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
First Trust/Four Corners Senior Floating Rate Income Fund
(Exact name of registrant as specified in charter)
1001 Warrenville Road, Suite 300
Lisle, IL 60532
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
1001 Warrenville Road, Suite 300
Lisle, IL 60532
(Name and address of agent for service)
registrant's telephone number, including area code: 630-241-4141
Date of fiscal year end: May 31
Date of reporting period: May 31, 2008
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. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
ANNUAL REPORT
FOR THE YEAR ENDED
MAY 31, 2008
FIRST TRUST/
FOUR CORNERS
SENIOR FLOATING
RATE INCOME FUND
(FOUR CORNERS CAPITAL MANAGEMENT LOGO) (FIRST TRUST LOGO)
TABLE OF CONTENTS
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND (FCM)
ANNUAL REPORT
MAY 31, 2008
Shareholder Letter ........................................................ 1
At A Glance ............................................................... 2
Portfolio Commentary ...................................................... 3
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 ................... 26
Additional Information .................................................... 27
Board of Trustees and Officers ............................................ 30
Privacy Policy ............................................................ 34
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Forward-looking
statements include statements regarding the goals, beliefs, plans or current
expectations of First Trust Advisors L.P. ("First Trust" or the "Advisor")
and/or Four Corners Capital Management, LLC ("Four Corners" or the
"Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause actual results, performance or achievements of
First Trust/Four Corners Senior Floating Rate Income Fund (the "Fund") to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. When evaluating the
information included in this report, you are cautioned not to place undue
reliance on these forward-looking statements, which reflect the judgment of the
Advisor and/or Four Corners and their respective representatives only as of the
date hereof. We undertake no obligation to publicly revise or update these
forward-looking statements to reflect events and circumstances that arise after
the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that 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 portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of Four
Corners are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, this report and other regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND (FCM)
ANNUAL REPORT
MAY 31, 2008
Dear Shareholders:
The year 2007 and the first half of 2008 have been challenging for the financial
markets and for many investors. Yet, regardless of the market, First Trust
Advisors L.P. ("First Trust") believes that in order to be successful in
reaching your financial goals, you should be invested for the long-term. We also
believe that investors should seek professional help from a financial advisor
who has been through many types of markets, knows the range of investments
available, and is committed to bringing you investments suitable to your
particular situation.
Our goal at First Trust has always been to offer a wide range of investment
products, including our family of closed-end funds, to help financial advisors
give you the opportunity to meet your financial objectives. We have continued to
expand our product line to ensure that you have many choices to fit your
investment needs.
The report you hold contains detailed information about your investment in First
Trust/Four Corners Senior Floating Rate Income Fund. It contains a portfolio
commentary from the Fund's portfolio management team that provides a market
recap for the period, a performance analysis and a market and Fund outlook.
Additionally, the report provides the Fund's financial statements for the period
covered by this report. I encourage you to read this document and discuss it
with your financial advisor.
As you may be aware, there is continuing uncertainty caused by the unprecedented
auction failures of auction rate preferred securities, also known as ARPS, over
the past several months. This Fund has issued this type of security, and First
Trust believes that auction rate securities may continue to experience failed
auctions. I want you to know that First Trust is seeking methods for refinancing
the outstanding auction rate securities that are experiencing failed auctions.
The ability to obtain this refinancing is contingent on finding third parties
willing to provide such financing on a cost effective basis. We will report to
you in the next edition of this report regarding this issue, or you may check
with your financial advisor.
First Trust has been through many types of markets and remains committed to
bringing you quality investment solutions regardless of the inevitable ups and
downs experienced in the market. We offer a variety of products that may fit
many financial plans to help those investors seeking long-term investment
success. As well, we are committed to giving you up-to-date information about
your investments so you and your financial advisor are always current on your
portfolio.
We continue to value our relationship with you, and we thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust/Four Corners Senior Floating Rate Income Fund
Page 1
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
"AT A GLANCE"
AS OF MAY 31, 2008 (UNAUDITED)
FUND STATISTICS
Symbol on American Stock Exchange FCM
Common Share Price $ 14.47
Common Share Net Asset Value $ 16.39
Premium (Discount) to NAV (11.71)%
Net Assets Applicable to Common Shares $80,712,896
Current Monthly Distribution per Common Share (1) $ 0.080
Current Annualized Distribution per Common Share $ 0.960
Current Distribution Rate on Closing Common Share Price (2) 6.63%
Current Distribution Rate on NAV (2) 5.85%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
Market NAV
------ ------
5/31/2007 $18.80 $18.87
6/8/2007 $18.46 $18.78
6/15/2007 $18.67 $18.79
6/22/2007 $18.73 $18.80
6/29/2007 $18.70 $18.76
7/6/2007 $18.53 $18.61
7/13/2007 $18.20 $18.52
7/20/2007 $17.58 $18.40
7/27/2007 $17.65 $17.88
8/3/2007 $16.78 $17.37
8/10/2007 $16.05 $17.54
8/17/2007 $15.89 $17.53
8/24/2007 $16.40 $17.52
8/31/2007 $16.72 $17.51
9/7/2007 $16.90 $17.41
9/14/2007 $16.38 $17.45
9/21/2007 $16.15 $17.71
9/28/2007 $16.30 $17.87
10/5/2007 $16.16 $17.83
10/12/2007 $16.25 $17.88
10/19/2007 $15.85 $17.88
10/26/2007 $15.82 $17.84
11/2/2007 $15.50 $17.71
11/9/2007 $15.26 $17.55
11/16/2007 $15.09 $17.45
11/23/2007 $14.82 $17.31
11/30/2007 $15.38 $17.27
12/7/2007 $15.23 $17.18
12/14/2007 $14.89 $17.21
12/21/2007 $14.85 $17.20
12/28/2007 $14.96 $17.12
1/4/2008 $15.16 $17.15
1/11/2008 $15.29 $17.06
1/18/2008 $15.11 $16.88
1/25/2008 $15.03 $16.52
2/1/2008 $14.62 $15.91
2/8/2008 $13.95 $15.35
2/15/2008 $13.32 $14.97
2/22/2008 $13.34 $15.24
2/29/2008 $13.80 $15.44
3/7/2008 $13.55 $15.29
3/14/2008 $13.17 $15.24
3/20/2008 $13.15 $15.13
3/28/2008 $13.16 $15.34
4/4/2008 $13.55 $15.49
4/11/2008 $13.73 $15.75
4/18/2008 $14.11 $15.95
4/25/2008 $14.53 $16.17
5/2/2008 $14.44 $16.31
5/9/2008 $14.52 $16.34
5/16/2008 $14.59 $16.33
5/23/2008 $14.37 $16.37
5/30/2008 $14.47 $16.39
PERFORMANCE
Average Annual
Total Return
1 Year Ended Inception (9/25/03)
5/31/2008 to 5/31/2008
------------ -------------------
Fund Performance
NAV (3) -5.68% 3.81%
Market Value (4) -16.42% 0.10%
Index Performance
S&P/LSTA Leveraged Loan Index -2.46% 4.25%
% OF TOTAL
TOP 10 BORROWERS INVESTMENTS
- ------------------------------------- -----------
Georgia-Pacific Corp. 2.3%
Las Vegas Sands, LLC 2.0
Charter Communications Operating, LLC 1.9
CHS/ Community Health Systems, Inc. 1.9
DaVita Inc. 1.7
Univision Communications, Inc. 1.5
WIMAR LANDCO, LLC 1.4
Macerich Partnership (The), L.P. 1.4
UPC Distribution Holding B.V. 1.4
Graphic Packaging International, Inc. 1.3
----
Total 16.8%
====
% OF TOTAL
CREDIT QUALITY (S&P RATINGS) (5) INVESTMENTS
- ------------------------------------- -----------
BBB 0.5%
BBB- 5.2
BB+ 13.1
BB 22.7
BB- 21.5
B+ 14.0
B 6.8
B- 1.0
CCC+ 0.1
CCC 0.3
CCC- 0.1
D 2.4
NR 3.5
NR (Privately Rated Securities) 7.9
Cash/Cash Equivalents 0.9
-----
Total 100.0%
=====
% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
- ------------------------------------- -----------
Consumer Discretionary 35.3%
Industrials 13.2
Health Care 10.7
Materials 8.7
Financials 7.6
Information Technologies 6.9
Energy 5.4
Utilities 5.2
Telecommunication Services 3.2
Consumer Staples 3.1
Cash/Cash Equivalents 0.7
-----
Total 100.0%
=====
(1) Most recent distribution paid or of record through 5/31/08. This
distribution was decreased subsequent to May 31, 2008. See Note 11 -
"Subsequent Events" in the Notes to Financial Statements.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or of record through the year ended May 31, 2008 and then
dividing by market price or NAV, as applicable, as of 5/31/08.
(3) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gain distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in net
asset value per share and does not reflect sales load. Past performance is
not indicative of future results.
(4) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price. Past performance is not indicative of future results.
(5) Ratings below BBB- by Standard & Poor's Ratings Group are considered to be
below investment grade.
Page 2
PORTFOLIO COMMENTARY
SUB-ADVISOR
Four Corners Capital Management, LLC ("Four Corners") was founded in 2001 by a
team of investment professionals and an affiliate of Australia-based Macquarie
Group, Ltd. ("Macquarie"). Four Corners manages approximately $3.8 billion of
assets (as of May 31, 2008), with an emphasis on senior secured floating-rate
corporate loans ("Senior Loans"). The experienced professionals at Four Corners
specialize in structuring and managing Senior Loan-based products for a global
client base. With multiple investment products, Four Corners' clients include
institutional investors, corporations, investment funds, high net worth and
retail investors. Four Corners is an investment advisor registered under the
Investment Advisors Act of 1940.
PORTFOLIO MANAGEMENT TEAM
MICHAEL P. MCADAMS, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Mr. McAdams is responsible for overseeing Four Corners' investment and
distribution activities. He has more than 29 years of experience in investment
management and banking, all of which have 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 working at ICA, Mr. McAdams was
founding portfolio manager of 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 in New York. He 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 has been an active member of the Loan Syndication and
Trading Association and was its Chairman in 2001, its Vice Chairman in 2002 and
has been a Board Member and/or served on committees reporting to the Board since
1998. Mr. McAdams received the 2006 Credit Investment News Outstanding
Contribution award in the U.S. Loan Market.
ROBERT I. BERNSTEIN, CFA, CHIEF INVESTMENT OFFICER
Mr. Bernstein is responsible for managing Four Corners' investment process. He
has over 16 years of experience in leveraged finance including senior secured
loans, high-yield bonds and private equity investments. Prior to joining Four
Corners, Mr. Bernstein was a partner of The Yucaipa Companies, a Los
Angeles-based private equity firm, where he completed M&A transactions and
leveraged financings valued in excess of $4 billion. Previously, Mr. Bernstein
was a Vice President in Bankers Trust's leveraged finance group, where he
arranged senior loan and high-yield bond financings for financial sponsors and
corporate issuers. Mr. Bernstein also worked in GE Capital's restructuring
group, where he focused primarily on asset-based loans to distressed borrowers.
Mr. Bernstein received an MBA in Finance from the University of Chicago and a
BBA in Finance magna cum laude from Hofstra University. He has earned the
Chartered Financial Analyst designation. Mr. Bernstein also served as an
infantry officer in the U.S. Marine Corps.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
The primary investment objective of the First Trust/Four Corners Senior Floating
Rate Income Fund ("FCM" or the "Fund") is to seek a high level of current
income. As a secondary objective, the Fund attempts to preserve capital. The
Fund pursues its objectives by investing in a portfolio of Senior Loans. There
can be no assurance that the Fund's investment objectives will be achieved. The
Fund may not be appropriate for all investors.
MARKET RECAP
The Fund's fiscal year ended May 31, 2008 included some of the most volatile
conditions in Senior Loan market history, despite strong fundamental performance
and record low default rates during much of the year. The year included the
worst quarter ever recorded (Q1 2008), during which the S&P/LSTA Leveraged Loan
Index ("Index") declined by -5.7%, and also included the best ever monthly Index
gain of 3.7% in April. As described in more detail below, we expect ongoing
volatility in the Senior Loan market to be higher than it had been prior to
Fiscal 2008.
As the sub-prime crisis began to unfold in mid-2007, there was a spillover
impact on the supply/demand relationship in the Senior Loan market. In recent
years, structured, securitized investment products such as collateralized loan
obligations ("CLOs") have been a significant source of demand in the Senior Loan
market, driving Senior Loan spreads to historical lows. As the sub-prime crisis
began to unfold, there was a dramatic global reduction in demand for all
structured product assets, including CLOs. This, in turn, resulted in a swift
and severe decline in demand for Senior Loans, even though most Senior Loans
have no direct exposure to sub-prime mortgage assets.
This dramatic reduction in demand coincided with record levels of Senior Loan
supply, as private equity firms sought to take advantage of favorable credit
markets, and commercial and investment banks agreed to provide Senior Loan and
high-yield bond financing for record amounts of mergers and acquisitions on very
borrower-friendly terms. This increase in supply, coupled with the decrease in
demand, created an imbalance that caused unprecedented declines in Senior Loan
prices, despite the fact that most CLOs and Senior Loans continue to perform
well.
Page 3
PORTFOLIO COMMENTARY - (CONTINUED)
The void created by the lack of CLO demand for Senior Loans has been partially
filled by non-traditional Senior Loan investors such as hedge funds, distressed
investors, newly created "dislocation" funds and equity-income funds. At reduced
price levels, these nontraditional investors recognized attractive relative
value in Senior Loans, which are typically secured and have priority claims over
borrowers' assets. However, these new Senior Loan market investors are typically
more focused on value across multiple asset classes, as opposed to being
dedicated to investing in Senior Loans, and as credit spreads widen or asset
prices decline across various asset classes, these investors are more likely to
trade in and out of Senior Loans (depending upon their relative value). This
increased capital velocity is in sharp contrast to the historically stable CLO
investor base. While we believe that these "non-traditional" investors will
continue to have incremental demand for loans and improve technical conditions
overall, we also believe that, compared to historical periods, their
participation in the Senior Loan market will result in higher volatility for the
foreseeable future.
PERFORMANCE ANALYSIS
FCM's NAV return of -5.7%(1) was one of the highest among its "pure-play" peer
group in Fiscal 2008, and the Fund's NAV return exceeded the broad peer group
average of -7.6%.(2) This is a result of the Fund's focus on higher quality
credit than many of its peers. The NAV return underperformed the Index return of
- -2.5% as a result of the negative impact of leverage, fees, expenses, and
un-invested cash balances which were not part of the Index return. The Fund
generated a total return of -16.4%(3) including market price change and
dividends for Fiscal 2008. The Fund's closing price on May 31, 2008 was $14.47,
which represented an 11.7% discount to its NAV, compared to the Fund's discount
to NAV of 0.4% twelve months earlier.
While credit spreads have widened significantly during Fiscal 2008, the
underlying FCM portfolio is still made up primarily of Senior Loans purchased
during the last several years. The credit spreads on these Senior Loans are
generally below the spreads on new Senior Loans which are being issued in the
current environment. As the assets in the Fund prepay, we will re-invest the
proceeds in either newly-issued Senior Loans that we expect to be on better
economic and structural terms than those which were issued prior to the loan
market correction, or pre-correction Senior Loans at discounted dollar prices.
The combination of reduced short-term interest rates and the credit spread
compression of recent years has pressured the Fund's dividend. While the Fund
had previously increased its dividend 14 times, it has had to reduce its
dividend 3 times in the last 12 months. The dividend distribution totaled $1.27
per Common Share during the fiscal year, which represented a 12.5% decrease from
the prior fiscal year. Based on the Fund's current dividend, FCM's distribution
rate is 6.6% (calculated on the Fund's share price) and 5.9% (based on the
Fund's NAV as of May 31, 2008), which was slightly lower than the pure play peer
group averages of 7.1% and 6.5%, respectively.
While we are disappointed with the Senior Loan market's heightened volatility
and the Fund's poor market price performance, we do believe that the recent
correction is healthy and good for the market overall. We were also pleased with
the Fund's relative performance compared to the peer group, based on total
return and the Fund's credit positioning going into an economic slowdown. Credit
standards had been eroding in 2006 and 2007 and the correction has already
resulted in new loans being issued on more investor-friendly economic and
structural terms. As discussed above, the Senior Loan market witnessed a marked
increase in volatility during the period covered by this report. The Fund's NAV
fluctuated from a high of $18.81 to a low of $14.79, a difference of $4.02 per
Common Share, whereas the market price of the Fund closed as high as $18.73 and
as low as $12.93, a difference of $5.80 per Common Share.
MARKET AND FUND OUTLOOK
Default rates during most of Fiscal 2008 were at or near historically low
levels, going as low as 0.2% in June 2007.(4) However, we have seen a meaningful
increase in default rates during calendar 2008, and Fiscal 2008 ended with a
trailing 12-month default rate of 1.7%.(5) We believe that the U.S. economy is
slowing and that default rates will continue to increase for the foreseeable
future.
Despite increasing default rates, we believe that the Senior Loan prices are
still being depressed by weak technical conditions and that Senior Loans are
"cheap" based on their underlying fundamentals. Loan market spreads based on an
assumed 3-year life were 626 basis points above LIBOR as of May 31, 2008.(6)
Assuming historical average default and recovery rates, we believe current loan
prices and spread levels imply continuous default rates of 12.9%, versus the
1.7% trailing default rate and the highest default rate ever of 7.5% in June
2000.(5)(7) This means that over one in three loans would need to default in the
next three years to justify current credit spreads; however, Four Corners does
not believe that this default level is likely. While we do expect Senior Loans
to remain volatile, we also see good value in the asset class at current price
and spread levels. Furthermore, we believe that we have constructed a portfolio
that will continue to perform in a slowing economy and offer investors a
compelling yield.
Page 4
PORTFOLIO COMMENTARY - (CONTINUED)
1) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gains distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per Common
Share and does not reflect sales load.
2) The "pure play" peer group consists of a smaller subset (FCM, FCT, PPR, TLI
and VVR) of the broad peer group, which invest almost exclusively in senior
loans. We believe that these "pure play" funds are generally more
comparable to the Fund than the broad peer group as the non-senior loan
holdings are routinely less than 5% of the fund. Of the broad peer group,
eleven funds invest a material portion of their assets in high yield bonds,
emerging markets debt or other types of corporate debt securities.
3) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in market
price per Common Share.
4) Leverage Lending Quarterly Review Q1 2008, S&P Leveraged Commentary & Data.
5) LoanStats Weekly June 12, 2008, S&P Leveraged Commentary & Data.
6) Based on the Credit Suisse Leveraged Loan Index, May 2008.
7) Based on Four Corners' calculation of Credit Suisse's Index data. Average
Rate ("AR") = 3.61%, Average Default Rate ("ADR") = 2.6%, Adjusted Credit
Loss ("ACL") = AR*ADR or 0.66%, Current Credit Spreads ("CCS") = 6.26%.
Implied Annual Default Rate ("IDR") = ((CCS-ACL) / (1-ADR)) / 10,000 or
12.9%.
Page 5
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (a)
MAY 31, 2008
RATINGS
PRINCIPAL (UNAUDITED) (b) STATED
VALUE DESCRIPTION MOODY'S S&P RATE MATURITY (c) VALUE
- -------------- --------------------------------------- --------------- -------------- ------------ ------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - 169.3%
AEROSPACE & DEFENSE - 8.4%
$ 500,000 BE Aerospace, Inc...................... NR(e) BBB- 4.75%-6.47% 08/24/12 $ 498,750
716,444 DAE Aviation Holdings, Inc............. B2 BB- 6.45%-6.65% 07/31/14 695,399
627,838 GenCorp, Inc........................... Ba2 BB 4.64%-4.90% 04/30/13 583,889
999,906 ILC Industries, Inc.................... NR(e) NR(e) 4.92% 02/24/12 944,911
997,468 Mid-Western Aircraft Systems, Inc...... Ba3 BBB- 4.57% 12/31/11 976,272
750,000 Robertson Aviation, LLC................ NR(e) NR(e) 5.64%-7.72% 04/19/13 738,748
471,326 Safenet, Inc........................... B1 B+ 5.46% 04/12/14 407,697
997,579 Vought Aircraft Industries, Inc........ Ba3 B- 4.89% 12/22/11 967,651
1,000,000 Wesco Aircraft Hardware Corp........... B1 BB- 4.95% 09/29/13 978,750
------------
6,792,067
------------
AGRICULTURAL PRODUCTS - 1.1%
984,092 Dole Food Company, Inc................. Ba3 B+ 4.71%-6.00% 04/12/13 910,439
------------
AIRLINES - 0.5%
495,000 Delta Air Lines, Inc................... Ba2 NR(e) 4.71%-4.90% 04/30/12 420,043
------------
ALUMINUM - 1.2%
682,344 Novelis Corp........................... Ba2 BB 4.70% 07/06/14 653,344
310,156 Novelis, Inc........................... Ba2 BB 4.70% 07/06/14 296,975
------------
950,319
------------
APPAREL RETAIL - 0.8%
697,322 Hanesbrands, Inc....................... Ba2 BB+ 4.13%-4.66% 09/05/13 677,661
------------
APPLICATION SOFTWARE - 1.0%
938,462 Verint Systems, Inc.................... NR B+ 5.87% 05/25/14 844,615
------------
ASSET MANAGEMENT & CUSTODY BANKS - 1.7%
458,319 Gartmore Investment Management......... Ba3 BB+ 4.67% 05/11/14 403,320
1,000,001 Nuveen Investments, Inc................ Ba3 BB- 5.38%-5.39% 11/13/14 935,500
------------
1,338,820
------------
AUTOMOBILE MANUFACTURERS - 2.2%
498,737 Ford Motor Co.......................... Ba3 B+ 5.80% 12/15/13 429,641
1,488,712 General Motors Corp.................... Ba3 BB- 5.06% 11/29/13 1,320,302
------------
1,749,943
------------
AUTOMOTIVE RETAIL - 1.1%
987,537 KAR Holdings, Inc...................... Ba3 B+ 4.95% 10/18/13 915,200
------------
BROADCASTING & CABLE TV - 19.2%
2,992,500 Charter Communications Operating, LLC.. B1 B+ 4.89%-4.90% 03/06/14 2,657,543
1,000,000 Citadel Broadcasting Corp.............. Ba3 BB- 4.02%-4.33% 06/12/14 863,333
1,960,000 CSC Holdings, Inc...................... Ba1 BBB- 4.34% 03/29/13 1,859,327
984,271 Cumulus Media, Inc..................... Ba3 B 4.13%-4.28% 06/07/14 848,933
498,718 DIRECTV Holdings, LLC.................. Baa3 BBB- 3.88% 04/13/13 483,064
1,496,249 Gray Television, Inc................... B1 B+ 4.19% 12/31/14 1,342,260
984,999 Intelsat Corp.......................... B1 BB- 5.18% 02/03/13 933,780
250,000 Paxson Communications Corp............. B1 CCC+ 5.96% 01/15/12 200,000
Page 6 See Notes to Financial Statements
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
MAY 31, 2008
RATINGS
PRINCIPAL (UNAUDITED) (b) STATED
VALUE DESCRIPTION MOODY'S S&P RATE MATURITY (c) VALUE
- -------------- --------------------------------------- --------------- -------------- ------------ ------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (CONTINUED)
BROADCASTING & CABLE TV - (CONTINUED)
$ 500,000 Raycom Media, Inc...................... NR NR 4.06% 06/25/14 $ 460,000
497,500 Sirius Satellite Radio, Inc............ B1 B 4.69% 12/20/12 457,700
1,986,244 Tribune Co............................. B2 B 5.54% 05/17/14 1,468,165
385,250 Univision Communications, Inc. (f)..... B3 CCC 4.88% 03/29/09 366,469
2,000,000 Univision Communications, Inc.......... Ba3 B 4.63%-5.15% 09/29/14 1,685,251
2,000,000 UPC Distribution Holding B.V........... Ba3 B+ 4.55% 12/31/14 1,875,000
------------
15,500,825
------------
CASINOS & GAMING - 14.1%
273,524 Cannery Casino Resorts, LLC............ B2 BB 4.95% 05/18/13 263,096
224,409 Cannery Casino Resorts, LLC (g)........ B2 BB 2.25% (h)-5.24% 05/18/13 215,855
496,175 CCM Merger, Inc........................ B1 BB- 4.64%-5.00% 10/21/12 466,404
318,182 Golden Nugget, Inc..................... B1 BB- 4.39%-4.46% 06/14/14 290,341
181,818 Golden Nugget, Inc. (g)................ B1 BB- 1.75% (h) 06/30/14 165,909
493,750 Greenwood Racing, Inc.................. B2 BB- 4.64% 11/28/11 459,187
249,370 Herbst Gaming, Inc..................... Caa3 CCC- 9.13%-11.22% 12/02/11 189,209
496,692 Isle of Capri Casinos, Inc............. Ba3 BB 4.45% 11/30/13 447,022
2,982,000 Las Vegas Sands, LLC................... Ba3 BB 4.17%-4.45% 05/23/14 2,740,956
955,366 Penn National Gaming, Inc.............. Ba2 BBB- 4.13%-4.66% 10/03/12 928,963
954,981 Seminole Tribe of Florida.............. NR(e) NR(e) 4.13%-4.63% 03/05/14 928,718
1,000,000 VML US Finance, LLC.................... B1 BB- 4.95% 05/25/13 965,000
2,035,714 WIMAR LANDCO, LLC (i).................. WR D 6.95% 07/03/08 1,944,107
1,411,314 WIMAR OPCO, LLC (i).................... WR D 8.25% 01/03/12 1,365,006
------------
11,369,773
------------
COMPUTER HARDWARE - 1.6%
1,493,168 Activant Solutions Holdings, Inc....... B1 B+ 4.75%-5.06% 05/02/13 1,321,455
------------
DISTILLERS & VINTNERS - 1.8%
1,500,000 Constellation Brands, Inc.............. Ba3 BB- 4.19%-6.44% 06/05/13 1,458,482
------------
DIVERSIFIED CHEMICALS - 2.9%
196,364 Brenntag Holding GmbH &
Company KG.......................... B1 B+ 5.79% 01/18/14 182,128
803,636 Brenntag Holding GmbH &
Company KG.......................... B1 B+ 5.79% 12/23/13 745,373
1,455,476 Huntsman International, LLC............ Ba1 BB+ 4.13% 04/19/14 1,408,173
------------
2,335,674
------------
DIVERSIFIED COMMERCIAL & PROFESSIONAL
SERVICES - 5.8%
1,523,256 Affinion Group, Inc.................... Ba2 BB 4.89%-5.18% 10/17/12 1,453,757
1,488,750 Clarke American Corp................... B1 BB- 5.20% 04/04/14 1,242,362
497,500 First Data Corp........................ Ba3 BB- 5.14%-5.45% 09/24/14 461,148
651,096 Itron, Inc............................. Ba3 B+ 4.39%-4.70% 04/18/14 636,446
490,978 N.E.W. Holdings I, LLC................. NR(e) NR(e) 5.15%-5.49% 05/22/14 443,109
526,463 Open Solutions, Inc.................... Ba3 BB- 5.19% 01/23/14 461,313
------------
4,698,135
------------
DIVERSIFIED METALS & MINING - 1.1%
932,500 Alpha Natural Resources, LLC........... Ba3 BB 4.42% 10/26/12 916,181
------------
See Notes to Financial Statements Page 7
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
MAY 31, 2008
RATINGS
PRINCIPAL (UNAUDITED) (b) STATED
VALUE DESCRIPTION MOODY'S S&P RATE MATURITY (c) VALUE
- -------------- --------------------------------------- --------------- -------------- ------------ ------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (CONTINUED)
EDUCATION SERVICES - 0.6%..............
$ 476,666 PRO-QUEST-CSA, LLC..................... Ba3 BB- 5.14%-5.69% 02/09/14 $ 452,833
------------
ELECTRIC UTILITIES - 8.4%
449,012 Astoria Generating Company.............
Acquisitions LLC....................... B1 BB- 4.66% 02/23/12 430,154
1,490,003 Calpine Corp........................... B2 B+ 5.58% 03/29/14 1,441,113
993,298 Covanta Energy Corp.................... Ba2 BB 4.19%-6.25% 02/09/14 950,257
598,273 Mirant North America, LLC.............. Ba2 BB 4.13% 01/03/13 577,988
1,823,854 NRG Energy, Inc........................ Ba1 BB 4.10%-4.20% 02/01/13 1,749,987
1,002,623 Riverside Energy Center, LLC........... Ba3 B 7.15% 06/24/11 1,002,623
627,963 Rocky Mountain Energy
Center, LLC......................... Ba3 B 7.15%-7.25% 06/24/11 627,963
------------
6,780,085
------------
ENVIRONMENTAL & FACILITIES SERVICES -
0.9%
757,193 EnergySolutions, LLC................... NR(e) NR(e) 4.68%-7.10% 06/07/13 734,476
------------
FOOD DISTRIBUTORS - 1.6%
856,667 Birds Eye Foods, Inc................... NR(e) NR(e) 4.45% 03/22/13 813,833
495,000 Dean Foods Co.......................... B1 BB 3.89%-4.20% 04/02/14 472,050
------------
1,285,883
------------
902,256 FOOD RETAIL - 1.1%
SUPERVALU, Inc......................... Ba3 BB+ 3.61% 06/02/12 871,579
------------
FOREST PRODUCTS - 4.0%
1,426,388 Georgia-Pacific Corp................... Ba2 BB+ 4.45%-4.74% 12/29/12 1,348,531
1,959,912 Georgia-Pacific Corp................... Ba2 BB+ 4.40%-4.74% 12/20/12 1,852,934
------------
3,201,465
------------
HEALTH CARE FACILITIES - 5.1%
1,483,731 HCA, Inc............................... Ba3 BB 4.95% 11/17/13 1,395,278
971,818 Health Management Associates, Inc. Ba3 BB- 4.45% 02/28/14 901,187
977,986 Select Medical Corp.................... Ba2 BB- 4.63%-6.00% 02/24/12 905,861
830,323 USP Domestic Holdings, Inc............. Ba3 B 5.49% 04/19/14 755,594
161,291 USP Domestic Holdings, Inc. (g)........ Ba3 B 1.75% (h)-5.02% 04/19/14 146,773
------------
4,104,693
------------
HEALTH CARE SERVICES - 9.6%
2,721,072 CHS/ Community Health
Systems, Inc........................ Ba3 BB 4.63%-4.90% 07/25/14 2,565,133
139,211 CHS/ Community Health..................
Systems, Inc. (g)................... Ba3 BB 1.00% (h) 07/25/14 131,233
2,500,000 DaVita Inc............................. Ba1 BB+ 3.89%-4.22% 10/05/12 2,391,562
901,786 Fresenius Medical Care AG.............. Baa3 BBB- 3.95%-4.09% 03/31/13 872,315
493,750 Healthways, Inc........................ Ba2 BB+ 4.20% 12/01/13 474,000
490,000 Quintiles Transnational Corp........... B1 BB 4.70% 03/31/13 466,112
843,479 US Oncology Holdings, Inc.............. Ba2 BB- 5.45%-5.65% 08/20/11 814,484
------------
7,714,839
------------
Page 8 See Notes to Financial Statements
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
MAY 31, 2008
RATINGS
PRINCIPAL (UNAUDITED) (b) STATED
VALUE DESCRIPTION MOODY'S S&P RATE MATURITY (c) VALUE
- -------------- --------------------------------------- --------------- -------------- ------------ ------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (CONTINUED)
INDEPENDENT POWER PRODUCERS & ENERGY
TRADERS - 2.3%
$ 1,000,000 Dynegy Holdings, Inc................... Ba1 BB- 4.36% 04/12/13 $ 945,750
995,000 Texas Competitive Electric Holdings
Company, LLC........................ Ba3 B+ 6.12%-6.48% 10/10/14 936,318
------------
1,882,068
------------
INDUSTRIAL MACHINERY - 0.5%
496,250 Edwards (Cayman Islands II) Ltd........ B1 BB 4.64% 05/31/14 389,556
------------
INSURANCE BROKERS - 0.5%
405,433 Hub International Holdings, Inc........ B2 B+ 5.20% 06/13/14 366,410
91,075 Hub International Holdings, Inc. (g)... B2 B+ 1.63% (h)-5.20% 06/13/14 82,309
------------
448,719
------------
INTEGRATED TELECOMMUNICATION
SERVICES - 12%
918,957 Telesat Canada......................... B1 BB- 5.65%-5.90% 10/31/14 870,999
78,728 Telesat Canada (g)..................... B1 BB- 1.50% (h)-5.92% 10/31/14 74,618
------------
945,617
------------
INTERNET RETAIL - 0.5%
485,904 Sabre Holdings Corp.................... B1 B+ 4.38%-4.90% 09/30/14 414,416
------------
INTERNET SOFTWARE & SERVICES - 1.1%
972,687 SunGard Data Systems, Inc.............. Ba3 BB 4.51% 02/28/14 915,874
------------
INVESTMENT BANKING & BROKERAGE - 1.5%
1,267,197 Ameritrade Holding Corp................ Ba1 BB 3.88% 12/31/12 1,238,685
------------
IT CONSULTING & OTHER SERVICES - 5.5%
505,352 Alion Science and Technology Corp...... B1 BB- 5.35%-5.49% 02/06/13 404,281
996,111 CACI International, Inc................ Ba1 NR 4.00%-4.49% 05/03/11 977,434
1,732,402 DynCorp International, LLC............. Ba2 BB 4.63% 06/28/12 1,658,775
1,481,287 West Corp.............................. B1 BB- 4.76%-5.30% 10/24/13 1,369,661
------------
4,410,151
------------
LEISURE FACILITIES - 3.5%
982,500 Cedar Fair, L.P........................ Ba3 BB 4.38% 08/30/12 933,512
984,925 London Area and Waterfront
Finance, LLC........................ NR(e) NR(e) 5.40% 03/08/12 945,528
1,047,087 Six Flags, Inc......................... B1 B 4.60%-5.33% 04/30/15 937,891
------------
2,816,931
------------
LIFE & HEALTH INSURANCE - 1.1%
492,506 Conseco, Inc........................... Ba3 B+ 4.38% 10/10/13 419,862
462,147 Multiplan Merger Corp.................. B1 B+ 4.94% 04/12/13 434,129
------------
853,991
------------
MOVIES & ENTERTAINMENT - 6.6%
1,000,000 AMC Entertainment, Inc................. Ba1 BB- 4.14% 01/26/13 949,286
810,200 Deluxe Entertainment Services
Group, Inc.......................... B1 B 4.63%-5.15% 05/11/13 704,874
See Notes to Financial Statements Page 9
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
MAY 31, 2008
RATINGS
PRINCIPAL (UNAUDITED) (b) STATED
VALUE DESCRIPTION MOODY'S S&P RATE MATURITY (c) VALUE
- -------------- --------------------------------------- --------------- -------------- ------------ ------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (CONTINUED)
MOVIES & ENTERTAINMENT - (CONTINUED)
$ 1,489,994 Discovery Communications
Holding, LLC........................ NR(e) NR(e) 4.70% 05/14/14 $ 1,445,666
500,000 National CineMedia, LLC................ B1 B+ 4.62% 02/13/15 459,609
1,914,077 WMG Acquisition Corp................... Ba3 BB 4.38%-4.92% 03/01/11 1,795,644
------------
5,355,079
------------
MULTI-UTILITIES - 0.6%
500,000 KGEN, LLC.............................. Ba3 BB 4.50% 02/08/14 475,625
------------
OFFICE SERVICES & SUPPLIES - 1.1%
947,765 Emdeon Business Services, LLC.......... B1 BB- 4.70% 11/16/13 892,083
------------
OIL & GAS EQUIPMENT & SERVICES - 2.5%
992,500 Hercules Offshore, Inc................. Ba3 BB 4.45% 07/11/13 961,898
1,074,051 Targa Resources, Inc................... Ba3 B+ 4.65%-4.70% 10/31/12 1,048,544
------------
2,010,442
------------
OIL & GAS EXPLORATION & PRODUCTION
- 3.9%
1,394,860 ATP Oil & Gas Corp..................... NR NR 5.88%-6.45% 04/14/10 1,357,549
997,446 Helix Energy Solutions Group, Inc...... Ba2 BB+ 4.38%-4.71% 07/01/13 967,938
853,737 Vulcan Energy Corp..................... Ba2 BB 4.18% 08/12/11 819,589
------------
3,145,076
------------
OIL & GAS REFINING, MARKETING &
TRANSPORTATION - 2.8%
748,340 Calumet Lubricants Company, L.P........ B1 BB- 6.51%-6.68% 01/03/15 664,153
1,150,000 Energy Transfer Equity, L.P............ Ba2 NR 4.51% 02/08/12 1,116,116
500,000 Enterprise GP Holdings, L.P............ Ba2 BB- 4.87%-4.96% 11/08/14 489,375
------------
2,269,644
------------
PACKAGED FOODS & MEATS - 0.9%
722,257 Michael Foods, Inc..................... Ba3 BB- 4.54%-4.85% 11/21/10 702,395
------------
PAPER PACKAGING - 2.3%
1,962,157 Graphic Packaging International, Inc... Ba3 BB- 4.70%-4.92% 05/16/14 1,862,578
------------
PAPER PRODUCTS - 2.3%
756,892 Appleton Papers, Inc................... Ba2 BB+ 4.45%-4.51% 06/05/14 700,124
1,201,875 Domtar Corp............................ Ba1 BB+ 3.78% 03/07/14 1,146,789
------------
1,846,913
------------
PHARMACEUTICALS - 3.7%
1,985,000 Cardinal Health 409, Inc............... Ba3 BB- 4.95% 04/10/14 1,764,169
914,910 Graceway Pharmaceuticals, LLC.......... Ba3 BB 5.13%-5.45% 05/03/12 716,679
493,750 Stiefel Laboratories, Inc.............. B1 BB- 4.97% 12/28/13 477,703
------------
2,958,551
------------
PUBLISHING - 7.4%
1,000,000 Cenveo Corp............................ Ba2 BB+ 4.35% 06/21/13 943,750
1,064,238 Dex Media West, Inc.................... Ba1 BB 3.89%-4.41% 03/09/10 1,053,265
500,000 GateHouse Media, Inc................... B2 BB- 4.65%-4.72% 08/28/14 348,750
Page 10 See Notes to Financial Statements
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
MAY 31, 2008
RATINGS
PRINCIPAL (UNAUDITED) (b) STATED
VALUE DESCRIPTION MOODY'S S&P RATE MATURITY (c) VALUE
- -------------- --------------------------------------- --------------- -------------- ------------ ------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (CONTINUED)
PUBLISHING - (CONTINUED)
$ 1,975,000 Idearc, Inc............................ Ba3 BBB- 4.39%-4.70% 11/17/14 $ 1,640,731
558,410 Media News Group, Inc.................. B1 B- 4.63% 12/30/10 455,104
647,385 RH Donnelley, Inc...................... Ba1 BB 4.10%-4.50% 06/30/11 631,431
455,833 Wenner Media, LLC...................... NR(e) NR(e) 4.45% 10/02/13 419,367
500,000 Yell Group, PLC........................ Ba3 BB- 4.38% 10/27/12 445,781
------------
5,938,179
------------
RAILROADS - 0.6%
500,000 Railamerica Transportation Corp. NR NR 4.93% 08/14/08 485,000
------------
REAL ESTATE MANAGEMENT & DEVELOPMENT -
2.9%
440,000 LNR Property Corp...................... B2 BB 6.03% 07/12/09 363,000
440,000 LNR Property Corp...................... B2 BB 6.03% 07/12/11 372,900
493,703 Mattamy Funding Partnership............ NR(e) NR(e) 4.94% 04/11/13 428,287
490,549 Shea Capital I, LLC.................... NR(e) NR(e) 4.39%-5.00% 10/27/11 343,385
1,000,000 Tishman Speyer Real Estate D.C.
Area Portfolio, L.P................. Ba2 BB- 4.34% 12/27/12 850,000
------------
2,357,572
------------
RETAIL REITS - 3.5%
930,263 Capital Automotive, L.P................ Ba1 BB+ 4.58% 12/16/10 898,036
2,000,000 Macerich Partnership (The), L.P........ NR(e) NR(e) 4.38% 04/26/10 1,900,000
------------
2,798,036
------------
SEMICONDUCTORS - 1.6%
1,481,250 Freescale Semiconductors, Inc.......... Ba1 BB 4.58% 12/01/13 1,330,096
------------
SPECIALIZED CONSUMER SERVICES - 2.7%
994,953 Nielsen Finance, LLC................... Ba3 B+ 4.73% 08/09/13 934,189
1,322,677 RMK Acquisition Corp................... Ba3 BB 4.57% 01/26/14 1,241,003
------------
2,175,192
------------
SPECIALIZED FINANCE - 1.5%
500,000 J.G. Wentworth, LLC.................... B2 B+ 4.92% 04/04/14 393,750
966,667 Peach Holdings, Inc.................... B2 B 6.64%-6.95% 11/21/13 790,250
------------
1,184,000
------------
SPECIALTY CHEMICALS - 1.2%
990,000 Celanese Holdings, LLC................. Ba2 BB+ 4.19% 04/02/14 947,925
------------
SPECIALTY STORES - 0.5%
461,634 Yankee Candle Company (The), Inc....... Ba3 BB- 4.39%-4.61% 02/06/14 420,912
------------
TECHNOLOGY DISTRIBUTORS - 0.8%
815,000 H3C Holdings, Ltd...................... Ba2 BB 5.63% 09/28/12 684,600
------------
TRUCKING - 2.0%
1,678,459 Hertz (The) Corp....................... Ba1 BB+ 4.25%-4.47% 12/21/12 1,598,943
------------
See Notes to Financial Statements Page 11
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
MAY 31, 2008
RATINGS
PRINCIPAL (UNAUDITED) (b) STATED
VALUE DESCRIPTION MOODY'S S&P RATE MATURITY (c) VALUE
- -------------- --------------------------------------- --------------- -------------- ------------ ------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (CONTINUED)
WIRELESS TELECOMMUNICATION SERVICES - 4.4%
$ 500,000 Asurion Corp........................... NR(e) NR(e) 5.78% 07/03/14 $ 462,187
497,500 Clearwire Corp......................... NR NR 8.95%-9.02% 07/03/12 470,137
990,000 Crown Castle Operating Co.............. Ba3 BB+ 4.20% 01/09/14 938,202
1,000,000 Intelsat (Bermuda), Ltd. (j)........... B3 BB- 5.20% 02/01/14 1,005,250
694,750 Windstream Corp........................ Baa3 BBB 4.22% 07/17/13 677,526
------------
3,553,302
------------
TOTAL SENIOR FLOATING-RATE TERM LOAN
INTERESTS (d) (Cost $146,154,058)... 136,653,636
------------
SENIOR FLOATING-RATE NOTES- 0.7%
ELECTRICAL COMPONENTS & EQUIPMENT -
0.4%
325,000 NXP B.V................................ Ba3 BB+ 5.46% 10/15/13 297,375
------------
LEISURE FACILITIES - 0.3%
250,000 HRP Myrtle Beach (k)................... B2 B+ 7.38% 04/01/12 220,000
------------
TOTAL SENIOR FLOATING-RATE NOTES
(Cost $576,125)...................................................................... 517,375
------------
NOTES- 0.0%
HOMEBUILDING - 0.0%
145,455 TOUSA, Inc. PIK (i) (k) (l) (m)........ NR NR 1.00% 07/01/15 12,800
------------
TOTAL NOTES
(Cost $87,273)...................... 12,800
------------
SHARES DESCRIPTION VALUE
- -------------- -------------------------------------------------------------------------------------- ------------
PREFERRED STOCKS - 0.0%
HOMEBUILDING - 0.0%
855 TOUSA, Inc. (8.0%, Series A Convertible Payment-In-Kind Preferred Stock) (i) (k) (m) 0
------------
TOTAL PREFERRED STOCKS................................................................ 0
(Cost $512,727) ------------
CLOSED-END FUND - 0.3%
ASSET MANAGEMENT & CUSTODY BANKS - 0.3%
38,000 ING Prime Rate Trust.................................................................. 226,860
------------
TOTAL CLOSED-END FUND................................................................. 226,860
(Cost $235,908) ------------
Page 12 See Notes to Financial Statements
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
MAY 31, 2008
RATINGS
PRINCIPAL (UNAUDITED) (b) STATED
VALUE DESCRIPTION MOODY'S S&P RATE MATURITY (c) VALUE
- -------------- --------------------------------------- --------------- -------------- ------------ ------------
SHORT-TERM INVESTMENTS - 1.2%
COMMERCIAL PAPER - 1.2%
$ 1,000,000 Elysian Funding, LLC................... 2.60% 06/02/08 $ 999,928
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $999,928)...................................................................... 999,928
------------
TOTAL INVESTMENTS - 171.5%
(Cost $148,566,019) (n)............................................................... 138,410,599
NET OTHER ASSETS AND LIABILITIES - (0.8)%............................................. (640,605)
MONEY MARKET CUMULATIVE PREFERRED(r) SHARES, AT LIQUIDATION VALUE
(INCLUDING ACCRUED DISTRIBUTIONS) - (70.7)%........................................ (57,057,098)
------------
NET ASSETS (APPLICABLE TO COMMON SHAREHOLDERS) - 100.0%............................... $ 80,712,896
============
- ----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets applicable to Common Shareholders.
(b) Ratings below Baa3 by Moody's Investors Service, Inc. or BBB- by Standard &
Poor's Ratings Group are considered to be below investment grade.
(c) Senior Loans generally are subject to mandatory and/or optional prepayment.
As a result, the actual remaining maturity of Senior Loans may be
substantially less than the stated maturities shown.
(d) Senior Loans in which the Fund invests generally pay interest at rates
which are periodically predetermined by reference to a base lending rate
plus a premium. These base lending rates are generally (i) the lending rate
offered by one or more major European banks, such as the London Interbank
Offered Rate ("LIBOR"), (ii) the prime rate offered by one or more United
States banks or (iii) the certificate of deposit rate.
(e) This Senior Loan Interest was privately rated upon issuance. The rating
agency does not provide ongoing surveillance on the rating.
(f) This issue is secured by a second lien on the issuer's assets.
(g) Delayed Draw Loan (See Note 2E in the Notes to Financial Statements).
(h) Represents commitment fee rate on delayed draw loans.
(i) This borrower has filed for protection in federal bankruptcy court.
(j) This issue is unsecured.
(k) This security is restricted and cannot be offered for public sale without
first being registered under the Securities Act of 1933, as amended. Prior
to registration, restricted securities may only be resold in transactions
exempt from registration (See Note 2F in the Notes to Financial
Statements).
(l) This security is a Senior Subordinated Payment-in-Kind Election Note
whereby 1.00% of interest per annum will be paid in cash and 13.75% of
interest per annum shall be paid by the issuer, at its option (i) entirely
in cash, (ii) entirely in Payment-in-Kind interest or (iii) in a
combination of (i) and (ii). Interest is paid semi-annually and the first
interest payment date was January 15, 2008.
(m) Security is fair valued in accordance with procedures adopted by the Fund's
Board of Trustees.
(n) Aggregate cost for federal income tax purposes is $148,612,739.
NR Not rated.
WR Withdrawn rating.
See Notes to Financial Statements Page 13
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2008
ASSETS:
Investments, at value
(Cost $148,566,019) ......................................... $138,410,599
Cash ........................................................... 1,000,812
Prepaid expenses ............................................... 3,910
Receivables:
Interest .................................................... 812,430
Investment securities sold .................................. 725,740
Dividends ................................................... 1,943
------------
Total Assets ................................................ 140,955,434
------------
LIABILITIES:
Payables:
Investment securities purchased ............................. 2,936,514
Investment advisory fees .................................... 113,261
Audit and tax fees .......................................... 55,700
Legal fees .................................................. 30,085
Printing fees ............................................... 25,350
Custodian fees .............................................. 9,868
Administrative fees ......................................... 7,018
Transfer agent fees ......................................... 3,267
Trustees' fees and expenses ................................. 74
Accrued expenses and other liabilities ......................... 4,303
------------
Total Liabilities ........................................... 3,185,440
------------
NET ASSETS INCLUDING MONEY MARKET CUMULATIVE PREFERRED(R)
SHARES: ..................................................... $137,769,994
============
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) ............................................ $ 57,057,098
------------
NET ASSETS (APPLICABLE TO COMMON SHAREHOLDERS) ................. $ 80,712,896
============
NET ASSETS CONSIST OF:
Paid-in capital ................................................ $ 92,711,637
Par value ...................................................... 49,243
Accumulated net investment income (loss) ....................... (103,818)
Accumulated net realized gain (loss) on investments
sold and swap transactions .................................. (1,788,746)
Net unrealized appreciation (depreciation) on
investments and swap transactions ........................... (10,155,420)
------------
NET ASSETS (APPLICABLE TO COMMON SHAREHOLDERS) ................. $ 80,712,896
============
NET ASSET VALUE, per Common Share (par value $0.01 per
Common Share) ............................................... $ 16.39
============
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, 2008
INVESTMENT INCOME:
Interest ....................................................... $ 10,266,481
Dividends ...................................................... 72,954
Other income ................................................... 92,985
------------
Total investment income ..................................... 10,432,420
------------
EXPENSES:
Investment advisory fees ....................................... 1,367,013
Money Market Cumulative Preferred(R) Shares commission fees .... 148,008
Administrative fees ............................................ 84,557
Audit and tax fees ............................................. 54,500
Custodian fees ................................................. 43,581
Legal fees ..................................................... 42,440
Trustees' fees and expenses .................................... 42,065
Transfer agent fees ............................................ 37,748
Printing fees .................................................. 28,441
Other .......................................................... 97,465
------------
Total expenses .............................................. 1,945,818
------------
Fees waived by investment advisor ........................... (25,711)
------------
Net expenses ................................................ 1,920,107
------------
NET INVESTMENT INCOME .......................................... 8,512,313
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ................................................. (1,235,293)
Credit default swaps ........................................ (29,834)
------------
Net realized gain (loss) ....................................... (1,265,127)
------------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................. (10,066,109)
Credit default swaps ........................................ (4,283)
------------
Net change in unrealized appreciation (depreciation) ........... (10,070,392)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ........................ (11,335,519)
------------
MONEY MARKET CUMULATIVE PREFERRED(R) SHARE DIVIDENDS ........... (3,114,008)
------------
NET INCREASE (DECREASE) IN NET ASSETS (APPLICABLE TO COMMON
SHAREHOLDERS) RESULTING FROM OPERATIONS ..................... $ (5,937,214)
============
See Notes to Financial Statements Page 15
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
5/31/08 5/31/2007
------------ ------------
OPERATIONS:
Net investment income (loss) .................... $ 8,512,313 $ 9,740,972
Net realized gain (loss) ........................ (1,265,127) 278,898
Net change in unrealized appreciation
(depreciation) ............................... (10,070,392) (649,464)
Distributions to Money Market Cumulative
Preferred(R) Shareholders from:
Net investment income ........................ (3,114,008) (3,019,946)
------------ ------------
Net increase (decrease) in net assets
applicable to Common Shareholders
resulting from operations .................... (5,937,214) 6,350,460
------------ ------------
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income ........................ (6,010,303) (7,155,572)
Return of capital ............................ (258,394) --
------------ ------------
Total distributions to Common
Shareholders ................................. (6,268,697) (7,155,572)
------------ ------------
Net increase (decrease) in net assets
applicable to Common Shareholders ............ (12,205,911) (805,112)
NET ASSETS (APPLICABLE TO COMMON SHAREHOLDERS):
Beginning of year ............................... 92,918,807 93,723,919
------------ ------------
End of year ..................................... $ 80,712,896 $ 92,918,807
============ ============
Accumulated net investment income
(loss) at end of year ........................ $ (103,818) $ 497,890
============ ============
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, 2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets applicable to
Common Shareholders resulting from
operations ................................... $ (5,937,214)
Adjustments to reconcile net increase
(decrease) in net assets applicable to
Common Shareholders resulting from
operations to net cash provided by operating
activities:
Purchases of investments ..................... (1,209,289,526)
Sales and maturities of investments .......... 1,218,408,250
Net amortization/accretion of
premium/discount on investments ........... (226,623)
Net realized loss on investments ............. 1,235,293
Net realized loss on credit default swaps .... 29,834
Net change in unrealized
appreciation/depreciation on investments .. 10,066,109
CHANGES IN ASSETS AND LIABILITIES:
Net change in net unrealized
appreciation/depreciation on credit
default swaps ............................. 4,283
Decrease in cash segregated as collateral
for open credit default swaps ............. 750,000
Decrease in interest receivable .............. 291,872
Decrease in dividends receivable ............. 7,061
Increase in prepaid expenses ................. (380)
Decrease in receivable for investment
securities sold ........................... 2,057,476
Decrease in payable for investment
securities purchased ...................... (10,522,308)
Decrease in accumulated unpaid dividends on
Money Market Cumulative Preferred(R)
Shares .................................... (9,250)
Decrease in investment advisory fees
payable ................................... (3,600)
Decrease in audit and tax fees payable ....... (500)
Increase in legal fees payable ............... 20,819
Decrease in transfer agent fees payable ...... (163)
Decrease in printing fees payable ............ (7,747)
Decrease in administrative fees payable ...... (603)
Increase in custodian fees payable ........... 1,479
Decrease in Trustees' fees and expenses
payable ................................... (7,009)
Decrease in accrued expenses and other
liabilities ............................... (1,988)
---------------
CASH PROVIDED BY OPERATING ACTIVITIES ........... $ 6,865,565
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders ......... (6,010,303)
Return of capital ............................ (258,394)
---------------
CASH USED BY FINANCING ACTIVITIES ............... (6,268,697)
-----------
Increase in cash ................................ 596,868
Cash at beginning of year ....................... 403,944
-----------
Cash at end of year ............................. $ 1,000,812
===========
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 YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
5/31/2008 5/31/2007 5/31/2006 5/31/2005 5/31/2004(a)
--------- --------- --------- --------- -----------
Net asset value, beginning of period ................. $ 18.87 $ 19.03 $ 19.07 $ 19.16 $ 19.10(b)
--------- --------- --------- --------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................................ 1.73 1.98 1.75 1.26 0.61
Net realized and unrealized gain (loss) .............. (2.31) (0.08) 0.10 0.02 0.25
Distributions paid to MMP (c) Shareholders from:
Net investment income ............................. (0.63) (0.61) (0.48) (0.26) (0.07)
--------- --------- --------- --------- -----------
Total from investment operations ..................... (1.21) 1.29 1.37 1.02 0.79
--------- --------- --------- --------- -----------
DISTRIBUTIONS PAID TO COMMON SHAREHOLDERS FROM:
Net investment income ............................. (1.22) (1.45) (1.24) (0.95) (0.53)
Net realized gain ................................. -- -- (0.17) (0.16) --
Return of capital ................................. (0.05) -- -- -- --
--------- --------- --------- --------- -----------
Total distributions to Common Shareholders ........... (1.27) (1.45) (1.41) (1.11) (0.53)
--------- --------- --------- --------- -----------
Dilutive impact from the offering of MMP Shares (d) .. -- -- -- -- (0.16)
--------- --------- --------- --------- -----------
Common Share offering costs charged to
paid-in capital ................................... -- -- -- -- (0.04)
--------- --------- --------- --------- -----------
Net asset value, end of period ....................... $ 16.39 $ 18.87 $ 19.03 $ 19.07 $ 19.16
========= ========= ========= ========= ===========
Market value, end of period .......................... $ 14.47 $ 18.80 $ 17.63 $ 18.00 $ 20.70
========= ========= ========= ========= ===========
TOTAL RETURN BASED ON NET ASSET VALUE (e) (f) ........ (5.68)% 7.39% 8.12% 5.49% 3.12%
========= ========= ========= ========= ===========
TOTAL RETURN BASED ON MARKET VALUE (f) (g) ........... (16.42)% 15.49% 6.12% (7.84)% 6.40%
========= ========= ========= ========= ===========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON SHAREHOLDERS:
Ratio of total expenses to average net assets ........ 2.32% 2.18% 2.19% 2.09% 2.00%(h)
Ratio of net expenses to average net assets .......... 2.29% 2.10% 2.07% 1.92% 1.84%(h)
Ratio of net investment income to average
net assets ........................................ 10.15% 10.52% 9.12% 6.53% 4.73%(h)
Ratio of net investment income to average net assets
net of MMP dividends (i) .......................... 6.44% 7.26% 6.63% 5.16% 4.18%(h)
SUPPLEMENTAL DATA:
Portfolio turnover rate .............................. 41% 92% 83% 113% 107%
Net assets, end of period (in 000's) ................. $ 80,713 $ 92,919 $ 93,724 $ 93,919 $ 94,170
Ratio of total expenses to total average Managed
Assets (j) ........................................ 1.38% 1.35% 1.36% 1.31% 1.35%(h)
Ratio of net expenses to total average Managed
Assets (j) ........................................ 1.36% 1.30% 1.29% 1.20% 1.24%(h)
PREFERRED SHARES:
Total MMP Shares outstanding ......................... 2,280 2,280 2,280 2,280 2,280
Liquidation and market value per MMP share (k) ....... $ 25,025 $ 25,029 $ 25,024 $ 25,013 $ 25,004
Asset coverage per share (l) ......................... $ 60,400 $ 65,754 $ 66,107 $ 66,193 $ 66,303
- ----------
(a) Initial seed date of September 18, 2003. The Fund commenced operations on
September25, 2003.
(b) Net of sales load of $0.90 per Common Share on initial offering.
(c) Money Market Cumulative Preferred(R) ("MMP")Shares.
(d) The expenses associated with the offering of the MMP Shares had a $(0.16)
impact on the Common Share NAV .
(e) 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.
(f) Total return is not annualized for periods less than one year.
(g) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price.
(h) Annualized.
(i) Ratio reflects the effect of distributions to MMP Shareholders.
(j) Managed Assets are calculated by taking the Fund's average daily gross
asset value (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.
(k) Includes accumulated and unpaid distributions to MMP Shareholders.
(l) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the MMP Shares), and dividing by the number of
MMP Shares outstanding.
Page 18 See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2008
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 attempts to preserve capital. The
Fund pursues these objectives by investing in a portfolio of senior secured
floating rate corporate loans ("Senior Loans"). There can be no assurance that
the Fund will achieve its investment objectives. Investing in Senior Loans
involves credit risk and, during periods of generally declining credit quality,
it may be particularly difficult for the Fund to achieve its secondary
investment objective. The Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the 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 NAV per Common Share is calculated by dividing the value of all assets of
the Fund (including accrued interest), less all liabilities (including accrued
expenses, dividends declared but unpaid and any borrowings of the Fund) and the
liquidation value of any outstanding Preferred Shares, by the total number of
Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio 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, First Trust Advisors L.P. ("First Trust") may use a fair value
method to value the Fund's securities and other investments. Additionally, if
events occur after the close of the principal market for particular securities
(e.g., domestic debt and foreign securities), but before the Fund values its
assets, that could materially affect NAV, First Trust may use a fair value
method to value the Fund's securities and other 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 when purchased are valued at amortized cost.
Page 19
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2008
B. CREDIT DEFAULT SWAPS:
The Fund may enter into credit default swap contracts for hedging purposes or to
gain exposure to a credit in which the Fund may otherwise invest. A credit
default swap contract is an agreement between two parties to exchange the credit
risk of an issuer. The Fund may be either the buyer or seller in a credit
default swap transaction. The "buyer" in a credit default swap contract is
obligated to pay the "seller" a periodic stream of payments over the term of the
contract provided that no event of default on the underlying reference
obligation has occurred. If an event of default occurs, the seller must pay the
buyer the full notional value, or "par value", of the reference obligation. In
exchange, the seller receives the par value of securities of the reference
obligor. In the case of cash settlement, the seller will pay the difference
between par and the market value of the securities of the reference obligor. An
event of default may be a grace period extension, obligation acceleration,
repudiation/moratorium, or restructuring.
Buying a credit default swap contract involves the risk that the contract may
expire worthless and the credit risk that the seller may fail to satisfy its
payment obligations to the Fund in the event of default. Selling a credit
default swap contract involves greater risks than if the Fund had invested in
the reference obligation directly. The Fund will segregate cash or liquid assets
in an amount equal to the aggregate market value of the credit default swap
contracts of which it is a seller. Additionally, the Fund maintains cash or
liquid assets for the full notional amount of the credit default swap contracts
of which it is a seller. The Fund may only enter into such transactions with
counterparties rated A- or higher.
Credit default swap contracts are marked to market daily based upon quotations
from brokers or market makers and the change in value, if any, is recorded as
unrealized appreciation (depreciation). For a credit default swap contract sold
by the Fund, payment of the agreed upon amount made by the Fund in the event of
default of the referenced debt obligation is recorded as the cost of the
reference debt obligation purchased/received. As of May 31, 2008, the Fund had
no credit default swaps.
C. REPURCHASE AGREEMENTS:
The Fund engages in repurchase agreement transactions. Under the terms of a
typical repurchase agreement, the Fund takes possession of an underlying debt
obligation subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during the Fund's holding period. This arrangement results in a fixed rate
of return that is not subject to market fluctuations during the Fund's holding
period. The value of the collateral is at all times at least equal to the total
amount of the repurchase obligation, including interest. In the event of
counterparty default, the Fund has the right to use the collateral to offset
losses incurred. There is potential loss to the Fund in the event the Fund is
delayed or prevented from exercising its rights to dispose of the collateral
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.
D. 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 maintains liquid assets with a
current value at least equal to the amount of its when-issued or
delayed-delivery purchase commitments. At May 31, 2008, the Fund had no
when-issued or delayed-delivery purchase commitments.
E. UNFUNDED LOAN COMMITMENTS:
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund had unfunded delayed draw loan commitments of
approximately $537,161 as of May 31, 2008. The Fund is obligated to fund these
loan commitments at the borrower's discretion. Net unrealized depreciation of
$27,899 from the commitments is included in "Net unrealized appreciation
(depreciation) on investments and swap transactions" on the Statement of Assets
and Liabilities.
F. RESTRICTED SECURITIES:
The Fund invests in restricted securities, which are securities that cannot be
offered for public sale without first being registered under the Securities Act
of 1933, as amended. Prior to registration, restricted securities may only be
resold in transactions exempt from registration. The Fund held restricted
securities at May 31, 2008 as 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 footnote (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.
Page 20
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2008
% OF
CARRYING NET ASSETS
VALUE APPLICABLE
ACQUISITION PRINCIPAL PER SHARE CURRENT 5/31/08 TO COMMON
SECURITY DATE VALUE/SHARES 5/31/08 CARRYING COST VALUE SHAREHOLDERS
- ------------------------------ ----------- ------------ --------- ------------- -------- ------------
HRP Myrtle Beach 3/23/06 250,000 $88.00 $250,000 $220,000 0.27%
TOUSA, Inc. - Notes 7/31/07(1) 145,455 8.80 87,273 12,800 0.02%
TOUSA, Inc. - Preferred Stocks 7/31/07(1) 855 0.00 512,727 0 0.00%
-------- -------- ----
$850,000 $232,800 0.29%
======== ======== ====
(l) Security was acquired through a restructuring that was effective on July
31, 2007.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with the financing associated with leverage. If the Fund
recognizes a long-term capital gain, it will be required to allocate such gain
between the Common Shares and Money Market Cumulative Preferred(R) Shares ("MMP
Shares") issued by the Fund in proportion to the total dividends paid for the
year. Distributions will automatically be reinvested into additional Common
Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash
distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterizations of distributions
made by the Fund. Permanent differences incurred during the tax year ended May
31, 2008 resulting in book and tax accounting differences, have been
reclassified at year end to reflect an increase in undistributed income by
$10,290 and a decrease in accumulated net realized gain (loss) on investments
sold by $10,290. Net assets applicable to Common Shareholders were not affected
by this reclassification.
The tax character of distributions paid during the fiscal years ended May 31,
2008 and May 31, 2007 was as follows:
2008 2007
---------- -----------
Distributions paid from:
Ordinary Income .............................. $9,124,311 $10,175,518
Return of Capital ............................ 258,394 --
As of May 31, 2008, the components of distributable earnings on a tax basis are
as follows:
Undistributed Ordinary Income ................ $ --
Net Unrealized Appreciation (Depreciation) ... $(10,202,140)
Accumulated Capital and other losses ......... $ (1,788,746)
H. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward for eight years following the
year of loss and offset such loss against any future realized capital gains. At
May 31, 2008, the Fund had available realized capital losses of $441,001 and
$646,089 to offset future net capital gains through the fiscal years ended 2014
and 2016, respectively.
POST-OCTOBER LOSSES. Under current laws, certain capital losses realized after
October 31 may be deferred and treated as occurring on the first day of the
following fiscal year. For the fiscal year ended May 31, 2008, the Fund intends
to elect to defer net realized losses incurred from November 1, 2007 through May
31, 2008 of $701,656.
In June 2006, Financial Accounting Standards Board ("FASB") Interpretation No.
48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement 109 ("FIN 48"), was issued and is effective for fiscal years beginning
after December 15, 2006. This Interpretation prescribes a minimum threshold for
financial statement recognition of the benefit of a tax position taken or
expected to be taken in a tax return. As of May 31, 2008, management has
evaluated the application of FIN 48 to the Fund, and has determined that there
is no material impact resulting from the adoption of this Interpretation on the
Fund's financial statements.
Page 21
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2008
I. EXPENSES:
The Fund pays all expenses directly related to its operations.
J. ACCOUNTING PRONOUNCEMENT:
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements
("FAS 157"), effective for the fiscal years beginning after November 15, 2007.
FAS 157 defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. Disclosure will include fair
value measurement at the reporting date and the assignment of levels within the
hierarchy in which the fair value measurements fall. At this time, management is
evaluating the implications of FAS 157 and its impact on the Fund's financial
statements, if any, has not been determined.
In March 2008, FASB released Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS
161"). FAS 161 requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. The
application of FAS 161 is required for fiscal years beginning after November 15,
2008 and interim periods within those fiscal years. Management is currently
evaluating the impact the adoption of FAS 161 will have on the Fund's financial
statement disclosures, if any.
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 investment 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 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 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 investment advisor" on the Statement of Operations.
PNC Global Investment Servicing (U.S.) Inc. ("PNC"), formerly known as PFPC
Inc., serves as the Fund's Administrator and Transfer Agent in accordance with
certain fee arrangements. PFPC Trust Company, an indirect, majority-owned
subsidiary of The PNC Financial Services Group, Inc., serves as the Fund's
Custodian in accordance with certain fee arrangements.
Deutsche Bank Trust Company Americas, a wholly-owned subsidiary of Deutsche Bank
AG ("Auction Agent"), serves as the Fund's MMP Share transfer agent, registrar,
dividend disbursing agent and redemption agent.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid an annual retainer
of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and
an annual retainer of $7,500 per trust for each subsequent trust added to the
First Trust Fund Complex. The annual retainer is allocated equally among each of
the trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually and the
Chairman of the Audit Committee is paid $5,000 annually, with such compensation
paid by the trusts in the First Trust Fund Complex and divided among those
trusts. Trustees are also reimbursed by the trusts in the First Trust Fund
Complex for travel and out-of-pocket expenses in connection with all meetings.
Effective January 1, 2008, each of the chairmen of the Nominating and Governance
Committee and Valuation Committee is paid $2,500 annually to serve in such
capacities, with such compensation paid by the trusts in the First Trust Fund
Complex and divided among those trusts. Also effective January 1, 2008, the Lead
Independent Trustee and each Committee chairman will serve two-year terms.
Page 22
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2008
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, 2008 were $55,854,818 and
$58,658,552, respectively.
As of May 31, 2008, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $184,429 and
the aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $10,386,569.
5. COMMON SHARES
As of May 31, 2008, 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.
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, 2008, the Fund has
2,280 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 Fund pays commissions to the auction agent as
compensation for conducting the auctions. These fees are included in the "Money
Market Cumulative Preferred(R) Shares commission fees" on the Statement of
Operations.
The markets for auction rate securities have continued to experience a number of
failed auctions, including auctions relating to the MMP Shares. A failed auction
results when there are not enough bidders in the auction at rates below the
maximum rate as prescribed by the terms of the security. When an auction fails,
the rate is automatically set at the maximum rate. A failed auction does not
cause an acceleration of, or otherwise have any impact on, outstanding principal
amounts due. In the case of the Fund's outstanding MMP Shares, the maximum rate
under the terms of those securities has been one-hundred fifty percent (and
could be up to two hundred seventy-five percent, depending on the ratings of the
MMP Shares) of the greater of: (1) the applicable AA composite commercial paper
rate (for a rate period of fewer than 184 days) or the applicable U.S. Treasury
index rate (for a rate period of 184 days or more), or (2) the applicable
London-InterBank Offered Rate.
On June 19, 2008, the Fund redeemed $35 million of its $57 million outstanding
MMP Shares with proceeds from a Revolving Credit Facility ("Credit Facility")
with the Bank of Nova Scotia. The Credit Facility is to be used as leverage for
the Fund. The Credit Facility has an expiration date of May 12, 2009. The total
commitment under the Credit Facility is $35,000,000. Loans under the Credit
Facility will bear interest at a per annum rate equal to either: (i) the
Adjusted LIBOR Rate plus a margin of 1.00% or (ii) the greater of (A) the prime
rate established by The Bank of Nova Scotia and (B) the Federal Funds Rate plus
0.50%. The Adjusted LIBOR Rate for the Loans (including the margin) in effect at
June 19, 2008 was 3.81%. The Fund also pays additional borrowing costs, which
include a commitment fee at a rate per annum equal to 0.10% payable on the daily
average of the unused commitment. Under the requirements of the 1940 Act, the
Fund, immediately after any such borrowings, must have an "asset coverage" of at
least 300% (33-1/3% of the Fund's total assets after borrowings).
First Trust is continuing to seek methods for refinancing the approximately $22
million of the Fund's MMP Shares that remain outstanding. The ability to obtain
this refinancing is contingent on finding third parties willing to provide such
financing on a cost effective basis. There is no assurance that First Trust will
be successful in finding such financing, and any such financing arrangements
would be subject to approval of the Fund's Board of Trustees.
The annual dividend rate in effect as of May 31, 2008 was 3.61%. 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, 2008, were 7.00% and 3.61%, respectively, and the average
dividend rate was 5.37%. 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.
Page 23
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2008
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. RISK CONSIDERATIONS
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the bond market, or when political or economic events
affecting the issuers occur.
LOWER GRADE DEBT INSTRUMENTS: The Senior Loans in which the Fund invests are
generally lower grade. These lower grade debt instruments may become the subject
of bankruptcy proceedings or otherwise subsequently default as to the repayment
of principal and/or payment of interest or be downgraded to ratings in the lower
rating categories. Lower grade debt instruments tend to be less liquid than
higher grade debt instruments.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The Fund borrowed pursuant to a leverage borrowing
program, through the issuance of Preferred Shares, which constitutes a
substantial lien and burden by reason of their prior claim against the income of
the Fund and against the net assets of the Fund in liquidation. The rights of
lenders to receive payments of interest on and repayments of principal on any
borrowings made by the Fund under a leverage borrowing program are senior to the
rights of holders of Common Shares and the holders of Preferred Shares, with
respect to the payment of dividends or upon liquidation. If the Fund is not in
compliance with certain credit facility provisions, the Fund may not be
permitted to declare dividends or other distributions, including dividends and
distributions with respect to Common Shares or Preferred Shares or purchase
Common Shares or Preferred Shares.
SENIOR LOAN RISK: In the event a borrower fails to pay scheduled interest or
principal payments on a Senior Loan held by the Fund, the Fund will experience a
reduction in its income and a decline in the market value of the Senior Loan,
which will likely reduce dividends and lead to a decline in the net asset value
of the Fund's Common Shares. If the Fund acquires a Senior Loan from another
lender, for example, by acquiring a participation, the Fund may also be subject
to credit risks with respect to that lender. The value of the collateral may not
equal the Fund's investment when the Senior Loan is acquired or may decline
below the principal amount of the Senior Loan subsequent to the Fund's
investment. Also, to the extent that collateral consists of stock of the
borrower or its subsidiaries or affiliates, the Fund bears the risk that the
stock may decline in value, be relatively illiquid, and/ or may lose all or
substantially all of its value, causing the Senior Loan to be under
collateralized. Therefore, the liquidation of the collateral underlying a Senior
Loan may not satisfy the issuer's obligation to the Fund in the event of
non-payment of scheduled interest or principal, and the collateral may not be
readily liquidated.
AUCTION RISK: If an auction fails you may not be able to sell some or all of
your preferred shares. No third parties related to the auction nor the Fund
itself are obligated to purchase preferred shares in an auction or otherwise,
nor is the Fund required to redeem preferred shares in the event of a failed
auction.
8. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
9. SUBSEQUENT EVENTS
On May 19, 2008, the Fund declared a dividend of $0.070 per share to Common
Shareholders of record June 4, 2008, payable June 16, 2008.
On June 20, 2008, the Fund declared a dividend of $0.070 per share to Common
Shareholders of record July 3, 2008, payable July 15, 2008.
Page 24
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2008
Effective July 14, 2008, PNC Global Investment Servicing (U.S.) Inc., formerly
known as PFPC, and PFPC Trust Company, no longer serve as the Fund's
Administrator and Transfer Agent and Custodian. As of that date, in accordance
with certain fee agreements, JPMorgan Investor Services Company serves as the
Fund's Administrator and Fund Accountant, JPMorgan Chase Bank, National
Association serves as the Custodian and American Stock Transfer & Trust Company
serves as the Transfer Agent.
Page 25
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, 2008, the related statement of
operations and cash flows for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for 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, 2008, by correspondence with the Fund's
custodian, agent banks, and brokers; where replies were not received, we
performed other auditing procedures. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of May 31, 2008, the results of its operations and its cash flows for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for the periods presented,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Deloitte & Jouche LLP
Chicago, Illinois
July 24, 2008
Page 26
ADDITIONAL INFORMATION (UNAUDITED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2008
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
American Stock Transfer & Trust Company (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price equal
to the greater of (i) NAV per Common Share on that date or (ii) 95% of
the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and will
purchase Common Shares in the open market, on the 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 (866) 659-2649, 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 and a transaction fee of $15.00.
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 American Stock Transfer &
Trust Company, 6201 15th Avenue, Brooklyn, New York, 11219 or through their
website located at www.amstock.com (you will need to know your 10-digit
participant number and social security number to gain access to your account
online).
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund votes proxies relating to
portfolio 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 27
ADDITIONAL INFORMATION (UNAUDITED) - (CONTINUED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2008
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the First Trust/Four Corners Senior
Floating Rate Income Fund and First Trust/Four Corners Senior Floating Rate
Income Fund II was held on September 10, 2007. At the Annual Meeting, holders of
Common and Preferred Shares of First Trust/Four Corners Senior Floating Rate
Income Fund voting together elected James A. Bowen for a three-year term,
Trustee Niel B. Nielson for a two-year term and Trustee Richard E. Erickson for
a one-year term. Holders of Preferred Shares elected Trustee Thomas R. Kadlec
and Trustee Robert F. Keith each for one-year terms. The number of votes cast in
favor of James A. Bowen was 4,482,639, the number of votes against was 114,575
and the number of abstentions was 329,416. The number of votes cast in favor of
Niel B. Nielson was 4,477,935, the number of votes against was 119,279 and the
number of abstentions was 329,416. The number of votes cast in favor of Richard
E. Erickson was 4,482,185, the number of votes against was 115,029 and the
number of abstentions was 329,416. The number of votes cast in favor of Thomas
R. Kadlec was 1,990, no votes were against and the number of abstentions was
290. The number of votes cast in favor of Robert F. Keith was 1,990, no votes
were against and the number of abstentions was 290.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATION REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AND
SUB-ADVISORY CONTRACTS
The Board of Trustees of First Trust/Four Corners Senior Floating Rate Income
Fund (the "Fund"), including the Independent Trustees, unanimously approved the
continuation of the Investment Management Agreement (the "Advisory Agreement")
between the Fund and First Trust Advisors L.P. (the "Advisor") and the
Investment Sub-Advisory Agreement (the "Sub-Advisory Agreement" and together
with the Advisory Agreement, the "Agreements") among the Fund, the Advisor and
Four Corners Capital Management, LLC (the "Sub-Advisor"), at a meeting held on
March 3, 2008. The Board determined that the terms of the Agreements are fair
and reasonable and that the Agreements continue to be in the best interests of
the Fund.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services provided by the Advisor and the Sub-Advisor
(including the relevant personnel responsible for these services and their
experience); the advisory and sub-advisory fees for the Fund as compared to fees
charged by investment advisors and sub-advisors to comparable funds and as
compared to fees charged to other clients of the Advisor and the Sub-Advisor;
expenses of the Fund as compared to expense ratios of comparable funds; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall-out benefits to the Advisor and the Sub-Advisor; and
information on the Advisor's and the Sub-Advisor's compliance programs. The
Independent Trustees also met separately with their independent legal counsel to
discuss the information provided by the Advisor and the Sub-Advisor. The Board
applied its business judgment to determine whether the arrangements between the
Fund and the Advisor and among the Fund, the Advisor and the Sub-Advisor are
reasonable business arrangements from the Fund's perspective as well as from the
perspective of shareholders.
In reviewing the Agreements, the Board considered the nature, quality and extent
of services provided by the Advisor and the Sub-Advisor under the Agreements.
With respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund, including
the oversight of the Sub-Advisor. The Board noted the compliance program that
had been developed by the Advisor and considered that the compliance program
includes policies and procedures for monitoring the Sub-Advisor's compliance
with the 1940 Act and the Fund's investment objectives and policies. With
respect to the Sub-Advisory Agreement, the Board received a presentation from
representatives of the Sub-Advisor discussing the services that the Sub-Advisor
provides to the Fund and how the Sub-Advisor meets the Fund's investment
objectives. In light of the information presented and
Page 28
ADDITIONAL INFORMATION (UNAUDITED) - (CONTINUED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2008
the considerations made, the Board concluded that the nature, quality and extent
of services provided to the Fund by the Advisor and the Sub-Advisor under the
Agreements have been and are expected to remain satisfactory and that the
Sub-Advisor has managed the Fund consistent with its investment objectives and
policies.
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board reviewed data prepared by Lipper Inc. ("Lipper"), an
independent source, showing the management fees and expense ratios of the Fund
as compared to the management fees and expense ratios of one peer group selected
by Lipper and a second peer group selected by the Advisor. The Board discussed
with representatives of the Advisor the differences between the two peer groups
and the limitations in creating a relevant peer group for the Fund, including
the difficulties in comparing (i) funds using different types of leverage, (ii)
"pure play" funds such as the Fund with senior loan funds that invest in high
yield bonds and (iii) senior loan funds with significantly larger assets with
the Fund. Based on the information provided, the Board noted that the Fund's
management fees and expense ratio were in the fifth and fourth quintiles of the
Lipper peer group and the Advisor peer group, respectively. The Board also
considered the sub-advisory fee rate and how it related to the overall
management fee structure of the Fund and noted that the Advisor pays the
Sub-Advisor out of the advisory fees it receives from the Fund. The Board noted
that the Lipper data reflected a fee waiver that is no longer in effect.
Finally, the Board considered the advisory fees paid to the Advisor by similar
funds, and noted that the Advisor does not provide advisory services to clients
with investment objectives and policies similar to the Fund's other than to two
other closed end funds, both of which are larger than the Fund. The Board also
considered information provided by the Sub-Advisor as to the fees it charges to
other clients.
The Board also considered the Fund's performance for the one-, two- and
three-year periods, as applicable, ended September 30, 2007, as compared to the
performance of a relevant benchmark index and to a performance group selected by
Lipper. The Board noted that the Fund's performance was in the fourth quintile
of the performance group for the one-year period and in the fifth quintile of
the performance group for each of the two- and three-year periods. The Board
also noted that the Fund underperformed its benchmark for the one-year period.
The Board also considered performance data provided by the Advisor for the
one-year and since-inception periods ended December 31, 2007, and considered an
analysis prepared by the Advisor on benefits provided by the Fund's leverage. In
addition, the Board considered the market price and net asset value performance
of the Fund since inception, and compared the Fund's premium/discount to the
average and median premium/discount of the Lipper peer group, noting that the
Fund's premium/discount was generally indicative of the asset class and market
events. The Board concluded that the Fund's performance was reasonable,
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 all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, quality and extent
of services provided by the Advisor and Sub-Advisor under the Agreements.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and had noted that the advisory fee is not structured to pass the
benefits of any economies of scale on to the shareholders as the Fund's assets
grow. The Board concluded that the management fee reflects an appropriate level
of sharing of any economies of scale. The Board also considered the costs of the
services provided and profits realized by the Advisor from serving as investment
manager to closed-end funds for the twelve months ended December 31, 2007, as
set forth in the materials provided to the Board. The Board noted the inherent
limitations in the profitability analysis, and concluded that the Advisor's
profitability appeared to be not excessive in light of the services provided to
the Fund. In addition, the Board considered and discussed any ancillary benefits
derived by the Advisor from its relationship with the Fund and noted that the
typical fall out benefits to the Advisor such as soft dollars are not present.
The Board concluded that any other fall-out benefits received by the Advisor or
its affiliates would appear to be attenuated.
The Board considered that the Sub-Advisor's investment services expenses are
primarily fixed, and that the Sub-Advisor had added personnel in the past year
to improve the quality and consistency of services and anticipated continued
investments in personnel and systems. The Board considered that the sub advisory
fee rate was negotiated at arm's length between the Advisor and the Sub-Advisor,
an unaffiliated third party. The Board also considered data provided by the
Sub-Advisor as to the profitability of the Sub-Advisory Agreement to the
Sub-Advisor, noting that the method used to allocate expenses was not a typical
practice of the Sub-Advisor. The Board noted the inherent limitations in this
profitability analysis and concluded that the profitability analysis for the
Advisor was more relevant, although the profitability of the Sub Advisory
Agreement appeared to be not excessive in light of the services provided to the
Fund. The Board noted that the Sub-Advisor does not maintain any soft-dollar
arrangements and that the Sub-Advisor indicated that it does not receive any
material fall-out benefits from its relationship to the Fund.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, determined that the terms of the
Agreements continue to be fair and reasonable and that the continuation of the
Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 29
BOARD OF TRUSTEES AND OFFICERS (UNAUDITED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2008
NUMBER OF
PORTFOLIOS IN
THE FIRST TRUST OTHER TRUSTEESHIPS OR
NAME, ADDRESS, DATE OF BIRTH TERM OF OFFICE PRINCIPAL OCCUPATIONS FUND COMPLEX DIRECTORSHIPS
AND POSITION WITH THE FUND AND LENGTH OF SERVICE DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
- ---------------------------- ------------------------- -------------------------- ------------------- ------------------------
INDEPENDENT TRUSTEES
Richard E. Erickson, Trustee - One Year Term Physician; President, 59 None
c/o First Trust Advisors L.P. - Since Fund Wheaton Orthopedics;
1001 Warrenville Road, Inception Co-owner and Co-
Suite 300 Director (January 1996 to
Lisle, IL 60532 May 2007), Sports Med
D.O.B.: 04/51 Center for Fitness;
Limited Partner,
Gundersen Real Estate
Partnership; Limited
Partner, Sportsmed LLC
Thomas R. Kadlec, Trustee - One Year Term Senior Vice President 59 Director of ADM
c/o First Trust Advisors L.P. - Since Fund and Chief Financial Investor Services, Inc.
1001 Warrenville Road, Inception Officer (May 2007 to and Director of Archer
Suite 300 Present), Vice President Financial Services, Inc.
Lisle, IL 60532 and Chief Financial
D.O.B.: 11/57 Officer (1990 to May
2007), ADM Investor
Services, Inc. (Futures
Commission Merchant);
President (May 2005 to
Present), ADM
Derivatives, Inc.;
Registered Representative
(2000 to Present),
Segerdahl & Company,
Inc., a FINRA member
(Broker-Dealer)
Robert F. Keith, Trustee - One Year Term President (2003 to 59 None
c/o First Trust Advisors L.P. - Since Fund Present), Hibs Enterprises
1001 Warrenville Road, Inception (Financial and
Suite 300 Management Consulting);
Lisle, IL 60532 President (2001 to 2003),
D.O.B.: 11/56 Aramark Service Master
Management; President
and Chief Operating
Officer (1998 to 2003),
Service Master
Management Services
Page 30
BOARD OF TRUSTEES AND OFFICERS (UNAUDITED) - (CONTINUED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2008
NUMBER OF
PORTFOLIOS IN
THE FIRST TRUST OTHER TRUSTEESHIPS OR
NAME, ADDRESS, DATE OF BIRTH TERM OF OFFICE PRINCIPAL OCCUPATIONS FUND COMPLEX DIRECTORSHIPS
AND POSITION WITH THE FUND AND LENGTH OF SERVICE DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
- ---------------------------- ------------------------- -------------------------- ------------------- ------------------------
INDEPENDENT TRUSTEES - (CONTINUED)
Niel B. Nielson, Trustee - Two Year Term President (June 2002 to 59 Director of Covenant
c/o First Trust Advisors L.P. - Since Fund Inception Present), Covenant College Transport Inc.
1001 Warrenville Road,
Suite 300
Lisle, IL 60532
D.O.B.: 03/54
INTERESTED TRUSTEE
James A. Bowen(1), Trustee, - Three Year Trustee President, First Trust 59 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.;
1001 Warrenville Road, - Since Fund Inception Chairman of the Board
Suite 300 of Directors, BondWave
Lisle, IL 60532 LLC (Software Development
D.O.B.: 09/55 Company/Broker- Dealer)
and Stonebridge Advisors
LLC (Investment Advisor)
NAME, ADDRESS, POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE OCCUPATIONS DURING PAST 5 YEARS
- ----------------- ------------------------- -------------------------- ---------------------------------------
OFFICERS WHO ARE NOT TRUSTEES(2)
Mark R. Bradley Treasurer, Controller, - Indefinite term Chief Financial Officer, First Trust
1001 Warrenville Road, Chief Financial Officer - Since Fund Inception Advisors L.P. and First Trust
Suite 300 and Chief Accounting Portfolios L.P.; Chief Financial
Lisle, IL 60532 Officer Officer, BondWave LLC (Software
D.O.B.: 11/57 Development Company/Broker-Dealer) and
Stonebridge Advisors LLC (Investment
Advisor)
- ----------
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as President of First Trust Advisors L.P., investment advisor of the Fund.
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 31
BOARD OF TRUSTEES AND OFFICERS (UNAUDITED) - (CONTINUED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2008
NAME, ADDRESS, POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE OCCUPATIONS DURING PAST 5 YEARS
- ----------------- ------------------------- -------------------------- ---------------------------------------
OFFICERS WHO ARE NOT TRUSTEES(2) - (CONTINUED)
James M. Dykas Assistant Treasurer - Indefinite term Senior Vice President (April 2007 to
1001 Warrenville Road, - Since Fund Inception Present), Vice President (January 2005
Suite 300 to April 2007), First Trust Advisors
Lisle, IL 60532 L.P. and First Trust Portfolios L.P.;
D.O.B.: 01/66 Executive Director (December 2002 to
January 2005), Vice President
(December 2000 to December 2002),
Van Kampen Asset Management and Morgan
Stanley Investment Management
Christopher R. Fallow Assistant Vice President - Indefinite term Assistant Vice President (August 2006
1001 Warrenville Road, - Since Fund Inception to Present), Associate (January 2005
Suite 300 to August 2006), First Trust Advisors
Lisle, IL 60532 L.P. and First Trust Portfolios L.P.;
D.O.B.: 04/79 Municipal Bond Trader (July 2001 to
January 2005), BondWave LLC (Software
Development Company/Broker-Dealer)
W. Scott Jardine Secretary and Chief - Indefinite term General Counsel, First Trust Advisors
1001 Warrenville Road, Compliance Officer - Since Fund Inception L.P. and First Trust Portfolios L.P.;
Suite 300 Secretary, BondWave LLC (Software
Lisle, IL 60532 Development Company/Broker- Dealer)
D.O.B.: 05/60 and Stonebridge Advisors LLC
(Investment Advisor)
Daniel J. Lindquist Vice President - Indefinite term Senior Vice President (September
1001 Warrenville Road, - Since Fund Inception 2005 to Present), Vice President (April
Suite 300 2004 to September 2005), First Trust
Lisle, IL 60532 Advisors L.P. and First Trust
D.O.B.: 02/70 Portfolios L.P.; Chief Operating
Officer (January 2004 to April 2004),
Mina Capital Management, LLC; Chief
Operating Officer (April 2000 to
January 2004), Samaritan Asset
Management Services, Inc.
- ----------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 32
BOARD OF TRUSTEES AND OFFICERS (UNAUDITED) - (CONTINUED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2008
NAME, ADDRESS, POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE OCCUPATIONS DURING PAST 5 YEARS
- ----------------- ------------------------- -------------------------- ---------------------------------------
OFFICERS WHO ARE NOT TRUSTEES(2) - (CONTINUED)
Coleen O. Lynch Assistant Vice President - Indefinite term Assistant Vice President (January
1001 Warrenville Road, - Since July, 2008 2008 to Present), First Trust Advisors
Suite 300 L.P. and First Trust Portfolios L.P.;
Lisle, IL 60532 Vice President (May 1998 to January
D.O.B.: 07/58 2008), Van Kampen Asset Management and
Morgan Stanley Investment Management
Kristi A. Maher Assistant Secretary - Indefinite term Deputy General Counsel (May 2007
1001 Warrenville Road, - Since Fund Inception to Present), Assistant General Counsel
Suite 300 (March 2004 to May 2007), First Trust
Lisle, IL 60532 Advisors L.P. and First Trust
D.O.B.: 12/66 Portfolios L.P.; Associate (December
1995 to March 2004), Chapman and Cutler
LLP
- ----------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 33
PRIVACY POLICY
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2008
PRIVACY POLICY
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") consider your privacy an important priority in maintaining our
relationship. We are committed to protecting the security and confidentiality of
your personal information.
SOURCES OF INFORMATION
We may collect nonpublic personal information about you from the following
sources:
- - Information we receive from you or your broker-dealer, investment advisor
or financial representative through interviews, applications, agreements or
other forms;
- - Information about your transactions with us, our affiliates or others;
- - Information we receive from your inquiries by mail, e-mail or telephone;
and
- - Information we collect on our website through the use of "cookies." For
example, we may identify the pages on our website that your browser
requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. The permitted uses
include the disclosure of such information to unaffiliated companies for the
following reasons:
- - In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your personal
information as described above to unaffiliated financial service providers
and other companies that perform administrative or other services on our
behalf, such as transfer agents, custodians and trustees, or that assist us
in the distribution of investor materials such as trustees, banks,
financial representatives and printers.
- - We may release information we have about you if you direct us to do so, if
we are compelled by law to do so, or in other legally limited circumstances
(for example to protect your account from fraud). In addition, in order to
alert you to our other financial products and services, we may share your
personal information with affiliates of the Fund. Please note, however,
that the California Financial Information Privacy Act contains an "opt out"
mechanism that California consumers may use to prevent us from sharing
nonpublic personal information with affiliates.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, the Fund restricts access to
your nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time; however, if we do change
it, we will tell you promptly.
For questions about our policy, or for additional copies of this notice, please
contact us at (800) 621-1675.
Page 34
This Page Left Blank Intentionally.
This Page Left Blank Intentionally.
(FIRST TRUST LOGO)
INVESTMENT ADVISOR
First Trust Advisors L.P.
1001 Warrenville Road
Lisle, IL 60532
INVESTMENT SUB-ADVISOR
Four Corners Capital Management, LLC
515 South Flower Street, Suite 1600
Los Angeles, CA 90071
CUSTODIAN
JPMorgan Chase Bank, National Association
3 Chase Metrotech Center, 6th Floor
Brooklyn, NY 11245
ADMINISTRATOR & FUND ACCOUNTANT
JPMorgan Investor Services Co.
73 Tremont Street
Boston, MA 02108
TRANSFER AGENT
American Stock Transfer & Trust Company
59 Maiden Lane, Plaza Level
New York, NY 10038
BOARD ADMINISTRATOR
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
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 and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES (REGISTRANT) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements were $44,000 for 2007 and
$47,500 for 2008.
(b) AUDIT-RELATED FEES (REGISTRANT) -- The aggregate fees billed in each of
the last two fiscal years, for assurance and related services by the principal
accountant that are reasonably related to the performance of the audit of the
registrant's financial statements and are not reported under paragraph (a) of
this Item were $0.
AUDIT-RELATED FEES (INVESTMENT ADVISER) -- The aggregate fees billed in
each of the last two fiscal years of the registrant for assurance and related
services by the principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item were $0 for 2007 and $986 for 2008.
These fees were for additional audit work.
(c) TAX FEES (REGISTRANT) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning to the registrant were $4,850
in 2007 and $5,000 in 2008. These fees were for tax consultation and tax
preparation.
TAX FEES (INVESTMENT ADVISER) -- The aggregate fees billed in each of the
last two fiscal years of the registrant for professional services rendered by
the principal accountant for tax compliance, tax advice, and tax planning to the
registrant's adviser were $0 for 2007 and $0 for 2008.
(d) ALL OTHER FEES (REGISTRANT) -- The aggregate fees billed in each of the
last two fiscal years for products and services provided by the principal
accountant to the registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $1,253 for 2007 and $0 for 2008. These fees were
for compliance consulting services.
ALL OTHER FEES (INVESTMENT ADVISER) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the principal
accountant to the registrant's investment adviser, other than services reported
in paragraphs (a) through (c) of this Item were $40,072 for 2007 and $0 for
2008. These fees were for compliance consulting.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "COMMITTEE") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the Registrant by its
independent auditors. The Chairman of the Committee authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the Registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the Registrant, if the engagement relates
directly to the operations and financial reporting of the Registrant, subject to
the DE MINIMIS exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the Registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
Registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b) through
(d) for the Registrant and the Registrant's investment adviser of this Item that
were approved by the audit committee pursuant to the pre-approval exceptions
included in paragraph (c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees
was less than fifty percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen
by another investment adviser), and any entity controlling, controlled
by, or under common control with the adviser that provides ongoing
services to the Registrant for 2007 were $6,103 and $65,072 for the
Registrant and the Registrant's investment adviser and for 2008 were
$5,000 and $15,486 for the Registrant and the Registrant's investment
adviser, respectively.
(h) The Registrant's audit committee of its Board of Trustees determined
that the provision of non-audit services that were rendered to the
Registrant's investment adviser (not including any sub-adviser whose
role is primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity controlling,
controlled by, or under common control with the investment adviser
that provides ongoing services to the Registrant that were not
pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal
accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The registrant has a separately designated standing audit committee
consisting of all the independent trustees of the registrant. The members
of the audit committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E.
Erickson and Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
FIRST TRUST ADVISORS, L.P.
FIRST TRUST FUNDS
PROXY VOTING GUIDELINES
First Trust Advisors, L.P. (the "ADVISER") serves as investment adviser
providing discretionary investment advisory services for 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
(RISKMETRICS GROUP LOGO)
2008 U.S. Proxy Voting Guidelines Summary
ISS Governance Services
December 17, 2007
Copyright (C) 2007 by RiskMetrics Group.
All rights reserved. No part of this publication may be reproduced or
transmitted in any form or by any means, electronic or mechanical, including
photocopy, recording, or any information storage and retrieval system, without
permission in writing from the publisher. Requests for permission to make copies
of any part of this work should be sent to: RiskMetrics Group Marketing
Department, One Chase Manhattan Plaza, 44th Floor, New York, NY 10005.
RiskMetrics Group is a trademark used herein under license.
Risk Management | RiskMetrics Labs |
ISS Governance Services | Financial Research & Analysis
www.riskmetrics.com
RISKMETRICS Group www.riskmetrics.com
ISS GOVERANCE SERVICES
2008 U.S. PROXY VOTING GUIDELINES SUMMARY
EFFECTIVE FOR MEETINGS ON OR AFTER FEB 1, 2008
UPDATED DEC 17, 2007
The following is a condensed version of the proxy voting recommendations
contained in the ISS Governance Services ("ISS") Proxy Voting Manual.
Table of Contents
1. OPERATIONAL ITEMS.......................................................... 6
Adjourn Meeting............................................................ 6
Amend Quorum Requirements.................................................. 6
Amend Minor Bylaws......................................................... 6
Auditor Indemnification and Limitation of Liability........................ 6
Auditor Ratification....................................................... 6
Change Company Name........................................................ 7
Change Date, Time, or Location of Annual Meeting........................... 7
Transact Other Business.................................................... 7
2. BOARD OF DIRECTORS:........................................................ 8
Voting on Director Nominees in Uncontested Elections....................... 8
2008 Classification of Directors........................................... 10
Age Limits................................................................. 11
Board Size................................................................. 11
Classification/Declassification of the Board............................... 12
Cumulative Voting.......................................................... 12
Director and Officer Indemnification and Liability Protection.............. 12
Establish/Amend Nominee Qualifications..................................... 12
Filling Vacancies/Removal of Directors..................................... 13
Independent Chair (Separate Chair/CEO)..................................... 13
Majority of Independent Directors/Establishment of Committees.............. 14
Majority Vote Shareholder Proposals........................................ 14
Office of the Board........................................................ 14
Open Access................................................................ 14
Performance Test for Directors............................................. 15
Stock Ownership Requirements............................................... 16
Term Limits................................................................ 16
3. PROXY CONTESTS............................................................. 17
Voting for Director Nominees in Contested Elections........................ 17
Reimbursing Proxy Solicitation Expenses.................................... 17
Confidential Voting........................................................ 17
4. ANTITAKEOVER DEFENSES AND VOTING RELATED ISSUES............................ 18
Advance Notice Requirements for Shareholder Proposals/Nominations.......... 18
Amend Bylaws without Shareholder Consent................................... 18
Poison Pills............................................................... 18
Shareholder Ability to Act by Written Consent.............................. 18
Shareholder Ability to Call Special Meetings............................... 19
2008 US PROXY VOTING GUIDELINES SUMMARY -2-
RISKMETRICS Group www.riskmetrics.com
Supermajority Vote Requirements............................................ 19
5. MERGERS AND CORPORATE RESTRUCTURINGS....................................... 20
OVERALL APPROACH.............................................................. 20
Appraisal Rights........................................................... 20
Asset Purchases............................................................ 20
Asset Sales................................................................ 20
Bundled Proposals.......................................................... 21
Conversion of Securities................................................... 21
Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy
Plans/Reverse Leveraged Buyouts/Wrap Plans.............................. 21
Formation of Holding Company............................................... 21
Going Private Transactions (LBOs, Minority Squeezeouts, and Going Dark).... 22
Joint Ventures............................................................. 22
Liquidations............................................................... 22
Mergers and Acquisitions/ Issuance of Shares to Facilitate
Merger or Acquisition................................................... 22
Private Placements/Warrants/Convertible Debentures......................... 23
Spinoffs................................................................... 23
Value Maximization Proposals............................................... 23
6. STATE OF INCORPORATION..................................................... 24
Control Share Acquisition Provisions....................................... 24
Control Share Cash-Out Provisions.......................................... 24
Disgorgement Provisions.................................................... 24
Fair Price Provisions...................................................... 24
Freeze-Out Provisions...................................................... 25
Greenmail.................................................................. 25
Reincorporation Proposals.................................................. 25
Stakeholder Provisions..................................................... 25
State Antitakeover Statutes................................................ 25
7. CAPITAL STRUCTURE.......................................................... 26
Adjustments to Par Value of Common Stock................................... 26
Common Stock Authorization................................................. 26
Dual-Class Stock........................................................... 26
Issue Stock for Use with Rights Plan....................................... 26
Preemptive Rights.......................................................... 26
Preferred Stock............................................................ 27
Recapitalization........................................................... 27
Reverse Stock Splits....................................................... 27
Share Repurchase Programs.................................................. 28
Stock Distributions: Splits and Dividends.................................. 28
Tracking Stock............................................................. 28
8. EXECUTIVE AND DIRECTOR COMPENSATION........................................ 29
EQUITY COMPENSATION PLANS..................................................... 29
Cost of Equity Plans....................................................... 29
Repricing Provisions....................................................... 29
Pay-for-Performance Disconnect............................................. 30
Three-Year Burn Rate/Burn Rate Commitment.................................. 31
Poor Pay Practices......................................................... 33
SPECIFIC TREATMENT OF CERTAIN AWARD TYPES IN EQUITY PLAN EVALUATIONS:......... 34
Dividend Equivalent Rights................................................. 34
2008 US PROXY VOTING GUIDELINES SUMMARY -3-
RISKMETRICS Group www.riskmetrics.com
Liberal Share Recycling Provisions......................................... 34
Option Overhang Cost....................................................... 34
OTHER COMPENSATION PROPOSALS AND POLICIES..................................... 35
401(k) Employee Benefit Plans.............................................. 35
Advisory Vote on Executive Compensation (Say-on-Pay) Management Proposals.. 35
Director Compensation...................................................... 36
Director Retirement Plans.................................................. 36
Employee Stock Ownership Plans (ESOPs)..................................... 36
Employee Stock Purchase Plans-- Qualified Plans............................ 37
Employee Stock Purchase Plans-- Non-Qualified Plans........................ 37
Incentive Bonus Plans and Tax Deductibility Proposals (OBRA-Related
Compensation Proposals)........................... ..................... 37
Options Backdating......................................................... 38
Option Exchange Programs/Repricing Options................................. 38
Stock Plans in Lieu of Cash................................................ 39
Transfer Programs of Stock Options......................................... 39
SHAREHOLDER PROPOSALS ON COMPENSATION......................................... 40
Advisory Vote on Executive Compensation (Say-on-Pay)....................... 40
Compensation Consultants- Disclosure of Board or Company's Utilization..... 40
Disclosure/Setting Levels or Types of Compensation for
Executives and Directors....................................... ........ 40
Pay for Superior Performance............................................... 40
Performance-Based Awards................................................... 41
Pension Plan Income Accounting............................................. 41
Pre-Arranged Trading Plans (10b5-1 Plans).................................. 41
Recoup Bonuses............................................................. 42
Severance Agreements for Executives/Golden Parachutes...................... 42
Share Buyback Holding Periods.............................................. 42
Stock Ownership or Holding Period Guidelines............................... 42
Supplemental Executive Retirement Plans (SERPs)............................ 43
Tax Gross-Up Proposals..................................................... 43
9. CORPORATE SOCIAL RESPONSIBILITY (CSR) ISSUES............................... 44
ANIMAL WELFARE................................................................ 44
Animal Testing............................................................. 44
Animal Welfare Policies.................................................... 44
Controlled Atmosphere Killing (CAK)........................................ 44
CONSUMER ISSUES............................................................... 44
Genetically Modified Ingredients........................................... 44
Consumer Lending........................................................... 45
Pharmaceutical Pricing..................................................... 45
Pharmaceutical Product Reimportation....................................... 45
Product Safety and Toxic Materials......................................... 46
Tobacco.................................................................... 46
DIVERSITY..................................................................... 47
Board Diversity............................................................ 47
Equality of Opportunity and Glass Ceiling.................................. 47
Sexual Orientation and Domestic Partner Benefits........................... 48
CLIMATE CHANGE AND THE ENVIRONMENT............................................ 48
Climate Change............................................................. 48
Concentrated Area Feeding Operations (CAFO)................................ 48
Energy Efficiency.......................................................... 48
Facility Safety (Nuclear and Chemical Plant Safety)........................ 49
2008 US PROXY VOTING GUIDELINES SUMMARY -4-
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General Environmental Reporting............................................ 49
Greenhouse Gas Emissions................................................... 49
Operations in Protected Areas.............................................. 49
Recycling.................................................................. 49
Renewable Energy........................................................... 49
GENERAL CORPORATE ISSUES...................................................... 50
Charitable Contributions................................................... 50
CSR Compensation-Related Proposals......................................... 50
HIV/AIDS................................................................... 50
Lobbying Expenditures/Initiatives.......................................... 51
Political Contributions and Trade Associations Spending.................... 51
INTERNATIONAL ISSUES, LABOR ISSUES, AND HUMAN RIGHTS.......................... 51
China Principles........................................................... 51
Codes of Conduct........................................................... 52
Community Impact Assessments............................................... 52
Foreign Military Sales/Offsets............................................. 52
Internet Privacy and Censorship............................................ 52
MacBride Principles........................................................ 53
Nuclear and Depleted Uranium Weapons....................................... 53
Operations in High Risk Markets............................................ 53
Outsourcing/Offshoring..................................................... 53
Vendor Standards........................................................... 53
SUSTAINABILITY................................................................ 54
Sustainability Reporting................................................... 54
10. MUTUAL FUND PROXIES....................................................... 55
Election of Directors...................................................... 55
Converting Closed-end Fund to Open-end Fund................................ 55
Proxy Contests............................................................. 55
Investment Advisory Agreements............................................. 55
Approving New Classes or Series of Shares.................................. 55
Preferred Stock Proposals.................................................. 55
1940 Act Policies.......................................................... 56
Changing a Fundamental Restriction to a Nonfundamental Restriction......... 56
Change Fundamental Investment Objective to Nonfundamental.................. 56
Name Change Proposals...................................................... 56
Change in Fund's Subclassification......................................... 56
Disposition of Assets/Termination/Liquidation.............................. 56
Changes to the Charter Document............................................ 56
Changing the Domicile of a Fund............................................ 57
Authorizing the Board to Hire and Terminate Subadvisors Without
Shareholder Approval.................................. ................. 57
Distribution Agreements.................................................... 57
Master-Feeder Structure.................................................... 57
Mergers.................................................................... 57
SHAREHOLDER PROPOSALS FOR MUTUAL FUNDS........................................ 57
Establish Director Ownership Requirement................................... 57
Reimburse Shareholder for Expenses Incurred................................ 58
Terminate the Investment Advisor........................................... 58
2008 US PROXY VOTING GUIDELINES SUMMARY -5-
RISKMETRICS Group www.riskmetrics.com
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).
AUDITOR INDEMNIFICATION AND LIMITATION OF LIABILITY
Consider the issue of auditor indemnification and limitation of liability on a
CASE-BY-CASE basis. Factors to be assessed include, but are not limited to:
- The terms of the auditor agreement- the degree to which these
agreements impact shareholders' rights;
- Motivation and rationale for establishing the agreements;
- Quality of disclosure; and
- Historical practices in the audit area.
WTHHOLD or vote AGAINST members of an audit committee in situations where there
is persuasive evidence that the audit committee entered into an inappropriate
indemnification agreement with its auditor that limits the ability of the
company, or its shareholders, to pursue legitimate legal recourse against the
audit firm.
AUDITOR RATIFICATION
Vote FOR proposals to ratify auditors, unless any of the following apply:
- An auditor has a financial interest in or association with the
company, and is therefore not independent;
- 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;
- Poor accounting practices are identified that rise to a serious level
of concern, such as: fraud; misapplication of GAAP; and material
weaknesses identified in Section 404 disclosures; or
- 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
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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.
In circumstances where "Other" fees include fees related to significant one-time
capital structure events: initial public offerings, bankruptcy emergence, and
spin-offs; and the company makes public disclosure of the amount and nature of
those fees which are an exception to the standard "non-audit fee" category, then
such fees may be excluded from the non-audit fees considered in determining the
ratio of non-audit to audit/audit-related fees/tax compliance and preparation
for purposes of determining whether non-audit fees are excessive.
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.
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, and/or location of the
annual meeting unless the proposed change is unreasonable.
Vote AGAINST shareholder proposals to change the date, time, and/or location of
the annual meeting unless the current scheduling or location is unreasonable.
TRANSACT OTHER BUSINESS
Vote AGAINST proposals to approve other business when it appears as voting item.
2008 US PROXY VOTING GUIDELINES SUMMARY -7-
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2. Board of Directors:
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Vote on director nominees should be determined on a CASE-BY-CASE basis.
Vote AGAINST or WITHHOLD(1) from individual directors who:
- 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);
- Sit on more than six public company boards;
- Are CEOs of public companies who sit on the boards of more than two
public companies besides their own-- withhold only at their outside
boards.
Vote AGAINST or WITHHOLD from all nominees of the board of directors, (except
from new nominees, who should be considered on a CASE-BY-CASE basis) if:
- The company's proxy indicates that not all directors attended 75% of
the aggregate of their board and committee meetings, but fails to
provide the required disclosure of the names of the directors
involved. If this information cannot be obtained, vote
against/withhold from all incumbent directors;
- The company's poison pill has a dead-hand or modified dead-hand
feature. Vote against/withhold every year until this feature is
removed;
- The board adopts or renews a poison pill without shareholder approval,
does not commit to putting it to shareholder vote within 12 months of
adoption (or in the case of an newly public company, does not commit
to put the pill to a shareholder vote within 12 months following the
IPO), or reneges on a commitment to put the pill to a vote, and has
not yet received a withhold/against recommendation for this issue;
- The board failed to act on a shareholder proposal that received
approval by a majority of the shares outstanding the previous year (a
management proposal with other than a FOR recommendation by management
will not be considered as sufficient action taken);
- The board failed to act on a shareholder proposal that received
approval of the majority of shares cast for the previous two
consecutive years (a management proposal with other than a FOR
recommendation by management will not be considered as sufficient
action taken);
- The board failed to act on takeover offers where the majority of the
shareholders tendered their shares;
- At the previous board election, any director received more than 50
percent withhold/against votes of the shares cast and the company has
failed to address the underlying issue(s) that caused the high
withhold/against vote;
- The company is a Russell 3000 company that underperformed its industry
group (GICS group) under the criteria discussed in the section
"Performance Test for Directors";
- The board is classified, and a continuing director responsible for a
problematic governance issue at the board/committee level that would
warrant a withhold/against vote recommendation is not up for election-
any or all appropriate nominees (except new) may be held accountable.
- ----------
(1) In general, companies with a plurality vote standard use "Withhold" as the
valid contrary vote option in director elections; companies with a majority
vote standard use "Against". However, it will vary by company and the proxy
must be checked to determine the valid contrary vote option for the
particular company.
2008 US PROXY VOTING GUIDELINES SUMMARY -8-
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Vote AGAINST or WITHHOLD from Inside Directors and Affiliated Outside Directors
(per the Classification of Directors below) when:
- The inside or affiliated outside director serves on any of the three
key committees: audit, compensation, or nominating;
- The company lacks an audit, compensation, or nominating committee so
that the full board functions as that committee;
- The company lacks a formal nominating committee, even if board attests
that the independent directors fulfill the functions of such a
committee;
- The full board is less than majority independent.
Vote AGAINST or WITHHOLD from the members of the Audit Committee if:
- The non-audit fees paid to the auditor are excessive (see discussion
under Auditor Ratification);
- Poor accounting practices are identified which rise to a level of
serious concern, such as: fraud; misapplication of GAAP; and material
weaknesses identified in Section 404 disclosures; or
- There is persuasive evidence that the audit committee entered into an
inappropriate indemnification agreement with its auditor that limits
the ability of the company, or its shareholders, to pursue legitimate
legal recourse against the audit firm.
Vote AGAINST or WITHHOLD from the members of the Compensation Committee if:
- There is a negative correlation between the chief executive's pay and
company performance (see discussion under Equity Compensation Plans);
- The company reprices underwater options for stock, cash or other
consideration without prior shareholder approval, even if allowed in
their equity plan;
- The company fails to submit one-time transfers of stock options to a
shareholder vote;
- The company fails to fulfill the terms of a burn rate commitment they
made to shareholders;
- The company has backdated options (see "Options Backdating" policy);
- The company has poor compensation practices (see "Poor Pay Practices"
policy). Poor pay practices may warrant withholding votes from the CEO
and potentially the entire board as well.
Vote AGAINST or WITHHOLD from directors, individually or the entire board, for
egregious actions or failure to replace management as appropriate.
2008 US PROXY VOTING GUIDELINES SUMMARY -9-
RISKMETRICS Group www.riskmetrics.com
2008 CLASSIFICATION OF DIRECTORS
INSIDE DIRECTOR (I)
- Employee of the company or one of its affiliates(1);
- Non-employee officer of the company if among the five most highly paid
individuals (excluding interim CEO);
- Listed as a Section 16 officer(2);
- Current interim CEO;
- 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)
- Board attestation that an outside director is not independent;
- Former CEO of the company(3);
- Former CEO of an acquired company within the past five years;
- 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;(4)
- Former executive(2) of the company, an affiliate or an acquired firm
within the past five years;
- Executive(2) 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;
- Executive(2), former executive, general or limited partner of a joint
venture or partnership with the company;
- Relative(5) of a current Section 16 officer of company or its
affiliates;
- Relative(5) of a current employee of company or its affiliates where
additional factors raise concern (which may include, but are not
limited to, the following: a director related to numerous employees;
the company or its affiliates employ relatives of numerous board
members; or a non-Section 16 officer in a key strategic role);
- Relative(5) of former Section 16 officer, of company or its affiliate
within the last five years;
- Currently provides (or a relative(5) provides) professional
services(6) to the company, to an affiliate of the company or an
individual officer of the company or one of its affiliates in excess
of $10,000 per year;
- Employed by (or a relative(5) is employed by) a significant customer
or supplier(7);
- Has (or a relative(5) has) any transactional relationship with the
company or its affiliates excluding investments in the company through
a private placement; (7)
- Any material financial tie or other related party transactional
relationship to the company;
- Party to a voting agreement to vote in line with management on
proposals being brought to shareholder vote;
- Has (or a relative(5) has) an interlocking relationship as defined by
the SEC involving members of the board of directors or its
Compensation and Stock Option Committee; (8)
- Founder (9) of the company but not currently an employee;
- Is (or a relative(5) is) a trustee, director or employee of a
charitable or non-profit organization that receives grants or
endowments(7) from the company or its affiliates(1).
INDEPENDENT OUTSIDE DIRECTOR (IO)
- No material(10) connection to the company other than a board seat.
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
2008 US PROXY VOTING GUIDELINES SUMMARY -10-
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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). A non-employee director serving as an officer due to
statutory requirements (e.g. corporate secretary) will be classified as an
Affiliated Outsider. If the company provides additional disclosure that the
director is not receiving additional compensation for serving in that
capacity, then the director will be classified as an Independent Outsider.
(3) Includes any former CEO of the company prior to the company's initial
public offering (IPO).
(4) 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.
(5) "Relative" follows the SEC's new definition of "immediate family members"
which covers spouses, parents, children, step-parents, step-children,
siblings, in-laws, and any person (other than a tenant or employee) sharing
the household of any director, nominee for director, executive officer, or
significant shareholder of the company.
(6) Professional services can be characterized as advisory in nature and
generally include the following: investment banking / financial advisory
services; commercial banking (beyond deposit services); investment
services; insurance services; accounting/audit services; consulting
services; marketing services; and legal services. The case of participation
in a banking syndicate by a non-lead bank should be considered a
transaction (and hence subject to the associated materiality test) rather
than a professional relationship.
(7) If the company makes or receives annual payments exceeding the greater of
$200,000 or 5 percent of the recipient's gross revenues. (The recipient is
the party receiving the financial proceeds from the transaction).
(8) 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).
(9) 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.
(10) 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.
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.
2008 US PROXY VOTING GUIDELINES SUMMARY -11-
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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.
Generally vote FOR proposals to restore or provide for cumulative voting unless:
- The company has proxy access or a similar structure(2) to allow
shareholders to nominate directors to the company's ballot; and
- The company has adopted a majority vote standard, with a carve-out for
plurality voting in situations where there are more nominees than
seats, and a director resignation policy to address failed elections.
Vote FOR proposals for cumulative voting at controlled companies (insider voting
power > 50%).
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 liability for acts, such as negligence, that are more serious
violations of fiduciary obligation than mere carelessness.
Vote AGAINST proposals that would expand the scope of indemnification to provide
for mandatory indemnification of company officials in connection with acts that
previously the company was permitted to provide indemnification for at the
discretion of the company's board (i.e., "permissive indemnification") but that
previously the company was not required to indemnify.
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:
- If 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
- If only the director's legal expenses would be covered.
ESTABLISH/AMEND NOMINEE QUALIFICATIONS
- ----------
(2) Similar structure" would be a structure that allows shareholders to
nominate candidates who the company will include on the management ballot
IN ADDITION TO management's nominees, and their bios are included in
management's proxy.
2008 US PROXY VOTING GUIDELINES SUMMARY -12-
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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 that the chairman's position
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 the following:
- Designated lead director, elected by and from the independent board
members with clearly delineated and comprehensive duties. (The role
may alternatively reside with a presiding director, vice chairman, or
rotating lead director; however the director must serve a minimum of
one year in order to qualify as a lead director.) The duties should
include, but are not limited to, the following:
- presides at all meetings of the board at which the chairman
is not present, including executive sessions of the
independent directors;
- serves as liaison between the chairman and the independent
directors;
- approves information sent to the board;
- approves meeting agendas for the board;
- approves meeting schedules to assure that there is
sufficient time for discussion of all agenda items;
- has the authority to call meetings of the independent
directors;
- if requested by major shareholders, ensures that he is
available for consultation and direct communication;
- The company publicly discloses a comparison of the duties of its
independent lead director and its chairman;
- The company publicly discloses a sufficient explanation of why it
chooses not to give the position of chairman to the independent lead
director, and instead combine the chairman and CEO positions;
- Two-thirds independent board;
- All independent key committees;
- Established governance guidelines;
- The company should not have underperformed both its peers and index on
the basis of both one-year and three-year total shareholder returns*,
unless there has been a change in the Chairman/CEO position within
that time; and
- The company does not have any problematic governance issues.
Vote FOR the proposal if the company does not provide disclosure with respect to
any or all of the bullet points above. If disclosure is provided, evaluate on a
CASE-BY-CASE basis.
2008 US PROXY VOTING GUIDELINES SUMMARY -13-
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* The industry peer group used for this evaluation is the average of the 12
companies in the same 6-digit GICS group that are closest in revenue to the
company. To fail, the company must under-perform its index and industry
group on all 4 measures (1 and 3 year on industry peers and index).
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' definition of independent outsider. (See Classification of Directors.)
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 precatory and binding resolutions requesting that the board
change the company's bylaws to stipulate that directors need to be elected with
an affirmative majority of votes cast, provided it does not conflict with the
state law where the company is incorporated. Binding resolutions need to allow
for a carve-out for a plurality vote standard when there are more nominees than
board seats.
Companies are strongly encouraged to also adopt a post-election policy (also
know as a director resignation policy) that will provide guidelines so that the
company will promptly address the situation of a holdover director.
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:
- Established a communication structure that goes beyond the exchange
requirements to facilitate the exchange of information between
shareholders and members of the board;
- Effectively disclosed information with respect to this structure to
its shareholders;
- Company has not ignored majority-supported shareholder proposals or a
majority withhold vote on a director nominee; and
- 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
Vote shareholder proposals asking for open or proxy access on a CASE-BY-CASE
basis, taking into account:
- The ownership threshold proposed in the resolution;
- The proponent's rationale for the proposal at the targeted company in
terms of board and director conduct.
2008 US PROXY VOTING GUIDELINES SUMMARY -14-
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PERFORMANCE TEST FOR DIRECTORS
On a CASE-BY-CASE basis, Vote AGAINST or WITHHOLD from directors of Russell 3000
companies that underperformed relative to their industry peers. The criterion
used to evaluate such underperformance is a combination of four performance
measures:
One measurement is a market-based performance metric and three measurements are
tied to the company's operational performance. The market performance metric in
the methodology is five-year Total Shareholder Return (TSR) on a relative basis
within each four-digit GICS group. The three operational performance metrics are
sales growth, EBITDA growth (or operating income growth for companies in the
financial sector), and pre-tax operating Return on Invested Capital (ROIC) (or
Return on Average Assets (ROAA) for companies in the financial sector) on a
relative basis within each four-digit GICS group. All four metrics will be
time-weighted as follows: 40 percent on the trailing 12 month period and 60
percent on the 48 month period prior to the trailing 12 months. This methodology
emphasizes the company's historical performance over a five-year period yet also
accounts for near-term changes in a company's performance.
The table below summarizes the framework:
METRICS BASIS OF EVALUATION WEIGHTING 2ND WEIGHTING
- ----------------------- --------------------- --------- ------------------
Operational Performance 50%
5-year Average pre-tax Management efficiency 33.3%
operating ROIC or ROAA* in deploying assets
5-year Sales Growth Top-Line 33.3%
5-year EBITDA Growth Core-earnings 33.3%
or Operating Income
Growth*
Sub Total 100%
Stock Performance 50%
5-year TSR Market
Total 100%
* Metric applies to companies in the financial sector
Adopt a two-phase approach. In Year 1, the worst performers (bottom 5 percent)
within each of the 24 GICS groups receive are noted. In Year 2, consider a vote
AGAINST or WITHHOLD votes from director nominees if a company continues to be in
the bottom five percent within its GICS group for that respective year and shows
no improvement in its most recent trailing 12 months operating and market
performance relative to its peers in its GICS group. Take into account various
factors including:
- Year-to-date performance;
- Situational circumstances;
- Change in management/board;
- Overall governance practices.
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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:
- Long-term financial performance of the target company relative to its
industry;
- Management's track record;
- Background to the proxy contest;
- Qualifications of director nominees (both slates);
- Strategic plan of dissident slate and quality of critique against
management;
- Likelihood that the proposed goals and objectives can be achieved
(both slates);
- Stock ownership positions.
REIMBURSING PROXY SOLICITATION EXPENSES
Vote CASE-BY-CASE on proposals to reimburse proxy solicitation expenses. When
voting in conjunction with support of a dissident slate, vote FOR the
reimbursement of all appropriate proxy solicitation expenses associated with the
election.
Generally vote FOR shareholder proposals calling for the reimbursement of
reasonable costs incurred in connection with nominating one or more candidates
in a contested election where the following apply:
- The election of fewer than 50% of the directors to be elected is
contested in the election;
- One or more of the dissident's candidates is elected;
- Shareholders are not permitted to cumulate their votes for directors;
and
- The election occurred, and the expenses were incurred, after the
adoption of this bylaw.
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
Vote CASE-BY-CASE on advance notice proposals, supporting 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:
- Shareholders have approved the adoption of the plan; or
- 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 12 months of adoption or
expire. If the pill is not approved by a majority of the votes cast on
this issue, the plan will immediately terminate.
Vote FOR shareholder proposals calling for poison pills to be put to a vote
within a time period of less than one year after adoption. If the company has no
non-shareholder approved poison pill in place and has adopted a policy with the
provisions outlined above, vote AGAINST the proposal. If these conditions are
not met, vote FOR the proposal, but with the caveat that a vote within 12 months
would be considered sufficient.
Vote CASE-by-CASE on management proposals on poison pill ratification, focusing
on the features of the shareholder rights plan. Rights plans should contain the
following attributes:
- No lower than a 20% trigger, flip-in or flip-over;
- A term of no more than three years;
- No dead-hand, slow-hand, no-hand or similar feature that limits the
ability of a future board to redeem the pill;
- Shareholder redemption feature (qualifying offer clause); if the board
refuses to redeem the pill 90 days after a qualifying offer is
announced, 10 percent of the shares may call a special meeting or seek
a written consent to vote on rescinding the pill.
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.
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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:
- 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.
- MARKET REACTION - How has the market responded to the proposed deal? A
negative market reaction should cause closer scrutiny of a deal.
- 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.
- 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.
- 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.
- 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:
- Purchase price;
- Fairness opinion;
- Financial and strategic benefits;
- How the deal was negotiated;
- Conflicts of interest;
- Other alternatives for the business;
- Non-completion risk.
ASSET SALES
Vote CASE-BY-CASE on asset sales, considering the following factors:
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- Impact on the balance sheet/working capital;
- Potential elimination of diseconomies;
- Anticipated financial and operating benefits;
- Anticipated use of funds;
- Value received for the asset;
- Fairness opinion;
- How the deal was negotiated;
- 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:
- Dilution to existing shareholders' position;
- Terms of the offer;
- Financial issues;
- Management's efforts to pursue other alternatives;
- Control issues;
- 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:
- The reasons for the change;
- Any financial or tax benefits;
- Regulatory benefits;
- Increases in capital structure;
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- 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:
- Increases in common or preferred stock in excess of the allowable
maximum (see discussion under "Capital Structure");
- 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:
- Whether the company has attained benefits from being publicly-traded
(examination of trading volume, liquidity, and market research of the
stock);
- Cash-out value;
- Whether the interests of continuing and cashed-out shareholders are
balanced; and
- 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:
- Percentage of assets/business contributed;
- Percentage ownership;
- Financial and strategic benefits;
- Governance structure;
- Conflicts of interest;
- Other alternatives;
- Noncompletion risk.
LIQUIDATIONS
Vote CASE-BY-CASE on liquidations, taking into account the following:
- Management's efforts to pursue other alternatives;
- Appraisal value of assets; and
- The compensation plan for executives managing the liquidation.
Vote FOR the liquidation if the company will file for bankruptcy if the proposal
is not approved.
MERGERS AND ACQUISITIONS/ ISSUANCE OF SHARES TO FACILITATE MERGER OR ACQUISITION
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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:
- Dilution to existing shareholders' position;
- Terms of the offer;
- Financial issues;
- Management's efforts to pursue other alternatives;
- Control issues;
- Conflicts of interest.
Vote FOR the private placement if it is expected that the company will file for
bankruptcy if the transaction is not approved.
SPINOFFS
Vote CASE-BY-CASE on spin-offs, considering:
- Tax and regulatory advantages;
- Planned use of the sale proceeds;
- Valuation of spinoff;
- Fairness opinion;
- Benefits to the parent company;
- Conflicts of interest;
- Managerial incentives;
- Corporate governance changes;
- Changes in the capital structure.
VALUE MAXIMIZATION PROPOSALS
Vote CASE-BY-CASE on shareholder proposals seeking to maximize shareholder value
by hiring a financial advisor to explore strategic alternatives, selling the
company or liquidating the company and distributing the proceeds to
shareholders. These proposals should be evaluated based on the following
factors:
- Prolonged poor performance with no turnaround in sight;
- Signs of entrenched board and management;
- Strategic plan in place for improving value;
- Likelihood of receiving reasonable value in a sale or dissolution; and
- Whether company is actively exploring its strategic options, including
retaining a financial advisor.
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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.
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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 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,
freeze-out 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:
- Rationale;
- Good performance with respect to peers and index on a five-year total
shareholder return basis;
- Absence of non-shareholder approved poison pill;
- Reasonable equity compensation burn rate;
- No non-shareholder approved pay plans; and
- 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:
- It is intended for financing purposes with minimal or no dilution to
current shareholders;
- 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
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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).
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:
- More simplified capital structure;
- Enhanced liquidity;
- Fairness of conversion terms;
- Impact on voting power and dividends;
- Reasons for the reclassification;
- Conflicts of interest; and
- Other alternatives considered.
REVERSE STOCK SPLITS
Vote FOR management proposals to implement a reverse stock split when the number
of authorized shares will be proportionately reduced.
Vote FOR management proposals to implement a reverse stock split to avoid
delisting.
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.
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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:
- Adverse governance changes;
- Excessive increases in authorized capital stock;
- Unfair method of distribution;
- Diminution of voting rights;
- Adverse conversion features;
- Negative impact on stock option plans; and
- 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:
- The total cost of the company's equity plans is unreasonable;
- The plan expressly permits the repricing of stock options without
prior shareholder approval;
- There is a disconnect between CEO pay and the company's performance;
- The company's three year burn rate exceeds the greater of 2% and the
mean plus one standard deviation of its industry group; or
- The plan is a vehicle for poor pay practices.
Each of these factors is 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 underwater stock
options without prior shareholder approval, even if the cost of the plan is
reasonable. Also, vote AGAINST OR WITHHOLD from members of the Compensation
Committee who approved and/or implemented an option exchange program by
repricing and buying out underwater options for stock, cash or other
consideration or canceling underwater options and regranting options with a
lower exercise price without prior shareholder approval, even if such repricings
are allowed in their equity plan.
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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:
- There is a disconnect between the CEO's pay and company performance
(an increase in pay and a decrease in performance);
- The main source of the pay increase (over half) is equity-based; and
- The CEO is a participant of the equity proposal.
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, value of non-equity incentive payouts, present
value of stock options, face value of restricted stock, target value of
performance-based awards, change in pension value and nonqualified deferred
compensation earnings, and all other compensation) increasing over the previous
year.
Vote AGAINST or 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:
- 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 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: $_____.
- 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
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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.
- 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 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(3) or performance-accelerated grants.(4)
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.
- 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 2 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.
The annual burn rate is calculated as follows:
Annual Burn rate = (# of options granted + # of full value shares awarded *
Multiplier) / Weighted Average common shares outstanding)
- ----------
(3) 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.
(4) 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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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 (or 2%, whichever is
greater), assuming all other conditions for voting FOR the plan have been met.
If a company fails to fulfill its burn rate commitment, vote AGAINST or WITHHOLD
from the compensation committee.
2008 BURN RATE TABLE
RUSSELL 3000 NON-RUSSELL 3000
---------------- ----------------
STANDARD STANDARD
GICS DESCRIPTION MEAN DEVIATION MEAN+STDEV MEAN DEVIATION MEAN+STDEV
- --------- -------------------------------- ---- --------- ---------- ---- --------- ----------
1010 Energy 1.71% 1.39% 3.09% 2.12% 2.31% 4.43%
1510 Materials 1.16% 0.77% 1.93% 2.23% 2.26% 4.49%
2010 Capital Goods 1.51% 1.04% 2.55% 2.36% 2.03% 4.39%
2020 Commercial Services & Supplies 2.35% 1.70% 4.05% 2.20% 2.03% 4.23%
2030 Transportation 1.59% 1.22% 2.80% 2.02% 2.08% 4.10%
2510 Automobiles & Components 1.89% 1.10% 2.99% 1.73% 2.05% 3.78%
2520 Consumer Durables & Apparel 2.02% 1.31% 3.33% 2.10% 1.94% 4.04%
2530 Hotels Restaurants & Leisure 2.15% 1.18% 3.33% 2.32% 1.93% 4.25%
2540 Media 1.92% 1.35% 3.27% 3.33% 2.60% 5.93%
2550 Retailing 1.86% 1.04% 2.90% 3.15% 2.65% 5.80%
3010, Food & Staples Retailing
3020,3030 1.69% 1.23% 2.92% 1.82% 2.03% 3.85%
3510 Health Care Equipment & Services 2.90% 1.67% 4.57% 3.75% 2.65% 6.40%
3520 Pharmaceuticals & Biotechnology 3.30% 1.66% 4.96% 4.92% 3.77% 8.69%
4010 Banks 1.27% 0.88% 2.15% 1.07% 1.12% 2.19%
4020 Diversified Financials 2.45% 2.07% 4.52% 4.41% 5.31% 9.71%
4030 Insurance 1.21% 0.93% 2.14% 2.07% 2.28% 4.35%
4040 Real Estate 1.04% 0.81% 1.85% 0.80% 1.21% 2.02%
4510 Software & Services 3.81% 2.30% 6.11% 5.46% 3.81% 9.27%
4520 Technology Hardware & Equipment 3.07% 1.74% 4.80% 3.43% 2.40% 5.83%
4530 Semiconductors & Semiconductor
Equipment 3.78% 1.81% 5.59% 4.51% 2.30% 6.81%
5010 Telecommunication Services 1.57% 1.23% 2.80% 2.69% 2.41% 5.10%
5510 Utilities 0.72% 0.50% 1.22% 0.59% 0.66% 1.25%
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.
The guideline for applying the premium is as follows:
ANNUAL STOCK PRICE VOLATILITY MULTIPLIER
- ----------------------------------- --------------------------------------------------
54.6% and higher 1 full-value award will count as 1.5 option shares
36.1% or higher and less than 54.6% 1 full-value award will count as 2.0 option shares
24.9% or higher and less than 36.1% 1 full-value award will count as 2.5 option shares
16.5% or higher and less than 24.9% 1 full-value award will count as 3.0 option shares
7.9% or higher and less than 16.5% 1 full-value award will count as 3.5 option shares
Less than 7.9% 1 full-value award will count as 4.0 option shares
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POOR PAY PRACTICES
Vote AGAINST or WITHHOLD from compensation committee members, CEO, and
potentially the entire board, if the company has poor compensation practices.
Vote AGAINST equity plans if the plan is a vehicle for poor compensation
practices.
The following practices, while not exhaustive, are examples of poor compensation
practices that may warrant voting against or withholding votes:
- Egregious employment contracts:
- Contracts containing multi-year guarantees for salary increases,
bonuses, and equity compensation;
- Excessive perks:
- Overly generous cost and/or reimbursement of taxes for personal
use of corporate aircraft, personal security systems maintenance
and/or installation, car allowances, and/or other excessive
arrangements relative to base salary;
- Abnormally large bonus payouts without justifiable performance linkage
or proper disclosure:
- Performance metrics that are changed, canceled, or replaced
during the performance period without adequate explanation of the
action and the link to performance;
- Egregious pension/SERP (supplemental executive retirement plan)
payouts:
- Inclusion of additional years of service not worked that result
in significant payouts
- Inclusion of performance-based equity awards in the pension
calculation;
- New CEO with overly generous new hire package:
- Excessive "make whole" provisions;
- Any of the poor pay practices listed in this policy;
- Excessive severance and/or change-in-control provisions:
- Inclusion of excessive change-in-control or severance payments,
especially those with a multiple in excess of 3X cash pay;
- Severance paid for a "performance termination," (i.e., due to the
executive's failure to perform job functions at the appropriate
level);
- Change-in-control payouts without loss of job or substantial
diminution of job duties (single-triggered);
- Perquisites for former executives such as car allowances,
personal use of corporate aircraft, or other inappropriate
arrangements;
- Poor disclosure practices:
- Unclear explanation of how the CEO is involved in the pay setting
process;
- Retrospective performance targets and methodology not discussed;
- Methodology for benchmarking practices and/or peer group not
disclosed and explained;
- Internal Pay Disparity:
- Excessive differential between CEO total pay and that of next
highest-paid named executive officer (NEO);
- Options backdating (covered in a separate policy);
- Other excessive compensation payouts or poor pay practices at the
company.
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SPECIFIC TREATMENT OF CERTAIN AWARD TYPES IN EQUITY PLAN EVALUATIONS:
DIVIDEND EQUIVALENT RIGHTS
Options 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.
OPTION OVERHANG COST
Companies with sustained positive stock performance and high overhang cost (the
overhang alone exceeds the allowable cap) attributable to in-the-money options
outstanding in excess of six years may warrant a carve-out of these options from
the overhang as long as the dilution attributable to the new share request is
reasonable and the company exhibits sound compensation practices. Consider, on a
CASE-BY-CASE basis, a carve-out of a portion of cost attributable to overhang,
considering the following criteria:
- PERFORMANCE: Companies with sustained positive stock performance will
merit greater scrutiny. Five-year total shareholder return (TSR),
year-over-year performance, and peer performance could play a
significant role in this determination.
- OVERHANG DISCLOSURE: Assess whether optionees have held in-the-money
options for a prolonged period (thus reflecting their confidence in
the prospects of the company). Note that this assessment would require
additional disclosure regarding a company's overhang. Specifically,
the following disclosure would be required:
- The number of in-the-money options outstanding in excess of
six or more years with a corresponding weighted average
exercise price and weighted average contractual remaining
term;
- The number of all options outstanding less than six years
and underwater options outstanding in excess of six years
with a corresponding weighted average exercise price and
weighted average contractual remaining term;
- The general vesting provisions of option grants; and
- The distribution of outstanding option grants with respect
to the named executive officers;
- DILUTION: Calculate the expected duration of the new share request in
addition to all shares currently available for grant under the equity
compensation program, based on the company's three-year average burn
rate (or a burn-rate commitment that the company makes for future
years). The expected duration will be calculated by multiplying the
company's unadjusted (options and full-value awards accounted on a
one-for-one basis) three-year average burn rate by the most recent
fiscal year's weighted average shares outstanding (as used in the
company's calculation of basic EPS) and divide the
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sum of the new share request and all available shares under the
company's equity compensation program by the product. For example, an
expected duration in excess of five years could be considered
problematic; and
- COMPENSATION PRACTICES: An evaluation of overall practices could
include: (1) stock option repricing provisions, (2) high concentration
ratios (of grants to top executives), or (3) additional practices
outlined in the Poor Pay Practices policy.
OTHER COMPENSATION PROPOSALS AND POLICIES
401(K) EMPLOYEE BENEFIT PLANS
Vote FOR proposals to implement a 401(k) savings plan for employees.
ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY) MANAGEMENT PROPOSALS
Vote CASE-BY-CASE on management proposals for an advisory vote on executive
compensation. Vote AGAINST these resolutions in cases where boards have failed
to demonstrate good stewardship of investors' interests regarding executive
compensation practices. The following principles and factors should be
considered:
1. The following FIVE GLOBAL PRINCIPLES apply to all markets:
- Maintain appropriate pay-for-performance alignment with emphasis on
long-term shareholder value: This principle encompasses overall
executive pay practices, which must be designed to attract, retain,
and appropriately motivate the key employees who drive shareholder
value creation over the long term. It will take into consideration,
among other factors: the linkage between pay and performance; the mix
between fixed and variable pay; performance goals; and equity-based
plan costs;
- Avoid arrangements that risk "pay for failure": This principle
addresses the use and appropriateness of long or indefinite contracts,
excessive severance packages, and guaranteed compensation;
- Maintain an independent and effective compensation committee: This
principle promotes oversight of executive pay programs by directors
with appropriate skills, knowledge, experience, and a sound process
for compensation decision-making (e.g., including access to
independent expertise and advice when needed);
- Provide shareholders with clear, comprehensive compensation
disclosures: This principle underscores the importance of informative
and timely disclosures that enable shareholders to evaluate executive
pay practices fully and fairly;
- Avoid inappropriate pay to non-executive directors: This principle
recognizes the interests of shareholders in ensuring that compensation
to outside directors does not compromise their independence and
ability to make appropriate judgments in overseeing managers' pay and
performance. At the market level, it may incorporate a variety of
generally accepted best practices.
2. For U.S. companies, vote CASE-BY-CASE considering the following factors in
the context of each company's specific circumstances and the board's disclosed
rationale for its practices:
RELATIVE CONSIDERATIONS:
- Assessment of performance metrics relative to business strategy, as
discussed and explained in the CD&A;
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- Evaluation of peer groups used to set target pay or award
opportunities;
- Alignment of company performance and executive pay trends over time
(e.g., performance down: pay down);
- Assessment of disparity between total pay of the CEO and other Named
Executive Officers (NEOs).
DESIGN CONSIDERATIONS:
- Balance of fixed versus performance-driven pay;
- Assessment of excessive practices with respect to perks, severance
packages, supplemental executive pension plans, and burn rates.
COMMUNICATION CONSIDERATIONS:
- Evaluation of information and board rationale provided in CD&A about
how compensation is determined (e.g., why certain elements and pay
targets are used, and specific incentive plan goals, especially
retrospective goals);
- Assessment of board's responsiveness to investor input and engagement
on compensation issues (e.g., in responding to majority-supported
shareholder proposals on executive pay topics).
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 will
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:
- Director stock ownership guidelines with a minimum of three times the
annual cash retainer.
- 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.
- Mix between cash and equity:
- A balanced mix of cash and equity, for example 40% cash/60%
equity or 50% cash/50% equity; or
- 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.
- No retirement/benefits and perquisites provided to non-employee
directors; and
- 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.
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).
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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:
- Purchase price is at least 85 percent of fair market value;
- Offering period is 27 months or less; and
- The number of shares allocated to the plan is ten percent or less of
the outstanding shares.
Vote AGAINST qualified employee stock purchase plans where any of the following
apply:
- Purchase price is less than 85 percent of fair market value; or
- Offering period is greater than 27 months; or
- 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:
- 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);
- Limits on employee contribution, which may be a fixed dollar amount or
expressed as a percent of base salary;
- Company matching contribution up to 25 percent of employee's
contribution, which is effectively a discount of 20 percent from
market value;
- 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) of the
Internal Revenue Code.
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.
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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.
OPTIONS BACKDATING
In cases where a company has practiced options backdating, vote AGAINST or
WITHHOLD on a CASE-BY-CASE basis from the members of the compensation committee,
depending on the severity of the practices and the subsequent corrective actions
on the part of the board. Vote AGAINST or WITHHOLD from the compensation
committee members who oversaw the questionable options grant practices or from
current compensation committee members who fail to respond to the issue
proactively, depending on several factors, including, but not limited to:
- Reason and motive for the options backdating issue, such as
inadvertent vs. deliberate grant date changes;
- Length of time of options backdating;
- Size of restatement due to options backdating;
- Corrective actions taken by the board or compensation committee, such
as canceling or repricing backdated options, or recoupment of option
gains on backdated grants;
- Adoption of a grant policy that prohibits backdating, and creation of
a fixed grant schedule or window period for equity grants going
forward.
OPTION EXCHANGE PROGRAMS/REPRICING OPTIONS
Vote CASE-by-CASE on management proposals seeking approval to exchange/reprice
options taking into consideration:
- Historic trading patterns--the stock price should not be so volatile
that the options are likely to be back "in-the-money" over the near
term;
- Rationale for the re-pricing--was the stock price decline beyond
management's control?
- Is this a value-for-value exchange?
- Are surrendered stock options added back to the plan reserve?
- Option vesting--does the new option vest immediately or is there a
black-out period?
- Term of the option--the term should remain the same as that of the
replaced option;
- Exercise price--should be set at fair market or a premium to market;
- Participants--executive officers and directors should be excluded.
If the surrendered options are added back to the equity plans for re-issuance,
then also take into consideration the company's three-year average burn rate.
In addition to the above considerations, evaluate the intent, rationale, and
timing of the repricing proposal. The proposal should clearly articulate why the
board is choosing to conduct an exchange program at this point in time.
Repricing underwater options after a recent precipitous drop in the company's
stock price demonstrates poor timing. Repricing after a recent decline in stock
price triggers additional scrutiny and a potential AGAINST vote on the proposal.
At a minimum, the decline should not have happened within the past year. Also,
consider the terms of the surrendered options, such as the grant date, exercise
price and vesting schedule. Grant dates of surrendered options should be far
enough back (two to three years) so as not to
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suggest that repricings are being done to take advantage of short-term downward
price movements. Similarly, the exercise price of surrendered options should be
above the 52-week high for the stock price.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
STOCK PLANS IN LIEU OF CASH
Vote CASE-by-CASE on plans that 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 that 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: Vote AGAINST or WITHHOLD from compensation committee members
if they fail to submit one-time transfers to shareholders for approval.
Vote CASE-BY-CASE on one-time transfers. Vote FOR if:
- Executive officers and non-employee directors are excluded from
participating;
- 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;
- 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.
Ongoing TSO program: Vote against equity plan proposals if the details of
ongoing TSO programs are not provided to shareholders. Since TSOs will be one of
the award types under a stock plan, the ongoing TSO program, structure and
mechanics must be disclosed to shareholders. The specific criteria to be
considered in evaluating these proposals include, but not limited, to the
following:
- Eligibility;
- Vesting;
- Bid-price;
- Term of options;
- Transfer value to third-party financial institution, employees and the
company.
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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.
SHAREHOLDER PROPOSALS ON COMPENSATION
ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY)
Generally, vote FOR shareholder proposals that call for non-binding shareholder
ratification of the compensation of the Named Executive Officers and the
accompanying narrative disclosure of material factors provided to understand the
Summary Compensation Table.
COMPENSATION CONSULTANTS- DISCLOSURE OF BOARD OR COMPANY'S UTILIZATION
Generally vote FOR shareholder proposals seeking disclosure regarding the
Company, Board, or Compensation Committee's use of compensation consultants,
such as company name, business relationship(s) and fees paid.
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.
PAY FOR SUPERIOR PERFORMANCE
Generally vote FOR shareholder proposals based on a case-by-case analysis that
requests the board establish a pay-for-superior performance standard in the
company's executive compensation plan for senior executives. The proposal has
the following principles:
- Sets compensation targets for the Plan's annual and long-term
incentive pay components at or below the peer group median;
- Delivers a majority of the Plan's target long-term compensation
through performance-vested, not simply time-vested, equity awards;
- Provides the strategic rationale and relative weightings of the
financial and non-financial performance metrics or criteria used in
the annual and performance-vested long-term incentive components of
the plan;
- Establishes performance targets for each plan financial metric
relative to the performance of the company's peer companies;
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- Limits payment under the annual and performance-vested long-term
incentive components of the plan to when the company's performance on
its selected financial performance metrics exceeds peer group median
performance.
Consider the following factors in evaluating this proposal:
- What aspects of the company's annual and long-term equity incentive
programs are performance driven?
- If the annual and long-term equity incentive programs are performance
driven, are the performance criteria and hurdle rates disclosed to
shareholders or are they benchmarked against a disclosed peer group?
- Can shareholders assess the correlation between pay and performance
based on the current disclosure?
- What type of industry and stage of business cycle does the company
belong to?
PERFORMANCE-BASED AWARDS
Vote CASE-BY-CASE on shareholder proposal requesting that a significant amount
of future long-term incentive compensation awarded to senior executives shall be
performance-based and requesting that the board adopt and disclose challenging
performance metrics to shareholders, based on the following analytical steps:
- - First, vote FOR shareholder proposals advocating the use of
performance-based equity awards, such as performance contingent options or
restricted stock, indexed options or premium-priced options, unless the
proposal is overly restrictive or if the company has demonstrated that it
is using a "substantial" portion of performance-based awards for its top
executives. Standard stock options and performance-accelerated awards do
not meet the criteria to be considered as performance-based awards.
Further, premium-priced options should have a premium of at least 25
percent and higher to be considered performance-based awards.
- - Second, assess the rigor of the company's performance-based equity program.
If the bar set for the performance-based program is too low based on the
company's historical or peer group comparison, generally vote FOR the
proposal. Furthermore, if target performance results in an above target
payout, vote FOR the shareholder proposal due to program's poor design. If
the company does not disclose the performance metric of the
performance-based equity program, vote FOR the shareholder proposal
regardless of the outcome of the first step to the test.
In general, vote FOR the shareholder proposal if the company does not meet both
of the above two steps.
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.
PRE-ARRANGED TRADING PLANS (10B5-1 PLANS)
Generally vote FOR shareholder proposals calling for certain principles
regarding the use of prearranged trading plans (10b5-1 plans) for executives.
These principles include:
- Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed
within two business days in a Form 8-K;
- Amendment or early termination of a 10b5-1 Plan is allowed only under
extraordinary circumstances, as determined by the board;
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- Ninety days must elapse between adoption or amendment of a 10b5-1 Plan
and initial trading under the plan;
- Reports on Form 4 must identify transactions made pursuant to a 10b5-1
Plan;
- An executive may not trade in company stock outside the 10b5-1 Plan.
- Trades under a 10b5-1 Plan must be handled by a broker who does not
handle other securities transactions for the executive.
RECOUP BONUSES
Vote on a CASE-BY-CASE on proposals to recoup unearned incentive bonuses or
other incentive payments made to senior executives if it is later determined
that fraud, misconduct, or negligence significantly contributed to a restatement
of financial results that led to the awarding of unearned incentive
compensation, taking into consideration:
- If the company has adopted a formal recoupment bonus policy; or
- If the company has chronic restatement history or material financial
problems.
SEVERANCE AGREEMENTS FOR EXECUTIVES/GOLDEN PARACHUTES
Vote FOR shareholder proposals requiring that golden parachutes or executive
severance agreements 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:
- The triggering mechanism should be beyond the control of management;
- 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;
- 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.
SHARE BUYBACK HOLDING PERIODS
Generally vote AGAINST shareholder proposals prohibiting executives from selling
shares of company stock during periods in which the company has announced that
it may or will be repurchasing shares of its stock. Vote FOR the proposal when
there is a pattern of abuse by executives exercising options or selling shares
during periods of share buybacks.
STOCK OWNERSHIP OR HOLDING PERIOD GUIDELINES
Generally vote AGAINST shareholder proposals that mandate a minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board. While ISS favors stock ownership on the part of directors, the
company should determine the appropriate ownership requirement.
Vote CASE-BY-CASE on shareholder proposals asking companies to adopt holding
period or retention ratios for their executives, taking into account:
- Whether the company has any holding period, retention ratio, or
officer ownership requirements in place. These should consist of:
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- Rigorous stock ownership guidelines, or
- A short-term holding period requirement (six months to one
year) coupled with a significant long-term ownership
requirement, or
- A meaningful retention ratio,
- Actual officer stock ownership and the degree to which it meets or
exceeds the proponent's suggested holding period/retention ratio or
the company's own stock ownership or retention requirements.
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.
Generally vote FOR shareholder proposals requesting to limit the executive
benefits provided under the company's supplemental executive retirement plan
(SERP) by limiting covered compensation to a senior executive's annual salary
and excluding of all incentive or bonus pay from the plan's definition of
covered compensation used to establish such benefits.
TAX GROSS-UP PROPOSALS
Generally vote FOR proposals calling for companies to adopt a policy of not
providing tax gross-up payments to executives, except in situations where
gross-ups are provided pursuant to a plan, policy, or arrangement applicable to
management employees of the company, such as a relocation or expatriate tax
equalization policy.
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9. Corporate Social Responsibility (CSR) Issues
ANIMAL WELFARE
ANIMAL TESTING
Generally vote AGAINST proposals to phase out the use of animals in product
testing unless:
- The company is conducting animal testing programs that are unnecessary
or not required by regulation;
- The company is conducting animal testing when suitable alternatives
are accepted and used at peer firms;
- The company has been the subject of recent, significant controversy
related to its testing programs.
ANIMAL WELFARE POLICIES
Generally vote FOR proposals seeking a report on the company's animal welfare
standards unless:
- The company has already published a set of animal welfare standards
and monitors compliance;
- The company's standards are comparable to or better than those of peer
firms; and
- There are no recent, significant fines or litigation related to the
company's treatment of animals.
CONTROLLED ATMOSPHERE KILLING (CAK)
Generally vote AGAINST proposals requesting the implementation of CAK methods at
company and/or supplier operations unless such methods are required by
legislation or generally accepted as the industry standard.
Vote CASE-BY-CASE on proposals requesting a report on the feasibility of
implementing CAK methods, considering the availability of existing research
conducted by the company or industry groups on this topic and any fines or
litigation related to current animal processing procedures at the company.
CONSUMER ISSUES
GENETICALLY MODIFIED INGREDIENTS
Generally, vote AGAINST proposals asking restaurants and food retail 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 food supply and genetic research 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:
- 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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- The quality of the company's disclosure on GE product labeling and
related voluntary initiatives and how this disclosure compares with
peer company disclosure;
- Company's current disclosure on the feasibility of GE product
labeling, including information on the related costs;
- Any voluntary labeling initiatives undertaken or considered by the
company.
Generally 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.
Generally vote AGAINST proposals to completely phase out GE ingredients from the
company's products or proposals asking for reports outlining the steps necessary
to eliminate GE ingredients from the company's products. Such resolutions
presuppose that there are proven health risks to GE ingredients (an issue better
left to federal regulators) that outweigh the economic benefits derived from
biotechnology.
CONSUMER LENDING
Vote CASE-BY CASE on requests for reports on the company's lending guidelines
and procedures, including the establishment of a board committee for oversight,
taking into account:
- Whether the company has adequately disclosed mechanisms in place to
prevent abusive lending practices;
- Whether the company has adequately disclosed the financial risks of
the lending products in question;
- Whether the company has been subject to violations of lending laws or
serious lending controversies;
- Peer companies' policies to prevent abusive lending practices.
PHARMACEUTICAL 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:
- The existing level of disclosure on pricing policies;
- Deviation from established industry pricing norms;
- The company's existing initiatives to provide its products to needy
consumers;
- Whether the proposal focuses on specific products or geographic
regions.
PHARMACEUTICAL PRODUCT 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.
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PRODUCT SAFETY AND TOXIC MATERIALS
Generally vote FOR proposals requesting the company to report on its policies,
initiatives/procedures, and oversight mechanisms related to toxic materials
and/or product safety in its supply chain, unless:
- The company already discloses similar information through existing
reports or policies such as a Supplier Code of Conduct and/or a
sustainability report;
- The company has formally committed to the implementation of a toxic
materials and/or product safety and supply chain reporting and
monitoring program based on industry norms or similar standards within
a specified time frame; and
- The company has not been recently involved in relevant significant
controversies or violations.
Vote CASE-BY-CASE on resolutions requesting that companies develop a feasibility
assessment to phase-out of certain toxic chemicals and/or evaluate and disclose
the potential financial and legal risks associated with utilizing certain
chemicals, considering:
- Current regulations in the markets in which the company operates;
- Recent significant controversy, litigation, or fines stemming from
toxic chemicals or ingredients at the company; and
- The current level of disclosure on this topic.
Generally vote AGAINST resolutions requiring that a company reformulate its
products.
TOBACCO
Most tobacco-related proposals should be evaluated on a CASE-BY-CASE basis,
taking into account the following factors:
Advertising to youth:
- Whether the company complies with federal, state, and local laws on
the marketing of tobacco or if it has been fined for violations;
- Whether the company has gone as far as peers in restricting
advertising;
- Whether the company entered into the Master Settlement Agreement,
which restricts marketing of tobacco to youth;
- Whether restrictions on marketing to youth extend to foreign
countries.
Cease production of tobacco-related products or avoid selling products to
tobacco companies:
- The percentage of the company's business affected;
- The economic loss of eliminating the business versus any potential
tobacco-related liabilities.
Investment in tobacco-related stocks or businesses:
Vote AGAINST proposals prohibiting investment in tobacco equities. Such
decisions are better left to portfolio managers.
Second-hand smoke:
- Whether the company complies with all local ordinances and
regulations;
- The degree that voluntary restrictions beyond those mandated by law
might hurt the company's competitiveness;
- The risk of any health-related liabilities.
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Spin-off tobacco-related businesses:
- The percentage of the company's business affected;
- The feasibility of a spin-off;
- 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.
DIVERSITY
BOARD DIVERSITY
Generally vote FOR reports on the company's efforts to diversify the board,
unless:
- The board composition is reasonably inclusive in relation to companies
of similar size and business; or
- 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:
- The degree of board diversity;
- Comparison with peer companies;
- Established process for improving board diversity;
- Existence of independent nominating committee;
- Use of outside search firm;
- History of EEO violations.
EQUALITY OF OPPORTUNITY AND GLASS CEILING
Generally vote FOR reports outlining the company's equal opportunity initiatives
unless all of the following apply:
- The company has well-documented equal opportunity programs;
- The company already publicly reports on its diversity initiatives
and/or provides data on its workforce diversity; and
- The company has no recent EEO-related violations or litigation.
Generally vote FOR requests for reports outlining the company's progress towards
the Glass Ceiling Commission's business recommendations, unless:
- The composition of senior management and the board is fairly
inclusive;
- The company has well-documented programs addressing diversity
initiatives and leadership development;
- The company already publicly reports on its company-wide
affirmative-action initiatives and provides data on its workforce
diversity; and
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- The company has had no recent, significant EEO-related violations or
litigation.
Vote CASE-BY-CASE on proposals requesting disclosure of a company's EEO1 data or
the composition of the company's workforce considering:
- Existing disclosure on the company's diversity initiatives and
policies;
- Any recent, significant violations or litigation related to
discrimination at the company.
Generally 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.
SEXUAL ORIENTATION AND DOMESTIC PARTNER BENEFITS
Generally, 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.
Generally vote AGAINST proposals to extend company benefits to, or eliminate
benefits from domestic partners. Benefits decisions should be left to the
discretion of the company.
CLIMATE CHANGE AND THE ENVIRONMENT
CLIMATE CHANGE
In general, vote FOR resolutions requesting that a company disclose information
on the impact of climate change on the company's operations unless:
- The company already provides current, publicly-available information
on the perceived impact that climate change may have on the company as
well as associated policies and procedures to address such risks
and/or opportunities;
- The company's level of disclosure is comparable to or better than
information provided by industry peers; and
- There are no significant fines, penalties, or litigation associated
with the company's environmental performance.
CONCENTRATED AREA FEEDING OPERATIONS (CAFO)
Generally vote FOR resolutions requesting that companies report to shareholders
on the risks and liabilities associated with CAFOs unless:
- The company has publicly disclosed guidelines for its corporate and
contract farming operations, including compliance monitoring; or
- The company does not directly source from CAFOs.
ENERGY EFFICIENCY
Vote CASE-BY-CASE on proposals requesting a company report on its energy
efficiency policies, considering:
- The current level of disclosure related to energy efficiency policies,
initiatives, and performance measures;
- The company's level of participation in voluntary energy efficiency
programs and initiatives;
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- The company's compliance with applicable legislation and/or
regulations regarding energy efficiency; and
- The company's energy efficiency policies and initiatives relative to
industry peers.
FACILITY SAFETY (NUCLEAR AND CHEMICAL PLANT SAFETY)
Vote CASE-BY-CASE on resolutions requesting that companies report on risks
associated with their operations and/or facilities, considering:
- The company's compliance with applicable regulations and guidelines;
- The level of existing disclosure related to security and safety
policies, procedures, and compliance monitoring; and,
- The existence of recent, significant violations, fines, or controversy
related to the safety and security of the company's operations and/or
facilities.
GENERAL ENVIRONMENTAL REPORTING
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.
GREENHOUSE GAS EMISSIONS
Generally vote FOR proposals requesting a report on greenhouse gas emissions
from company operations and/or products unless this information is already
publicly disclosed or such factors are not integral to the company's line of
business.
Generally vote AGAINST proposals that call for reduction in greenhouse gas
emissions by specified amounts or within a restrictive time frame unless the
company lags industry standards and has been the subject of recent, significant
fines or litigation resulting from greenhouse gas emissions.
OPERATIONS IN PROTECTED AREAS
Generally vote FOR requests for reports outlining potential environmental damage
from operations in protected regions unless:
- Operations in the specified regions are not permitted by current laws
or regulations;
- The company does not currently have operations or plans to develop
operations in these protected regions; or,
- 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:
- The nature of the company's business and the percentage affected;
- The extent that peer companies are recycling;
- The timetable prescribed by the proposal;
- The costs and methods of implementation;
- Whether the company has a poor environmental track record, such as
violations of applicable regulations.
RENEWABLE ENERGY
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In general, vote FOR requests for reports on the feasibility of developing
renewable energy sources unless the report is duplicative of existing disclosure
or irrelevant to the company's line of business.
Generally vote AGAINST proposals requesting that the company invest in renewable
energy sources. Such decisions are best left to management's evaluation of the
feasibility and financial impact that such programs may have on the company.
GENERAL CORPORATE ISSUES
CHARITABLE CONTRIBUTIONS
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.
CSR COMPENSATION-RELATED PROPOSALS
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:
- The relevance of the issue to be linked to pay;
- The degree that social performance is already included in the
company's pay structure and disclosed;
- The degree that social performance is used by peer companies in
setting pay;
- Violations or complaints filed against the company relating to the
particular social performance measure;
- Artificial limits sought by the proposal, such as freezing or capping
executive pay;
- Independence of the compensation committee;
- Current company pay levels.
Generally vote AGAINST proposals calling for an analysis of the pay disparity
between corporate executives and other employees as such comparisons may be
arbitrary in nature and/or provide information of limited value to shareholders.
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:
- The nature and size of the company's operations in Sub-Saharan Africa
and the number of local employees;
- The company's existing healthcare policies, including benefits and
healthcare access for local workers; and
- Company donations to healthcare providers operating in the region.
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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.
LOBBYING EXPENDITURES/INITIATIVES
Vote CASE-BY-CASE on proposals requesting information on a company's lobbying
initiatives, considering any significant controversy or litigation surrounding a
company's public policy activities, the current level of disclosure on lobbying
strategy, and the impact that the policy issue may have on the company's
business operations.
POLITICAL CONTRIBUTIONS AND TRADE ASSOCIATIONS SPENDING
Generally vote AGAINST proposals asking the company to affirm political
nonpartisanship in the workplace so long as:
- The company is in compliance with laws governing corporate political
activities; and
- 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 and trade association spending considering:
- Recent significant controversy or litigation related to the company's
political contributions or governmental affairs; and
- The public availability of a company policy on political contributions
and trade association spending including information on the types of
organizations supported, the business rationale for supporting these
organizations, and the oversight and compliance procedures related to
such expenditures of corporate assets.
Vote AGAINST proposals barring the company from making political contributions.
Businesses are affected by legislation at the federal, state, and local level
and barring contributions can put the company at a competitive disadvantage.
Vote AGAINST proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
INTERNATIONAL ISSUES, LABOR ISSUES, AND HUMAN RIGHTS
CHINA PRINCIPLES
Vote AGAINST proposals to implement the China Principles unless:
- There are serious controversies surrounding the company's China
operations; and
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- The company does not have a code of conduct with standards similar to
those promulgated by the International Labor Organization (ILO).
CODES OF CONDUCT
Vote CASE-BY-CASE on proposals to implement certain human rights standards and
policies at company facilities. In evaluating these proposals, the following
should be considered:
- The degree to which existing human rights policies and practices are
disclosed;
- Whether or not existing policies are consistent with internationally
recognized labor standards;
- Whether company facilities are monitored and how;
- Company participation in fair labor organizations or other
internationally recognized human rights initiatives;
- The company's primary business model and methods of operation;
- Proportion of business conducted in markets known to have higher risk
of workplace labor right abuse;
- Whether the company has been recently involved in significant labor
and human rights controversies or violations;
- Peer company standards and practices; and
- Union presence in company's international factories.
COMMUNITY IMPACT ASSESSMENTS
Vote CASE-BY-CASE on requests for reports outlining the potential community
impact of company operations in specific regions considering:
- Current disclosure of applicable risk assessment report(s) and risk
management procedures;
- The impact of regulatory non-compliance, litigation, remediation, or
reputational loss that may be associated with failure to manage the
company's operations in question, including the management of relevant
community and stakeholder relations;
- The nature, purpose, and scope of the company's operations in the
specific region(s); and,
- The degree to which company policies and procedures are consistent
with industry norms.
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.
INTERNET PRIVACY AND CENSORSHIP
Vote CASE-BY-CASE on resolutions requesting the disclosure and implementation of
Internet privacy and censorship policies and procedures considering:
- The level of disclosure of policies and procedures relating to
privacy, freedom of speech, Internet censorship, and government
monitoring of the Internet;
- Engagement in dialogue with governments and/or relevant groups with
respect to the Internet and the free flow of information;
- The scope of business involvement and of investment in markets that
maintain government censorship or monitoring of the Internet;
- The market-specific laws or regulations applicable to Internet
censorship or monitoring that may be imposed on the company; and,
- The level of controversy or litigation related to the company's
international human rights policies and procedures.
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MACBRIDE PRINCIPLES
Vote CASE-BY-CASE on proposals to endorse or increase activity on the MacBride
Principles, taking into account:
- Company compliance with or violations of the Fair Employment Act of
1989;
- Company antidiscrimination policies that already exceed the legal
requirements;
- The cost and feasibility of adopting all nine principles;
- The cost of duplicating efforts to follow two sets of standards (Fair
Employment and the
- MacBride Principles);
- The potential for charges of reverse discrimination;
- The potential that any company sales or contracts in the rest of the
United Kingdom could be negatively impacted;
- The level of the company's investment in Northern Ireland;
- The number of company employees in Northern Ireland;
- The degree that industry peers have adopted the MacBride Principles;
and
- Applicable state and municipal laws that limit contracts with
companies that have not adopted the MacBride Principles.
NUCLEAR AND DEPLETED URANIUM WEAPONS
Vote AGAINST proposals asking a company to cease production or report on the
risks associated with the use of depleted uranium munitions or nuclear weapons
components and delivery systems, including disengaging from current and proposed
contracts. Such contracts are monitored by government agencies, serve multiple
military and non-military uses, and withdrawal from these contracts could have a
negative impact on the company's business.
OPERATIONS IN HIGH RISK MARKETS
Vote CASE-BY-CASE on requests for review and a report outlining the company's
potential financial and reputation risks associated with operations in
"high-risk" markets, such as a terrorism-sponsoring state or otherwise, taking
into account:
- The nature, purpose, and scope of the operations and business involved
that could be affected by social or political disruption;
- Current disclosure of applicable risk assessment(s) and risk
management procedures;
- Compliance with U.S. sanctions and laws;
- Consideration of other international policies, standards, and laws;
and
- Whether the company has been recently involved in significant
controversies or violations in "high-risk" markets.
OUTSOURCING/OFFSHORING
Vote CASE-BY-CASE on proposals calling for companies to report on the risks
associated with outsourcing, considering:
- Risks associated with certain international markets;
- The utility of such a report to shareholders;
- The existence of a publicly available code of corporate conduct that
applies to international operations.
VENDOR STANDARDS
Generally vote FOR reports outlining vendor standards compliance unless any of
the following apply:
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- The company does not operate in countries with significant human
rights violations;
- The company has no recent human rights controversies or violations; or
- The company already publicly discloses information on its vendor
standards policies and compliance mechanisms.
SUSTAINABILITY
SUSTAINABILITY REPORTING
Generally vote FOR proposals requesting the company to report on policies and
initiatives related to social, economic, and environmental sustainability,
unless:
- 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
- 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.
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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:
- Past performance as a closed-end fund;
- Market in which the fund invests;
- Measures taken by the board to address the discount; and
- Past shareholder activism, board activity, and votes on related
proposals.
PROXY CONTESTS
Vote CASE-BY-CASE on proxy contests, considering the following factors:
- Past performance relative to its peers;
- Market in which fund invests;
- Measures taken by the board to address the issues;
- Past shareholder activism, board activity, and votes on related
proposals;
- Strategy of the incumbents versus the dissidents;
- Independence of directors;
- Experience and skills of director candidates;
- Governance profile of the company;
- Evidence of management entrenchment.
INVESTMENT ADVISORY AGREEMENTS
Vote CASE-BY-CASE on investment advisory agreements, considering the following
factors:
- Proposed and current fee schedules;
- Fund category/investment objective;
- Performance benchmarks;
- Share price performance as compared with peers;
- Resulting fees relative to peers;
- 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:
- Stated specific financing purpose;
- Possible dilution for common shares;
- Whether the shares can be used for antitakeover purposes.
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1940 ACT POLICIES
Vote CASE-BY-CASE on policies under the Investment Advisor Act of 1940,
considering the following factors:
- Potential competitiveness;
- Regulatory developments;
- Current and potential returns; and
- Current and potential risk.
Generally vote FOR these amendments as long as the proposed changes do not
fundamentally alter the investment focus of the fund and do comply with 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:
- The fund's target investments;
- The reasons given by the fund for the change; and
- The projected impact of the change on the portfolio.
CHANGE FUNDAMENTAL INVESTMENT OBJECTIVE TO NONFUNDAMENTAL
Vote AGAINST proposals to change a fund's fundamental investment objective to
non-fundamental.
NAME CHANGE PROPOSALS
Vote CASE-BY-CASE on name change proposals, considering the following factors:
- Political/economic changes in the target market;
- Consolidation in the target market; and
- Current asset composition.
CHANGE IN FUND'S SUBCLASSIFICATION
Vote CASE-BY-CASE on changes in a fund's sub-classification, considering the
following factors:
- Potential competitiveness;
- Current and potential returns;
- Risk of concentration;
- 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:
- Strategies employed to salvage the company;
- The fund's past performance;
- The terms of the liquidation.
CHANGES TO THE CHARTER DOCUMENT
Vote CASE-BY-CASE on changes to the charter document, considering the following
factors:
- The degree of change implied by the proposal;
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- The efficiencies that could result;
- The state of incorporation;
- Regulatory standards and implications.
Vote AGAINST any of the following changes:
- Removal of shareholder approval requirement to reorganize or terminate
the trust or any of its series;
- Removal of shareholder approval requirement for amendments to the new
declaration of trust;
- 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;
- 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;
- Removal of shareholder approval requirement to engage in and terminate
subadvisory arrangements;
- 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:
- Regulations of both states;
- Required fundamental policies of both states;
- 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:
- Fees charged to comparably sized funds with similar objectives;
- The proposed distributor's reputation and past performance;
- The competitiveness of the fund in the industry;
- 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:
- Resulting fee structure;
- Performance of both funds;
- Continuity of management personnel;
- Changes in corporate governance and their impact on shareholder
rights.
SHAREHOLDER PROPOSALS FOR MUTUAL FUNDS
ESTABLISH DIRECTOR OWNERSHIP REQUIREMENT
2008 US PROXY VOTING GUIDELINES SUMMARY -57-
RISKMETRICS Group www.riskmetrics.com
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:
- Performance of the fund's Net Asset Value (NAV);
- The fund's history of shareholder relations;
- The performance of other funds under the advisor's management.
2008 US PROXY VOTING GUIDELINES SUMMARY -58-
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
Four Corners Capital Management LLC, the registrant's sub-advisor ("Four
Corners") manages multiple portfolios comprised principally of U.S. dollar
denominated, floating-rate, senior secured, commercial and industrial loans and
notes and other debt instruments and may manage portfolios of high yield bonds.
Michael P. McAdams, Chief Executive Officer and Robert I. Bernstein, Chief
Investment Officer, are co-portfolio managers of the registrant. 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 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 November 2001. Michael P. McAdams has been the
Managing Director, President and Chief Executive Officer of Four Corners since
September 2001.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST AS OF MAY 31, 2008
Total # of Accounts Total Assets
# of Managed that that Advisory
Name of Portfolio Manager Accounts Total Assets Advisory Fee Based Fee Based on
or Team Member Type of Accounts Managed ($ millions) on Performance Performance
- ------------------------- --------------------------------- -------- ------------ ------------------ -------------
1. ROBERT I. BERNSTEIN Registered Investment Companies*: 3 $ 876.80 0 $ 0
Other Pooled Investment Vehicles: 4 $1,104.57 4 $1,104.57
Other Accounts: 8 $1,662.06 0 $ 0
2. MICHAEL P. MCADAMS Registered Investment Companies*: 3 $ 876.80 0 $ 0
Other Pooled Investment Vehicles: 4 $1,045.58 4 $1,104.57
Other Accounts: 8 $1,810.20 0 $ 0
* Information excludes the registrant.
POTENTIAL CONFLICTS OF INTERESTS
In general, Four Corners seeks to allocate the purchase and sale of
corporate loans to clients in a fair and equitable manner to quickly and
prudently create a well-constructed, fully invested portfolio of corporate
loans. Since Four Corners' clients have varying investment restrictions, and
because of the constraining mechanics of the corporate loan market, allocation
of trades through methods such as pro-rata allocation are not feasible.
Therefore, the allocation of corporate loan purchases and sales to various
accounts is generally based on factors such as the client's investment
restrictions and objectives, including expected liquidity and/or third party
credit ratings, the client's acceptance or rejection of prospective investments,
if applicable, and the relative percentage of invested assets of a client's
portfolio, among others. Assets may be disproportionately allocated to accounts
during their initial investment (ramp up) period, notwithstanding that other
accounts may also have assets available for investment. Such disproportionate
allocation to accounts during the ramp-up process may have a detrimental effect
on other accounts. Subject to the foregoing, whenever Four Corners' clients have
available funds for investment, investments suitable and appropriate for each
will be allocated in a manner Four Corners believes to be equitable to each,
although such allocation may result in a delay in one or more client accounts
being fully invested that would not occur if an allocation to other client
accounts were not made. Moreover, it is possible that due to differing
investment objectives or for other reasons, Four Corners and its affiliates may
purchase securities or loans of an issuer for one client and at approximately
the same time recommend selling or sell the same or similar types of securities
or loans for another client. For these and other reasons, not all portfolios
will participate in the gains or losses experienced by other portfolios with
similar investment objectives.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
Portfolio Manager and Management Team compensation is typically comprised
of a base salary and a bonus. There are no pre-determined formulas to determine
base salaries or bonus amounts. Currently, the registrant's Portfolio Managers
are also Principals of Four Corners, and thus also maintain a percentage equity
ownership of the firm. From time to time, individuals on the Management Team may
also be offered equity ownership in the firm.
The Portfolio Managers' and Management Team's compensation (e.g., base
salary and bonus) is determined by the profitability of Four Corners as a firm
without regard to the performance of any one particular fund. The Portfolio
Managers and the Management Team have no direct incentive to take undue risks
when individual fund performance is lagging.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
Dollar ($) Range
Name of Portfolio of Fund Shares
Manager or Team Member Beneficially Owned
- ---------------------- ------------------
Michael P. McAdams $0 (0 Shares)
Robert I. Bernstein $0 (0 shares)
Information Provided as of May 31, 2008.
(B) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of trustees, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act
(17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the
Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust/Four Corners Senior Floating Rate Income Fund
By (Signature and Title)* /s/ James A. Bowen
----------------------------------------
James A. Bowen, Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date: July 17, 2008
-------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James A. Bowen
----------------------------------------
James A. Bowen, Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date: July 17, 2008
-------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, Treasurer, Controller,
Chief Financial Officer and Chief
Accounting Officer
(principal financial officer)
Date: July 17, 2008
-------------
* Print the name and title of each signing officer under his or her
signature.