as of May 31, 2006, including 8
times (in the aggregate amount of 2.0%) during Fiscal 2006, in order to quell
inflation fears. Aside from the impact that interest rates have on the credit
statistics of companies that the Fund finances, Senior Loan managers are not
concerned with interest rate risk. Rather, in rising rate environments that we
have seen during the last year, Senior Loan income typically rises (with a
several month lag) along with Federal Reserve rate increases. One caveat is that
during the beginning of Fiscal 2006, credit spread narrowing partly offset the
benefits from rising rates. Notwithstanding the modest decline in credit
spreads, the Fund still increased its dividend 8 times during Fiscal 2006 and
demonstrated low NAV volatility.
Page 2
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PORTFOLIO COMMENTARY - (CONTINUED)
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Signs of a slowdown in GDP growth domestically and internationally have emerged
which have, among other indicators, led some economists to predict a hiatus in
Fed tightening during the upcoming fiscal year. While we acknowledge these
signals and the significant rise in interest rates since 2003, we believe that
the fundamental strength of the economy may result in further interest rate
increases. As Brian Wesbury, First Trust's Chief Economist, has commented, "The
Fed has not yet reached neutral. Call it the seventh inning. Rates should, and
most likely will, continue to rise while the economy continues to grow
strongly."
Inflows into the asset class during Fiscal 2006 were exceptional and occurred in
tandem with the strong growth in new Senior Loan issuance reported during the
year. New Senior Loan issuance rose from $248 billion in calendar year 2004 to
$291 billion in calendar year 2005. Similarly, Senior Loan market liquidity as
measured by trading volume grew nearly 20% year over year. Again, the demand for
Senior Loans remained strong as investors perceived reduced levels of risk as a
result of an improved economic environment and low levels of defaults and credit
losses. The total return benefit of a floating rate asset class also supported
Senior Loans. For calendar year 2005, Senior Loans generated a total return of
6.4% (S&P/LSTA Leveraged Loan Index), which compares favorably to 10-year
Treasury returns of 2.3%, high yield bond returns of 2.3% (CSFB High Yield
Index), and equity returns of 4.9% (S&P 500 Index) for the same period.
INVESTMENT STRATEGY AND PORTFOLIO COMPOSITION
The primary objective of the Fund is to seek a high level of current income. As
a secondary objective, the Fund will attempt to preserve capital. The investment
strategy employed in managing the Fund was designed to achieve the Fund's
objectives through risk minimization during the entire economic and credit
cycles. In contrast, 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 in the short run. 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 current dividends/yields than some other Senior Loan-based closed-end
funds. However, we believe that our long-term thinking can result in lower NAV
volatility while maintaining competitive dividends/yield and higher long-term
total NAV returns.
Our 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 including commodities and labor/healthcare/benefit expense, undue revenue
pressures, or other technical factors. For example, the Fund has always had very
little exposure to the airline and automotive industries, which have performed
poorly based on weak industry fundamentals as evidenced by ratings downgrades
and defaults.
The Fund is broadly diversified with over 120 positions across 34 industries. At
May 31, 2006, the five largest individual borrower exposures in total
represented 8.2% 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 at the time of
purchase or are experiencing financial difficulties. We view our ability to
achieve modest gains from this sub-set of Senior Loans 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 economy. On May 31,
2006, the portfolio included two special situation investments, representing
2.5% of the Fund's portfolio.
As mentioned in prior reports, the Fund is leveraged using Money Market
Cumulative Preferred(R) Shares. The terms and conditions of the leverage
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 short-term interest
rates. At May 31, 2006, the portfolio leverage accounted for 37.8% of the Fund's
total managed assets.
PERFORMANCE REVIEW
FCM generated a market price total return of 6.1%, including distributions, for
Fiscal 2006. The Fund's NAV total return was 8.1% over the same period. This
return exceeded the benchmark (Standard & Poor's/LSTA Leveraged Loan Index)
return of 6.4%. The Fund's performance includes the beneficial impact of
leverage, and the negative impact of fees, expenses and uninvested cash
balances, which are not part of the benchmark return. The Fund's total
distributions were $1.4059 per common share in Fiscal 2006. FCM paid a yield of
8.0% calculated on the Fund's $17.63 share price and 7.4% based on the Fund's
$19.03 NAV as of May 31, 2006. Additionally, the Fund's NAV was relatively
stable during the year, ranging from a high of $19.33 to a low of $18.91, a
range of approximately 2.2%.
Page 3
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PORTFOLIO COMMENTARY - (CONTINUED)
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The Fund's strong performance during the year was influenced by a number of
factors. We had net gains on the portfolio (realized plus unrealized), and also
benefited from favorable sector allocations. In addition to the above-mentioned
underweighting of the poor performing airline and automotive industries, we were
overweight in the building and development and business equipment and services
industries, both of which performed well during the year. Perhaps most
importantly, we had no defaults and very few distressed sales during the year,
which helped keep NAV volatility low.
Despite the Fund's strong NAV performance/total return and high yield during
Fiscal 2006, the Fund's market price performance was disappointing. During the
year, the market price of the Fund closed as high as $18.12 (August 4, 2005) and
as low as $16.62 (December 2, 2005). The Fund's closing price on May 31, 2006
was $17.63, a 2.1% decline from the Fund's closing price of $18.00 on May 31,
2005. The Fund closed the year at a 7.4% discount to its NAV.
Surprisingly, 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 14 of the 15 Senior Loan
closed-end funds traded at discounts to NAV on May 31, 2006, the average of the
narrower pure play group being 6.0%. FCM's market and NAV yield on May 31, 2006
(8.0% and 7.4%, respectively) are in line with the pure play peer group average
of 8.0% and 7.5%, respectively.
Additionally, since the May 31, 2006 period end, the market price for the Fund
has risen and subsequently returned to the price level of May 31, 2006. We
believe that this swing reflects the market's uncertainty with and
interpretation of Federal Reserve interest rate policy and does not reflect any
fundamental aspect of the Fund's strategy, holdings or outlook.
We remain committed to long-term performance and superior client support, and we
appreciate the opportunity to assist investors in meeting their investment
goals.
Page 4
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO COMPONENTS+
MAY 31, 2006
S&P RATING BREAKDOWN
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
B+ 22.92%
BB- 18.03%
BB 10.44%
B 12.52%
BBB- 0.67%
NR 20.72%*
CCC 0.51%
B- 4.10%
BB+ 3.83%
Cash/Cash Equivalents 2.33%
CCC+ 1.83%
Common Stocks 2.10%
ECONOMIC SECTOR BREAKDOWN
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Consumer Discretionary 28.69%
Consumer Staples 4.56%
Energy 9.44%
Financials 10.44%
Health Care 4.82%
Industrials 13.69%
Information Technology 4.28%
Materials 8.41%
Telecommunication Services 2.07%
Utilities 9.17%
Common Stocks 2.10%
Cash/Cash Equivalents 2.33%
+ Percentages are based on total investments. Please note that the
percentages shown on the Portfolio of Investments are based on net assets.
NR Not rated.
* The percentage of Senior Loan Interests not rated includes 9.94% of Senior
Loan Interests that were privately rated upon issuance. The rating
agencies do not provide ongoing surveillance on the private ratings.
See Notes to Financial Statements. Page 5
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS
MAY 31, 2006
BANK LOAN
PRINCIPAL RATINGS+ STATED MARKET
VALUE DESCRIPTIONo MOODY'S S&P COUPON MATURITY* VALUE
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SENIOR FLOATING RATE TERM LOAN INTERESTS** - 149.7%
AEROSPACE & DEFENSE - 1.9%
AEROSPACE & DEFENSE - 1.9%
$ 1,000,000 ILC Industries, Inc. (c)......... NR(a) NR(a) 10.73% 8/24/12 $ 1,015,000
769,231 Standard Aero Holdings, Inc. .... B2 B+ 6.96%-7.35% 8/24/12 767,788
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TOTAL AEROSPACE & DEFENSE 1,782,788
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AUTO COMPONENTS - 1.1%
AUTO PARTS & EQUIPMENT - 1.1%
1,000,000 Axletech International Holdings,
Inc. (c)....................... Caa1 B- 11.52% 4/21/13 1,004,167
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TOTAL AUTO COMPONENTS 1,004,167
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BEVERAGES - 1.1%
SOFT DRINKS - 1.1%
990,000 Culligan Corp. .................. B1 B+ 7.08% 9/30/11 993,094
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TOTAL BEVERAGES 993,094
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BUILDING PRODUCTS - 3.9%
BUILDING PRODUCTS - 3.9%
648,936 Headwaters, Inc. ................ B1 B+ 7.08% 4/30/11 650,288
2,000,000 Landsource Communities
Development, LLC............... NR(a) NR(a) 7.63% 3/31/10 2,003,750
997,403 NCI Building Systems, Inc. ...... Ba2 BB 6.71% 6/18/10 999,896
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TOTAL BUILDING PRODUCTS 3,653,934
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CAPITAL MARKETS - 2.1%
INVESTMENT BANKING & BROKERAGE - 2.1%
1,000,000 Ameritrade Holding Corp. ........ Ba1 BB 6.59% 12/31/12 998,625
1,000,000 NASDAQ Stock Market (The), Inc. Ba3 BBB- 6.83%-7.03% 4/18/12 998,438
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TOTAL CAPITAL MARKETS 1,997,063
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CHEMICALS - 1.9%
DIVERSIFIED CHEMICALS - 1.9%
801,040 BCP Crystal US Holdings Corp. ... B1 BB- 6.98% 4/06/11 804,043
1,000,000 Brenntag Holding GmbH &
Company KG..................... B2 B+ 7.44% 12/23/13 1,010,112
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TOTAL CHEMICALS 1,814,155
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COMMERCIAL SERVICES & SUPPLIES - 12.0%
DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES - 7.8%
997,500 Acosta, Inc. .................... NR(a) NR(a) 7.34% 12/06/12 999,994
1,860,465 Affinion Group, Inc. ............ B1 B+ 7.83%-7.92% 10/17/12 1,868,605
997,500 IAP Worldwide Services, Inc. .... B2 B+ 8.00% 12/30/12 1,003,734
1,000,000 IAP Worldwide Services, Inc. (c). B3 B- 13.00% 6/30/13 1,021,250
1,500,000 N.E.W. Customer Service
Companies, Inc. (c)............ NR(a) NR(a) 11.06%-12.13% 7/01/12 1,522,500
950,444 Western Inventory Service, Ltd. . NR NR 7.90%-9.75% 3/31/11 952,820
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7,368,903
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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, 2006
BANK LOAN
PRINCIPAL RATINGS+ STATED MARKET
VALUE DESCRIPTIONo MOODY'S S&P COUPON MATURITY* VALUE
- ------------- --------------------------------- -------------- ------------- -------------- --------------
SENIOR FLOATING RATE TERM LOAN INTERESTS** - CONTINUED
COMMERCIAL SERVICES & SUPPLIES - (CONTINUED)
ENVIRONMENTAL & FACILITIES SERVICES - 2.1%
$ 1,119,236 Duratek, Inc. ................... B1 BB- 7.94%-8.19% 12/16/09 $ 1,116,438
818,182 Envirocare of Utah, LLC.......... NR(a) NR(a) 7.85% 4/13/10 826,705
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1,943,143
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OFFICE SERVICES & SUPPLIES - 2.1%
1,929,324 Infrasource Inc. ................ Ba3 BB- 7.73% 9/30/10 1,934,147
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TOTAL COMMERCIAL SERVICES & SUPPLIES 11,246,193
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COMMUNICATIONS EQUIPMENT - 0.5%
COMMUNICATIONS EQUIPMENT - 0.5%
500,000 Nortel Networks, Inc. ........... B3 B- 7.13% 2/15/07 500,000
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TOTAL COMMUNICATIONS EQUIPMENT 500,000
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CONTAINERS & PACKAGING - 6.7%
METAL & GLASS CONTAINERS - 2.7%
1,985,000 Berry Plastics Corp. ............ B1 B+ 6.59% 12/02/11 1,992,856
525,619 Owens-Illinois Group, Inc. ...... B1 BB- 6.85% 4/01/08 525,400
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2,518,256
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PAPER PACKAGING - 4.0%
215,264 Boise Cascade, LLC............... Ba3 BB 6.75% 10/28/11 216,096
1,090,500 Graham Packaging Holdings
Company........................ B2 B 6.94%-7.38% 10/07/11 1,094,816
714,286 Graham Packaging Holdings
Company (c).................... B3 CCC+ 9.25% 4/07/12 726,488
1,743,525 Graphic Packaging International,
Inc. .......................... B1 B+ 7.14%-7.75% 8/08/10 1,758,158
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3,795,558
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TOTAL CONTAINERS & PACKAGING 6,313,814
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DIVERSIFIED TELECOMMUNICATION SERVICES - 1.1%
INTEGRATED TELECOMMUNICATION SERVICES - 1.1%
990,000 Telcordia Technologies, Inc. .... B1 B+ 7.67%-7.73% 9/15/12 986,700
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TOTAL DIVERSIFIED TELECOMMUNICATION SERVICES 986,700
--------------
ELECTRIC UTILITIES - 12.4%
ELECTRIC UTILITIES - 12.4%
500,000 Astoria Generating Company
Acquisitions, LLC (c).......... B3 B 8.69% 8/23/13 506,875
164,533 Calpine Corp.,
(Debtor in Possession) (g)..... NR(a) NR(a) 7.23% 12/20/07 166,110
414,894 Calpine Corp.,
(Debtor in Possession) (c) (g) NR(a) NR(a) 8.98% 12/20/07 424,229
893,191 Covanta Energy Corp. ............ B1 B+ 7.96%-8.08% 6/24/12 893,191
959,596 LSP Gen Finance Co., LLC......... Ba3 BB- 6.84% 5/04/13 961,195
727,279 LSP-Kendall Energy, LLC.......... B1 B 6.98% 10/07/13 724,249
997,500 Mirant North America, LLC........ Ba3 BB- 6.83% 1/03/13 997,500
3,000,000 NRG Energy, Inc. ................ Ba2 BB- 6.98% 2/01/13 3,010,782
1,000,000 Plum Point Energy
Associates, LLC................ B1 B 7.17%-8.34% 3/14/14 1,009,583
See Notes to Financial Statements. Page 7
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2006
BANK LOAN
PRINCIPAL RATINGS+ STATED MARKET
VALUE DESCRIPTIONo MOODY'S S&P COUPON MATURITY* VALUE
- ------------- --------------------------------- -------------- ------------- -------------- --------------
SENIOR FLOATING RATE TERM LOAN INTERESTS** - CONTINUED
ELECTRIC UTILITIES - (CONTINUED)
ELECTRIC UTILITIES - (CONTINUED)
$ 1,892,964 Riverside Energy Center, LLC..... B1 B 9.38%-9.48% 6/24/11 $ 1,949,753
1,000,000 Wolf Hollow I, LP (c)............ B2 B 9.44% 12/22/12 1,017,500
--------------
TOTAL ELECTRIC UTILITIES 11,660,967
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ELECTRICAL EQUIPMENT - 0.8%
ELECTRICAL COMPONENTS & EQUIPMENT - 0.8%
733,257 Penn Engineering & Manufacturing
Corp. ......................... B2 B 7.23% 5/25/11 742,423
--------------
TOTAL ELECTRICAL EQUIPMENT 742,423
--------------
ENERGY EQUIPMENT & SERVICES - 3.2%
OIL & GAS EQUIPMENT & SERVICES - 3.2%
997,500 Key Energy Services, Inc. ....... B1 B- 8.25%-8.40% 6/30/12 1,004,358
1,993,948 Targa Resources, Inc. ........... Ba3 B+ 7.23%-7.47% 10/31/12 2,005,163
--------------
TOTAL ENERGY EQUIPMENT & SERVICES 3,009,521
--------------
FOOD & STAPLES RETAILING - 1.9%
DRUG RETAIL - 1.9%
1,803,787 Jean Coutu Group (PJC) (The) Inc. B2 BB- 7.63% 7/30/11 1,812,555
--------------
TOTAL FOOD & STAPLES RETAILING 1,812,555
--------------
FOOD PRODUCTS - 2.1%
AGRICULTURAL PRODUCTS - 1.1%
1,000,000 Del Monte Corp. ................. Ba3 BB 6.65% 2/08/12 1,003,438
--------------
PACKAGED FOODS & MEATS - 1.0%
912,752 THL Food Products Company........ B1 B+ 6.67%-7.03% 11/21/10 915,794
--------------
TOTAL FOOD PRODUCTS 1,919,232
--------------
HEALTH CARE PROVIDERS & SERVICES - 7.4%
HEALTH CARE SERVICES - 7.4%
985,000 Community Health Systems, Inc. .. Ba3 BB- 6.85%-6.97% 8/19/11 990,130
902,304 DaVita Inc. ..................... B1 BB- 6.69%-7.21% 10/05/12 901,364
1,000,000 DJ Orthopedics, LLC.............. Ba3 BB- 6.56% 4/07/13 1,000,000
1,000,000 Fresenius Medical Care AG........ Ba2 BB+ 6.35%-6.40% 3/31/13 995,179
885,057 Per-Se Technologies, Inc. ....... B1 B+ 7.23%-7.35% 1/06/13 892,802
500,000 Quintiles Transnational Corp. ... B1 BB- 7.08% 3/31/13 499,687
925,505 US Oncology Holdings, Inc. ...... B1 B+ 6.92%-7.50% 8/20/11 931,289
762,218 VWR International, Inc. ......... B2 B+ 7.34% 4/07/11 767,300
--------------
TOTAL HEALTH CARE PROVIDERS & SERVICES 6,977,751
--------------
HOTELS, RESTAURANTS & LEISURE - 10.2%
CASINOS & GAMING - 9.2%
982,500 Boyd Gaming Corp. ............... Ba2 BB 6.48%-6.61% 6/30/11 985,980
1,599,532 Global Cash Access, Inc. ........ Ba3 B+ 6.84% 3/10/10 1,607,530
1,000,000 MGM Mirage....................... Ba2 BB 6.28% 11/22/09 998,000
995,000 Penn National Gaming, Inc. ...... Ba3 BB- 6.73%-7.02% 10/03/12 1,000,528
1,000,000 Pinnacle Entertainment, Inc. .... B1 BB- 7.09% 12/14/11 1,004,063
1,000,000 Venetian Casino Resort, LLC...... Ba3 BB- 6.73% 6/15/11 1,003,438
1,000,000 VML US Finance, LLC ............. B1 BB- 7.83% 5/25/13 1,003,438
Page 8 See Notes to Financial Statements.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2006
BANK LOAN
PRINCIPAL RATINGS+ STATED MARKET
VALUE DESCRIPTIONo MOODY'S S&P COUPON MATURITY* VALUE
- ------------- --------------------------------- -------------- ------------- -------------- --------------
SENIOR FLOATING RATE TERM LOAN INTERESTS** - CONTINUED
HOTELS, RESTAURANTS & LEISURE - (CONTINUED)
CASINOS & GAMING - (CONTINUED)
$ 1,000,000 Wynn Las Vegas, LLC.............. B2 B+ 7.24% 12/14/11 $ 1,003,958
--------------
8,606,935
--------------
LEISURE FACILITIES - 1.0%
973,442 American Skiing Company.......... NR NR 9.57%-9.78% 11/24/10 977,701
--------------
TOTAL HOTELS, RESTAURANTS & LEISURE 9,584,636
--------------
HOUSEHOLD DURABLES - 2.1%
HOMEBUILDING - 2.1%
1,000,000 Technical Olympic USA, Inc. ..... NR(a) NR 7.75% 8/01/08 1,006,250
1,000,000 Technical Olympic USA, Inc.,
(Mezzanine Debt) (c)........... NR(a) NR 10.25% 8/01/09 997,500
--------------
TOTAL HOUSEHOLD DURABLES 2,003,750
--------------
INDUSTRIAL CONGLOMERATES - 1.0%
INDUSTRIAL CONGLOMERATES - 1.0%
892,675 Rexnord Corp. ................... B1 B+ 7.23%-7.41% 12/31/11 897,138
--------------
TOTAL INDUSTRIAL CONGLOMERATES 897,138
--------------
INSURANCE - 0.5%
LIFE & HEALTH INSURANCE - 0.5%
495,065 Conseco, Inc. ................... Ba3 BB- 6.83% 6/22/10 496,509
--------------
TOTAL INSURANCE 496,509
--------------
INTERNET SOFTWARE & SERVICES - 1.1%
INTERNET SOFTWARE & SERVICES - 1.1%
992,500 SunGard Data Systems Inc. ....... B1 B+ 7.66% 2/11/13 998,207
--------------
TOTAL INTERNET SOFTWARE & SERVICES 998,207
--------------
IT SERVICES - 5.3%
DATA PROCESSING & OUTSOURCED SERVICES - 2.1%
990,000 Fidelity National Information
Solutions, Inc. .............. Ba3 BB 6.33% 3/09/11 989,272
948,649 Fidelity National Information
Solutions, Inc. .............. Ba3 BB 6.83% 3/09/13 949,539
--------------
1,938,811
--------------
IT CONSULTING & OTHER SERVICES - 3.2%
989,975 Alion Science and Technology Corp. B1 B+ 7.56% 8/02/09 992,450
1,970,000 DynCorp International, LLC....... B2 B+ 7.44%-7.81% 2/11/11 1,985,596
--------------
2,978,046
--------------
TOTAL IT SERVICES 4,916,857
--------------
MEDIA - 28.8%
BROADCASTING & CABLE TV - 16.5%
3,000,000 Century Cable Holdings, LLC (h).. NR NR 10.00% 6/30/09 2,910,625
1,000,000 Cequel Communications, LLC....... NR NR 10.07% 5/05/14 990,000
1,997,517 Charter Communications
Operating, LLC................ B2 B 7.76% 4/17/13 2,005,888
2,000,000 CSC Holdings, Inc. .............. Ba3 BB 6.67%-6.88% 3/29/13 1,998,270
See Notes to Financial Statements. Page 9
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2006
BANK LOAN
PRINCIPAL RATINGS+ STATED MARKET
VALUE DESCRIPTIONo MOODY'S S&P COUPON MATURITY* VALUE
- ------------- --------------------------------- -------------- ------------- -------------- --------------
SENIOR FLOATING RATE TERM LOAN INTERESTS** - CONTINUED
MEDIA - (CONTINUED)
BROADCASTING & CABLE TV - (CONTINUED)
$ 1,044,312 Gray Television, Inc. ........... Ba2 BB- 6.49% 11/22/13 $ 1,045,879
1,000,000 NextMedia Operating, Inc. (c).... B3 CCC+ 9.58% 11/15/13 1,017,500
985,000 PanAmSat Corp. .................. B1 BB+ 6.90% 8/20/11 991,156
500,000 Panavision Inc. (c).............. B3 CCC 12.13% 3/30/12 510,000
1,994,808 Raycom Media, Inc. .............. NR NR 6.50% 8/28/13 1,994,808
1,000,000 UPC Financing Partnership........ B1 B 7.11% 3/31/13 1,002,321
1,000,000 UPC Financing Partnership........ B1 B 7.11% 12/31/13 1,002,321
--------------
15,468,768
--------------
MOVIES & ENTERTAINMENT - 6.3%
1,000,000 Deluxe Entertainment
Services Group, Inc. .......... B1 B 8.73% 1/28/11 1,008,750
2,000,000 Metro-Goldwyn-Mayer
Holdings II, Inc. ............. NR(a) NR(a) 7.23% 4/08/12 2,010,500
950,229 Regal Cinemas Corp. ............. Ba3 BB- 6.48% 11/10/10 949,689
1,960,799 WMG Acquisition Corp. ........... Ba2 B+ 7.09%-7.32% 3/01/11 1,966,315
--------------
5,935,254
--------------
PUBLISHING - 6.0%
1,563,843 CBD Media, LLC................... B1 B 7.59% 12/31/09 1,581,436
1,553,189 Dex Media West, Inc. ............ Ba2 BB- 6.38%-6.72% 3/09/10 1,550,717
569,893 Media News Group, Inc. .......... Ba3 BB 6.34% 12/30/10 569,419
1,000,000 Newspaper Holdings, Inc. ........ NR NR 6.19% 8/24/12 1,000,000
863,050 RH Donnelley Inc. ............... Ba3 BB 6.35%-6.72% 6/30/11 861,355
--------------
5,562,927
--------------
TOTAL MEDIA 26,966,949
--------------
METALS & MINING - 1.7%
ALUMINUM - 0.7%
626,923 Novelis Corp. ................... Ba2 BB- 7.38% 1/07/12 630,548
--------------
DIVERSIFIED METALS & MINING - 1.0%
997,500 Alpha Natural Resources, LLC..... B2 BB- 6.83% 10/26/12 1,000,617
--------------
TOTAL METALS & MINING 1,631,165
--------------
MULTI-UTILITIES - 2.2%
MULTI-UTILITIES - 2.2%
990,000 KGEN, LLC........................ B2 B 7.60% 8/05/11 995,569
1,062,255 KGEN, LLC (c).................... B3 B- 13.98% 8/05/11 1,094,122
--------------
TOTAL MULTI-UTILITIES 2,089,691
--------------
OIL, GAS & CONSUMABLE FUELS - 11.9%
OIL & GAS EXPLORATION & PRODUCTION - 3.6%
990,000 ATP Oil & Gas Corp. ............. NR NR 10.41%-10.61% 4/14/10 1,013,512
868,086 Plains Resources Inc. ........... Ba2 BB 6.69% 8/12/11 869,171
1,000,000 Resoluth Aneth, LLC (c).......... NR NR 10.15% 4/13/12 1,005,000
500,000 Venoco, Inc. (c)................. Caa1 B- 10.13%-10.25% 3/30/11 502,188
--------------
3,389,871
--------------
Page 10 See Notes to Financial Statements.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2006
BANK LOAN
PRINCIPAL RATINGS+ STATED MARKET
VALUE DESCRIPTIONo MOODY'S S&P COUPON MATURITY* VALUE
- ------------- --------------------------------- -------------- ------------- -------------- --------------
SENIOR FLOATING RATE TERM LOAN INTERESTS** - CONTINUED
OIL, GAS & CONSUMABLE FUELS - (CONTINUED)
OIL & GAS REFINING, MARKETING & TRANSPORTATION - 8.3%
$ 995,000 Cheniere LNG Holdings, LLC....... NR BB 7.73% 8/31/12 $ 1,002,152
1,000,000 Coffeyville Resources, LLC (c)... B3 B 11.75% 7/08/13 1,026,875
997,500 Eagle Rock Gas Gathering &
Processing, Ltd. .............. NR NR 7.49% 10/01/12 1,006,228
2,003,445 El Paso Corp. ................... B3 B+ 6.35% 11/23/09 2,012,906
1,000,000 Hawkeye Renewables, LLC.......... B2 B 7.84% 1/31/12 995,625
1,712,787 Regency Gas Service, LLC......... B1 B+ 7.23% 5/30/11 1,712,787
--------------
7,756,573
--------------
TOTAL OIL, GAS & CONSUMABLE FUELS 11,146,444
--------------
PAPER & FOREST PRODUCTS - 3.1%
FOREST PRODUCTS - 2.2%
997,500 Georgia-Pacific Corp. ........... Ba2 BB- 6.88%-6.98% 12/20/12 998,825
1,000,000 Georgia-Pacific Corp. (c)........ Ba3 B+ 7.88%-8.08% 12/23/13 1,012,308
--------------
2,011,133
--------------
PAPER PRODUCTS - 0.9%
840,517 Appleton Papers Inc. ............ Ba3 BB- 7.18%-7.44% 6/09/10 843,669
--------------
TOTAL PAPER & FOREST PRODUCTS 2,854,802
--------------
PERSONAL PRODUCTS - 2.0%
PERSONAL PRODUCTS - 2.0%
1,856,111 American Safety Razor Company.... B2 B 7.97% 2/28/12 1,865,392
--------------
TOTAL PERSONAL PRODUCTS 1,865,392
--------------
REAL ESTATE INVESTMENT TRUSTS (REITS) - 4.7%
OFFICE REITS - 1.0%
1,000,000 Trizec Partners Real Estate, L.P. NR NR(a) 6.53% 5/02/07 997,500
--------------
RESIDENTIAL REITS - 0.5%
440,224 Lion Gables Realty, L.P.......... Ba2 BB+ 6.82%-6.86% 9/30/06 440,590
--------------
RETAIL REITS - 3.2%
999,951 Capital Automotive, L.P. ........ Ba1 BB+ 6.78% 12/16/10 1,003,076
2,000,000 Macerich Partnership (The), L.P.. NR NR(a) 6.56% 4/26/10 2,001,666
--------------
3,004,742
--------------
TOTAL REAL ESTATE INVESTMENT TRUSTS (REITS) 4,442,832
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT - 9.3%
REAL ESTATE MANAGEMENT & DEVELOPMENT - 9.3%
768,136 CB Richard Ellis Services, Inc. . Ba3 BB+ 6.67%-7.08% 3/31/10 768,136
719,037 LNR Property Corp. .............. B2 B+ 8.04%-8.08% 2/03/08 719,149
771,062 LNR Property Corp.,
(Mezzanine Debt) (d) (e)....... NR NR 9.54% 2/03/08 787,447
1,542,451 Newkirk Master (The), L.P........ NR(a) BB+ 6.83% 8/11/08 1,550,163
1,000,000 November 2005 Land Investors,
LLC........................... B1 BB 7.83% 5/30/11 1,003,750
995,000 Pivotal Promontory, LLC.......... NR(a) NR(a) 7.84% 8/31/10 989,196
950,000 Rhodes Companies (The), LLC...... Ba3 BB- 8.31% 11/21/10 961,875
1,000,000 Shea Capital I, LLC.............. NR(a) NR(a) 7.15% 10/27/11 997,500
See Notes to Financial Statements. Page 11
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2006
BANK LOAN
PRINCIPAL RATINGS+ STATED MARKET
VALUE DESCRIPTIONo MOODY'S S&P COUPON MATURITY* VALUE
- ------------- --------------------------------- -------------- ------------- -------------- --------------
SENIOR FLOATING RATE TERM LOAN INTERESTS** - CONTINUED
REAL ESTATE MANAGEMENT & DEVELOPMENT - (CONTINUED)
REAL ESTATE MANAGEMENT & DEVELOPMENT - (CONTINUED)
$ 955,200 Yellowstone Development, LLC..... NR(a) NR(a) 7.47% 9/30/10 $ 955,200
--------------
TOTAL REAL ESTATE MANAGEMENT & DEVELOPMENT 8,732,416
--------------
ROAD & RAIL - 2.4%
TRUCKING - 2.4%
2,207,450 Hertz (The) Corp. ............... Ba2 BB 7.09%-7.41% 12/21/12 2,214,878
--------------
TOTAL ROAD & RAIL 2,214,878
--------------
SPECIALTY RETAIL - 1.0%
APPAREL RETAIL - 1.0%
949,367 Neiman Marcus Group (The), Inc. . B1 B+ 7.34% 4/06/13 956,233
--------------
TOTAL SPECIALTY RETAIL 956,233
--------------
WIRELESS TELECOMMUNICATION SERVICES - 2.3%
WIRELESS TELECOMMUNICATION SERVICES - 2.3%
1,000,000 MetroPCS Wireless, Inc. ......... NR NR 10.00% 5/31/11 1,024,167
1,090,909 Nextel Partners, Inc. ........... Ba2 B+ 6.32% 5/31/12 1,089,772
--------------
TOTAL WIRELESS TELECOMMUNICATION SERVICES 2,113,939
--------------
TOTAL SENIOR FLOATING RATE TERM LOAN INTERESTS**................................ 140,326,195
--------------
(Cost $139,918,023)
SENIOR FLOATING RATE NOTES - 3.2%
FOOD & STAPLES RETAILING - 0.3%
FOOD DISTRIBUTORS - 0.3%
250,000 Nutro Products, Inc. (f)......... B3 CCC 9.19% 10/15/13 253,125
--------------
TOTAL FOOD & STAPLES RETAILING 253,125
--------------
HOTELS, RESTAURANTS & LEISURE - 0.5%
LEISURE FACILITIES - 0.5%
500,000 HRP Myrtle Beach (f)............. B3 NR 9.84% 4/01/12 500,625
--------------
TOTAL HOTELS, RESTAURANTS & LEISURE 500,625
--------------
HOUSEHOLD DURABLES - 1.1%
HOMEBUILDING - 1.1%
1,000,000 Builders Firstsource, Inc. (c) (f) B3 B- 9.42% 2/15/12
1,030,000
--------------
TOTAL HOUSEHOLD DURABLES 1,030,000
--------------
MEDIA - 1.0%
BROADCASTING & CABLE TV - 1.0%
1,000,000 Paxson Communications Corp. (f) B2 CCC+ 8.32% 1/15/12 995,000
--------------
TOTAL MEDIA 995,000
--------------
Page 12 See Notes to Financial Statements.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2006
BANK LOAN
PRINCIPAL RATINGS+ STATED MARKET
VALUE DESCRIPTIONo MOODY'S S&P COUPON MATURITY* VALUE
- ------------- --------------------------------- -------------- ------------- -------------- --------------
SENIOR FLOATING RATE TERM LOAN INTERESTS** - CONTINUED
PHARMACEUTICALS - 0.3%
PHARMACEUTICALS - 0.3%
$ 250,000 Elan Finance PLC (d) (f)......... B3 B 8.34% 11/15/11 $ 253,125
--------------
TOTAL PHARMACEUTICALS 253,125
--------------
TOTAL SENIOR FLOATING RATE NOTES................................................ 3,031,875
(Cost $2,984,845) --------------
SHARES
- -------------
CLOSED-END FUNDS - 3.4%
OTHER DIVERSIFIED FINANCIAL SERVICES - 3.4%
180,400 ING Prime Rate Trust............................................................ 1,271,820
231,400 Van Kampen Senior Income Trust.................................................. 1,881,282
--------------
3,153,102
--------------
TOTAL CLOSED-END FUNDS.......................................................... 3,153,102
(Cost $3,043,868) --------------
PRINCIPAL
VALUE
- -------------
REPURCHASE AGREEMENT - 3.7%
(Cost $3,500,000)
$ 3,500,000 Agreement with Wachovia Capital Markets, LLC, 4.95% dated 5/31/06, to be
repurchased at $3,500,481 on 6/01/06, collateralized by $3,575,000 Federal
Home Loan Bank, 5.10% due 5/11/09 (Value $3,570,500)......................... 3,500,000
--------------
TOTAL INVESTMENTS - 160.0%...................................................... 150,011,172
(Cost $149,446,736) (b)
NET OTHER ASSETS AND LIABILITIES - 0.8%......................................... 712,747
--------------
MONEY MARKET CUMULATIVE PREFERRED(R) SHARES, AT LIQUIDATION
VALUE - (60.8)%.............................................................. (57,000,000)
--------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS - 100.0%........................... $ 93,723,919
==============
- -----------------------------------------------
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 $149,560,481.
(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) Securities are restricted and cannot be offered for public sale without
first being registered under the Securities Act of 1933, as amended (Note
2E).
(g) This borrower has filed for protection in federal bankruptcy court.
(h) This Senior Loan Interest was purchased subsequent to the borrower's
filing for protection in federal bankruptcy court and has priority over
other debt holders.
+ Ratings below Baa3 by Moody's Investors Service, Inc. or BBB- by Standard
& Poor's Ratings Group are considered to be below investment grade.
NR Not rated.
* Senior Loans generally are subject to mandatory and/or optional
prepayment. Prepayments of Senior Loans may occur because of the mandatory
prepayment conditions and because there may be significant economic
incentives for a borrower to optionally prepay. 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 United States banks, or (iii) the certificate of deposit rate.
See Notes to Financial Statements. Page 13
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2006
ASSETS:
Investments, at value
(Cost $149,446,736) ......................................................................... $ 150,011,172
Cash ........................................................................................... 879,129
Prepaid expenses ............................................................................... 12,890
Receivables:
Investment securities sold ................................................................ 1,887,655
Interest .................................................................................. 1,267,164
Dividends ................................................................................. 2,763
-------------
Total Assets .............................................................................. 154,060,773
-------------
LIABILITIES:
Payables:
Investment securities purchased ........................................................... 3,034,580
Investment advisory fees .................................................................. 117,745
Audit and legal fees ...................................................................... 58,351
Accumulated unpaid dividends on Money Market Cumulative Preferred(R) Shares ............... 54,862
Administrative fees ....................................................................... 7,679
Custodian fees ............................................................................ 11,770
Accrued expenses and other liabilities ......................................................... 51,867
-------------
Total Liabilities ......................................................................... 3,336,854
-------------
NET ASSETS INCLUDING MONEY MARKET CUMULATIVE PREFERRED(R) SHARES ............................... $ 150,723,919
-------------
MONEY MARKET CUMULATIVE PREFERRED(R) SHARES:
($0.01 par value, 2,280 shares issued with liquidation preference of $25,000 per share,
unlimited number of Money Market Cumulative Preferred(R) Shares has been authorized) ........ 57,000,000
-------------
NET ASSETS (APPLICABLE TO COMMON SHAREHOLDERS) ................................................. $ 93,723,919
=============
NET ASSETS CONSIST OF:
Undistributed net investment income ............................................................ $ 858,382
Accumulated net realized loss on investments sold .............................................. (718,173)
Net unrealized appreciation of investments ..................................................... 564,436
Par value ...................................................................................... 49,243
Paid-in capital ................................................................................ 92,970,031
-------------
Net Assets (Applicable to Common Shareholders) ............................................ $ 93,723,919
=============
NET ASSET VALUE, applicable to Common Shares outstanding (par value $0.01 per Common Share) .... $ 19.03
=============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) .... 4,924,349
=============
Page 14 See Notes to Financial Statements.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 2006
INVESTMENT INCOME:
Interest ....................................................................................... $ 10,256,365
Dividends ...................................................................................... 133,420
Other .......................................................................................... 145,088
-------------
Total investment income ................................................................... 10,534,873
-------------
EXPENSES:
Investment advisory fees ....................................................................... 1,466,182
Money Market Cumulative Preferred(R) Shares commission fees .................................... 144,445
Administration fees ............................................................................ 90,692
Audit and legal fees ........................................................................... 86,158
Custodian fees ................................................................................. 47,265
Trustees' fees and expenses .................................................................... 39,512
Other .......................................................................................... 183,320
-------------
Total expenses ............................................................................ 2,057,574
Fees waived by the investment advisor ..................................................... (105,964)
-------------
Net expenses ................................................................................... 1,951,610
-------------
NET INVESTMENT INCOME .......................................................................... 8,583,263
-------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss on investments during the year ............................................... (109,123)
Net change in unrealized appreciation of investments during the year ........................... 596,700
-------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ................................................ 487,577
-------------
MONEY MARKET CUMULATIVE PREFERRED(R) SHARE DIVIDENDS ........................................... (2,343,159)
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................................... $ 6,727,681
=============
See Notes to Financial Statements. Page 15
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
5/31/2006 5/31/2005
------------ -------------
OPERATIONS:
Net investment income .......................................................... $ 8,583,263 $ 6,183,004
Net realized gain/(loss) on investments during the year ........................ (109,123) 567,829
Net change in unrealized appreciation/(depreciation) of investments
during the year .............................................................. 596,700 (463,233)
Distributions to Preferred Shareholders:
Dividends paid from net investment income .................................... (2,343,159) (1,278,845)
------------ -------------
Net increase in net assets resulting from operations ........................... 6,727,681 5,008,755
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Dividends paid from net investment income .................................... (6,084,831) (4,657,498)
Dividends paid from net realized short-term gains ............................ (838,312) (799,925)
------------ -------------
Total distributions to Common Shareholders ..................................... (6,923,143) (5,457,423)
------------ -------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS APPLICABLE
TO COMMON SHARES ...... ...................................................... (195,462) (448,668)
------------ -------------
CAPITAL TRANSACTIONS:
Proceeds from 10,265 shares reinvested ......................................... -- 198,182
------------ -------------
Total capital transactions ..................................................... -- 198,182
------------ -------------
Net decrease in net assets ..................................................... (195,462) (250,486)
NET ASSETS (APPLICABLE TO COMMON SHAREHOLDERS):
Beginning of year .............................................................. 93,919,381 94,169,867
------------ -------------
End of year .................................................................... $ 93,723,919 $ 93,919,381
============ =============
Undistributed net investment income at end of year ............................. $ 858,382 $ 584,441
============ =============
Page 16 See Notes to Financial Statements.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations ........................... $ 6,727,681
Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided by operating activities:
Changes in assets and liabilities:
Increase in investments, at value* .......................................... (898,115)
Increase in dividends receivable ............................................ (2,763)
Increase in interest receivable ............................................. (369,301)
Decrease in prepaid expenses ................................................ 700
Decrease in receivable for investment securities sold ....................... 3,119,198
Decrease in payable for investment securities purchased ..................... (3,180,825)
Increase in accumulated unpaid dividends on Money Market Cumulative
Preferred(R) Shares ....................................................... 25,517
Increase in investment advisory fees payable ................................ 7,527
Decrease in audit and legal fees payable .................................... (45)
Decrease in administrative fees payable ..................................... (11)
Increase in custodian fees payable .......................................... 7,288
Decrease in Trustees' fees and expenses payable ............................. (9,463)
Increase in accrued expenses and other liabilities .......................... 36,568
------------
CASH PROVIDED BY OPERATING ACTIVITIES .......................................... $ 5,463,956
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income
and net realized short-term gains .......................................... (6,923,143)
------------
CASH USED BY FINANCING ACTIVITIES .............................................. (6,923,143)
-------------
Decrease in cash ............................................................... (1,459,187)
Cash at beginning of year ...................................................... 2,338,316
-------------
CASH AT END OF YEAR ............................................................ $ 879,129
=============
- --------------------------------------------------------------------------------
* Includes net change in unrealized appreciation on investments of $596,700.
See Notes to Financial Statements. Page 17
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR PERIOD
ENDED ENDED ENDED
5/31/2006 5/31/2005 5/31/2004*
---------- ---------- ----------
Net asset value, beginning of period ................................ $ 19.07 $ 19.16 $ 19.10
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............................................... 1.75 1.26 0.61
Net realized and unrealized gain on investments ..................... 0.10 0.02 0.25
Distributions paid to MMP*** Shareholders:
Dividends paid from net investment income ........................ (0.48) (0.26) (0.07)
---------- ---------- ----------
Total from investment operations .................................... 1.37 1.02 0.79
---------- ---------- ----------
DISTRIBUTIONS PAID TO COMMON SHAREHOLDERS:
Dividends paid from net investment income ........................ (1.24) (0.95) (0.53)
Dividends paid from net realized short-term gains ................ (0.17) (0.16) --
---------- ---------- ----------
Total distributions to Common Shareholders .......................... (1.41) (1.11) (0.53)
---------- ---------- ----------
Dilutive impact from the offering of MMP Shares++ ................... -- -- (0.16)
---------- ---------- ----------
Common Share offering costs charged to paid-in capital .............. -- -- (0.04)
---------- ---------- ----------
Net asset value, end of period ...................................... $ 19.03 $ 19.07 $ 19.16
========== ========== ==========
Market value, end of period ......................................... $ 17.63 $ 18.00 $ 20.70
========== ========== ==========
TOTAL RETURN BASED ON NET ASSET VALUE (a)+ .......................... 8.12% 5.49% 3.12%
========== ========== ==========
TOTAL RETURN BASED ON MARKET VALUE (b)+ ............................. 6.12% (7.84)% 6.40%
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON SHAREHOLDERS:
Ratio of net expenses to average net assets ......................... 2.07% 1.92% 1.84%**
Ratio of total expenses to average net assets ....................... 2.19% 2.09% 2.00%**
Ratio of net investment income to average net assets ................ 9.12% 6.53% 4.73%**
Ratio of net investment income to average net assets net of
MMP dividends (e) ................................................. 6.63% 5.16% 4.18%**
SUPPLEMENTAL DATA:
Portfolio turnover rate ............................................. 83% 113% 107%
Net assets, end of period (in 000's) ................................ $ 93,724 $ 93,919 $ 94,170
- ---------------------------------------------------------------------
Ratio of net expenses to total average Managed Assets ............... 1.29% 1.20% 1.24%**
Ratio of total expenses to total average Managed Assets ............. 1.36% 1.31% 1.35%**
PREFERRED SHARES:
Total MMP Shares outstanding ........................................ 2,280 2,280 2,280
Liquidation and market value per MMP share (c) ...................... $ 25,024 $ 25,013 $ 25,004
Asset coverage per share (d) ........................................ $ 66,107 $ 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 distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in net
asset value per share and does not reflect sales load.
(b) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share market price per share, all based on Common Share market price per
share.
(c) Includes accumulated and unpaid distributions to MMP Shareholders.
(d) Calculated by subtracting the Fund's total liabilities (not including the
MMP Shares) from the Fund's total assets, and dividing by the number of
MMP Shares outstanding.
(e) The net investment income ratio reflects income net of operating expenses
and distributions 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.
Page 18 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2006
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.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is computed based
upon the value of the Fund's portfolio and other assets less any accrued
liabilities. 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 (including accrued expenses, dividends payable and any
borrowings of the Fund) and the liquidation value of any outstanding Preferred
Shares from the Fund's Total Assets (the value of securities and other
investments the Fund holds plus cash or other assets, including interest accrued
but not yet received), and dividing the result by the total number of Common
Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. In the
event that market quotations are not readily available, the pricing service does
not provide a valuation for a particular asset, or the valuations are deemed
unreliable, or if events occurring after the close of the principal markets for
particular securities (e.g., domestic debt and foreign securities), but before
the Fund values its assets, would materially affect NAV, First Trust Advisors
L.P. ("First Trust") may use a fair value method to value the Fund's securities
and investments. The use of fair value pricing by the Fund is governed by
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with the provisions of the 1940 Act.
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 less than 60 days are valued at amortized cost.
Page 19
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2006
B. 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.
C. 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.
D. 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 $553,091 as
of May 31, 2006. The Fund is obligated to fund these loan commitments at the
borrower's discretion. Net unrealized depreciation of $4,556 from these
commitments is included in "Accrued expenses and other liabilities" on the
Statement of Assets and Liabilities.
E. RESTRICTED SECURITIES:
The Fund may invest a portion of its assets in restricted securities. Restricted
securities are securities that cannot be offered for public sale without first
being registered under the Securities Act of 1933, as amended. The Fund
currently holds the restricted securities shown in the following table. The Fund
does not have the right to demand that such securities be registered. These
securities are valued using market quotations according to the valuation
procedures as stated in the Portfolio Valuation section (Note 2A) and are not
expressed as a discount to the carrying value of a comparable unrestricted
security. There are no unrestricted securities with the same maturity dates and
yields for these issuers.
CARRYING
VALUE CARRYING COST 5/31/06
PER SHARE PER SHARE AT MARKET
ACQUISITION PRINCIPAL 5/31/06 ACQUISITION DATE VALUE % OF
SECURITY DATE VALUE (RESTRICTED) (RESTRICTED) (RESTRICTED) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
Builders Firstsource, Inc. 2/8/05 $ 1,000,000 103.00 100.00 $ 1,030,000 1.10%
Elan Finance PLC 8/9/05 250,000 101.25 90.50 253,125 0.27%
HRP Myrtle Beach 3/23/06 500,000 100.13 100.00 500,625 0.53%
Nutro Products, Inc. 4/18/06 250,000 101.25 102.25 253,125 0.27%
Paxson Communications Corp. 12/19/04 1,000,000 99.50 100.00 995,000 1.06%
----------- ------------ ----------
$ 3,000,000 $ 3,031,875 3.23%
=========== ============ ==========
F. 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
Page 20
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2006
Fund. Permanent differences incurred during the year ended May 31, 2006,
resulting in book and tax accounting differences, have been reclassified at year
end to reflect an increase in undistributed net investment income by $118,668
and an increase in accumulated net realized loss on investments sold by
$118,668. Net assets were not affected by this reclassification.
The tax character of distributions paid during the fiscal years ended May 31,
2006 and May 31, 2005 is as follows:
2006 2005
------------ ------------
Distributions paid from:
Ordinary Income................................ $ 9,266,302 $ 6,736,268
As of May 31, 2006, the components of distributable earnings on a tax basis are
as follows:
Undistributed Ordinary Income.................. $ 913,244
Net Unrealized Appreciation.................... $ 450,691
G. 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.
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, 2006, the Fund incurred and elected to defer
$82,516 in capital losses.
As of May 31, 2006, the Fund had a capital loss carryforward for federal income
tax purposes of $521,912, expiring on May 31, 2014.
H. EXPENSES:
The Fund will pay all expenses directly related to its operations.
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 (which includes assets attributable to the Fund's MMP Shares, and the
principal amount of borrowings), minus the sum of the Fund's accrued and unpaid
dividends on any outstanding MMP Shares and accrued liabilities.
Four Corners Capital Management, LLC ("Four Corners" or the "Sub-Advisor")
serves as the Fund's sub-advisor and manages the Fund's portfolio subject to
First Trust's supervision. The Sub-Advisor receives an annual portfolio
management fee of 0.56% of Managed Assets that is paid monthly by First Trust
from its investment advisory fee.
First Trust has agreed to waive fees in an amount equal to 0.05% of the average
daily Managed Assets of the Fund from October 1, 2005 through September 30,
2007. Prior to October 1, 2005, First Trust waived fees equal to 0.11% of the
average daily Managed Assets of the Fund for the first two years of the Fund's
operation. The Sub-Advisor has agreed to bear a portion of this fee waiver
obligation by reducing the amount of its sub-advisory fee by 0.02% from October
1, 2005 through September 30, 2007. Prior to October 1, 2005, the Sub-Advisor
agreed to reduce the amount of its sub-advisory fee by 0.045%. Waivers are
reported as "Fees waived by the investment advisor" on 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, also 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.
The Fund pays each Trustee who is not an officer or employee of First Trust or
any of its affiliates ("Disinterested Trustees") an annual retainer of $10,000,
which includes compensation for all board and committee meetings. Until December
31, 2005 additional fees of $1,000 and $500 were paid to Disinterested Trustees
for special board meetings and non-regular committee meetings, respectively.
These
Page 21
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2006
additional fees were shared by the funds in the First Trust fund complex that
participated 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. Effective January 1, 2006, the Disinterested Trustees are no longer
paid additional fees for special board meetings and non-regular committee
meetings.
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, 2006, were $122,686,625 and
$127,735,507 respectively.
As of May 31, 2006, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $687,208 and
the aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $236,517.
5. COMMON SHARES
As of May 31, 2006, 4,924,349 of $0.01 par value Common Shares were issued. An
unlimited number of Common Shares have been authorized under the Fund's Dividend
Reinvestment Plan.
COMMON SHARE TRANSACTIONS WERE AS FOLLOWS:
YEAR ENDED YEAR ENDED
MAY 31, 2006 MAY 31, 2005
--------------- ------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ---------
Issued as reinvestment of dividends under
the Dividend Reinvestment Plan............... -- $ -- 10,265 $ 198,182
------ ------ ------ ---------
-- $ -- 10,265 $ 198,182
====== ====== ====== =========
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, 2006, the Fund has
2,280 Money Market Cumulative Preferred(R) Shares ("MMP Shares") outstanding at
a liquidation value of $25,000 per share.
The Fund is required to meet certain asset coverage tests with respect to the
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, 2006 was 4.95% The dividend
rate, as set by the auction process, is generally expected to vary with
short-term interest rates. The high and low annual dividend rates during the
year ended May 31, 2006, were 4.95% and 3.09%, respectively, and the average
dividend rate was 4.05%. 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. SUBSEQUENT EVENTS
On May 22, 2006, the Fund declared a dividend of $0.1178 per share, which
represents a dividend from net investment income to Common Shareholders of
record June 5, 2006, payable June 15, 2006.
On June 20, 2006, the Fund declared a dividend of $0.1178 per share, which
represents a dividend from net investment income to Common Shareholders of
record July 6, 2006, payable July 17, 2006.
Page 22
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST/FOUR CORNERS SENIOR
FLOATING RATE INCOME FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust/Four Corners Senior Floating Rate Income Fund (the "Fund"), including the
portfolio of investments, as of May 31, 2006, the related statements of
operations and cash flows for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended and the financial
highlights for the periods presented. 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, 2006, by correspondence with the Fund's
custodian, brokers and selling or agent banks; where replies were not received
from selling or agent banks, we performed other auditing procedures. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of May 31, 2006, 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 14, 2006
Page 23
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2006 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by PFPC
Inc. (the "Plan Agent"), in additional Common Shares under the Plan. If you
elect to receive cash distributions, you will receive all distributions in cash
paid by check mailed directly to you by PFPC Inc., as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the 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 elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 331-1710, in
accordance with such reasonable requirements as the Plan Agent and Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing PFPC Inc., 301 Bellevue
Parkway, Wilmington, Delaware 19809.
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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 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 24
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ADDITIONAL INFORMATION - (CONTINUED)
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2006 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling 1-800-SEC-0330.
BY-LAW AMENDMENTS
On December 12, 2005, and again on June 12, 2006, the Board of Trustees approved
certain changes to the By-Laws of the Fund which may have the effect of delaying
or preventing a change in control of the Fund. To receive a copy of the revised
By-Laws, investors may call the Fund at (800) 988-5891.
ADVISORY AGREEMENT
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AND
SUB-ADVISORY CONTRACTS
The Trustees unanimously approved the continuation of the Investment Management
Agreement (the "AGREEMENT") between First Trust Advisors L.P. ("FIRST TRUST")
and First Trust/Four Corners Senior Floating Rate Income Fund (the "FUND") at a
meeting held on March 13, 2006. The Board of Trustees determined that the
Agreement is in the best interests of the Fund and that the compensation
arrangement set forth in the Agreement is fair and reasonable in light of the
nature, extent and quality of the services provided by First Trust and such
other matters as the Trustees considered to be relevant in the exercise of their
reasonable business judgment.
To reach this determination, the Trustees considered their duties under the
Investment Company Act of 1940, as amended (the "1940 ACT") as well as under the
general principles of state law in reviewing and approving advisory contracts;
the requirements of the 1940 Act in such matters; the fiduciary duty of
investment advisers with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Trustees in
voting on such agreements. The Independent Trustees received advice from
independent legal counsel. The Trustees also applied their business judgment to
determine whether the arrangement between the Fund and First Trust was a
reasonable business arrangement from the Fund's perspective as well as from the
perspective of its shareholders. In reviewing such arrangement, the Board of
Trustees considered factors such as the nature, quality and extent of services
provided by First Trust under the Agreement and the fairness of the fee charged,
whether the fee level reflects any economies of scale, and any profitability
realized by First Trust under the Agreement.
The Trustees considered the nature, quality and extent of services provided by
First Trust, including the overall administration of the Fund and First Trust's
oversight of Four Corners Capital Management, LLC ("FOUR CORNERS"), the Fund's
sub-advisor. The Board considered the experience and skills of the personnel
primarily responsible for providing services to the Fund and noted the
compliance program that had been developed by First Trust. In light of these
considerations and their overall familiarity with First Trust, the Trustees
concluded that the nature, quality and extent of services provided by First
Trust to the Fund have been and are expected to remain satisfactory.
The Trustees reviewed data prepared by Lipper Inc. ("LIPPER"), an independent
source, showing the management fees and expense ratios of the Fund compared to
those of a peer group that included seven other closed-end loan participation
funds using preferred stock leverage or debt leverage. The Trustees also
considered the Fund's management fees and expense ratios as compared to a second
peer group of thirteen other closed-end loan participation funds currently using
preferred stock leverage or debt leverage, as selected by First Trust using data
compiled by Lipper. The Trustees considered First Trust's agreement to waive
fees and reimburse the Fund for expenses in an amount equal to 0.05% of average
daily Managed Assets for the period October 1, 2005 through September 30, 2007.
The Trustees noted that the Fund's management fees were below the median of the
Lipper peer group and above the median of the First Trust-selected peer group,
and the Fund's expense ratios were in the second or third quintile, depending on
which peer group was considered. The Trustees also considered the advisory fees
paid to First Trust by similar funds, and noted that First Trust did not provide
advisory services to clients other than closed-end funds with investment
objectives and policies similar to the Fund. The Trustees also considered the
Fund's performance for the one year, two year and since-inception periods ended
December 31, 2005 as compared to that of a relevant benchmark index and the
other closed-end funds in the peer group and performance universe selected by
Lipper and the peer group and performance universe selected by First Trust. The
Board noted the good performance of the Fund over the one- and two-year periods
versus the performance universes. In addition, the Trustees considered the
market price and net asset value performance of the Fund since inception, and
compared the Fund's premium/discount to the average and median premium/discount
of each peer group, noting that the Fund's premium/discount was indicative of
the asset class. The Trustees concluded that the Fund's performance was
reasonable,
Page 25
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ADDITIONAL INFORMATION - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2006 (UNAUDITED)
particularly in light of the small number of funds managed in a similar "pure
play" style, without a high yield bond component. On the basis of the
information provided, the Trustees concluded that the Fund's management fees
were reasonable and appropriate in light of the nature, quality and extent of
services provided by First Trust.
The Trustees noted that First Trust has continued to invest in personnel and
infrastructure but had not identified any economies of scale realized by the
Fund and had indicated that, because the Fund is a closed-end fund that is not
issuing more shares other than pursuant to its dividend reinvestment plan, First
Trust believed that any discussion of economies of scale was not meaningful. The
Trustees concluded that the management fee reflects an appropriate level of
sharing of any economies of scale. The Trustees also considered the costs of the
services provided and profits realized by First Trust from its relationship with
the Fund for the twelve months ended December 31, 2005, as set forth in the
materials provided to the Board. The Trustees noted the inherent limitations in
the profitability analysis, and concluded that First Trust's profitability
appeared to be not unreasonable in light of the services provided to the Fund.
In addition, the Trustees considered and discussed any ancillary benefits
derived by First Trust from its relationship with the Fund and noted that First
Trust receives no brokerage or soft dollars from the Fund and therefore the
typical fall out benefits are not present. The Trustees concluded that any other
fall out benefits received by First Trust or its affiliates would appear to be
attenuated. Based on all of the factors considered, the Trustees concluded that
it was in the best interests of the Fund to approve the continuation of the
Agreement, including the fees to be charged for the services thereunder. No
single factor was determinative in the Board's analysis.
At the March 13, 2006 meeting, the Trustees also approved the continuation of
the Investment Sub-Advisory Agreement (the "SUB-ADVISORY AGREEMENT") among the
Fund, First Trust and Four Corners, after considering the factors discussed
above, as well as the following information. The Trustees considered the nature,
quality and extent of services provided by Four Corners under the Sub-Advisory
Agreement. They received a presentation from representatives of Four Corners.
They concluded that Four Corners had managed the Fund consistent with its
investment objectives and policies. The Trustees considered the sub-advisory fee
rate (which is paid by First Trust out of the management fee it receives from
the Fund) as compared to the sub-advisory fees of one other sub-advised loan
participation fund that uses preferred stock leverage, based on data provided by
Lipper, and noted that the Fund's sub-advisory fee rate was higher than the
other fund, but that the Fund's assets were significantly smaller than those of
the other fund. The Trustees noted that Four Corners had agreed to reduce its
sub-advisory fee by 0.02% for the period October 1, 2005 through September 30,
2007. The Trustees also considered information provided by Four Corners as to
the fees it charges to other clients, which generally were similar to those it
receives under the Sub-Advisory Agreement. The Trustees considered that Four
Corners' investment services expenses are primarily fixed, and that Four Corners
had added personnel in the past year to improve the quality and consistency of
service and anticipated continued investments in personnel and systems. Based on
the information provided, the Trustees concluded that the sub-advisory fees were
reasonable. The Trustees considered the sub-advisory fee rate and how it related
to the overall management fee structure of the Fund. The Trustees considered
that the sub-advisory fee rate was negotiated at arm's length between First
Trust and Four Corners, an unaffiliated third party, and that First Trust
compensates Four Corners from its management fee. The Trustees also considered
data provided by Four Corners as to the profitability of the Sub-Advisory
Agreement to Four Corners, noting that the method used to allocate expenses was
not a typical practice of Four Corners. The Trustees noted the inherent
limitations in this profitability analysis and concluded that the profitability
analysis for First Trust was more relevant, although the profitability of the
Sub-Advisory Agreement appeared to be not unreasonable in light of the services
provided to the Fund. The Trustees noted that Four Corners does not maintain any
soft-dollar arrangements and that Four Corners indicated that it does not
receive any material fall out benefits from its relationship to the Fund. Based
on all of the factors considered, the Trustees concluded that it was in the best
interests of the Fund to approve the continuation of the Sub-Advisory Agreement,
including the fees to be charged for the services thereunder. No single factor
was determinative in the Board's analysis.
Page 26
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BOARD OF TRUSTEES AND OFFICERS (UNAUDITED)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2006
Information pertaining to the Trustees and officers* of the Fund is set forth
below.
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 term Physician; President, 29 portfolios None
D.O.B. 04/51 o 3 years 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
Thomas R. Kadlec, Trustee o One year term Vice President and Chief 29 portfolios None
D.O.B. 11/57 o 3 years 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); President, ADM
Derivatives, Inc. (May
2005 to present)
Robert F. Keith+ o One year term President, Hibs 17 portfolios None
D.O.B. 11/56 o 1 month served Enterprises Financial and
c/o First Trust Advisors L.P. Management Consulting
1001 Warrenville Road, (2003 to Present);
Suite 300 Aramark Service Master
Lisle, IL 60532 Management (2001 to
2003); President and
Chief Operating Officer,
Service Master
Management Services
(1998 to 2003)
Niel B. Nielson, Trustee o One year term President, Covenant 29 portfolios Director of Good
D.O.B. 03/54 o 3 years served College (June 2002 to News Publishers-
c/o First Trust Advisors L.P. Present); Pastor, College Crossway Books;
1001 Warrenville Road Church in Wheaton Covenant Transport,
Suite 300 (1997 to June 2002) Inc.
Lisle, IL 60532
Page 27
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (UNAUDITED) - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2006
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 29 portfolios Trustee of Wheaton
President, Chairman of the term and indefinite Advisors L.P. and First College
Board and CEO officer term Trust Portfolios L.P;
D.O.B. 09/55 o 3 years served Chairman of the Board,
1001 Warrenville Road BondWave LLC
Suite 300 (software development
Lisle, IL 60532 company/Broker-Dealer)
and Stonebridge
Advisors LLC
- ----------------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ----------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley, Treasurer, o Indefinite term Chief Financial Officer, N/A N/A
Controller, Chief Financial o 3 years 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
Susan M. Brix o Indefinite term Representative, First N/A N/A
Assistant Vice President o 3 years 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
Robert F. Carey, Vice o Indefinite term Senior Vice President, N/A N/A
President o 3 years 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
James M. Dykas o Indefinite term Vice President, First N/A N/A
Assistant Treasurer o 6 months served Trust Advisors L.P. and
D.O.B. 01/66 First Trust Portfolios
1001 Warrenville Road L.P. (January 2005 to
Suite 300 present); Executive
Lisle, IL 60532 Director, Van Kampen
Asset Management and
Morgan Stanley
Investment Management
(1999-2005)
Page 28
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (UNAUDITED) - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2006
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
- ----------------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES - (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
W. Scott Jardine, Secretary o Indefinite term General Counsel, N/A N/A
and Chief Compliance o 3 years 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
Daniel J. Lindquist o Indefinite term Senior Vice President, N/A N/A
Vice President o 6 months served First Trust Advisors L.P.
D.O.B. 02/70 and First Trust Portfolios
1001 Warrenville Road L.P. (April 2004 to
Suite 300 present); Chief Operating
Lisle, IL 60532 Officer, Mina Capital
Management, LLC
(January 2004-April
2004); Chief Operating
Officer, Samaritan Asset
Management Services,
Inc. (April 2000-January
2004)
Kristi A. Maher o Indefinite term Assistant General N/A N/A
Assistant Secretary o 2 years served Counsel, First Trust
D.O.B. 12/66 Advisors L.P. and First
1001 Warrenville Road Trust Portfolios L.P.
Suite 300 (March 2004 to
Lisle, IL 60532 present); Associate,
Chapman and Cutler
LLP (1995-2004)
Roger F. Testin o Indefinite term Senior Vice President, N/A N/A
Vice President o 3 years served First Trust Advisors L.P.
D.O.B. 06/66 and First Trust Portfolios
1001 Warrenville Road L.P. (August 2001 to
Suite 300 present); Analyst, Dolan
Lisle, IL 60532 Capital Management
(1998-2001)
_________________
* The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
+ Effective June 12, 2006, the Board of Trustees of the Fund unanimously
appointed Robert F. Keith to the Board of Trustees and as a member to the
Fund's Audit Committee, Valuation Committee and Nominating and Governance
Committee.
Page 29
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
those fiscal years are $27,350 for the fiscal year ending May 31, 2005
and $46,000 for the fiscal year ending May 31, 2006.
(B) AUDIT-RELATED FEES (REGISTRANT) -- The aggregate fees billed in each of
the last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance of
the audit of the registrant's financial statements and are not reported
under paragraph (a) of this Item are $0 for the fiscal year ending May
31, 2005 and $0 for the fiscal year ending May 31, 2006.
AUDIT-RELATED FEES (INVESTMENT ADVISOR) -- The aggregate fees billed in
each of the last two fiscal years for assurance and related services by
the principal accountant that are reasonably related to the performance
of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item are $20,000 for the fiscal
year ending May 31, 2005 and $6,500 for the fiscal year ending May 31,
2006. These fees were for AIMR - PPS verification services.
(C) TAX FEES (REGISTRANT) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning are $4,500
for the fiscal year ending May 31, 2005 and $4,725 for the fiscal year
ending May 31, 2006. These fees were for tax return preparation.
TAX FEES (INVESTMENT ADVISOR) -- The aggregate fees billed in each of
the last two fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and tax planning
are $6,000 for the fiscal year ending May 31, 2005 and $6,175 for the
fiscal year ending May 31, 2006. These fees were for tax return
preparation.
(D) ALL OTHER FEES (REGISTRANT) -- The aggregate fees billed in each of the
last two fiscal years ending May 31, 2005 and May 31, 2006 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 and $2,962, respectively. These fees were for services
related to compliance program evaluation.
ALL OTHER FEES (INVESTMENT ADVISER) The aggregate fees billed in each
of the last two fiscal years ending May 31, 2005 and May 31, 2006 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 $35,450 and $77,927, respectively. These fees
were for services related to compliance program evaluation.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services
Pre-Approval Policy adopted December 12, 2005, the Audit Committee (the
"COMMITTEE") is responsible for the pre-approval of all audit services and
permitted non-audit services (including the fees and terms thereof) to be
performed for the Registrant by its independent auditors. The Chairman of the
Committee is authorized to give such pre-approvals on behalf of the Committee up
to $25,000 and report any such pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the
independent auditor's engagements for non-audit services with the Registrant's
adviser (not including a sub-adviser whose role is primarily portfolio
management and is sub-contracted or overseen by another investment adviser) and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the Registrant, if the
engagement relates directly to the operations and financial reporting of the
Registrant, subject to the DE MINIMIS exceptions for non-audit services
described in Rule 2-01 of Regulation S-X. If the independent auditor has
provided non-audit services to the Registrant's adviser (other than any
sub-adviser whose role is primarily portfolio management and is sub-contracted
with or overseen by another investment adviser) and any entity controlling,
controlled by or under common control with the investment adviser that provides
ongoing services to the Registrant that were
not pre-approved pursuant to 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 fiscal year ending May 31, 2005 and May 31,
2006 were $4,500 and $7,687, respectively for the Registrant and
$61,450 and $90,602, respectively for the Registrant's investment
adviser.
(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.
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, Richard E. Erickson and Robert F. Keith.
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. There have been no changes to
the policies.
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
- --------------------------------------------------------------------------------
ISS 2006 US PROXY VOTING GUIDELINES
SUMMARY
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[LOGO] ISS
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ISS 2006 PROXY VOTING GUIDELINES SUMMARY
EFFECTIVE FOR MEETINGS FEB 1, 2006
UPDATED DEC 19, 2005
The following is a condensed version of the proxy voting recommendations
contained in the ISS Proxy Voting Manual.
1. OPERATIONAL ITEMS ........................................................ 6
Adjourn Meeting ....................................................... 6
Amend Quorum Requirements ............................................. 6
Amend Minor Bylaws .................................................... 6
Change Company Name ................................................... 6
Change Date, Time, or Location of Annual Meeting ...................... 6
Ratifying Auditors .................................................... 6
Transact Other Business ............................................... 6
2. BOARD OF DIRECTORS: ...................................................... 7
Voting on Director Nominees in Uncontested Elections .................. 7
2006 Classification of Directors ...................................... 9
Age Limits ............................................................ 10
Board Size ............................................................ 10
Classification/Declassification of the Board .......................... 10
Cumulative Voting ..................................................... 10
Director and Officer Indemnification and Liability Protection ......... 11
Establish/Amend Nominee Qualifications ................................ 11
Filling Vacancies/Removal of Directors ................................ 11
Independent Chair (Separate Chair/CEO) ................................ 11
Majority of Independent Directors/Establishment of Committees ......... 12
Majority Vote Shareholder Proposals ................................... 12
Office of the Board ................................................... 13
Open Access ........................................................... 13
Stock Ownership Requirements .......................................... 13
Term Limits ........................................................... 13
3. PROXY CONTESTS ........................................................... 14
Voting for Director Nominees in Contested Elections ................... 14
Reimbursing Proxy Solicitation Expenses ............................... 14
Confidential Voting ................................................... 14
4. ANTITAKEOVER DEFENSES AND VOTING RELATED ISSUES .......................... 15
Advance Notice Requirements for Shareholder Proposals/Nominations ..... 15
Amend Bylaws without Shareholder Consent .............................. 15
Poison Pills .......................................................... 15
Shareholder Ability to Act by Written Consent ......................... 15
Shareholder Ability to Call Special Meetings .......................... 15
Supermajority Vote Requirements ....................................... 15
5. MERGERS AND CORPORATE RESTRUCTURINGS ..................................... 16
Overall Approach ...................................................... 16
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Appraisal Rights ...................................................... 16
Asset Purchases ....................................................... 16
Asset Sales ........................................................... 17
Bundled Proposals ..................................................... 17
Conversion of Securities .............................................. 17
Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy
Plans/Reverse Leveraged Buyouts/Wrap Plans ............................ 17
Formation of Holding Company .......................................... 17
Going Private Transactions (LBOs, Minority Squeezeouts, and
Going Dark) .......................................................... 18
Joint Ventures ....................................................... 18
Liquidations ......................................................... 18
Mergers and Acquisitions/ Issuance of Shares to Facilitate Merger
or Acquisition ....................................................... 18
Private Placements/Warrants/Convertible Debentures ................... 18
Spinoffs ............................................................. 19
Value Maximization Proposals ......................................... 19
6. STATE OF INCORPORATION .................................................. 20
Control Share Acquisition Provisions ................................. 20
Control Share Cash-out Provisions .................................... 20
Disgorgement Provisions .............................................. 20
Fair Price Provisions ................................................ 20
Freeze-out Provisions ................................................ 20
Greenmail ............................................................ 20
Reincorporation Proposals ............................................ 21
Stakeholder Provisions ............................................... 21
State Antitakeover Statutes .......................................... 21
7. CAPITAL STRUCTURE ....................................................... 22
Adjustments to Par Value of Common Stock ............................. 22
Common Stock Authorization ........................................... 22
Dual-Class Stock ..................................................... 22
Issue Stock for Use with Rights Plan ................................. 22
Preemptive Rights .................................................... 22
Preferred Stock ...................................................... 22
Recapitalization ..................................................... 23
Reverse Stock Splits ................................................. 23
Share Repurchase Programs ............................................ 23
Stock Distributions: Splits and Dividends ............................ 23
Tracking Stock ....................................................... 23
8. EXECUTIVE AND DIRECTOR COMPENSATION ...................................... 24
Equity Compensation Plans ................................................ 24
Cost of Equity Plans .................................................. 24
Repricing Provisions .................................................. 24
Pay-for Performance Disconnect ........................................ 24
Three-Year Burn Rate/Burn Rate Commitment ............................. 26
Poor Pay Practices .................................................... 27
Specific Treatment of Certain Award Types in Equity Plan Evaluations:..... 28
Dividend Equivalent Rights ............................................ 28
Liberal Share Recycling Provisions .................................... 28
Transferable Stock Option Awards ...................................... 28
Other Compensation Proposals and Policies ................................ 28
401(k) Employee Benefit Plans ......................................... 28
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Director Compensation ................................................. 28
Director Retirement Plans ............................................. 29
Disclosure of CEO Compensation-Tally Sheet ............................ 29
Employee Stock Ownership Plans (ESOPs) ................................ 30
Employee Stock Purchase Plans-- Qualified Plans ....................... 30
Employee Stock Purchase Plans-- Non-Qualified Plans ................... 31
Incentive Bonus Plans and Tax Deductibility Proposals (OBRA-Related ... 31
Compensation Proposals) ............................................... 31
Option Exchange Programs/Repricing Options ............................ 31
Stock Plans in Lieu of Cash ........................................... 32
Transfer Programs of Stock Options .................................... 32
Shareholder Proposals on Compensation .................................... 32
Disclosure/Setting Levels or Types of Compensation for Executives
and Directors ......................................................... 32
Option Expensing ...................................................... 33
Option Repricing ...................................................... 33
Pension Plan Income Accounting ........................................ 33
Performance-Based Awards .............................................. 33
Severance Agreements for Executives/Golden Parachutes ................. 33
Supplemental Executive Retirement Plans (SERPs) ....................... 33
9. CORPORATE RESPONSIBILITY ................................................. 34
Consumer Issues and Public Safety ........................................ 34
Animal Rights ......................................................... 34
Drug Pricing .......................................................... 34
Drug Reimportation .................................................... 34
Genetically Modified Foods ............................................ 34
Handguns .............................................................. 35
HIV/AIDS .............................................................. 35
Predatory Lending ..................................................... 35
Tobacco ............................................................... 36
Toxic Chemicals ....................................................... 36
Environment and Energy ................................................... 37
Arctic National Wildlife Refuge ....................................... 37
CERES Principles ...................................................... 37
Concentrated Area Feeding Operations (CAFOs) .......................... 37
Environmental-Economic Risk Report .................................... 37
Environmental Reports ................................................. 37
Global Warming ........................................................ 37
Kyoto Protocol Compliance ............................................. 38
Land Use .............................................................. 38
Nuclear Safety ........................................................ 38
Operations in Protected Areas ......................................... 38
Recycling ............................................................. 38
Renewable Energy ...................................................... 38
Sustainability Report ................................................. 39
General Corporate Issues ................................................. 39
Charitable/Political Contributions .................................... 39
Link Executive Compensation to Social Performance ..................... 39
Outsourcing/Offshoring ................................................ 40
Labor Standards and Human Rights ......................................... 40
China Principles ...................................................... 40
Country-specific Human Rights Reports ................................. 40
International Codes of Conduct/Vendor Standards ....................... 40
MacBride Principles ................................................... 41
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Military Business ....................................................... 41
Foreign Military Sales/Offsets ....................................... 41
Landmines and Cluster Bombs .......................................... 41
Nuclear Weapons ...................................................... 41
Operations in Nations Sponsoring Terrorism (e.g., Iran) .............. 42
Spaced-Based Weaponization ........................................... 42
Workplace Diversity ..................................................... 42
Board Diversity ..................................................... 42
Equal Employment Opportunity (EEO) ................................... 42
Glass Ceiling ........................................................ 42
Sexual Orientation ................................................... 43
10. MUTUAL FUND PROXIES .................................................... 44
Election of Directors ................................................ 44
Converting Closed-end Fund to Open-end Fund .......................... 44
Proxy Contests ....................................................... 44
Investment Advisory Agreements ....................................... 44
Approving New Classes or Series of Shares ............................ 44
Preferred Stock Proposals ............................................ 44
1940 Act Policies .................................................... 44
Changing a Fundamental Restriction to a Nonfundamental Restriction ... 45
Change Fundamental Investment Objective to Nonfundamental ............ 45
Name Change Proposals ................................................ 45
Change in Fund's Subclassification ................................... 45
Disposition of Assets/Termination/Liquidation ........................ 45
Changes to the Charter Document ...................................... 45
Changing the Domicile of a Fund ...................................... 46
Authorizing the Board to Hire and Terminate Subadvisors Without
Shareholder Approval ................................................. 46
Distribution Agreements .............................................. 46
Master-Feeder Structure .............................................. 46
Mergers .............................................................. 46
Shareholder Proposals for Mutual Funds ..................................... 46
Establish Director Ownership Requirement ............................. 46
Reimburse Shareholder for Expenses Incurred .......................... 46
Terminate the Investment Advisor ..................................... 46
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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 if supporting that merger or transaction. 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 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, or
o Fees for non-audit services ("Other" fees) are excessive.
Non-audit fees are excessive if:
Non-audit ("other") fees >audit fees + audit-related fees + tax
compliance/preparation fees
Tax compliance and preparation include the preparation of original and amended
tax returns, refund claims and tax payment planning. All other services in the
tax category, such as tax advice, planning or consulting should be added to
"Other" fees. If the breakout of tax fees cannot be determined, add all tax fees
to "Other" fees.
Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit
their auditors from engaging in non-audit services.
Vote CASE-BY-CASE on shareholder proposals asking for audit firm rotation,
taking into account 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.
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2. BOARD OF DIRECTORS:
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Vote CASE-BY-CASE on director nominees, examining, but not limited to, the
following factors:
o Composition of the board and key board committees;
o Attendance at board and committee meetings;
o Corporate governance provisions and takeover activity;
o Disclosures under Section 404 of Sarbanes-Oxley Act;
o Long-term company performance relative to a market and peer index;
o Extent of the director's investment in the company;
o Existence of related party transactions;
o Whether the chairman is also serving as CEO;
o Whether a retired CEO sits on the board;
o Number of outside boards at which a director serves.
WITHHOLD from individual directors who:
o Attend less than 75 percent of the board and committee meetings
without a valid excuse (such as illness, service to the nation, work
on behalf of the company);
o Sit on more than six public company boards;
o Are CEOs of public companies who sit on the boards of more than two
public companies besides their own-- withhold only at their outside
boards.
WITHHOLD from the entire board of directors, (excepting new nominees, who should
be considered on a CASE-BY-CASE basis) if:
o The company's poison pill has a dead-hand or modified dead-hand
feature. Withhold every year until this feature is removed;
o The board adopts or renews a poison pill without shareholder
approval since the beginning of 2005, does not commit to putting it
to shareholder vote within 12 months of adoption or reneges on a
commitment to put the pill to a vote and has not yet been withheld
from for this issue;
o The board failed to act on a shareholder proposal that received
approval by a majority of the shares outstanding the previous year;
o The board failed to act on a shareholder proposal that received
approval of the majority of shares cast for the previous two
consecutive years;
o The board failed to act on takeover offers where the majority of the
shareholders tendered their shares;
o At the previous board election, any director received more than 50
percent withhold votes of the shares cast and the company has failed
to address the issue(s) that caused the high withhold rate;
o A Russell 3000 company underperformed its industry group (GICS
group). The test will consist of the bottom performers within each
industry group (GICS) based on a weighted average TSR. The
weightings are as follows: 20 percent weight on 1-year TSR; 30
percent weight on 3-year TSR; and 50 percent weight on 5-year TSR.
Company's response to performance issues will be considered before
withholding.
WITHHOLD from Inside Directors and Affiliated Outside Directors (per the
Classification of Directors below) when:
o The inside or affiliated outside director serves on any of the three
key committees: audit, compensation, or nominating;
o The company lacks an audit, compensation, or nominating committee so
that the full board functions as that committee;
o The full board is less than majority independent.
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WITHHOLD from the members of the Audit Committee if:
o The non -audit fees paid to the auditor are excessive (see
discussion under Ratifying Auditors);
o A material weakness identified in the Section 404 Sarbanes-Oxley Act
disclosures rises to a level of serious concern; there are chronic
internal control issues and an absence of established effective
control mechanisms.
WITHHOLD from the members of the Compensation Committee if:
o There is a negative correlation between chief executive pay and
company performance (see discussion under Equity Compensation
Plans);
o The company fails to submit one-time transfers of stock options to a
shareholder vote;
o The company fails to fulfill the terms of a burn rate commitment
they made to shareholders;
o The company has poor compensation practices, which include, but are
not limited to:
- Egregious employment contracts including excessive severance
provisions;
- Excessive perks that dominate compensation;
- Huge bonus payouts without justifiable performance linkage;
- Performance metrics that are changed during the performance
period;
- Egregious SERP (Supplemental Executive Retirement Plans)
payouts;
- New CEO with overly generous new hire package;
- Internal pay disparity;
- Other excessive compensation payouts or poor pay practices at
the company.
WITHHOLD from directors, individually or the entire board, for egregious actions
or failure to replace management as appropriate.
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2006 CLASSIFICATION OF DIRECTORS
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INSIDE DIRECTOR (I)
o Employee of the company or one of its affiliates; 1
o Non-employee officer of the company if among the five most highly
paid individuals (excluding interim CEO);
o Listed as a Section 16 officer; 2
o Current interim CEO;
o Beneficial owner of more than 50 percent of the company's voting
power (this may be aggregated if voting power is distributed among
more than one member of a defined group).
AFFILIATED OUTSIDE DIRECTOR (AO)
o Board attestation that an outside director is not independent;
o Former CEO of the company;
o Former CEO of an acquired company within the past five years;
o Former interim CEO if the service was longer than 18 months. If the
service was between twelve and eighteen months an assessment of the
interim CEO's employment agreement will be made; 3
o Former executive of the company, an affiliate or an acquired firm
within the past five years;
o Executive of a former parent or predecessor firm at the time the
company was sold or split off from the parent/predecessor within the
past five years;
o Executive, former executive, general or limited partner of a joint
venture or partnership with the company;
o Relative 4 of a current employee of company or its affiliates;
o Relative 4 of former executive, including CEO, of company or its
affiliate within the last five years;
o Currently provides (or a relative provides) professional services
directly to the company, to an affiliate of the company or an
individual officer of the company or one of its affiliates;
o Employed by (or a relative is employed by) a significant customer or
supplier; 5
o Has (or a relative has) any transactional relationship with the
company or its affiliates excluding investments in the company
through a private placement; 5
o Any material financial tie or other related party transactional
relationship to the company;
o Party to a voting agreement to vote in line with management on
proposals being brought to shareholder vote;
o Has (or a relative has) an interlocking relationship as defined by
the SEC involving members of the board of directors or its
Compensation and Stock Option Committee; 6
o Founder 7 of the company but not currently an employee;
o Is (or a relative is) a trustee, director or employee of a
charitable or non-profit organization that receives grants or
endowments 5 from the company or its affiliates. 1
INDEPENDENT OUTSIDE DIRECTOR (IO)
o No material 8 connection to the company other than a board seat.
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FOOTNOTES:
1 "Affiliate" includes a subsidiary, sibling company, or parent company. ISS
uses 50 percent control ownership by the parent company as the standard
for applying its affiliate designation.
2 "Executives" (officers subject to Section 16 of the Securities and
Exchange Act of 1934) include the chief executive, operating, financial,
legal, technology, and accounting officers of a company (including the
president, treasurer, secretary, controller, or any vice president in
charge of a principal business unit, division or policy function).
3 ISS will look at the terms of the interim CEO's employment contract to
determine if it contains severance pay, long-term health and pension
benefits or other such standard provisions typically contained in
contracts of permanent, non-temporary CEOs. ISS will also consider if a
formal search process was underway for a full-time CEO at the time.
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4 "Relative" follows the NYSE definition of "immediate family members" which
covers: spouses, parents, children, siblings, in-laws, and anyone sharing
the director's home.
5 If the company makes or receives annual payments exceeding the greater of
$200,000 or five percent of the recipient's gross revenues. (The recipient
is the party receiving the financial proceeds from the transaction).
6 Interlocks include: (a) executive officers serving as directors on each
other's compensation or similar committees (or, in the absence of such a
committee, on the board) or (b) executive officers sitting on each other's
boards and at least one serves on the other's compensation or similar
committees (or, in the absence of such a committee, on the board).
7 The operating involvement of the Founder with the company will be
considered. Little to no operating involvement may cause ISS to deem the
Founder as an independent outsider.
8 For purposes of ISS' director independence classification, "material" will
be defined as a standard of relationship (financial, personal or
otherwise) that a reasonable person might conclude could potentially
influence one's objectivity in the boardroom in a manner that would have a
meaningful impact on an individual's ability to satisfy requisite
fiduciary standards on behalf of shareholders.
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AGE LIMITS
Vote AGAINST shareholder or management proposals to limit the tenure of outside
directors through 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
Generally vote AGAINST proposals to eliminate cumulative voting. Vote
CASE-BY-CASE if the company has in place one of the three corporate governance
structures that are listed below.
Vote CASE-BY-CASE on proposals to restore or permit cumulative voting. If one of
these three structures is present, vote AGAINST the proposal:
o the presence of a majority threshold voting standard;
o a proxy access provision in the company's bylaws or governance
documents; or
o a counterbalancing governance structure coupled with acceptable
relative performance.
The counterbalancing governance structure coupled with acceptable relative
performance should include all of the following:
o Annually elected board;
o Two-thirds of the board composed of independent directors;
o Nominating committee composed solely of independent directors;
o Confidential voting; however, there may be a provision for
suspending confidential voting during proxy contests;
o Ability of shareholders to call special meetings or act by written
consent with 90 days' notice;
o Absence of superior voting rights for one or more classes of stock;
o Board does not have the right to change the size of the board beyond
a stated range that has been approved by shareholders;
o The company has not under-performed its peers and index on a
one-year and three-year basis, unless there has been a change in the
CEO position within the last three years;
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o No director received WITHHOLD votes of 35% or more of the votes cast
in the previous election.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION
Vote CASE-BY-CASE on proposals on director and officer indemnification and
liability protection 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 If only 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 shareholders' 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 CHAIR (SEPARATE CHAIR/CEO)
Generally vote FOR shareholder proposals requiring the position of chair 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; however the director must serve a minimum
of one year in order to qualify as a lead director.) At a minimum
these should include:
- Presides at all meetings of the board at which the chairman is
not present, including executive sessions of the independent
directors,
- Serves as liaison between the chairman and the independent
directors,
- Approves information sent to the board,
- Approves meeting agendas for the board,
- Approves meetings schedules to assure that there is sufficient
time for discussion of all agenda items,
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- Has the authority to call meetings of the independent
directors,
- If requested by major shareholders, ensures that he is
available for consultation and direct communication;
o Two-thirds independent board;
o All-independent key committees;
o Established governance guidelines;
o The company does not under-perform 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.
MAJORITY VOTE SHAREHOLDER PROPOSALS
Generally vote FOR reasonably crafted shareholders proposals calling for
directors to be elected with an affirmative majority of votes cast and/or the
elimination of the plurality standard for electing directors (including binding
resolutions requesting that the board amend the company's bylaws), provided the
proposal includes a carve-out for a plurality voting standard when there are
more director nominees than board seats (e.g. contested elections).
Consider voting AGAINST the shareholder proposal if the company has adopted
formal corporate governance principles that present a meaningful alternative to
the majority voting standard and provide an adequate response to both new
nominees as well as incumbent nominees who fail to receive a majority of votes
cast.
Policies should address the specific circumstances at each company. At a
minimum, a company's policy should articulate the following elements to
adequately address each director nominee who fails to receive an affirmative of
majority of votes cast in an election:
o Established guidelines disclosed annually in the proxy statement
concerning the process to follow for nominees who receive majority
withhold votes;
o The policy needs to outline a clear and reasonable timetable for all
decision-making regarding the nominee's status;
o The policy needs to specify that the process of determining the
nominee's status will be managed by independent directors and must
exclude the nominee in question;
o An outline of a range of remedies that can be considered concerning
the nominee needs to be in the policy (for example, acceptance of
the resignation, maintaining the director but curing the underlying
causes of the withheld votes, etc.);
o The final decision on the nominee's status should be promptly
disclosed via an SEC filing. The policy needs to include the
timeframe in which the decision will be disclosed and a full
explanation of how the decision was reached.
In addition, the company should articulate to shareholders why this alternative
to a full majority threshold voting standard is the best structure at this time
for demonstrating accountability to shareholders. Also evaluate the company's
history of accountability to shareholders in its governance structure and in its
actions. In particular, a classified board structure or a history of ignoring
majority supported shareholder proposals will be considered at a company which
receives a shareholder proposal requesting the elimination of plurality voting
in favor of majority threshold for electing directors.
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OFFICE OF THE BOARD
Generally vote FOR shareholders proposals requesting that the board establish an
Office of the Board of Directors in order to facilitate direct communications
between shareholders and non-management directors, unless the company has all of
the following:
o Established a communication structure that goes beyond the exchange
requirements to facilitate the exchange of information between
shareholders and members of the board;
o Effectively disclosed information with respect to this structure to
its shareholders;
o Company has not ignored majority supported shareholder proposals or
a majority WITHHOLD on a director nominee; and
o The company has an independent chairman or a lead/presiding
director, according to ISS' definition. This individual must be made
available for periodic consultation and direct communication with
major shareholders.
OPEN ACCESS
Generally vote FOR reasonably crafted shareholder proposals providing
shareholders with the ability to nominate director candidates to be included on
management's proxy card, provided the proposal substantially mirrors the SEC's
proposed two-trigger formulation (see the proposed "Security Holder Director
Nominations" rule (HTTP://WWW.SEC.GOV/RULES/PROPOSED/34-48626.HTM) or ISS'
comment letter to the SEC dated 6/13/2003, available on ISS website under
Governance Center- ISS Position Papers).
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 stock ownership on the part of directors is desired, the
company should determine the appropriate ownership requirement.
Vote CASE-BY-CASE on 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 through term limits. However, scrutinize boards where the average
tenure of all directors exceeds 15 years for independence from management and
for sufficient turnover to ensure that new perspectives are being added to the
board.
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3. PROXY CONTESTS
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Vote CASE-BY-CASE on the election of directors in contested elections,
considering the following factors:
o Long-term financial performance of the target company relative to
its industry;
o Management's track record;
o Background to the proxy contest;
o Qualifications of director nominees (both slates);
o Strategic plan of dissident slate and quality of critique against
management;
o Likelihood that the proposed goals and objectives can be achieved
(both slates);
o Stock ownership positions.
REIMBURSING PROXY SOLICITATION EXPENSES
Vote CASE-BY-CASE on proposals to reimburse proxy solicitation expenses. When
voting in conjunction with support of a dissident slate, vote FOR the
reimbursement of all appropriate proxy solicitation expenses associated with the
election.
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.
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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 UNLESS the company has: (1) A
shareholder approved poison pill in place; or (2) The company has adopted a
policy concerning the adoption of a pill in the future specifying that the board
will only adopt a shareholder rights plan if either:
o Shareholders have approved the adoption of the plan; or
o The board, in its exercise of its fiduciary responsibilities,
determines that it is in the best interest of shareholders under the
circumstances to adopt a pill without the delay in adoption that
would result from seeking stockholder approval (i.e. the "fiduciary
out" provision). A poison pill adopted under this fiduciary out will
be put to a shareholder ratification vote within twelve months of
adoption or expire. If the pill is not approved by a majority of the
votes cast on this issue, the plan will immediately terminate.
Vote FOR shareholder proposals calling for poison pills to be put to a vote
within a time period of less than one year after adoption. If the company has no
non-shareholder approved poison pill in place and has adopted a policy with the
provisions outlined above, vote AGAINST the proposal. If these conditions are
not met, vote FOR the proposal, but with the caveat that a vote within twelve
months would be considered sufficient.
Vote CASE-by-CASE on management proposals on poison pill ratification, focusing
on the features of the shareholder rights plan. Rights plans should contain the
following attributes:
o No lower than a 20% trigger, flip-in or flip-over;
o A term of no more than three years;
o No dead-hand, slow-hand, no-hand or similar feature that limits the
ability of a future board to redeem the pill;
o Shareholder redemption feature (qualifying offer clause); if the
board refuses to redeem the pill 90 days after a qualifying offer is
announced, ten percent of the shares may call a special meeting or
seek a written consent to vote on rescinding the pill.
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.
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5. MERGERS AND CORPORATE RESTRUCTURINGS
OVERALL APPROACH
For mergers and acquisitions, review and evaluate the merits and drawbacks of
the proposed transaction, balancing various and sometimes countervailing factors
including:
o VALUATION - Is the value to be received by the target shareholders
(or paid by the acquirer) reasonable? While the fairness opinion may
provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on the offer premium, market
reaction and strategic rationale.
o MARKET REACTION - How has the market responded to the proposed deal?
A negative market reaction should cause closer scrutiny of a deal.
o STRATEGIC RATIONALE - Does the deal make sense strategically? From
where is the value derived? Cost and revenue synergies should not be
overly aggressive or optimistic, but reasonably achievable.
Management should also have a favorable track record of successful
integration of historical acquisitions.
o NEGOTIATIONS AND PROCESS - Were the terms of the transaction
negotiated at arm's-length? Was the process fair and equitable? A
fair process helps to ensure the best price for shareholders.
Significant negotiation "wins" can also signify the deal makers'
competency. The comprehensiveness of the sales process (e.g., full
auction, partial auction, no auction) can also affect shareholder
value.
o CONFLICTS OF INTEREST - Are insiders benefiting from the transaction
disproportionately and inappropriately as compared to non-insider
shareholders? As the result of potential conflicts, the directors
and officers of the company may be more likely to vote to approve a
merger than if they did not hold these interests. Consider whether
these interests may have influenced these directors and officers to
support or recommend the merger. The CIC figure presented in the
"ISS Transaction Summary" section of this report is an aggregate
figure that can in certain cases be a misleading indicator of the
true value transfer from shareholders to insiders. Where such figure
appears to be excessive, analyze the underlying assumptions to
determine whether a potential conflict exists.
o GOVERNANCE - Will the combined company have a better or worse
governance profile than the current governance profiles of the
respective parties to the transaction? If the governance profile is
to change for the worse, the burden is on the company to prove that
other issues (such as valuation) outweigh any deterioration in
governance.
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 Non-completion risk.
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ASSET SALES
Vote CASE-BY-CASE on asset sales, 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
Vote CASE-BY-CASE on bundled or "conditional" 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
Vote CASE-BY-CASE on proposals regarding conversion of securities. 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
Vote CASE-BY-CASE on proposals to increase common and/or preferred shares and to
issue shares as part of a debt restructuring plan, 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
Vote CASE-BY-CASE on proposals regarding the formation of a holding company,
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.
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:
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o Increases in common or preferred stock in excess of the allowable
maximum (see discussion under "Capital Structure");
o Adverse changes in shareholder rights.
GOING PRIVATE TRANSACTIONS (LBOS, MINORITY SQUEEZEOUTS, AND GOING DARK)
Vote CASE-BY-CASE on going private transactions, taking into account the
following: offer price/premium, fairness opinion, how the deal was negotiated,
conflicts of interest, other alternatives/offers considered, and non-completion
risk.
Vote CASE-BY-CASE on "going dark" transactions, determining whether the
transaction enhances shareholder value by taking into consideration:
o Whether the company has attained benefits from being publicly-traded
(examination of trading volume, liquidity, and market research of
the stock);
o Cash-out value;
o Whether the interests of continuing and cashed-out shareholders are
balanced; and
o The market reaction to public announcement of transaction.
JOINT VENTURES
Vote CASE-BY-CASE on proposals to form joint ventures, taking into account the
following:
o Percentage of assets/business contributed;
o Percentage ownership;
o Financial and strategic benefits;
o Governance structure;
o Conflicts of interest;
o Other alternatives;
o Noncompletion risk.
LIQUIDATIONS
Vote CASE-BY-CASE on liquidations, taking into account the following:
o Management's efforts to pursue other alternatives;
o Appraisal value of assets; and
o 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
Vote CASE-BY-CASE on mergers and acquisitions, determining whether the
transaction enhances shareholder value by giving consideration to items listed
under "Mergers and Corporate Restructurings: Overall Approach."
PRIVATE PLACEMENTS/WARRANTS/CONVERTIBLE DEBENTURES
Vote CASE-BY-CASE on proposals regarding private placements, taking into
consideration:
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.
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Vote FOR the private placement if it is expected that the company will file for
bankruptcy if the transaction is not approved.
SPINOFFS
Vote CASE-BY-CASE on spin-offs, considering:
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:
o Prolonged poor performance with no turnaround in sight;
o Signs of entrenched board and management;
o Strategic plan in place for improving value;
o Likelihood of receiving reasonable value in a sale or dissolution;
and
o Whether company is actively exploring its strategic options,
including retaining a financial advisor.
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6. STATE OF INCORPORATION
CONTROL SHARE ACQUISITION PROVISIONS
Control share acquisition statutes function by denying shares their voting
rights when they contribute to ownership in excess of certain thresholds. Voting
rights for those shares exceeding ownership limits may only be restored by
approval of either a majority or supermajority of disinterested shares. Thus,
control share acquisition statutes effectively require a hostile bidder to put
its offer to a shareholder vote or risk voting disenfranchisement if the bidder
continues buying up a large block of shares.
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 CASH-OUT PROVISIONS
Control share cash-out statutes give dissident shareholders the right to
"cash-out" of their position in a company at the expense of the shareholder who
has taken a control position. In other words, when an investor crosses a preset
threshold level, remaining shareholders are given the right to sell their shares
to the acquirer, who must buy them at the highest acquiring price.
Vote FOR proposals to opt out of control share cash-out statutes.
DISGORGEMENT PROVISIONS
Disgorgement provisions require an acquirer or potential acquirer of more than a
certain percentage of a company's stock to disgorge, or pay back, to the company
any profits realized from the sale of that company's stock purchased 24 months
before achieving control status. All sales of company stock by the acquirer
occurring within a certain period of time (between 18 months and 24 months)
prior to the investor's gaining control status are subject to these
recapture-of-profits provisions.
Vote FOR proposals to opt out of state disgorgement provisions.
FAIR PRICE PROVISIONS
Vote CASE-BY-CASE on proposals to adopt fair price provisions (provisions that
stipulate that an acquirer must pay the same price to acquire all shares as it
paid to acquire the control shares), 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.
FREEZE-OUT PROVISIONS
Vote FOR proposals to opt out of state freeze-out provisions. Freeze-out
provisions force an investor who surpasses a certain ownership threshold in a
company to wait a specified period of time before gaining control of the
company.
GREENMAIL
Greenmail payments are targeted share repurchases by management of company stock
from individuals or groups seeking control of the company. Since only the
hostile party receives
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payment, usually at a substantial premium over the market value of its shares,
the practice discriminates against all other shareholders.
Vote FOR proposals to adopt anti-greenmail charter or bylaw amendments or
otherwise restrict a company's ability to make greenmail payments.
Vote CASE-BY-CASE on anti-greenmail proposals when they are bundled with other
charter or bylaw amendments.
REINCORPORATION PROPOSALS
Vote CASE-BY-CASE on proposals to change a company's state of incorporation,
taking into consideration both financial and corporate governance concerns,
including the reasons for reincorporating, a comparison of the governance
provisions, comparative economic benefits, and a comparison of the
jurisdictional laws.
Vote FOR re-incorporation when the economic factors outweigh any neutral or
negative governance changes.
STAKEHOLDER PROVISIONS
Vote AGAINST proposals that ask the board to consider non-shareholder
constituencies or other non-financial effects when evaluating a merger or
business combination.
STATE ANTITAKEOVER STATUTES
Vote CASE-BY-CASE on proposals to opt in or out of state takeover statutes
(including control share acquisition statutes, control share cash-out statutes,
freezeout provisions, fair price provisions, stakeholder laws, poison pill
endorsements, severance pay and labor contract provisions, anti-greenmail
provisions, and disgorgement provisions).
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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
Vote CASE-BY-CASE on proposals to increase the number of shares of common stock
authorized for issuance using a model developed by ISS.
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.
In addition, for capital requests less than or equal to 300 percent of the
current authorized shares that marginally fail the calculated allowable cap
(i.e., exceed the allowable cap by no more than 5 percent), on a CASE-BY-CASE
basis, vote FOR the increase based on the company's performance and whether the
company's ongoing use of shares has shown prudence. Factors should include, at a
minimum, the following:
o Rationale;
o Good performance with respect to peers and index on a five-year
total shareholder return basis;
o Absence of non-shareholder approved poison pill;
o Reasonable equity compensation burn rate;
o No non-shareholder approved pay plans; and
o Absence of egregious equity compensation practices.
DUAL-CLASS STOCK
Vote AGAINST proposals to create a new class of common stock with superior
voting rights.
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 create a new class of nonvoting or sub-voting 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 non-shareholder approved shareholder rights plan
(poison pill).
PREEMPTIVE RIGHTS
Vote CASE-BY-CASE on shareholder proposals that seek preemptive rights, taking
into consideration: 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).
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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
Vote CASE-BY-CASE on recapitalizations (reclassifications of securities), taking
into account the following:
o More simplified capital structure;
o Enhanced liquidity;
o Fairness of conversion terms;
o Impact on voting power and dividends;
o Reasons for the reclassification;
o Conflicts of interest; and
o 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.
Vote CASE-BY-CASE on proposals to implement a reverse stock split that do not
proportionately reduce the number of shares authorized for issue based on the
allowable increased calculated using the Capital Structure model.
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
Vote CASE-BY-CASE on the creation of tracking stock, weighing the strategic
value of the transaction against such factors as:
o Adverse governance changes;
o Excessive increases in authorized capital stock;
o Unfair method of distribution;
o Diminution of voting rights;
o Adverse conversion features;
o Negative impact on stock option plans; and
o Alternatives such as spin-off.
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8. EXECUTIVE AND DIRECTOR COMPENSATION
EQUITY COMPENSATION PLANS
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity
plan if any of the following factors apply:
o The total cost of the company's equity plans is unreasonable;
o The plan expressly permits the repricing of stock options without
prior shareholder approval;
o There is a disconnect between CEO pay and the company's performance;
o The company's three year burn rate exceeds the greater of 2% and the
mean plus 1 standard deviation of its industry group; or
o The plan is a vehicle for poor pay practices.
Each of these factors is further described below:
COST OF EQUITY PLANS
Generally, vote AGAINST equity plans if the cost is unreasonable. For
non-employee director plans, vote FOR the plan if certain factors are met (see
Director Compensation section).
The cost of the equity plans is expressed as Shareholder Value Transfer (SVT),
which is measured using a binomial option pricing model that assesses the amount
of shareholders' equity flowing out of the company to employees and directors.
SVT is expressed as both a dollar amount and as a percentage of market value,
and includes the new shares proposed, shares available under existing plans, and
shares granted but unexercised. All award types are valued. For omnibus plans,
unless limitations are placed on the most expensive types of awards (for
example, full value awards), the assumption is made that all awards to be
granted will be the most expensive types. See discussion of specific types of
awards.
The Shareholder Value Transfer is reasonable if it falls below the
company-specific allowable cap. The allowable cap is determined as follows: The
top quartile performers in each industry group (using the Global Industry
Classification Standard GICS) are identified. Benchmark SVT levels for each
industry are established based on these top performers' historic SVT. Regression
analyses are run on each industry group to identify the variables most strongly
correlated to SVT. The benchmark industry SVT level is then adjusted upwards or
downwards for the specific company by plugging the company-specific performance
measures, size and cash compensation into the industry cap equations to arrive
at the company's allowable cap.
REPRICING PROVISIONS
Vote AGAINST plans that expressly permit the repricing of stock options without
prior shareholder approval, even if the cost of the plan is reasonable.
Vote AGAINST plans if the company has a history of repricing options without
shareholder approval, and the applicable listing standards would not preclude
them from doing so.
PAY-FOR PERFORMANCE DISCONNECT
Generally vote AGAINST plans in which:
o there is a disconnect between the CEO's pay and company performance
(an increase in pay and a decrease in performance);
o the main source of the pay increase (over half) is equity-based, and
o the CEO is a participant of the equity proposal.
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Performance decreases are based on negative one- and three-year total
shareholder returns. CEO pay increases are 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.
WITHHOLD votes from the Compensation Committee members when the company has a
pay for performance disconnect.
On a CASE-BY-CASE basis, vote for equity plans and FOR compensation committee
members with a pay-for-performance disconnect if compensation committee members
can present strong and compelling evidence of improved committee performance.
This evidence must go beyond the usual compensation committee report disclosure.
This additional evidence necessary 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 total 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. (A complete
breakdown of pay components also can be found in Disclosure of CEO Compensation
- - Tally Sheet.)
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 providing 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 granting 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
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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 performance-contingent 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.
THREE-YEAR BURN RATE/BURN RATE COMMITMENT
Generally vote AGAINST plans if the company's most recent three-year burn rate
exceeds one standard deviation in excess of the industry mean (per the following
Burn Rate Table) and is over two percent of common shares outstanding. The
three-year burn rate policy does not apply to non-employee director plans unless
outside directors receive a significant portion of shares each year.
However, vote FOR equity plans if the company fails this burn rate test but the
company commits in a public filing to a three-year average burn rate equal to
its GICS group burn rate mean plus one standard deviation, assuming all other
conditions for voting FOR the plan have been met. If a company fails to fulfill
its burn rate commitment, vote to WITHHOLD from the compensation committee.
- ----------
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).
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2006 PROXY SEASON BURN RATE TABLE
RUSSELL 3000 NON-RUSSELL 3000
- --------------------------------------------------------------------------------------------------------------------------------
STANDARD STANDARD
GICS DESCRIPTION MEAN DEVIATION MEAN+STDEV MEAN DEVIATION MEAN+STDEV
- --------------------------------------------------------------------------------------------------------------------------------
1010 Energy 1.53% 0.96% 2.50% 2.03% 2.53% 4.56%
- --------------------------------------------------------------------------------------------------------------------------------
1510 Materials 1.37% 0.74% 2.11% 2.15% 2.01% 4.16%
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2010 Capital Goods 1.84% 1.09% 2.93% 2.74% 2.63% 5.37%
- --------------------------------------------------------------------------------------------------------------------------------
2020 Commercial Services & Supplies 2.73% 1.60% 4.33% 3.43% 4.18% 7.61%
- --------------------------------------------------------------------------------------------------------------------------------
2030 Transportation 1.76% 1.71% 3.47% 2.18% 2.12% 4.30%
- --------------------------------------------------------------------------------------------------------------------------------
2510 Automobiles & Components 1.97% 1.27% 3.24% 2.23% 2.29% 4.51%
- --------------------------------------------------------------------------------------------------------------------------------
2520 Consumer Durables & Apparel 2.04% 1.22% 3.26% 2.86% 2.48% 5.35%
- --------------------------------------------------------------------------------------------------------------------------------
2530 Hotels Restaurants & Leisure 2.22% 1.09% 3.31% 2.71% 2.46% 5.17%
- --------------------------------------------------------------------------------------------------------------------------------
2540 Media 2.14% 1.24% 3.38% 3.26% 2.52% 5.77%
- --------------------------------------------------------------------------------------------------------------------------------
2550 Retailing 2.54% 1.59% 4.12% 4.01% 4.03% 8.03%
- --------------------------------------------------------------------------------------------------------------------------------
3010, 3020,
3030 Food & Staples Retailing 1.82% 1.31% 3.13% 2.20% 2.79% 4.99%
- --------------------------------------------------------------------------------------------------------------------------------
3510 Health Care Equipment & Services 3.20% 1.71% 4.91% 4.33% 3.20% 7.53%
- --------------------------------------------------------------------------------------------------------------------------------
3520 Pharmaceuticals & Biotechnology 3.70% 1.87% 5.57% 5.41% 4.74% 10.15%
- --------------------------------------------------------------------------------------------------------------------------------
4010 Banks 1.46% 1.00% 2.46% 1.38% 1.42% 2.79%
- --------------------------------------------------------------------------------------------------------------------------------
4020 Diversified Financials 3.00% 2.28% 5.28% 4.46% 4.01% 8.47%
- --------------------------------------------------------------------------------------------------------------------------------
4030 Insurance 1.52% 1.04% 2.56% 2.25% 2.85% 5.10%
- --------------------------------------------------------------------------------------------------------------------------------
4040 Real Estate 1.30% 1.01% 2.31% 1.12% 1.67% 2.79%
- --------------------------------------------------------------------------------------------------------------------------------
4510 Software & Services 5.02% 2.98% 8.00% 6.92% 6.05% 12.97%
- --------------------------------------------------------------------------------------------------------------------------------
4520 Technology Hardware & Equipment 3.64% 2.48% 6.11% 4.73% 4.02% 8.75%
- --------------------------------------------------------------------------------------------------------------------------------
4530 Semiconductors & Semiconductor Equip. 4.81% 2.86% 7.67% 5.01% 3.06% 8.07%
- --------------------------------------------------------------------------------------------------------------------------------
5010 Telecommunication Services 2.31% 1.61% 3.92% 3.70% 3.41% 7.11%
- --------------------------------------------------------------------------------------------------------------------------------
5510 Utilities 0.94% 0.62% 1.56% 2.11% 4.13% 6.24%
- --------------------------------------------------------------------------------------------------------------------------------
For companies that grant both full value awards and stock options to their
employees, apply a premium on full value awards for the past three fiscal years
as follows:
- -----------------------------------------------------------------------------------------------------
CHARACTERISTICS ANNUAL STOCK PRICE PREMIUM
VOLATILITY
- -----------------------------------------------------------------------------------------------------
High annual volatility 53% and higher 1 full-value award for 1.5 option shares
- -----------------------------------------------------------------------------------------------------
Moderate annual volatility 25% - 52% 1 full-value award for 2.0 option shares
- -----------------------------------------------------------------------------------------------------
Low annual volatility Less than 25% 1 full-value award for 4.0 option shares
- -----------------------------------------------------------------------------------------------------
POOR PAY PRACTICES
Vote AGAINST equity plans if the plan is a vehicle for poor compensation
practices.
WITHOLD from compensation committee members if the company has poor compensation
practices.
Poor compensation practices include, but are not limited to, the following:
o Egregious employment contracts including excessive severance
provisions;
o Excessive perks that dominate compensation;
o Huge bonus payouts without justifiable performance linkage;
o Performance metrics that are changed during the performance period;
o Egregious SERP (Supplemental Executive Retirement Plans) payouts;
o New CEO with overly generous hiring package;
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o Internal pay disparity;
o Other excessive compensation payouts or poor pay practices at the
company.
SPECIFIC TREATMENT OF CERTAIN AWARD TYPES IN EQUITY PLAN EVALUATIONS:
DIVIDEND EQUIVALENT RIGHTS
Equity plans that have Dividend Equivalent Rights (DERs) associated with them
will have a higher calculated award value than those without DERs under the
binomial model, based on the value of these dividend streams. The higher value
will be applied to new shares, shares available under existing plans, and shares
awarded but not exercised per the plan specifications. DERS transfer more
shareholder equity to employees and non-employee directors and this cost should
be captured.
LIBERAL SHARE RECYCLING PROVISIONS
Under net share counting provisions, shares tendered by an option holder to pay
for the exercise of an option, shares withheld for taxes or shares repurchased
by the company on the open market can be recycled back into the equity plan for
awarding again. All awards with such provisions should be valued as full-value
awards. Stock-settled stock appreciation rights (SSARs) will also be considered
as full-value awards if a company counts only the net shares issued to employees
towards their plan reserve.
TRANSFERABLE STOCK OPTION AWARDS
For transferable stock option award types within a new equity plan, calculate
the cost of the awards by setting their forfeiture rate to zero when comparing
to the allowable cap. In addition, in order to vote FOR plans with such awards,
the structure and mechanics of the ongoing transferable stock option program
must be disclosed to shareholders; and amendments to existing plans that allow
for introduction of transferability of stock options should make clear that only
options granted post-amendment shall be transferable.
OTHER COMPENSATION PROPOSALS AND POLICIES
401(K) EMPLOYEE BENEFIT PLANS
Vote FOR proposals to implement a 401(k) savings plan for employees.
DIRECTOR COMPENSATION
Vote CASE-BY-CASE on compensation plans for non-employee directors, based on the
cost of the plans against the company's allowable cap.
On occasion, director stock plans that set aside a relatively small number of
shares when combined with employee or executive stock compensation plans exceed
the allowable cap. Vote for the plan if ALL of the following qualitative factors
in the board's compensation are met and disclosed in the proxy statement:
o Director stock ownership guidelines with 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; or
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- 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.
o No retirement/benefits and perquisites provided to non-employee
directors; and
o Detailed disclosure provided 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.
DIRECTOR RETIREMENT PLANS
Vote AGAINST retirement plans for non-employee directors.
Vote FOR shareholder proposals to eliminate retirement plans for non-employee
directors.
DISCLOSURE OF CEO COMPENSATION-TALLY SHEET
Encourage companies to provide better and more transparent disclosure related to
CEO pay. Consider withhold votes in the future from the compensation committee
and voting against equity plans if compensation disclosure is not improved and a
tally sheet is not provided.
In addition to the current SEC requirements, the following table sets forth the
current minimum standard on CEO pay disclosure according to ISS's guidelines:
- -----------------------------------------------------------------------------------------------------------
COMPONENT AMOUNT EARNED/GRANTED DESCRIPTION
- -----------------------------------------------------------------------------------------------------------
Base Salary Current figure Explanation of any increase in
base salary
- -----------------------------------------------------------------------------------------------------------
Annual Incentive Target: Explanation of specific
Actual earned: performance measures and
actual deliverables.
State amount tied to actual
performance.
State any discretionary bonus.
- -----------------------------------------------------------------------------------------------------------
Stock Options Number granted: Rationale for determining the
Exercise price: number of stock options
Vesting: issued to CEO.
Grant value:
Accumulated dividend
equivalents (if any).
- -----------------------------------------------------------------------------------------------------------
Restricted Stock Number granted: Performance based or time
Vesting: based.
Grant value:
Rationale for determining the
number of restricted stock
issued to CEO.
Accumulated dividends on
vested and unvested portion.
- -----------------------------------------------------------------------------------------------------------
Performance Shares Minimum: Explanation of specific
Target: performance measures and
Maximum: actual deliverables.
Actual earned:
Grant value: Any dividends on unearned
performance shares.
- -----------------------------------------------------------------------------------------------------------
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- -----------------------------------------------------------------------------------------------------------
COMPONENT AMOUNT EARNED/GRANTED DESCRIPTION
- -----------------------------------------------------------------------------------------------------------
Deferred compensation Executive portion: Provide structure and terms of
Company match (if any): program.
Accumulated executive Explanation of interest,
portion: formulas, minimum
Accumulated company match guarantees or multipliers on
(if any): deferred compensation.
Any holding periods on the
company match portion.
Funding mechanism
- -----------------------------------------------------------------------------------------------------------
Supplemental retirement Actual projected payment Provide structure and terms of
benefit obligations program.
Explanation of formula,
additional credits for years not
worked, multipliers or interest
on SERPs.
Funding mechanism.
- -----------------------------------------------------------------------------------------------------------
Executive perquisites Breakdown of the market The types of perquisites
value of various perquisites provided. Examples: company
aircraft, company cars, etc.
- -----------------------------------------------------------------------------------------------------------
Gross-ups (if any) Breakdown of gross-ups for
any pay component
- -----------------------------------------------------------------------------------------------------------
Severance associated with Estimated payout amounts for Single trigger or double
change-in-control cash, equity and benefits trigger.
- -----------------------------------------------------------------------------------------------------------
Severance (Termination Estimated payout amounts for
scenario under "for cause" and cash, equity and benefits
"not for cause") under different scenarios
- -----------------------------------------------------------------------------------------------------------
Post retirement package Estimated value of consulting
agreement and continuation of
benefits
- -----------------------------------------------------------------------------------------------------------
ESTIMATED TOTAL PACKAGE $
- -----------------------------------------------------------------------------------------------------------
See the remedy for Pay for Performance disconnect for a more qualitative
description of certain pay components.
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).
EMPLOYEE STOCK PURCHASE PLANS-- QUALIFIED PLANS
Vote CASE-BY-CASE on qualified employee stock purchase plans. 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.
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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.
EMPLOYEE STOCK PURCHASE PLANS-- NON-QUALIFIED PLANS
Vote CASE-by-CASE on nonqualified employee stock purchase plans. Vote FOR
nonqualified employee stock purchase plans with all the following features:
o Broad-based participation (i.e., all employees of the company with
the exclusion of individuals with 5 percent or more of beneficial
ownership of the company);
o Limits on employee contribution, which may be a fixed dollar amount
or expressed as a percent of base salary;
o Company matching contribution up to 25 percent of employee's
contribution, which is effectively a discount of 20 percent from
market value;
o No discount on the stock price on the date of purchase since there
is a company matching contribution.
Vote AGAINST nonqualified employee stock purchase plans when any of the plan
features do not meet the above criteria. If the company matching contribution
exceeds 25 percent of employee's contribution, evaluate the cost of the plan
against its allowable cap.
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.
Vote CASE-BY-CASE on amendments to existing plans to increase shares reserved
and to qualify for favorable tax treatment under the provisions of Section
162(m) as long as the plan does not exceed the allowable cap and the plan does
not violate any of the supplemental policies.
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.
OPTION EXCHANGE PROGRAMS/REPRICING OPTIONS
Vote CASE-by-CASE on management proposals seeking approval to exchange/reprice
options taking into consideration:
o Historic trading patterns;
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.
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If the surrendered options are added back to the equity plans for re-issuance,
then also take into consideration the company's three-year average burn rate.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
STOCK PLANS IN LIEU OF CASH
Vote CASE-by-CASE on plans which provide participants with the option of taking
all or a portion of their cash compensation in the form of stock.
Vote FOR non-employee director only equity plans which provide a
dollar-for-dollar cash for stock exchange.
Vote CASE-by-CASE on plans which do not provide a dollar-for-dollar cash for
stock exchange. In cases where the exchange is not dollar-for-dollar, the
request for new or additional shares for such equity program will be considered
using the binomial option pricing model. In an effort to capture the total cost
of total compensation, ISS will not make any adjustments to carve out the
in-lieu-of cash compensation.
TRANSFER PROGRAMS OF STOCK OPTIONS
One-time Transfers: WITHHOLD votes from compensation committee members if they
fail to submit one-time transfers for to shareholders for approval.
Vote CASE-BY-CASE on one-time transfers. Vote FOR if:
o Executive officers and non-employee directors are excluded from
participating;
o Stock options are purchased by third-party financial institutions at
a discount to their fair value using option pricing models such as
Black-Scholes or a Binomial Option Valuation or other appropriate
financial models;
o There is a two-year minimum holding period for sale proceeds (cash
or stock) for all participants.
Additionally, management should provide a clear explanation of why options are
being transferred and whether the events leading up to the decline in stock
price were beyond management's control. A review of the company's historic stock
price volatility should indicate if the options are likely to be back
"in-the-money" over the near term.
SHAREHOLDER PROPOSALS ON COMPENSATION
DISCLOSURE/SETTING LEVELS OR TYPES OF COMPENSATION FOR EXECUTIVES AND DIRECTORS
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 CASE-BY-CASE on 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.
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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.
OPTION REPRICING
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
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.
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, where substantial
portion would constitute 50 percent of the shares awarded to those
executives for that fiscal year.
SEVERANCE AGREEMENTS FOR EXECUTIVES/GOLDEN PARACHUTES
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, but is not limited to, 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. Change in
control is defined as a change in the company ownership structure.
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.
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9. CORPORATE RESPONSIBILITY
CONSUMER ISSUES AND PUBLIC SAFETY
ANIMAL RIGHTS
Generally vote AGAINST proposals to phase out the use of animals in product
testing unless:
o The company is conducting animal testing programs that are
unnecessary or not required by regulation;
o The company is conducting animal testing when suitable alternatives
are accepted and used at peer firms;
o The company has been the subject of recent, significant controversy
related to its testing programs.
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
Generally vote AGAINST proposals requesting that companies implement specific
price restraints on pharmaceutical products unless the company fails to adhere
to legislative guidelines or industry norms in its product pricing.
Vote CASE-BY-CASE on proposals requesting that the company evaluate their
product pricing considering:
o The existing level of disclosure on pricing policies;
o Deviation from established industry pricing norms;
o The company's existing initiatives to provide its products to needy
consumers;
o Whether the proposal focuses on specific products or geographic
regions.
DRUG REIMPORTATION
Generally vote FOR proposals requesting that companies report on the financial
and legal impact of their policies regarding prescription drug reimportation
unless such information is already publicly disclosed.
Generally vote AGAINST proposals requesting that companies adopt specific
policies to encourage or constrain prescription drug reimportation.
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;
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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. Evaluate the following:
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;
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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 peers 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.
Spin-off tobacco-related businesses:
o The percentage of the company's business affected;
o The feasibility of a spin-off;
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.
TOXIC CHEMICALS
Generally vote FOR resolutions requesting that a company discloses its policies
related to toxic chemicals.
Vote CASE-BY-CASE on resolutions requesting that companies evaluate and disclose
the potential financial and legal risks associated with utilizing certain
chemicals, considering:
o Current regulations in the markets in which the company operates;
o Recent significant controversy, litigation, or fines stemming from
toxic chemicals or ingredients at the company; and
o The current level of disclosure on this topic.
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Generally vote AGAINST resolutions requiring that a company reformulate its
products within a certain timeframe unless such actions are required by law in
specific markets.
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.
CONCENTRATED AREA FEEDING OPERATIONS (CAFOS)
Vote FOR resolutions requesting that companies report to shareholders on the
risks and liabilities associated with CAFOs unless:
o The company has publicly disclosed guidelines for its corporate and
contract farming operations, including compliance monitoring; or
o The company does not directly source from CAFOs.
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
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and has been the subject of recent, significant fines or litigation resulting
from greenhouse gas emissions.
KYOTO PROTOCOL COMPLIANCE
Generally vote FOR resolutions requesting that companies outline their
preparations to comply with standards established by Kyoto Protocol signatory
markets unless:
o The company does not maintain operations in Kyoto signatory markets;
o The company already evaluates and substantially discloses such
information; or,
o Greenhouse gas emissions do not significantly impact the company's
core businesses.
LAND USE
Generally vote AGAINST resolutions that request the disclosure of detailed
information on a company's policies related to land use or development unless
the company has been the subject of recent, significant fines or litigation
stemming from its land use.
NUCLEAR SAFETY
Generally vote AGAINST resolutions requesting that companies report on risks
associated with their nuclear reactor designs and/or the production and interim
storage of irradiated fuel rods unless:
o The company does not have publicly disclosed guidelines describing
its policies and procedures for addressing risks associated with its
operations;
o The company is non-compliant with Nuclear Regulatory Commission
(NRC) requirements; or
o The company stands out amongst its peers or competitors as having
significant problems with safety or environmental performance
related to its nuclear operations.
OPERATIONS IN PROTECTED AREAS
Generally vote FOR requests for reports outlining potential environmental damage
from operations in protected regions, including wildlife refuges unless:
o The company does not currently have operations or plans to develop
operations in these protected regions; or,
o The company provides disclosure on its operations and environmental
policies in these regions comparable to industry peers.
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.
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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; a comprehensive Code of Corporate Conduct; and/or a
Diversity Report; or
o The company has formally committed to the implementation of a
reporting program based on Global Reporting Initiative (GRI)
guidelines or a similar standard within a specified time frame.
GENERAL CORPORATE ISSUES
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 publish in newspapers and public media the company's
political contributions as such publications could present significant cost to
the company without providing commensurate value to shareholders.
Vote CASE-BY-CASE on proposals to improve the disclosure of a company's
political contributions considering:
o Recent significant controversy or litigation related to the
company's political contributions or governmental affairs; and
o The public availability of a policy on political contributions.
Vote AGAINST proposals barring 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.
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:
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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.
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.
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.
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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.
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.
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OPERATIONS IN NATIONS SPONSORING TERRORISM (E.G., 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 a
terrorism-sponsoring state, taking into account current disclosure on:
o The nature and purpose of the 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 non-discrimination
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;
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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.
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10. MUTUAL FUND PROXIES
ELECTION OF DIRECTORS
Vote CASE-BY-CASE on the election of directors and trustees, following the same
guidelines for uncontested directors for public company shareholder meetings.
However, mutual fund boards do not usually have compensation committees, so do
not withhold for the lack of this committee.
CONVERTING CLOSED-END FUND TO OPEN-END FUND
Vote CASE-BY-CASE on conversion proposals, considering the following factors:
o Past performance as a closed-end fund;
o Market in which the fund invests;
o Measures taken by the board to address the discount; and
o Past shareholder activism, board activity, and votes on related
proposals.
PROXY CONTESTS
Vote CASE-BY-CASE on proxy contests, 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
Vote CASE-BY-CASE on investment advisory agreements, 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
Vote CASE-BY-CASE on the authorization for or increase in preferred shares,
considering the following factors:
o Stated specific financing purpose;
o Possible dilution for common shares;
o Whether the shares can be used for antitakeover purposes.
1940 ACT POLICIES
Vote CASE-BY-CASE on policies under the Investment Advisor Act of 1940,
considering the following factors:
o Potential competitiveness;
o Regulatory developments;
o Current and potential returns; and
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o 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 the
current SEC interpretation.
CHANGING A FUNDAMENTAL RESTRICTION TO A NONFUNDAMENTAL RESTRICTION
Vote CASE-BY-CASE on proposals to change a fundamental restriction to a
non-fundamental restriction, considering the following factors:
o The fund's target investments;
o The reasons given by the fund for the change; and
o 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
non-fundamental.
NAME CHANGE PROPOSALS
Vote CASE-BY-CASE on name change proposals, considering the following factors:
o Political/economic changes in the target market;
o Consolidation in the target market; and
o Current asset composition.
CHANGE IN FUND'S SUBCLASSIFICATION
Vote CASE-BY-CASE on changes in a fund's sub-classification, considering the
following factors:
o Potential competitiveness;
o Current and potential returns;
o Risk of concentration;
o Consolidation in target industry.
DISPOSITION OF ASSETS/TERMINATION/LIQUIDATION
Vote CASE-BY-CASE on proposals to dispose of assets, to terminate or liquidate,
considering the following factors:
o Strategies employed to salvage the company;
o The fund's past performance;
o The terms of the liquidation.
CHANGES TO THE CHARTER DOCUMENT
Vote CASE-BY-CASE on changes to the charter document, 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;
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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 CASE-BY-CASE on re-incorporations, considering the following factors:
o Regulations of both states;
o Required fundamental policies of both states;
o 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 CASE-BY-CASE on distribution agreement proposals, considering the following
factors:
o Fees charged to comparably sized funds with similar objectives;
o The proposed distributor's reputation and past performance;
o The competitiveness of the fund in the industry;
o The terms of the agreement.
MASTER-FEEDER STRUCTURE
Vote FOR the establishment of a master-feeder structure.
MERGERS
Vote CASE-BY-CASE on merger proposals, considering the following factors:
o Resulting fee structure;
o Performance of both funds;
o Continuity of management personnel;
o Changes in corporate governance and their impact on shareholder
rights.
SHAREHOLDER PROPOSALS FOR MUTUAL FUNDS
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.
REIMBURSE SHAREHOLDER FOR EXPENSES INCURRED
Vote CASE-BY-CASE on shareholder proposals to reimburse proxy solicitation
expenses. When supporting the dissidents, vote FOR the reimbursement of the
proxy solicitation expenses.
TERMINATE THE INVESTMENT ADVISOR
Vote CASE-BY-CASE on proposals to terminate the investment advisor, considering
the following factors:
o Performance of the fund's Net Asset Value (NAV);
o The fund's history of shareholder relations;
o The performance of other funds under the advisor's management.
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ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
Four Corners manages multiple portfolios comprised principally of U.S.
dollar denominated, floating-rate, senior secured, commercial and industrial
loans and notes and other debt instruments and may manage portfolios of high
yield bonds. Michael P. McAdams, Chief Executive Officer and Robert I.
Bernstein, Chief Investment Officer, are co-portfolio managers. Mr. McAdams'
involvement in the investment process primarily relates to oversight and
strategic direction, while Mr. Bernstein has primary responsibility for the
day-to-day investment decisions. Both Mr. Bernstein and Mr. McAdams share
investment decision-making authority. The co-portfolio managers are supported in
their portfolio management activities by the Four Corners investment staff. Four
Corners' investment analysts are assigned loans within specific industries and
report to the Chief Investment Officer. Robert I. Bernstein has been a Managing
Director and Chief Investment Officer of Four Corners since 11/2001 through the
present. Michael P. McAdams has been the Managing Director, President and Chief
Executive Officer of Four Corners since 9/2001 through the present. Mr. McAdams
was a President and Managing Director of ING Capital Advisors, LLC from
11/95-9/2001.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
- -----------------------------------------------------------------------------------------------------------------------------------
Total Total Assets
# of Accounts that
# of Total Assets Managed that Advisory Fee
Name of Portfolio Manager Accounts Advisory Fee Based Based on
or Team Member Type of Accounts Managed ($ millions) on Performance Performance
- -----------------------------------------------------------------------------------------------------------------------------------
1. Robert I. Bernstein Registered Investment Companies*: 3 $ 940.6 0 $0
- -----------------------------------------------------------------------------------------------------------------------------------
Other Pooled Investment Vehicles: 5 $ 886.1 4 $ 880.9 M
- -----------------------------------------------------------------------------------------------------------------------------------
Other Accounts: 4 $ 1,530.3 1 $ 714.9 M
- -----------------------------------------------------------------------------------------------------------------------------------
2. Michael P. McAdams Registered Investment Companies*: 3 $ 940.6 0 $0
- -----------------------------------------------------------------------------------------------------------------------------------
Other Pooled Investment Vehicles: 5 $ 886.1 4 $ 880.9 M
- -----------------------------------------------------------------------------------------------------------------------------------
Other Accounts: 4 $ 1,530.3 1 $ 714.9 M
- -----------------------------------------------------------------------------------------------------------------------------------
* Information Provided as of May 31, 2006.
POTENTIAL CONFLICTS OF INTERESTS
In general, Four Corners seeks to allocate the purchase and sale of
corporate loans to clients in a fair and equitable manner to quickly and
prudently create a well-constructed, fully invested portfolio of corporate
loans. Since Four Corners' clients have varying investment restrictions, and
because of the constraining mechanics of the corporate loan market, allocation
of trades through methods such as pro-rata allocation are not feasible.
Therefore, the allocation of corporate loan purchases and sales to various
accounts is generally based on factors such as the client's investment
restrictions and objectives, including expected liquidity and/or third party
credit ratings, the client's acceptance or rejection of prospective investments,
if applicable, and the relative percentage of invested assets of a client's
portfolio, among others. Assets may be disproportionately allocated to accounts
during their initial investment (ramp up) period, notwithstanding that other
accounts may also have assets available for investment. Such disproportionate
allocation to accounts during the ramp-up process may have a detrimental effect
on other accounts. Subject to the foregoing, whenever Four Corners' clients have
available funds for investment, investments suitable and appropriate for each
will be allocated in a manner Four Corners believes to be equitable to each,
although such allocation may result in a delay in one or more client accounts
being fully invested that would not occur if an allocation to other client
accounts were not made. Moreover, it is possible that due to differing
investment objectives or for other reasons, Four Corners and its affiliates may
purchase securities or loans of an issuer for one client and at approximately
the same time recommend selling or sell the same or similar types of securities
or loans for another client. For these and other reasons, not all portfolios
will participate in the gains or losses experienced by other portfolios with
similar investment objectives.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
The portfolio managers' compensation is determined by the profitability
of Four Corners Capital Management as a firm without regard to the performance
of any one particular fund. The portfolio managers have limited incentive to
take undue risks when performance is lagging because of the indirect connection
between better fund performance and personal compensation. Compensation is
typically comprised of a base salary and bonus.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
------------------------------------------------------------------------------------
Name of Portfolio Manager or Dollar ($) Range of Fund Shares Beneficially Owned
Team Member
------------------------------------------------------------------------------------
Michael P. McAdams $0
------------------------------------------------------------------------------------
Robert I. Bernstein $0
------------------------------------------------------------------------------------
Information Provided as of May 31, 2006.
(B) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the
shareholders may recommend nominees to the registrant's board of 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. A copy of the Nominating and Governance
Committee Charter is available on the Registrant's website at
www.ftportfolios.com.
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 AUGUST 14, 2006
----------------------------------------------------------------------------
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 AUGUST 14, 2006
----------------------------------------------------------------------------
By (Signature and Title)* /s/ MARK R. BRADLEY
-------------------------------------------------------
Mark R. Bradley, Treasurer, Controller, Chief Financial
Officer and Chief Accounting Officer
(principal financial officer)
Date AUGUST 14, 2006
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.