UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21344
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First Trust/Four Corners Senior Floating Rate Income Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: May 31
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Date of reporting period: May 31, 2010
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
[GRAPHIC OMITTED]
ANNUAL REPORT
For the Year Ended
May 31, 2010
FIRST TRUST/
FOUR CORNERS
SENIOR FLOATING
RATE INCOME FUND
[LOGO OMITTED] FOUR CORNERS [LOGO OMITTED] FIRST TRUST
CAPITAL MANAGEMENT
Front Cover
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TABLE OF CONTENTS
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND (FCM)
ANNUAL REPORT
MAY 31, 2010
Shareholder Letter 1
At A Glance 2
Portfolio Commentary 3
Portfolio of Investments 6
Statement of Assets and Liabilities 15
Statement of Operations 16
Statements of Changes in Net Assets 17
Statement of Cash Flows 18
Financial Highlights 19
Notes to Financial Statements 20
Report of Independent Registered Public Accounting Firm 26
Additional Information 27
Board of Trustees and Officers 30
Privacy Policy 32
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
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 the 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 Sub-Advisor 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 by investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of certain 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 may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the 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, the statement of additional information, this
report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND (FCM)
ANNUAL REPORT
MAY 31, 2010
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust/Four Corners Senior Floating Rate Income Fund ("the Fund").
First Trust Advisors L.P. ("First Trust") has always believed that staying
invested in quality products and having a long-term horizon can help investors
reach their financial goals. The past eighteen months have been challenging, but
successful investors understand that the success they have achieved is typically
because of their long-term investment perspective through all kinds of markets.
The report you hold contains detailed information about your investment; a
portfolio commentary from the Fund's management team that provides a recap of
the period; a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the twelve months this report
covers. I encourage you to read this document and discuss it with your financial
advisor.
On July 22, 2010, the Fund announced that the Board of Trustees of the Fund
approved and adopted a Plan of Termination, Liquidation and Dissolution (the
"Plan") which will result in the termination of the Fund. As a result of
adopting the Plan, the Fund will begin to wind up its affairs and will no longer
seek to attain its investment objectives.
First Trust offers a variety of products that can fit many financial plans to
help those investors who are seeking long-term financial success. You may want
to talk to your advisor about the other investments we offer that might fit your
financial plan.
At First Trust we continue to be committed to making available up-to-date
information about your investments so you and your financial advisor have
current information on your portfolio. We 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, 2010 (UNAUDITED)
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Fund Statistics
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Symbol on NYSE Amex FCM
Common Share Price $12.50
Common Share Net Asset Value ("NAV") $13.70
Premium (Discount) to NAV (8.76)%
Net Assets Applicable to Common Shares $67,474,880
Current Monthly Distribution per Common Share (1) $0.0350
Current Annualized Distribution per Common Share $0.4200
Current Distribution Rate on Closing Common Share Price (2) 3.36%
Current Distribution Rate on NAV (2) 3.07%
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Common Share Price & NAV (weekly closing price)
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[CHART OMITTED]
[DATA POINTS REPRESENTED IN CHART]
Common Share Price NAV
5/31/2009 $ 9.69 $11.42
6/5/2009 9.73 11.66
6/12/2009 9.82 11.96
6/19/2009 9.67 11.97
6/26/2009 9.40 11.98
7/2/2009 9.58 12.05
7/10/2009 9.55 12.13
7/17/2009 9.80 12.37
7/24/2009 10.07 12.51
7/31/2009 10.55 12.73
8/7/2009 10.64 12.86
8/14/2009 10.71 12.94
8/21/2009 10.68 12.91
8/28/2009 10.93 12.95
9/4/2009 11.11 12.94
9/11/2009 11.10 12.98
9/18/2009 11.44 13.13
9/25/2009 11.45 13.21
10/2/2009 11.40 13.20
10/9/2009 11.41 13.22
10/16/2009 11.49 13.26
10/23/2009 11.65 13.28
10/30/2009 11.40 13.23
11/6/2009 11.27 13.09
11/13/2009 11.20 13.09
11/20/2009 11.10 13.10
11/27/2009 11.10 13.11
12/4/2009 11.12 13.13
12/11/2009 11.22 13.23
12/18/2009 11.48 13.32
12/24/2009 11.69 13.40
12/31/2009 12.08 13.45
1/8/2010 12.34 13.68
1/15/2010 12.19 13.77
1/22/2010 12.30 13.76
1/29/2010 12.29 13.79
2/5/2010 12.29 13.77
2/12/2010 12.40 13.73
2/19/2010 12.56 13.74
2/26/2010 12.57 13.76
3/5/2010 12.56 13.78
3/12/2010 12.57 13.85
3/19/2010 12.65 13.90
3/26/2010 12.72 13.94
4/1/2010 13.04 13.97
4/9/2010 13.03 14.04
4/16/2010 13.07 14.11
4/23/2010 13.01 14.11
4/30/2010 13.00 14.11
5/7/2010 12.22 13.92
5/14/2010 12.61 13.92
5/21/2010 12.41 13.76
5/31/2010 12.50 13.70
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Performance
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Average Annual Total Return
1 Year Ended 5 Years Ended Inception (9/25/2003)
5/31/2010 5/31/2010 to 5/31/2010
FUND PERFORMANCE (3)
NAV 24.19% 0.50% 1.65%
Market Value 33.54% -0.18% -0.43%
INDEX PERFORMANCE
S&P/LSTA Leveraged Loan Index 24.28% 4.76% 4.88%
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% of Long-Term
Industry Classifications Investments
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Health Care Providers & Services 13.0%
Media 9.6
Electric Utilities 6.9
Chemicals 6.6
Containers & Packaging 5.8
Aerospace & Defense 5.5
Hotels, Restaurants & Leisure 5.5
Diversified Consumer Services 5.3
Software 3.8
Diversified Telecommunication Services 3.6
Oil, Gas & Consumable Fuels 3.2
Pharmaceuticals 2.8
Road & Rail 2.4
Commercial Services & Supplies 2.4
Independent Power Producers & Energy Traders 2.4
Paper & Forest Products 2.3
Specialty Retail 2.0
Energy Equipment & Services 2.0
IT Services 1.8
Computers & Peripherals 1.4
Insurance 1.4
Food & Staples Retailing 1.3
Multi-Utilities 1.0
Metals & Mining 1.0
Capital Markets 1.0
Real Estate Investment Trusts (REITs) 0.9
Health Care Equipment & Supplies 0.8
Gas Utilities 0.6
Food Products 0.6
Semiconductors & Semiconductor Equipment 0.6
Airlines 0.5
Electronic Equipment, Instruments & Components 0.5
Household Durables 0.5
Automobiles 0.5
Internet & Catalog Retail 0.5
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Total 100.0%
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% of Long-Term
Credit Quality (S&P Ratings) (4) Investments
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BBB 3.4%
BBB- 5.3
BB+ 8.7
BB 16.6
BB- 26.0
B+ 18.5
B 7.8
B- 2.4
CCC+ 0.3
D 2.1
NR 1.4
NR (Privately Rated Securities) 7.5
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Total 100.0%
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% of Long-Term
Top 10 Holdings Investments
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NRG Energy, Inc. 1.9%
Georgia-Pacific Corporation 1.8
Sungard Data Systems, Inc. 1.8
The Hertz Corporation 1.7
Reynolds Consumer Products Holdings, Inc. 1.6
Univar, Inc. 1.6
Dynegy Holdings, Inc. 1.5
Intelsat Corp. 1.5
Graham Packaging Holdings Co. 1.5
Graphic Packaging International, Inc. 1.4
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Total 16.3%
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(1) Most recent distribution paid or declared through 5/31/2010. The
distribution was increased subsequent to 5/31/2010. See Note 9 -
Subsequent Events in the Notes to Financial Statements. Subject to change
in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share Price or NAV, as applicable, as of 5/31/2010. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load. Past performance is not
indicative of future results.
(4) Ratings below BBB- by Standard & Poor's Ratings Group are considered to
be below investment grade.
Page 2
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PORTFOLIO COMMENTARY (Unaudited)
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SUB-ADVISOR
Four Corners Capital Management, LLC ("Four Corners"), a Macquarie Funds Group
company, was founded in 2001 by a team of investment professionals and an
affiliate of Australia-based Macquarie Group Limited ("Macquarie") and became a
wholly-owned, indirect subsidiary of Macquarie in 2008. Macquarie Group is a
global provider of banking, financial, advisory, investment and funds management
services. Macquarie Funds Group, with over $200 billion in assets under
management (as of May 31, 2010) is the global asset management business of
Macquarie Group. Macquarie Funds Group offers a diverse range of products
including managed funds, funds-based structured products, hedge funds and fund
of funds. Four Corners managed approximately $2.1 billion of assets (as of May
31, 2010), 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, and high net worth and retail
investors. Four Corners is an investment advisor registered under the Investment
Advisers Act of 1940, as amended.
PORTFOLIO MANAGEMENT TEAM
ROBERT I. BERNSTEIN, CFA
CO-PORTFOLIO MANAGER
CHIEF INVESTMENT OFFICER, FOUR CORNERS CAPITAL MANAGEMENT, LLC
Mr. Bernstein is responsible for managing Four Corners' investment activities.
He has over 18 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.
DREW R. SWEENEY
CO-PORTFOLIO MANAGER
SENIOR VICE PRESIDENT, FOUR CORNERS CAPITAL MANAGEMENT, LLC
Mr. Sweeney's responsibilities include the co-portfolio management of Four
Corners' retail funds as well as coverage of the media and entertainment, cable
and satellite industries. Mr. Sweeney has 15 years of investment experience
including 12 years in senior secured loans and high-yield bonds. Mr. Sweeney
joined Four Corners in 2005 from American Express Asset Management Group, Inc.
where he was primarily responsible for managing investments of senior secured
loans and high-yield bonds in the gaming, lodging, leisure, homebuilding, and
building product sectors. Prior to joining American Express, Mr. Sweeney worked
at Four Corners and ING Capital Advisors LLC managing investments of senior
secured loans in the media sector. Previously, Mr. Sweeney was an Associate at
First Union Securities in the Financial Sponsors and Diversified Industries
Groups. Mr. Sweeney received an MBA from the Kenan-Flagler Business School at
the University of North Carolina at Chapel Hill and a BS from Rutgers
University.
COMMENTARY
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
ON JULY 22, 2010, THE FUND ANNOUNCED THAT THE BOARD OF TRUSTEES OF THE FIRST
TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND ("FCM" OR THE "FUND")
APPROVED AND ADOPTED A PLAN OF TERMINATION, LIQUIDATION AND DISSOLUTION (THE
"PLAN") WHICH WILL RESULT IN THE TERMINATION OF THE FUND. AS A RESULT OF
ADOPTING THE PLAN, THE FUND WILL BEGIN TO WIND UP ITS AFFAIRS AND WILL NO LONGER
SEEK TO ATTAIN ITS INVESTMENT OBJECTIVES. PRIOR TO ADOPTING THE PLAN, THE
PRIMARY INVESTMENT OBJECTIVE OF THE FUND WAS TO SEEK A HIGH LEVEL OF CURRENT
INCOME AND THE SECONDARY OBJECTIVE OF THE FUND WAS TO ATTEMPT TO PRESERVE
CAPITAL. THE FUND PURSUED ITS INVESTMENT OBJECTIVES BY INVESTING IN A PORTFOLIO
OF SENIOR LOANS. SEE NOTE 9-SUBSEQUENT EVENTS IN THE NOTES TO FINANCIAL
STATEMENTS FOR FURTHER INFORMATION.
MARKET RECAP
After the S&P LSTA Leveraged Loan Index ("Index") posted its worst return in
history in 2008 (down 29.0%), the Index had a remarkable recovery and finished
2009 with the best return in Senior Loan market history (up 51.6%). The recovery
has extended into 2010, with Index returns up 3.8% through May, and up over
60.9% since the lows of December 2008. For the Fund's fiscal year ended May 31,
2010, Index returns were up 24.3%.
Page 3
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PORTFOLIO COMMENTARY - (Continued) (Unaudited)
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The rally in the Senior Loan market in 2009 was driven by strong technical
conditions rather than a strong fundamental environment. Despite record high
default rates, record low recovery rates, weak earnings and increased amendment
activity, demand for Senior Loans was broad-based, with investors seeking to
take advantage of the low prices/wide spreads at which Senior Loans were
trading. This strong demand combined with very little Senior Loan supply and
pushed the average reported Senior Loan price from 75.2% on June 1, 2009 to
87.3% on December 31, 2009.(1)
Technical conditions have remained strong for most of 2010. High-yield bond
issuance has been very strong, and the proceeds from much of this issuance have
been used to repay Senior Loans. The reduction in outstanding Senior Loans from
these repayments has only been slightly offset by Senior Loan new issuance, and
the net result has been a 14% reduction in the amount of outstanding Senior
Loans from their peak on December 31, 2008 ($596 billion).(2) As of March 26,
2010, the amount of outstanding Senior Loans stood at $512.6 billion. In
addition to reduced supply, 2010 has also witnessed increased demand as retail
investors, searching for low duration alternatives, poured into the market with
$4.5 billion of new money into open-end Senior Loan mutual funds in the first
five months of the year.(3)
Along with continuing strong technical conditions, fundamental conditions have
been improving in 2010. The default rate, as measured by number of Senior Loan
issuers, has more than halved from its peak in November 2009 of 10.8% to 4.6% at
the end of May 2010.(4) Additionally, market-wide credit quality continues to
improve as new-issue Senior Loans are being structured more conservatively than
Senior Loans which were structured prior to the credit crisis. Further, earnings
are improving, with EBITDA (Earnings before interest, taxes, depreciation and
amortization) across public filers up 9.7% year-over-year in the first
quarter.(5)
Notwithstanding the continuing strong technical and improving fundamental
conditions in the Senior Loan market, we believe that broad-based macroeconomic
concerns weigh on global markets as fiscal imbalances come into focus,
unemployment remains stubbornly high, real estate remains weak and the European
sovereign debt crisis looms large in the minds of investors still reeling from
the U.S. credit crisis. Additionally, the correlation of the loan market with
broader risk markets has increased, and the Index return fell over 2.0% in May
2010 as concern surrounding the European debt crisis and the "flash crash" that
occurred in the U.S. equity markets spilled into the Senior Loan market.
PERFORMANCE ANALYSIS
For the Fund's fiscal year ended May 31, 2010, FCM generated a market total
return(6) of 33.5% (including market price change and dividends) and net asset
value ("NAV") total return(7) of 24.2%. While the Fund had three dividend cuts
early in its fiscal year, FCM has recently declared a dividend increase in May
2010 beginning with the distribution payable in June 2010. The Fund's closing
price on May 28, 2010 was $12.50, which represented an 8.8% discount to its NAV,
compared to the Fund's discount to NAV 12 months earlier on May 29, 2009 of
15.2%.
Distributions totaled $0.393 per Common Share during the twelve months ended May
31, 2010, which represented a 45.1% decrease from the prior twelve months ended
May 31, 2009. Based on the Fund's current dividend, FCM's distribution rate is
2.88% (calculated on the Fund's share price) and 2.63% (based on the Fund's NAV)
as of May 31, 2010. For the Fund's fiscal year ended May 31, 2010 dividends
produced a Fund yield (based on price) of 3.14%. The Fund's yield declined
earlier in its fiscal year as lower LIBOR (London Interbank Offered Rate)
reduced the Fund's income. Likewise, the Fund's yield increased later in its
fiscal year as higher asset spreads flowed through the portfolio. The Fund's
yield was lower than the "pure-play" peer group average price yield of 4.71% and
lower than the broad peer group average price yield of 5.90%(8) for the Fund's
fiscal year ended May 31, 2010.
The Fund's NAV return for its fiscal year ended May 31, 2010 was essentially
flat to the Index, while it underperformed its peer group. The Fund trailed the
Index by 0.05% and underperformed the "pure-play" peer group average by 5.5% and
the broad peer group average by 12.6% for the same period. The Fund's
performance includes the negative impact of fees, expenses, and un-invested cash
balances which are not part of the Index return.
There are a number of reasons for the Fund's lower yield and lower NAV returns.
Recent relative underperformance has been largely attributable to continued risk
asset outperformance. The Fund's assets have higher average credit quality than
most funds in the "pure-play" peer group, and lower quality assets outperformed
higher quality assets during the year.
Additionally, many of the Fund's peers have higher levels of leverage, which
helped to improve their relative performance in an improving market. We have
deliberately reduced the Fund's level of leverage. While Senior Loan funds had
historically been structured with target leverage, including preferred stock, of
close to 40%, that was also in an environment where Senior Loan prices were more
stable than they have been in recent years. While we understand that lower
leverage can result in underperformance and lower yields during rising markets,
we believe that, given the higher correlation to global markets and higher
Page 4
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PORTFOLIO COMMENTARY - (Continued) (Unaudited)
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volatility in the Senior Loan market, it is now prudent to maintain lower levels
of leverage than existed prior to the recent credit crisis. During the period,
the Fund purchased or redeemed all of its outstanding Money Market Cumulative
Preferred(R) Shares. The Fund's leverage is now entirely in the form of debt,
which also limits the amount of leverage that the Fund can utilize.
_________________________
1 Standard & Poor's LCD Leverage Loan Index.
2 Standard & Poor's Leveraged Commentary & Data. Leveraged Lending Review
1Q10.
3 Standard & Poor's Leveraged Commentary & Data News. Loan funds see second
straight week of inflows, June 11, 2010.
4 Standard & Poor's Leveraged Commentary & Data News. Default rate
continues to fall in May, beating recent expectations, June 1, 2010.
5 Standard & Poor's Leveraged Commentary & Data News. EBITDA growth
continues, though road ahead remains uncertain, May 17, 2010.
6 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.
7 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
share and does not reflect sales load. Past performance is not indicative
of future results.
8 The "pure-play" peer group consists of a smaller subset (FCM, FCT, PPR,
TLI and VVR) of the broad peer group, which invests 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 such funds. Of the broad peer
group, eleven of the 16 total funds invest a material portion of their
assets in high-yield bonds, emerging markets debt or other types of
corporate debt securities.
Page 5
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (A) (B)
MAY 31, 2010
Ratings
Principal (Unaudited) (c) Stated
Value Description Moody's S&P Rate (d) Maturity (e) Value
- ----------- ------------------------------------------------ ------------------ ------------ ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - 136.5%
AEROSPACE & DEFENSE - 7.6%
$ 359,429 DAE Aviation Holdings, Inc., Term Loan B1 B3 B 4.09% 07/31/14 $ 336,666
349,839 DAE Aviation Holdings, Inc., Term Loan B2 B3 B 4.06%-4.09% 07/31/14 327,682
323,116 GenCorp, Inc., Synthetic Letter of Credit Ba2 B+ 3.61% 04/30/13 297,267
166,057 GenCorp, Inc., Term Loan Ba2 B+ 3.79% 04/30/13 152,772
477,641 L-1 Identity Solutions Operating Co., Term
Loan B-2 Ba3 BB 7.25% 08/05/13 475,252
484,427 Robertson Fuel Systems, LLC, Term Loan NR (f) NR (f) 3.02%-3.10% 04/19/13 457,784
461,828 Safenet, Inc., Term Loan, First Lien B1 B+ 2.84% 04/12/14 436,139
977,215 Spirit Aerosystems, Inc., Term Loan B Ba2 BBB- 2.05% 09/30/13 950,342
127,969 TASC, Inc., Term Loan A Ba2 BB 5.50% 12/18/14 127,755
741,891 TASC, Inc., Term Loan B Ba2 BB 5.75% 12/18/15 741,891
423,548 Triumph Group, Inc., Term Loan B Baa3 BB+ 4.50% 06/14/16 423,548
423,548 Vought Aircraft Industries, Inc., Term
Loan B Ba2 BB- 7.50% 12/22/11 421,695
______________
5,148,793
______________
AGRICULTURAL PRODUCTS - 0.1%
93,235 Dole Food Co., Inc., Prefunded Letter of Credit Ba2 BB- 8.00% 08/30/10 93,117
______________
AIRLINES - 0.7%
485,000 Delta Air Lines, Inc., Synthetic Revolving
Credit Facility Ba2 BB- 2.28%-2.32% 04/30/12 463,175
______________
ALUMINUM - 1.4%
668,626 Novelis Corporation, Term Loan Ba3 BB- 2.30%-2.54% 07/06/14 628,230
303,906 Novelis, Inc., Canadian Term Loan Ba3 BB- 2.36% 07/06/14 285,545
______________
913,775
______________
APPAREL RETAIL - 0.7%
460,625 Hanesbrands, Inc., New Term Loan Ba1 BB+ 5.25% 12/10/15 460,366
______________
APPLICATION SOFTWARE - 1.2%
897,283 Verint Systems, Inc., Term Loan, First Lien NR BB- 3.54% 05/25/14 836,716
______________
ASSET MANAGEMENT & CUSTODY BANKS - 1.3%
901,597 Nuveen Investments, Inc., Term Loan B3 B 3.32%-3.33% 11/13/14 763,942
138,486 Oxford US Acquisition, LLC, Term Loan,
Tranche B2 NR (f) NR (f) 2.31% 05/12/14 124,869
______________
888,811
______________
AUTOMOBILE MANUFACTURERS - 0.7%
486,178 Ford Motor Co., Term Loan, Tranche B-1 Ba1 B- 3.31%-3.34% 12/15/13 452,666
______________
AUTOMOTIVE RETAIL - 0.5%
368,291 KAR Holdings, Inc., Term Loan B Ba3 B+ 3.11% 10/18/13 349,570
______________
BROADCASTING - 2.3%
843,361 Cumulus Media, Inc., Term Loan, First Lien Caa1 B- 4.34% 06/11/14 780,812
355,286 Gray Television, Inc., Term Loan B B2 B 3.80%-3.81% 12/31/14 331,749
497,500 Raycom Media, Inc., Term Loan, Tranche B NR NR 1.88% 06/25/14 457,700
______________
1,570,261
______________
CABLE & SATELLITE - 5.0%
51,582 Charter Communications Operating, LLC,
Term Loan B1 Ba2 BB+ 2.30% 03/06/14 47,685
917,473 Charter Communications Operating, LLC,
Term Loan C Ba2 BB+ 3.55% 09/06/16 854,069
Page 6 See Notes to Financial Statements
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (A) (B) (CONTINUED)
MAY 31, 2010
Ratings
Principal (Unaudited) (c) Stated
Value Description Moody's S&P Rate (d) Maturity (e) Value
- ----------- ------------------------------------------------ ------------------ ------------ ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (CONTINUED)
CABLE & SATELLITE - (CONTINUED)
$ 496,124 CSC Holdings, Inc., Term Loan B-2,
Extended Maturity Baa3 BBB- 2.09% 03/29/16 $ 487,070
443,077 CSC Holdings, Inc., Term Loan B-3,
Extended Maturity Baa3 BBB- 2.09% 03/29/16 434,295
350,000 Mediacom Broadband, LLC, Term Loan F Ba3 BB- 4.50% 10/22/17 343,525
925,856 UPC Broadband Holding B.V., Term Loan T Ba3 B+ 3.93% 12/31/16 894,222
324,144 UPC Broadband Holding B.V., Term Loan X Ba3 B+ 2.18% 12/31/17 310,773
______________
3,371,639
______________
CASINOS & GAMING - 3.2%
432,748 CCM Merger, Inc., Term Loan B B3 BB- 8.50% 07/13/12 424,003
117,900 Las Vegas Sands, LLC, Term Loan 1 B3 B- 2.05% 05/23/14 104,678
114,818 Seminole Tribe of Florida, Term Loan B1 Baa3 BBB 1.81% 03/05/14 110,225
413,846 Seminole Tribe of Florida, Term Loan B2 Baa3 BBB 1.81% 03/05/14 397,292
301,619 Seminole Tribe of Florida, Term Loan B3 Baa3 BBB 1.81% 03/05/14 289,555
831,827 VML US Finance, LLC, Term Loan B B3 B- 4.80% 05/25/13 801,228
______________
2,126,981
______________
COMMODITY CHEMICALS - 2.2%
1,558,327 Univar, Inc., Term Loan B-Opco B2 B+ 3.35% 10/11/14 1,488,981
______________
COMPUTER HARDWARE - 1.9%
1,341,779 Activant Solutions, Inc., Term Loan B1 B 2.31% 05/02/13 1,264,626
______________
DATA PROCESSING & OUTSOURCED SERVICES - 1.9%
1,458,750 Harland Clarke Holdings Corp., Term Loan B B1 B+ 2.79%-2.85% 06/30/14 1,272,030
______________
DIVERSIFIED CHEMICALS - 4.9%
115,850 Brenntag Holding GmbH & Co. KG,
Acquisition Term Loan Ba2 BBB- 4.07%-4.14% 01/17/14 114,691
785,948 Brenntag Holding GmbH & Co. KG, Term
Loan B2 Ba2 BBB- 4.07%-4.09% 01/17/14 778,088
1,309,277 Huntsman International, LLC,
Term Loan B Ba2 B+ 2.08%-2.18% 04/19/14 1,224,174
969,482 Rockwood Specialties Group, Inc., Term
Loan H Ba2 BB- 6.00% 05/15/14 967,664
250,000 Solutia, Inc., Term Loan Ba2 BB- 4.75% 03/17/17 249,583
______________
3,334,200
______________
DIVERSIFIED SUPPORT SERVICES - 0.4%
249,375 JohnsonDiversey, Inc., Term Loan Ba2 BB- 5.50% 11/24/15 249,375
______________
EDUCATION SERVICES - 0.7%
496,056 Education Management, LLC, Term Loan C B1 BB- 2.06% 06/01/13 467,740
______________
ELECTRIC UTILITIES - 9.5%
818,239 Astoria Generating Co. Acquisitions, LLC,
Term Loan B B1 BB- 2.01%-2.03% 02/23/12 780,191
1,347,409 Calpine Corporation, First Priority
Term Loan B1 B+ 3.17% 03/29/14 1,263,618
330,747 Covanta Energy Corporation, Synthetic
Letter of Credit Ba1 BB 1.79% 02/09/14 316,415
651,675 Covanta Energy Corporation, Term Loan Ba1 BB 1.81%-1.94% 02/09/14 623,436
438,140 Mirant North America, LLC, Term Loan Ba2 BB 2.10% 01/03/13 424,683
1,823,853 NRG Energy, Inc., Synthetic Letter of Credit Baa3 BB+ 2.04% 02/01/13 1,749,655
856,395 Riverside Energy Center, LLC, Term Loan Ba3 BB- 4.59% 06/24/11 852,113
See Notes to Financial Statements Page 7
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (A) (B) (CONTINUED)
MAY 31, 2010
Ratings
Principal (Unaudited) (c) Stated
Value Description Moody's S&P Rate (d) Maturity (e) Value
- ----------- ------------------------------------------------ ------------------ ------------ ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (CONTINUED)
ELECTRIC UTILITIES - (CONTINUED)
$ 84,958 Rocky Mountain Energy Center, LLC, Synthetic
Letter of Credit Ba3 BB- 4.69% 06/24/11 $ 84,534
333,289 Rocky Mountain Energy Center, LLC,
Term Loan Ba3 BB- 4.59% 06/24/11 331,622
______________
6,426,267
______________
ENVIRONMENTAL & FACILITIES SERVICES - 0.9%
31,447 EnergySolutions, LLC, Synthetic Letter
of Credit Ba2 NR (f) 4.10% 06/07/13 30,739
201,790 EnergySolutions, LLC, Term Loan (Duratek) Ba2 NR (f) 4.03% 06/07/13 197,250
420,593 EnergySolutions, LLC, Term Loan
(EnergySolutions) Ba2 NR (f) 4.03% 06/07/13 411,130
______________
639,119
______________
FOOD DISTRIBUTORS - 1.8%
485,000 Dean Foods Co., Term Loan B Ba3 BB 1.68% 04/02/14 464,388
319,018 Wm. Wrigley Jr. Company, Term Loan B1 NR (f) NR (f) 3.06% 12/17/12 318,039
424,979 Wm. Wrigley Jr. Company, Term Loan B2 NR (f) NR (f) 3.31% 09/30/14 424,094
______________
1,206,521
______________
FOREST PRODUCTS - 2.5%
482,084 Georgia-Pacific Corporation, Term Loan B1 Ba1 BBB 2.25%-2.54% 12/20/12 470,086
155,301 Georgia-Pacific Corporation, Term Loan B2 Ba1 BBB 2.29%-2.54% 12/20/12 151,436
1,099,910 Georgia-Pacific Corporation, Term Loan C Ba1 BBB 3.50%-3.79% 12/23/14 1,092,520
______________
1,714,042
______________
GAS UTILITIES - 0.9%
602,173 Atlas Pipeline Partners, L.P., Term Loan B1 B 6.75% 07/27/14 598,159
______________
HEALTH CARE EQUIPMENT - 1.1%
744,275 Biomet, Inc., Dollar Term Loan B1 BB- 3.28%-3.35% 03/25/15 723,528
______________
HEALTH CARE FACILITIES - 8.3%
374,322 HCA, Inc., Term Loan B Ba3 BB 2.54% 11/18/13 353,734
897,698 HCA, Inc., Term Loan B-2 Ba3 BB 3.54% 03/31/17 867,681
909,840 Health Management Associates, Inc., Term
Loan B B1 BB- 2.04% 02/28/14 853,354
1,250,000 Lifepoint Hospitals, Inc., Term Loan B Ba1 BB 2.13% 04/15/12 1,208,854
734,563 Select Medical Corporation, Term Loan B-1 Ba2 BB- 4.23% 08/22/14 709,465
137,253 Sun Healthcare Group, Inc., Synthetic
Letter of Credit Ba2 B+ 2.29% 04/19/14 130,665
612,747 Sun Healthcare Group, Inc., Term Loan,
First Lien Ba2 B+ 2.27%-2.66% 04/19/14 583,335
153,700 United Surgical Partners International, Inc.,
Delayed Draw Term Loan Ba3 B 2.35% 04/19/14 143,325
813,548 United Surgical Partners International, Inc.,
Term Loan B Ba3 B 2.32%-2.35% 04/19/14 758,634
______________
5,609,047
______________
HEALTH CARE SERVICES - 6.7%
64,878 CHS/Community Health Systems, Inc.,
Delayed Draw Term Loan Ba3 BB 2.79% 07/25/14 60,653
1,266,049 CHS/Community Health Systems, Inc.,
Term Loan Ba3 BB 2.60%-2.79% 07/25/14 1,183,598
Page 8 See Notes to Financial Statements
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (A) (B) (CONTINUED)
MAY 31, 2010
Ratings
Principal (Unaudited) (c) Stated
Value Description Moody's S&P Rate (d) Maturity (e) Value
- ----------- ------------------------------------------------ ------------------ ------------ ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (CONTINUED)
HEALTH CARE SERVICES - (CONTINUED)
$ 1,000,000 DaVita, Inc., Term Loan B-1 Ba1 BB+ 1.79%-1.85% 10/05/12 $ 975,556
885,641 Fresenius Medical Care AG, Term Loan B Baa3 BBB- 1.66%-1.70% 03/31/13 861,143
318,223 Fresenius SE, Term Loan C-1 Baa3 BBB- 4.50% 09/10/14 317,560
181,777 Fresenius SE, Term Loan C-2 Baa3 BBB- 4.50% 09/10/14 181,398
483,750 Healthways, Inc., Term Loan B Ba2 BB 1.79% 12/01/13 452,306
478,792 Quintiles Transnational Corp., Term Loan B,
First Lien Ba2 BB 2.30% 03/31/13 461,236
______________
4,493,450
______________
HOMEBUILDING - 0.7%
483,627 Mattamy Funding Partnership, Term Loan NR (f) NR (f) 2.81% 04/11/13 454,610
______________
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 3.2%
1,500,000 Dynegy Holdings, Inc., Synthetic Letter of Credit Ba2 B+ 4.11% 04/02/13 1,426,875
987,342 Texas Competitive Electric Holdings Co., LLC,
Initial Term Loan B-2 B1 B+ 3.79%-4.07% 10/10/14 758,490
______________
2,185,365
______________
INTEGRATED TELECOMMUNICATION SERVICES - 5.0%
496,252 Intelsat Corp., Term Loan B-2-A B1 BB- 2.79% 01/03/14 472,749
496,100 Intelsat Corp., Term Loan B-2-B B1 BB- 2.79% 01/03/14 472,604
496,100 Intelsat Corp., Term Loan B-2-C B1 BB- 2.79% 01/03/14 472,604
995,000 NTELOS, Inc., Term Loan Ba3 BB- 5.75% 08/07/15 991,766
77,832 Telesat Canada, U.S. Term Loan II B1 BB- 3.36% 10/31/14 74,779
906,167 Telesat Canada, U.S. Term Loan I B1 BB- 3.36% 10/31/14 870,628
______________
3,355,130
______________
INTERNET RETAIL - 0.6%
481,479 Sabre Holdings Corp., Term Loan B1 B 2.34%-2.35% 09/30/14 431,525
______________
IT CONSULTING & OTHER SERVICES - 0.6%
464,082 West Corporation, Term Loan B-2 B1 BB- 2.68%-2.81% 10/24/13 434,303
______________
LEISURE FACILITIES - 4.5%
376,179 Cedar Fair, L.P., U.S. Term Loan Ba2 BB- 2.35% 08/30/12 371,164
701,894 London Arena and Waterfront Finance, LLC,
Term Loan A NR (f) NR (f) 2.80% 03/08/12 652,761
1,000,000 Six Flags, Inc., Exit Term Loan Caa1 D 6.00% 06/30/16 993,386
997,500 Universal City Development Partners, Ltd.,
Term Loan Ba2 BB- 5.50%-6.00% 11/06/14 992,712
______________
3,010,023
______________
LIFE & HEALTH INSURANCE - 1.9%
78,869 Conseco, Inc., Term Loan B2 B- 7.50% 10/10/13 76,075
885,714 Multiplan Merger Corporation, Term Loan B1 B+ 6.00% 04/12/13 881,286
375,416 Multiplan Merger Corporation, Term Loan C B1 B+ 3.63% 04/12/13 357,897
______________
1,315,258
______________
MANAGED HEALTH CARE - 2.8%
234,018 IASIS Healthcare Corporation, Delayed Draw
Term Loan Ba2 B+ 2.35% 03/15/14 220,562
63,516 IASIS Healthcare Corporation, Synthetic
Letter of Credit Ba2 B+ 2.35% 03/15/14 59,864
676,179 IASIS Healthcare Corporation, Term Loan Ba2 B+ 2.35% 03/15/14 637,299
1,000,000 Vanguard Health Systems, Inc., Term Loan B Ba2 B+ 5.00% 01/29/16 986,500
______________
1,904,225
______________
See Notes to Financial Statements Page 9
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (A) (B) (CONTINUED)
MAY 31, 2010
Ratings
Principal (Unaudited) (c) Stated
Value Description Moody's S&P Rate (d) Maturity (e) Value
- ----------- ------------------------------------------------ ------------------ ------------ ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (CONTINUED)
METAL AND GLASS CONTAINERS - 0.4%
$ 242,167 Owens-Illinois, Inc., Term Loan B Baa2 BBB 1.75% 06/14/13 $ 238,171
______________
MOVIES & ENTERTAINMENT - 5.0%
979,540 AMC Entertainment, Inc., Term Loan Ba2 BB- 2.10% 01/26/13 930,563
742,500 Discovery Communications Holding, LLC,
Term Loan C Baa3 NR (f) 5.50% 05/14/14 741,688
500,000 National CineMedia, LLC, Term Loan B Ba3 B+ 2.01% 02/13/15 473,333
748,391 Regal Cinemas Corporation, Term Loan Ba3 BB- 3.79% 11/19/16 742,466
492,148 TWCC Holdings Corporation, Term Loan B Ba2 BB- 5.00% 09/14/15 490,672
______________
3,378,722
______________
MULTI-UTILITIES - 1.4%
689,274 KGEN, LLC, Synthetic Letter of Credit B BB- 2.06% 02/08/14 647,918
305,205 KGEN, LLC, Term Loan B B1 BB- 2.13% 02/08/14 286,893
______________
934,811
______________
OFFICE SERVICES & SUPPLIES - 2.0%
906,573 Emdeon Business Services, LLC, Term Loan,
First Lien Ba3 BB 2.30% 11/16/13 873,710
500,000 Pike Electric, Inc., Term Loan C NR (f) NR (f) 2.13% 12/10/12 470,000
______________
1,343,710
______________
OIL & GAS EQUIPMENT & SERVICES - 2.7%
750,000 Aquilex Holdings, LLC, Term Loan Ba2 BB- 5.50% 04/01/16 748,438
495,960 Dresser Inc., Term Loan B B2 B+ 2.70% 05/04/14 462,979
509,555 Hercules Offshore, Inc., Term Loan B2 B 6.00% 07/11/13 478,344
120,331 Targa Resources, Inc., Term Loan Ba3 B+ 6.00% 07/05/16 120,090
______________
1,809,851
______________
OIL & GAS EXPLORATION & PRODUCTION - 1.8%
479,613 Helix Energy Solutions Group, Inc.,
Term Loan Ba2 BB 2.55%-2.59% 07/01/13 456,232
752,341 SemCrude, L.P., Prefunded Synthetic
Letter of Credit NR NR 8.50% 11/30/12 742,310
39,597 SemCrude, L.P., Prefunded Synthetic
Letter of Credit (OID) NR NR 8.50% 11/30/12 39,069
______________
1,237,611
______________
OIL & GAS REFINING & MARKETING - 1.0%
86,207 Calumet Lubricants Co., L.P., Synthetic
Letter of Credit B1 B 4.14% 01/03/15 78,305
638,401 Calumet Lubricants Co., L.P., Term Loan B1 B 4.38%-4.44% 01/03/15 579,881
______________
658,186
______________
OIL & GAS STORAGE & TRANSPORTATION - 1.7%
650,000 Energy Transfer Equity, L.P., Term Loan Ba2 BB- 2.09% 11/01/12 636,071
490,000 Enterprise GP Holdings, L.P., Term Loan B Ba2 BB- 2.55% 11/08/14 475,300
______________
1,111,371
______________
PACKAGED FOODS & MEATS - 0.7%
152,487 Weight Watchers International, Inc., Term
Loan B Ba1 BB+ 1.81% 01/26/14 148,674
337,386 Weight Watchers International, Inc., Term
Loan D Ba1 BB+ 2.56% 06/30/16 331,794
______________
480,468
______________
Page 10 See Notes to Financial Statements
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (A) (B) (CONTINUED)
MAY 31, 2010
Ratings
Principal (Unaudited) (c) Stated
Value Description Moody's S&P Rate (d) Maturity (e) Value
- ----------- ------------------------------------------------ ------------------ ------------ ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (CONTINUED)
PAPER PACKAGING - 7.7%
$ 1,375,667 Graham Packaging Holdings Co., Term Loan B,
First Lien B1 B+ 2.56%-2.69% 10/07/11 $ 1,351,937
1,000,000 Graphic Packaging International, Inc.,
Term Loan Ba3 BB 3.04%-3.05% 05/16/14 961,071
403,287 Graphic Packaging International, Inc.,
Term Loan B Ba3 BB 2.29%-2.32% 05/16/14 380,728
996,875 Reynolds Consumer Products Holdings, Inc.,
Term Loan Ba2 BB- 6.25% 11/05/15 993,884
500,000 Reynolds Consumer Products Holdings, Inc.,
Incremental Term Loan Ba2 BB- 5.75% 05/05/16 496,250
141,813 Smurfit-Stone Container Enterprises, Inc.,
Canadian Revolving Credit Facility (g) WR D 2.50%-5.00% 11/01/09 140,750
85,822 Smurfit-Stone Container Enterprises, Inc.,
Synthetic Letter of Credit (g) WR D 4.50% 11/01/10 85,178
97,667 Smurfit-Stone Container Enterprises, Inc.,
Term Loan B (g) WR D 2.57% 11/01/11 96,935
184,087 Smurfit-Stone Container Enterprises, Inc.,
Term Loan C (g) WR D 2.57% 11/01/11 183,627
55,658 Smurfit-Stone Container Enterprises, Inc.,
Term Loan C1 (g) WR D 2.57% 11/01/11 55,518
426,551 Smurfit-Stone Container Enterprises, Inc.,
U.S. Revolving Credit Facility (g) WR D 2.50%-4.50% 11/01/09 423,352
______________
5,169,230
______________
PAPER PRODUCTS - 0.6%
438,750 Domtar Corporation, Term Loan B Baa3 BBB 1.71% 03/07/14 433,327
______________
PHARMACEUTICALS - 3.8%
960,190 Catalent Pharma Solutions, Inc., Dollar
Term Loan Ba3 BB- 2.60% 04/10/14 880,374
556,889 Mylan, Inc., Term Loan B Ba1 BB+ 3.56% 10/02/14 552,558
330,508 Warner Chilcott Corporation, Term Loan A B1 BB+ 5.50% 10/30/14 329,945
399,000 Warner Chilcott Corporation, Term Loan B B1 BB+ 5.75% 04/30/15 398,302
152,119 Warner Chilcott Corporation, Term Loan B1 B1 BB+ 5.75% 04/30/15 151,802
253,305 Warner Chilcott Corporation, Term Loan B2 B1 BB+ 5.75% 04/30/15 252,777
______________
2,565,758
______________
PUBLISHING - 0.8%
7,208 Cenveo Corporation, Delayed Draw
Term Loan Ba2 BB 4.77% 06/21/13 7,136
252,454 Cenveo Corporation, Term Loan C Ba2 BB 4.77% 06/21/13 249,929
422,574 Yell Group, PLC, Term Loan B1 B2 B 4.10% 07/31/14 307,271
______________
564,336
______________
RETAIL REITS - 1.2%
879,986 Capital Automotive, L.P., Term Loan C Ba3 B 5.78% 12/14/12 809,367
______________
SEMICONDUCTORS - 0.4%
250,000 Intersil Corporation, Term Loan B Ba2 BB+ 4.75% 04/26/16 249,062
______________
SPECIALIZED CONSUMER SERVICES - 6.6%
745,000 Acxiom Corporation, Extended Term Loan Ba2 BBB- 3.32% 03/15/15 730,100
1,000,000 Advantage Sales and Marketing, Inc., Term
Loan, First Lien NR (f) NR (f) 5.00% 04/26/16 991,250
500,000 Affinion Group, Inc., Term Loan B Ba2 BB 5.00% 10/09/16 478,125
See Notes to Financial Statements Page 11
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (A) (B) (CONTINUED)
MAY 31, 2010
Ratings
Principal (Unaudited) (c) Stated
Value Description Moody's S&P Rate (d) Maturity (e) Value
- ----------- ------------------------------------------------ ------------------ ------------ ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (CONTINUED)
SPECIALIZED CONSUMER SERVICES - (CONTINUED)
$ 6,873 ARAMARK Corporation, Synthetic
Letter of Credit 1 Ba3 BB 2.17% 01/26/14 $ 6,553
12,381 ARAMARK Corporation, Synthetic
Letter of Credit 2 Ba3 BB 3.54% 07/26/16 11,982
104,851 ARAMARK Corporation, Term Loan Ba3 BB 2.17% 01/26/14 99,969
188,260 ARAMARK Corporation, Term Loan B Ba3 BB 3.54% 07/26/16 182,201
996,247 Asurion Corp., Term Loan, First Lien NR (f) NR (f) 3.28%-3.42% 07/03/14 954,618
839,755 Nielsen Finance, LLC, Dollar Term Loan A Ba3 B+ 2.30% 08/09/13 783,282
249,370 Nielsen Finance, LLC, Dollar Term Loan B Ba3 B+ 4.05% 05/01/16 240,019
______________
4,478,099
______________
SPECIALTY CHEMICALS - 1.4%
970,000 Celanese Holdings, LLC, Term Loan,
First Lien Ba2 BB+ 2.04% 04/02/14 922,561
______________
SPECIALTY STORES - 1.6%
727,227 Harbor Freight Tools USA, Inc., Term Loan C NR (f) NR (f) 5.00% 02/12/16 721,773
357,788 The Yankee Candle Co., Inc., Term Loan Ba3 BB- 2.36% 02/06/14 342,420
______________
1,064,193
______________
SYSTEMS SOFTWARE - 4.0%
290,934 Dealer Computer Services, Inc., Term Loan,
First Lien Ba2 BB 5.25% 04/21/17 288,449
250,000 Information Solution Company, Term Loan Ba2 BB+ 4.75% 04/12/16 249,687
515,829 Open Solutions, Inc., Term Loan, First Lien B1 BB- 2.45% 01/23/14 456,938
496,154 Sungard Data Systems, Inc., Term Loan A Ba3 BB 2.05% 02/28/14 472,028
1,244,214 Sungard Data Systems, Inc., Term Loan B Ba3 BB 3.89%-4.00% 02/28/16 1,208,046
______________
2,675,148
______________
TECHNOLOGY DISTRIBUTORS - 0.7%
489,822 Sensata Technologies Finance Co., LLC,
Term Loan, First Lien B1 BB- 2.05%-2.08% 04/27/13 458,596
______________
TRUCKING - 3.3%
668,088 Oshkosh Corporation, Term Loan B Ba3 BB- 6.26% 12/06/13 667,045
277,778 The Hertz Corporation, Prefunded Synthetic
Letter of Credit Ba1 BB- 2.02% 12/21/12 264,583
1,372,912 The Hertz Corporation, Term Loan B Ba1 BB- 2.09%-2.10% 12/21/12 1,307,698
______________
2,239,326
______________
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS 92,075,298
(Cost $94,921,363) ______________
SENIOR FLOATING-RATE NOTES - 0.4%
LEISURE FACILITIES - 0.0%
250,000 HRP Myrtle Beach (g) (h) (i) (k) WR NR 7.38% 04/01/12 -
______________
SEMICONDUCTORS - 0.4%
325,000 NXP B.V. C CCC+ 3.05% 10/15/13 281,531
______________
TOTAL SENIOR FLOATING-RATE NOTES 281,531
(Cost $575,195) ______________
Page 12 See Notes to Financial Statements
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (A) (B) (CONTINUED)
MAY 31, 2010
Ratings
Principal (Unaudited) (c) Stated
Value Description Moody's S&P Rate (d) Maturity (e) Value
- ----------- ------------------------------------------------ ------------------ ------------ ------------ -------------
NOTES - 0.0%
HOMEBUILDING - 0.0%
$ 145,455 TOUSA, Inc. (Payment-In-Kind Election
Note) (g) (h) (i) (j) (k) NR NR 14.75% 07/01/15 $ -
______________
TOTAL NOTES -
(Cost $87,273) ______________
Shares Description Value
- ------------ ---------------------------------------------------------------------------------------- -------------
COMMON STOCKS - 0.5%
DIVERSIFIED CHEMICALS - 0.5%
9,982 LyondellBasell Industries AF S.C.A., Class A 177,380
9,148 LyondellBasell Industries AF S.C.A., Class B 161,920
______________
339,300
______________
TOTAL COMMON STOCKS 339,300
(Cost $316,664) ______________
PREFERRED STOCKS - 0.0%
HOMEBUILDING - 0.0%
855 TOUSA, Inc. (8.0%, Series A Convertible Payment-In-Kind Preferred Stock) (g) (h) (i) (k) -
______________
TOTAL PREFERRED STOCKS -
(Cost $512,727) ______________
WARRANTS - 0.0%
BROADCASTING - 0.0%
1,543 Cumulus Media, Inc. (i) (k) 4,522
______________
TOTAL WARRANTS 4,522
(Cost $0) ______________
TOTAL INVESTMENTS - 137.4% 92,700,651
(Cost $96,413,222) (l) ______________
OUTSTANDING LOAN - (37.1)% $ (25,000,000)
NET OTHER ASSETS AND LIABILITIES - 0.3% (225,771)
______________
NET ASSETS (APPLICABLE TO COMMON SHARES) - 100.0% $ 67,474,880
==============
________________________
(a) All percentages shown in the Portfolio of Investments are based on net
assets applicable to Common Shares.
(b) All or a portion of the investments are available to serve as collateral
on the outstanding loan.
(c) Ratings below Baa3 by Moody's Investors Service, Inc. ("Moody's") or BBB-
by Standard & Poor's Ratings Group ("S&P") are considered to be below
investment grade.
(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) 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.
(f) This Senior Loan Interest was privately rated upon issuance. The rating
agency does not provide ongoing surveillance on the rating.
(g) This borrower has filed for protection in federal bankruptcy court.
See Notes to Financial Statements Page 13
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS (A) (B) (CONTINUED)
MAY 31, 2010
(h) Non-income producing investment.
(i) This investment 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 investments may only be resold
in transactions exempt from registration (see Note 2E - "Restricted
Investments" in the Notes to Financial Statements).
(j) This investment is a Senior Subordinated Payment-in-Kind Election Note
whereby 1.00% of interest per annum is to be paid in cash and 13.75% of
interest per annum is to 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 to be paid semi-annually;
however, this issuer is in default and income is not being accrued.
(k) This investment is fair valued in accordance with valuation procedures
adopted by the Fund's Board of Trustees.
(l) Aggregate cost for federal income tax purposes is $96,496,499. As of May
31, 2010, the aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost was $213,231 and the
aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value was $4,009,079.
NR Not rated.
WR Withdrawn rating.
______________________________
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of May 31, 2010
is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE QUOTED OBSERVABLE UNOBSERVABLE
AT 5/31/2010 PRICES INPUTS INPUTS
----------------- -------------- --------------- ---------------
Senior Floating-Rate Loan Interests* $ 92,075,298 $ - $ 88,857,140 $ 3,218,158
Senior Floating-Rate Notes* 281,531 - 281,531 -
Common Stocks* 339,300 339,300 - -
Warrants* 4,522 - 4,522 -
----------------- -------------- --------------- ---------------
Total Investments $ 92,700,651 $ 339,300 $ 89,143,193 $ 3,218,158
================= ============== =============== ===============
Following is a reconciliation of investments in which significant unobservable
inputs (Level 3) were used in determining value:
CHANGE IN
INVESTMENTS AT FAIR VALUE TRANSFERS NET UNREALIZED NET
USING SIGNIFICANT UNOBSERVABLE BALANCE AS OF IN (OUT) NET REALIZED APPRECIATION PURCHASES BALANCE AS OF
INPUTS (LEVEL 3) MAY 31, 2009 OF LEVEL 3 GAINS (LOSSES) (DEPRECIATION) (SALES) MAY 31, 2010
- ------------------------------ ------------- ----------- -------------- --------------- --------- -------------
Senior Floating-Rate
Loan Interests* $ - $ 3,218,158 $ - $ - $ - $ 3,218,158
Net change in unrealized appreciation/depreciation from Level 3 investments held
as of May 31, 2010 was $319,684 and is included in the "Net change in unrealized
appreciation (depreciation) on investments" on the Statement of Operations.
* See the Portfolio of Investments for industry breakout.
Page 14 See Notes to Financial Statements
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2010
ASSETS:
Investments, at value
(Cost $96,413,222) $ 92,700,651
Cash 2,513,446
Prepaid expenses 525
Receivables:
Investment securities sold 452,022
Interest 327,917
_____________
Total Assets 95,994,561
_____________
LIABILITIES:
Outstanding loan 25,000,000
Payables:
Investment securities purchased 3,314,307
Investment advisory fees 76,966
Audit and tax fees 60,200
Interest and fees on loan 15,487
Printing fees 13,020
Legal fees 10,764
Trustees' fees and expenses 9,753
Administrative fees 7,020
Custodian fees 6,122
Transfer agent fees 2,320
Other liabilities 3,722
_____________
Total Liabilities 28,519,681
_____________
NET ASSETS (APPLICABLE TO COMMON SHARES) $ 67,474,880
=============
NET ASSETS CONSIST OF:
Paid-in capital 93,357,148
Par value 49,243
Accumulated net investment income (loss) (35,407)
Accumulated net realized gain (loss) on investments (22,183,533)
Net unrealized appreciation (depreciation) on investments (3,712,571)
_____________
NET ASSETS (APPLICABLE TO COMMON SHARES) $ 67,474,880
=============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) $ 13.70
=============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) 4,924,349
=============
See Notes to Financial Statements Page 15
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 2010
INVESTMENT INCOME:
Interest $ 3,834,123
Other income 129,833
______________
Total investment income 3,963,956
______________
EXPENSES:
Investment advisory fees 863,677
Interest and fees on loan 676,591
Tender offer fees 149,466
Administrative fees 102,874
Legal fees 78,694
Audit and tax fees 62,724
Trustees' fees and expenses 39,648
Custodian fees 38,101
Printing fees 27,588
Transfer agent fees 23,789
Money Market Cumulative Preferred(R) Shares commission fees 1,728
Other 34,491
______________
Total expenses 2,099,371
______________
NET INVESTMENT INCOME (LOSS) 1,864,585
______________
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments (5,678,295)
Net change in unrealized appreciation (depreciation) on investments 15,997,436
______________
NET REALIZED AND UNREALIZED GAIN (LOSS) 10,319,141
______________
GAIN ON PURCHASE OF MONEY MARKET CUMULATIVE PREFERRED(R) SHARES (NOTE 5) 1,016,250
______________
MONEY MARKET CUMULATIVE PREFERRED(R) SHARE DIVIDENDS (NOTE 5) (14,629)
______________
NET INCREASE (DECREASE) IN NET ASSETS (APPLICABLE TO COMMON SHARES) RESULTING FROM OPERATIONS $ 13,185,347
==============
Page 16 See Notes to Financial Statements
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
5/31/2010 5/31/2009
---------------- ----------------
OPERATIONS:
Net investment income (loss) $ 1,864,585 $ 4,092,517
Net realized gain (loss) on investments (5,678,295) (14,878,895)
Net change in unrealized appreciation (depreciation) on investments 15,997,436 (9,554,587)
Gain on purchase of Money Market Cumulative Preferred(R) Shares (Note 5) 1,016,250 -
Distributions to Money Market Cumulative Preferred(R) Shareholders from:
Net investment income (14,629) (628,680)
_______________ _______________
Net increase (decrease) in net assets applicable to Common Shares resulting
from operations 13,185,347 (20,969,645)
_______________ _______________
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (1,721,456) (3,447,546)
Return of capital (211,351) (73,365)
_______________ _______________
Total distributions to Common Shareholders (1,932,807) (3,520,911)
_______________ _______________
Total increase (decrease) in net assets applicable to Common Shares 11,252,540 (24,490,556)
NET ASSETS (APPLICABLE TO COMMON SHAREHOLDERS):
Beginning of period 56,222,340 80,712,896
_______________ _______________
End of period $ 67,474,880 $ 56,222,340
=============== ===============
Accumulated net investment income (loss) at end of period $ (35,407) $ (83,849)
=============== ===============
See Notes to Financial Statements Page 17
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets applicable to Common Shares resulting
from operations $ 12,169,097
Adjustments to reconcile net increase (decrease) in net assets applicable to Common
Shares resulting from operations to net cash provided by operating activities:
Purchases of investments (53,525,951)
Sales and maturities of investments 54,050,273
Net amortization/accretion of premium/discount on investments (802,305)
Net realized gain/loss on investments 5,678,295
Net change in unrealized appreciation/depreciation on investments (15,997,436)
CHANGES IN ASSETS AND LIABILITIES:
Increase in interest receivable (27,615)
Decrease in dividends receivable 59
Decrease in prepaid expenses 150,606
Decrease in accumulated unpaid dividends on Money Market
Cumulative Preferred(R) Shares (3,105)
Increase in interest and fees on loan payable 12,773
Increase in investment advisory fees payable 10,524
Increase in audit and tax fees payable 4,316
Decrease in legal fees payable (18,048)
Increase in transfer agent fees payable 799
Decrease in printing fees payable (7,499)
Decrease in administrative fees payable (1,250)
Increase in custodian fees payable 4,836
Increase in Trustees' fees and expenses payable 9,753
Decrease in other liabilities (3,098)
_______________
CASH PROVIDED BY OPERATING ACTIVITIES $ 1,705,024
_______________
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income (1,721,456)
Return of capital distributions (211,351)
Purchase pursuant to a tender offer of Money Market Cumulative
Preferred(R) Shares (20,325,000)
Redemption of Money Market Cumulative Preferred(R) Shares (1,675,000)
Gain on purchase of Money Market Cumulative Preferred(R) Shares (Note 5) 1,016,250
Proceeds from borrowings 25,500,000
Repayments of borrowings (3,600,000)
_______________
CASH USED IN FINANCING ACTIVITIES (1,016,557)
_______________
Increase in cash 688,467
Cash at beginning of period 1,824,979
_______________
CASH AT END OF PERIOD $ 2,513,446
===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees $ 663,818
===============
Page 18 See Notes to Financial Statements
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
5/31/2010 5/31/2009 5/31/2008 5/31/2007 5/31/2006
--------- --------- --------- --------- ---------
Net asset value, beginning of period $ 11.42 $ 16.39 $ 18.87 $ 19.03 $ 19.07
_________ _________ _________ _________ _________
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.38 0.83 1.73 1.98 1.75
Net realized and unrealized gain (loss) 2.08 (4.95) (2.31) (0.08) 0.10
Gain on purchase of MMP (a) Shares (c) 0.21 - - - -
Distributions paid to MMP Shareholders from:
Net investment income (0.00)(b) (0.13) (0.63) (0.61) (0.48)
_________ _________ _________ _________ _________
Total from investment operations 2.67 (4.25) (1.21) 1.29 1.37
_________ _________ _________ _________ _________
DISTRIBUTIONS PAID TO COMMON SHAREHOLDERS FROM:
Net investment income (0.35) (0.71) (1.22) (1.45) (1.24)
Net realized gain - - - - (0.17)
Return of capital (0.04) (0.01) (0.05) - -
_________ _________ _________ _________ _________
Total distributions to Common Shareholders (0.39) (0.72) (1.27) (1.45) (1.41)
_________ _________ _________ _________ _________
Net asset value, end of period $ 13.70 $ 11.42 $ 16.39 $ 18.87 $ 19.03
========= ========= ========= ========= =========
Market value, end of period $ 12.50 $ 9.69 $ 14.47 $ 18.80 $ 17.63
========= ========= ========= ========= =========
TOTAL RETURN BASED ON NET ASSET VALUE (d) 24.19% (24.61)% (5.68)% 7.39% 8.12%
========= ========= ========= ========= =========
TOTAL RETURN BASED ON MARKET VALUE (d) 33.54% (27.54)% (16.42)% 15.49% 6.12%
========= ========= ========= ========= =========
________________________________________________________
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON SHARES:
Ratio of total expenses to average net assets 3.22% 3.68% 2.32% 2.18% 2.19%
Ratio of net expenses to average net assets 3.22% 3.68% 2.29% 2.10% 2.07%
Ratio of total expenses to average net assets
excluding interest expense 2.18% 2.54% 2.32% 2.18% 2.19%
Ratio of net investment income (loss) to average net
assets 2.86% 7.09% 10.15% 10.52% 9.12%
Ratio of net investment income (loss) to average net
assets net of MMP Shares dividends (e) 2.84% 6.00% 6.44% 7.26% 6.63%
SUPPLEMENTAL DATA:
Portfolio turnover rate 58% 19% 41% 92% 83%
Net assets, end of period (in 000's) $ 67,475 $ 56,222 $ 80,713 $ 92,919 $ 93,724
Ratio of total expenses to total average
Managed Assets (f) 2.36% 2.15% 1.38% 1.35% 1.36%
Ratio of net expenses to total average
Managed Assets (f) 2.36% 2.15% 1.36% 1.30% 1.29%
Ratio of total expenses to total average Managed
Assets excluding interest expense (f) 1.60% 1.49% 1.38% 1.35% 1.36%
PREFERRED SHARES AND LOAN OUTSTANDING:
Total MMP Shares outstanding (c) - 880 2,280 2,280 2,280
Liquidation and market value per MMP share (g) N/A $ 25,004 $ 25,025 $ 25,029 $ 25,024
Asset coverage per share (h) N/A $ 88,889 $ 60,400 $ 65,754 $ 66,107
Loan outstanding (in 000's) $ 25,000 $ 3,100 N/A N/A N/A
Asset coverage per $1,000 of loan outstanding (i) $ 3,699 $ 26,233 N/A N/A N/A
________________________________________________________
(a) Money Market Cumulative Preferred(R) ("MMP") Shares.
(b) Amount represents less than $0.01 per share.
(c) As of November 5, 2009, the Fund no longer has any MMP Shares
outstanding. See Note 5 - "Money Market Cumulative Preferred(R) Shares" in
the Notes to Financial Statements for more information about the Fund's
MMP Share tender offer and redemption transactions.
(d) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns not reflect sales load and are not annualized
for periods less than one year. Past performance is not indicative of
future results.
(e) Ratio reflects the effect of distributions to MMP Shareholders.
(f) Managed Assets are calculated by taking the Fund's average daily gross
asset value (which includes assets attributable to the Fund's MMP Shares,
if MMP Shares are outstanding, and the principal amount of borrowings),
minus the sum of the Fund's accrued and unpaid dividends on any
outstanding MMP Shares, if MMP Shares are outstanding, and liabilities.
(g) Includes accumulated and unpaid distributions to MMP Shareholders.
(h) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the MMP Shares liquidation value) and dividing
by the number of MMP Shares outstanding.
(i) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the MMP Shares liquidation value and the loan
outstanding) and dividing by the outstanding loan balance in 000's.
N/A Not Applicable
See Notes to Financial Statements Page 19
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2010
1. FUND DESCRIPTION
First Trust/Four Corners Senior Floating Rate Income Fund (the "Fund") is a
diversified, closed-end management investment company 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 NYSE Amex
(formerly known as NYSE Alternext US and the AMEX).
Please see Note 9 for further information with respect to the Plan of
Termination, Liquidation and Dissolution (the "Plan") that was approved and
adopted by the Board of Trustees of the Fund and which will result in the
termination of the Fund. As a result of adopting the Plan, the Fund will begin
to wind up its affairs and will no longer seek to attain its investment
objectives. Prior to adopting the Plan, the primary investment objective of the
Fund was to seek a high level of current income and the secondary objective of
the Fund was to attempt to preserve capital. The Fund pursued these investment
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 investments, at fair value according
to valuation 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, the Fund's Board of Trustees has designated First Trust
Advisors L.P. ("First Trust") to use a fair value method to value the Fund's
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 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 since its inception, 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 a 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 valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with the provisions of the 1940 Act.
Portfolio investments 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
investments are valued at the mean of the most recent bid and asked prices on
such day. Portfolio investments traded on the NASDAQ are valued at the NASDAQ
Official Closing Price as determined by NASDAQ. Portfolio investments 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 investments. Portfolio
investments traded in the over-the-counter market, but excluding investments
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.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
Page 20
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (Continued)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2010
- Level 1 - Level 1 inputs are quoted prices in active markets for
identical securities. An active market is a market in which
transactions for the security occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
- Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar securities in active markets.
o Quoted prices for identical or similar securities in markets that
are non-active. A non-active market is a market where there are
few transactions for the security, the prices are not current, or
price quotations vary substantially either over time or among
market makers, or in which little information is released
publicly.
o Inputs other than quoted prices that are observable for the
security (for example, interest rates and yield curves observable
at commonly quoted intervals, volatilities, prepayment speeds,
loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
- Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs
reflect the reporting entity's own assumptions about the assumptions
that market participants would use in pricing the security.
The inputs or methodology used for valuing portfolio investments are not
necessarily an indication of the risks associated with investing in those
investments. A summary of the inputs used to value the Fund's portfolio
investments as of May 31, 2010 is included with the Fund's Portfolio of
Investments.
B. REPURCHASE AGREEMENTS:
The Fund engages in repurchase agreement transactions. Under the terms of a
typical repurchase agreement, the Fund takes possession of an underlying debt
obligation subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during the Fund's holding period.
This arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral is at
all times at least equal to the total amount of the repurchase obligation,
including interest. In the event of counterparty default, the Fund has the right
to use the collateral to offset losses incurred. There is potential loss to the
Fund in the event the Fund is delayed or prevented from exercising its rights to
dispose of the collateral investments, including the risk of a possible decline
in the value of the underlying investments during the period while the Fund
seeks to assert its rights. The Advisor 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. As of May 31, 2010, the Fund
had no open repurchase agreements.
C. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME:
Investment transactions are recorded as of the trade date. Realized gains and
losses from investment 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.
Investments purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date. Due to the nature of the Senior
Loan market, the actual settlement date may not be certain at the time of the
purchase or sale for some of the investments. Interest income on such
investments 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.
D. UNFUNDED LOAN COMMITMENTS:
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. The Fund did not have unfunded delayed draw loan
commitments as of May 31, 2010.
E. RESTRICTED INVESTMENTS:
The Fund invests in restricted investments, which are investments that cannot be
offered for public sale without first being registered under the Securities Act
of 1933, as amended. Prior to registration, restricted investments may only be
resold in transactions exempt from registration. The Fund held restricted
investments at May 31, 2010 as shown in the following table. The Fund does not
have the right to demand that such investments be registered. These investments
are valued according to the valuation procedures as stated in the Portfolio
Valuation footnote (Note 2A) and are not expressed as a discount to the carrying
value of a comparable unrestricted investment. There are no unrestricted
investments with the same maturity dates and yields for these issuers.
Page 21
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (Continued)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2010
% OF
NET ASSETS
APPLICABLE
ACQUISITION PRINCIPAL VALUE CURRENT TO COMMON
INVESTMENT DATE VALUE/SHARES PER SHARE CARRYING COST VALUE SHARES
- -------------------------------------------------------------------------------------------------------------------------------
Cumulus Media, Inc. - Warrants 6/29/09 1,543 $ 2.93 $ - $ 4,522 0.01%
HRP Myrtle Beach - Senior
Floating-Rate Notes 3/23/06 $ 250,000 - 250,000 - 0.00
TOUSA, Inc.-Notes 7/31/07(1) $ 145,455 - 87,273 - 0.00
TOUSA, Inc.-Preferred Stocks 7/31/07(1) 855 - 512,727 - 0.00
--------------------------------------
$ 850,000 $ 4,522 0.01%
=======================================
<FN>
(1) Security was acquired through a restructuring that was effective on
July 31, 2007.
</FN>
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with the 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 any Money Market Cumulative Preferred(R) Shares
("MMP Shares") issued by the Fund, if MMP Shares are issued and outstanding at
the time, 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 investments 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,
2010, resulting in book and tax differences, have been reclassified at year end
to reflect a decrease in accumulated net investment income (loss) of $80,058, a
decrease in accumulated net realized gain (loss) on investments of $850,169 and
an increase in paid-in capital of $930,227. 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,
2010 and 2009 is as follows:
Distributions paid from: 2010 2009
---- ----
Ordinary Income $ 1,736,085 $ 4,076,226
Return of Capital 211,351 73,365
As of May 31, 2010, the components of distributable earnings on a tax basis are
as follows:
Undistributed Ordinary Income $ -
Net Unrealized Appreciation (Depreciation) $ (3,795,848)
Accumulated Capital and Other Losses $ (22,135,663)
G. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, 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 realized capital losses forward for eight years following the
year of loss and offset such loss against any future realized capital gains. The
Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At May 31, 2010, the Fund
had a capital loss carryforward for federal income tax purposes of $21,152,756,
with $441,001, $646,089, $6,356,869 and $13,708,797 expiring on May 31, 2014,
2016, 2017 and 2018, respectively.
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, 2010, the Fund intends to elect to defer net realized losses of
$982,907 incurred between November 1, 2009 and May 31, 2010.
The Fund is subject to tax accounting standards that establish a minimum
threshold for recognizing, and a system for measuring, the benefits of a tax
position taken or expected to be taken in a tax return. Taxable years ending
2007, 2008, 2009 and 2010 remain open to federal and state audit. As of May 31,
2010, management has evaluated the application of these standards to the Fund,
and has determined that no provision for income tax is required in the Fund's
financial statements for uncertain tax positions.
Page 22
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NOTES TO FINANCIAL STATEMENTS - (Continued)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2010
H. EXPENSES:
The Fund pays all expenses directly related to its operations.
I. ACCOUNTING PRONOUNCEMENT:
In January 2010, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2010-06 "Improving Disclosures about
Fair Value Measurements." ASU 2010-06 amends FASB Accounting Standards
Codification Topic 820, Fair Value Measurements and Disclosures, to require
additional disclosures regarding fair value measurements. Certain disclosures
required by ASU No. 2010-06 are effective for interim and annual reporting
periods beginning after December 15, 2009, and other required disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. Management is currently evaluating the impact
ASU No. 2010-06 will have on the Fund's financial statement disclosures.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
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, which are the average daily gross asset
value of the Fund (which includes assets attributable to the Fund's MMP Shares,
if MMP shares are outstanding at the time, and the principal amount of
borrowings), minus the sum of the Fund's accrued and unpaid dividends on any
outstanding MMP Shares, if MMP Shares are outstanding at the time, and
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. Four Corners receives an annual portfolio
management fee of 0.56% of Managed Assets that is paid monthly by First Trust
from its investment advisory fee.
In accordance with certain fee arrangements, PNC Global Investment Servicing
(U.S.) Inc., an indirect, wholly-owned subsidiary of The PNC Financial Services
Group, Inc. ("PNC"), serves as the Fund's Administrator, Fund Accountant and
Transfer Agent. PFPC Trust Company, also an indirect, majority-owned subsidiary
of PNC, serves as the Fund's Custodian in accordance with certain fee
arrangements.
On July 1, 2010, all of the stock of PNC Global Investment Servicing Inc., an
indirect, wholly owned subsidiary of PNC, was sold to The Bank of New York
Mellon Corporation (BNY Mellon) ("Stock Sale"). The Stock Sale included PNC
Global Investment Servicing (U.S.) Inc. and PFPC Trust Company. Effective July
1, 2010, PNC Global Investment Servicing (U.S.) Inc. changed its name to BNY
Mellon Investment Servicing (US) Inc. PFPC Trust Company will not change its
name until a later date to be announced.
Deutsche Bank Trust Company Americas, a wholly-owned subsidiary of Deutsche Bank
AG, served as the Fund's MMP Share transfer agent, registrar, dividend
disbursing agent and redemption agent prior to the Fund's MMP Share tender offer
and redemption transactions (see Note 5 below).
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 in 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, the
Chairman of the Audit Committee is paid $5,000 annually and 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. 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. The Lead Independent
Trustee and each Committee chairman will serve two-year terms ending on December
31, 2011, before rotating to serve as a chairman of another committee or as Lead
Independent Trustee. The officers and "Interested" Trustee receive no
compensation from the trusts for serving in such capacities.
4. PURCHASES AND SALES OF INVESTMENTS
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the fiscal year ended May 31, 2010 were $56,332,820 and
$50,708,779, respectively.
5. 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 described below, as of May 31,
2010, the Fund did not have any preferred shares outstanding.
Page 23
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NOTES TO FINANCIAL STATEMENTS - (Continued)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2010
On April 9, 2009, the Fund was notified of a proposed nomination of two
individuals for election to the Board of Trustees (the "Board") at the 2009
annual meeting of shareholders of the Fund by individuals representing
approximately 88% of the MMP Shares then outstanding. At the request of such
holders and as part of the Board's ongoing review of available options to
provide liquidity to the holders of the MMP Shares, on June 15, 2009, the Fund
entered into an agreement with such holders of MMP Shares pursuant to which the
Fund agreed to commence an offer to purchase for cash up to 100% of the
outstanding MMP Shares at a price equal to 95% of the liquidation preference of
$25,000 per share ($23,750 per share) and such holders agreed to tender all of
their MMP Shares and to withdraw their previous nomination of two nominees for
election to the Board. The offer expired at 5:00 p.m. Eastern time on July 14,
2009 and holders of approximately 92.4% of the MMP Shares agreed to tender their
MMP Shares in accordance with the offer. The difference between the purchase
price ($23,750 per share) and the liquidation preference of $25,000 per share is
included on the Statements of Changes in Net Assets and Statement of Cash Flows
as a "Gain on purchase of Money Market Cumulative Preferred(R) Shares." The gain
resulting from completion of the tender offer was $1,016,250.
The estimated total payment by the Fund for tendered MMP Shares, not including
fees and expenses incurred in connection with the offer, was approximately
$19,308,750 plus any unpaid dividends accrued through the expiration date of the
offer. The Fund borrowed funds under its existing credit facility and used cash
on hand to pay the purchase price for MMP Shares tendered. After the
consummation of the offer on July 16, 2009, 67 MMP Shares remained outstanding.
On October 12, 2009, First Trust announced the Fund's intention to redeem its
remaining outstanding MMP Shares in the principal amount of $1,675,000. The Fund
completed such redemption of MMP Shares on November 5, 2009. Following
completion of such redemption, the Fund no longer has any preferred shares
outstanding.
For the fiscal year ended May 31, 2010, tender offer and redemption transactions
in MMP Shares were as follows:
SHARES LIQUIDATION VALUE
------ ------------------
Outstanding at 5/31/09 880 $ 22,000,000
Amount Tendered (813) (20,325,000)
Amount Redeemed (67) (1,675,000)
------------------------------
Outstanding at 5/31/10 - $ -
==============================
6. BORROWING
The Fund has entered into a Revolving Credit Facility ("Credit Facility") with
The Bank of Nova Scotia, as agent, to be used as leverage for the Fund. The
Credit Facility has an expiration date of October 8, 2010. The Credit Facility
provides for a secured line of credit for the Fund, where Fund assets are
pledged against advances made to the Fund. Under the requirements of the 1940
Act, the Fund, immediately after any such borrowings, must have an "asset
coverage" of at least 300% (33-1/3% of the Fund's total assets after
borrowings). The total commitment under the Credit Facility is $25,000,000. For
the year ended May 31, 2010, the average amount outstanding was $20,609,863. The
borrowing rate under the Credit Facility was, at the option of the Fund, a per
annum rate equal to either (i) the adjusted LIBOR rate for the interest period
chosen by the Fund, plus 2.25% or (ii) the alternate base rate plus 1.25%.
Effective May 10, 2010, the borrowing rate under the Credit Facility is, at the
option of the Fund, a per annum rate equal to either (i) the adjusted LIBOR rate
for the interest period chosen by the Fund, plus 1.15% or (ii) the alternate
base rate plus 0.15%. The high and low annual interest rates during the year
ended May 31, 2010, were 2.57% and 1.49%, respectively, with a weighted average
interest rate of 2.46%. The annual interest rate in effect at May 31, 2010 was
1.57%. The Fund also pays additional borrowing costs, which includes a
commitment fee at a rate per annum equal to 0.50% payable on the daily average
of the unused commitment. On May 12, 2009, in connection with the annual
extension of the expiration date of the Credit Facility, the Fund paid upfront
closing fees of $100,000 and administration fees of $50,000, both of which were
being amortized over a one-year period. Such expenses are included in "Interest
and fees on loan" on the Statement of Operations.
7. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
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 investments owned by the Fund. The value of these investments, 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. Investment prices can fluctuate for several reasons including
the general condition of the bond market, or when political or economic events
affecting the issuers occur. When the Advisor or Sub-Advisor determines that it
is temporarily unable to follow the Fund's investment strategy or that it is
impractical to do so (such as when a market disruption event has occurred and
trading in the investments is extremely limited or absent), the Fund may take
temporary defensive positions.
Page 24
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NOTES TO FINANCIAL STATEMENTS - (Continued)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2010
HIGH-YIELD SECURITIES RISK: The Senior Loans in which the Fund invests are
generally rated below investment grade by one or more rating agencies and are
considered to be "high-yield" securities. High-yield securities should be
considered speculative as their low ratings indicate a quality of less than
investment grade, and therefore carry an increased risk of default as compared
to investment grade issues. Because high-yield securities are generally
subordinated obligations and are perceived by investors to be riskier than
higher rated securities, their prices tend to fluctuate more than higher rated
securities and are affected by short-term credit developments to a greater
degree.
High-yield securities are subject to greater market fluctuations and risk of
loss than securities with higher investment ratings. A reduction in an issuer's
creditworthiness may result in the bankruptcy of an issuer or the default by an
issuer on the interest and principal payments. The market for high-yield
securities is smaller and less liquid than that for investment grade securities.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. If the income and gains from the securities and
investments purchased with such proceeds do not cover the cost of leverage, the
Common Shares' return will be less than if leverage had not been used. The Fund
borrowed pursuant to a leverage borrowing program, 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, 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 purchase Common Shares. The use of leverage by the Fund increases the
likelihood of greater volatility of NAV and market price of the Common Shares.
Leverage also increases the risk that fluctuations in interest rates on
borrowings and short-term debt that the Fund may pay will reduce the return to
the Common Shareholders or will result in fluctuations in the dividends paid on
the Common 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. Although Senior Loans may be
secured by specific collateral, 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.
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
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined that besides
those subsequent events that have already been disclosed there were the
following subsequent events:
On May 20, 2010, the Fund declared a dividend of $0.035 per share to Common
Shareholders of record on June 3, 2010, payable June 15, 2010.
On June 21, 2010, the Fund declared a dividend of $0.040 per share to Common
Shareholders of record on July 6, 2010, payable July 15, 2010.
On July 20, 2010, the Fund declared a dividend of $0.0425 per share to Common
Shareholders of record on August 4, 2010, payable August 16, 2010.
BOARD OF TRUSTEES OF THE FUND APPROVES AND ADOPTS PLAN OF TERMINATION,
LIQUIDATION AND DISSOLUTION THAT WILL RESULT IN THE TERMINATION OF THE FUND
On July 22, 2010, the Fund announced that the Board of Trustees of the Fund (the
"Board") approved and adopted a Plan of Termination, Liquidation and Dissolution
(the "Plan") which will result in the termination of the Fund in accordance with
the laws of the Commonwealth of Massachusetts and the Fund's Declaration of
Trust, as amended. As a result of adopting the Plan, the Fund will begin to wind
up its affairs and will no longer seek to attain its previously stated
investment objectives.
Once the assets of the Fund have been liquidated, the Fund will establish and
will provide notice of a "Record Date," i.e. the date on which shares of the
Fund will cease trading on the NYSE Amex, the transfer books of the Fund will
close and all certificates representing shares of the Fund will be deemed
canceled. Holders of record of shares of the Fund at the close of business on
the Record Date shall be entitled to a distribution of their allocable portion
of the trust property of the Fund in accordance with the Plan. The Fund expects
to make a first and final liquidating distribution in approximately 90 days
(from the announcement date) to holders of record on the Record Date.
Page 25
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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, 2010, and the related statements of
operations and cash flows for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. 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 investments owned as of May 31, 2010, 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 First
Trust/Four Corners Senior Floating Rate Income Fund as of May 31, 2010, 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 each of the five years in the period then
ended, in conformity with accounting principles generally accepted in the United
States of America.
As noted in Note 9 to the Financial Statements, the Fund announced that the
Board of Trustees of the Fund approved and adopted a Plan of Termination,
Liquidation and Dissolution for the Fund.
/s/ Deloitte & Touche LLP
Chicago, Illinois
July 29, 2010
Page 26
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ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2010 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (formerly PNC Global Investment Servicing
(U.S.) Inc.) (the "Plan Agent"), in additional Common Shares under the Plan. If
you elect to receive cash distributions, you will receive all distributions in
cash paid by check mailed directly to you by 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 NYSE Amex (formerly
known as the NYSE Alternext US and the AMEX) or elsewhere, for the
participants' accounts. It is possible that the market price for the
Common Shares may increase before the Plan Agent has completed its
purchases. Therefore, the average purchase price per share paid by
the Plan Agent may exceed the market price at the time of valuation,
resulting in the purchase of fewer shares than if the dividend or
distribution had been paid in Common Shares issued by the Fund. The
Plan Agent will use all dividends and distributions received in cash
to purchase Common Shares in the open market within 30 days of the
valuation date except where temporary curtailment or suspension of
purchases is necessary to comply with federal securities laws.
Interest will not be paid on any uninvested cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 331-1710, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
________________________________________________________________________________
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund votes proxies relating to
portfolio investments 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 ("SEC") website located at
http://www.sec.gov.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the 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.
Page 27
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ADDITIONAL INFORMATION - (Continued)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2010 (UNAUDITED)
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 21, 2009. At the Annual Meeting, holders of
Common and Preferred Shares of First Trust/Four Corners Senior Floating Rate
Income Fund voting together elected Trustee Niel B. Nielsen for a three-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
Niel B. Nielson was 4,079,979, the number of votes against was 361,970 and the
number of abstentions was 482,467. The number of votes cast in favor of Thomas
R. Kadlec was 19, the number of votes against was 4 and the number of
abstentions was 44. The number of votes cast in favor of Robert F. Keith was 19,
the number of votes against was 4 and the number of abstentions was 44. James A.
Bowen and Richard E. Erickson are the current and continuing Trustees.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended May 31, 2010, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.
INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AND
SUB-ADVISORY AGREEMENTS
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 21-22, 2010. 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 to other clients of the Advisor and the Sub-Advisor and as compared to
fees charged by investment advisors and sub-advisors to comparable funds;
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.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. 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 efforts made by the
Advisor with respect to a tender offer for the Fund's outstanding money market
cumulative preferred shares. 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. The Board
also noted the enhancements made by the Advisor to the compliance program in
2009. 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 manages the
Fund's investments. In light of the information presented and 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,
under the oversight of the 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 considered the advisory fees charged by the Advisor to
similar funds and other non-fund clients, 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 to which
different advisory fee rates are charged. The Board also considered information
Page 28
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION - (Continued)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2010 (UNAUDITED)
provided by the Sub-Advisor as to the fees it charges to other similar clients,
noting that the Sub-Advisor sub-advises the same two other closed-end funds with
similar investment objectives and policies, to which different sub-advisory fee
rates are charged. In addition, the Board received 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 a
combined peer group selected by Lipper and the Advisor. The Board discussed with
representatives of the Advisor the limitations in creating a relevant peer group
for the Fund, including that (i) the peer funds may use different types of
leverage which have different costs associated with them; (ii) most peer funds
do not employ an advisor/sub-advisor management structure; (iii) the peer funds
may not have the same fiscal year as the Fund, which may cause the expense data
used by Lipper to be measured over different time periods; and (iv) many of the
peer funds are larger than the Fund. The Board reviewed the Lipper materials,
but based on its discussions with the Advisor, the Board determined that the
Lipper data was of limited value for purposes of its consideration of the
renewal of the Agreements.
The Board also considered performance information for the Fund, noting that the
performance information included the Fund's quarterly performance report, which
is part of the process that the Board has established for monitoring the Fund's
performance on an ongoing basis, and had been enhanced to assess portfolio risk
as well. The Board determined that this process continues to be effective for
reviewing the Fund's performance. In addition to the Board's ongoing review of
performance, the Board also received data prepared by Lipper comparing the
Fund's performance to the combined peer group selected by Lipper and the
Advisor, as well as to a larger group and to a benchmark. The Board reviewed the
Lipper materials, but for similar reasons to those described above, the Board
determined that the performance data provided by Lipper was of limited value.
The Board considered changes made to the Fund's leverage arrangements in 2009 as
a result of market events and considered an analysis prepared by the Advisor on
the continued 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 combined peer group, noting that the Fund's
premium/discount was generally indicative of the asset class and market events.
Based on the information provided and the Board's ongoing review of the Fund's
performance, the Board concluded that the Fund's performance, particularly over
the long term, was reasonable.
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 considered whether fee levels reflect any economies of scale
for the benefit of shareholders. The Board concluded that the advisory fee
reflects an appropriate level of sharing of any economies of scale at current
asset levels. The Board also considered the costs of the services provided and
profits realized by the Advisor from serving as investment manager to the Fund
for the twelve months ended December 31, 2009, as set forth in the materials
provided to the Board, noting that the Advisor incurred a loss in providing
services to the Fund in 2009. 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 limited.
The Board considered that the Sub-Advisor's investment services expenses are
primarily fixed, and that the Sub-Advisor had previously invested in personnel
and systems and anticipated continued maintenance of efficient personnel and
systems in support of the Fund. 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
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2010 (UNAUDITED)
Number of
Portfolios
in the First Other
Trust Trusteeships or
Name, Address, Term of Office Fund Complex Directorships
Date of Birth and and Length of Principal Occupations Overseen by Held by
Position with the Fund Service(2) During Past 5 Years Trustee Trustee
- -------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
- -------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three Year Physician; President, Wheaton 64 None
c/o First Trust Advisors L.P. Term Orthopedics; Co-owner and
120 E. Liberty Drive, Co-Director (January 1996 to May
Suite 400 o Since Fund 2007), Sports Med Center for
Wheaton, IL 60187 Inception Fitness; Limited Partner, Gundersen
D.O.B.: 04/51 Real Estate Limited Partnership;
Member, Sportsmed LLC
Thomas R. Kadlec, Trustee o One Year President (March 2010 to present), 64 Director of ADM
c/o First Trust Advisors L.P. Term Senior Vice President and Chief Investor
120 E. Liberty Drive, Financial Officer (May 2007 to Services, Inc.
Suite 400 o Since Fund March 2010), Vice President and and ADM Investor
Wheaton, IL 60187 Inception Chief Financial Officer (1990 to Services
D.O.B.: 11/57 May 2007), ADM Investor Services, International
Inc. (Futures Commission Merchant(
Robert F. Keith, Trustee o One Year President (2003 to Present), 64 None
c/o First Trust Advisors L.P. Term Hibs Enterprises (Financial and
120 E. Liberty Drive, Management Consulting)
Suite 400 o Since Fund
Wheaton, IL 60187 Inception
D.O.B.: 03/64
Niel B. Nielson, Trustee o Three Year President (June 2002 64 Director of
c/o First Trust Advisors L.P. Term to Present), Covenant Covenant
120 E. Liberty Drive, College Transport Inc.
Suite 400 o Since Fund
Wheaton, IL 60187 Inception
D.O.B.: 03/54
- -------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
- -------------------------------------------------------------------------------------------------------------------------
James A. Bowen, Trustee, o Three Year President, First Trust Advisors L.P. 64 Trustee of
President, Chairman of the Trustee and First Trust Portfolios L.P.; Wheaton College
Board and CEO(1) Term and Chairman of the Board of Directors,
120 E. Liberty Drive, Indefinite BondWave LLC (Software Development
Suite 400 Officer Company/Investment Advisor) and
Wheaton, IL 60187 Term Stonebridge Advisors LLC (Investment
D.O.B.: 09/55 Advisor)
o Since Fund
Inception
__________________________
<FN>
(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) Currently, Richard E. Erickson, as a Class I Trustee, is serving as a
trustee until the Fund's 2011 annual meeting of shareholders or until his
successor is elected and qualified. Niel B. Nielson, as a Class II
Trustee, is serving as a trustee until the Fund's 2012 annual meeting of
shareholders or until his successor is elected and qualified. James A.
Bowen, as a Class III Trustee, is serving as a trustee until the Fund's
2010 annual meeting of shareholders or until his successor is elected and
qualified. Thomas R. Kadlec and Robert F. Keith, as trustees elected by
holders of preferred shares only on an annual basis, are serving as
trustees until the Fund's 2010 annual meeting of shareholders or until
their successors are elected and qualified. At a meeting held on June 16,
2010, the Board approved the reclassification of the preferred share
trustees as common share trustees. Accordingly, Robert F. Keith will be
reclassified as a Class III common share Trustee so that he is elected for
a three-year term at the 2010 annual meeting and for three-year terms
thereafter and Thomas R. Kadlec will be reclassified as a Class I common
share Trustee so that he is elected for a one-year term at the 2010 annual
meeting and for three-year terms thereafter. Officers of the Fund have an
indefinite term. The term "officer" means the president, vice president,
secretary, treasurer, controller or any other officer who performs a
policy making function.
</FN>
Page 30
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (Continued)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2010 (UNAUDITED)
Term of Office
Name, Address and Position and Offices and Length of Principal Occupations
Date of Birth with Fund Service(2) During Past 5 Years
- ----------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES (3)
- ----------------------------------------------------------------------------------------------------------
Mark R. Bradley Treasurer, o Indefinite Chief Financial Officer,
120 E. Liberty Drive, Controller, Chief term First Trust Advisors L.P.
Suite 400 Financial Officer and First Trust Portfolios
Wheaton, IL 60187 and Chief Accounting o Since Fund L.P.; Chief Financial
D.O.B.: 11/57 Officer Inception Officer, BondWave LLC
(Software Development
Company/Investment Advisor)
and Stonebridge Advisors LLC
(Investment Advisor)
Erin E. Chapman Assistant Secretary o Indefinite Assistant General Counsel
120 E. Liberty Drive, term (October 2007 to Present),
Suite 400 Associate Counsel (March
Wheaton, IL 60187 o Since June 2006 to October 2007), First
D.O.B.: 08/76 2009 Trust Advisors L.P. and
First Trust Portfolios
L.P.; Associate Attorney
(November 2003 to March
2006), Doyle & Bolotin, Ltd.
James M. Dykas Assistant Treasurer o Indefinite Senior Vice President (April
120 E. Liberty Drive, term 2007 to Present), Vice
Suite 400 President (January 2005 to
Wheaton, IL 60187 o Since Fund April 2007), First Trust
D.O.B.: 01/66 Inception Advisors L.P. and First
Trust Portfolios L.P.
Christopher R. Fallow Assistant Vice o Indefinite Assistant Vice President
120 E. Liberty Drive, President term (August 2006 to Present),
Suite 400 Associate (January 2005 to
Wheaton, IL 60187 o Since Fund August 2006), First Trust
D.O.B.: 04/79 Inception Advisors L.P. and First
Trust Portfolios L.P.;
Municipal Bond Trader (July
2001 to January 2005),
BondWave LLC (Software
Development
Company/Investment Advisor)
W. Scott Jardine Secretary and Chief o Indefinite General Counsel, First Trust
120 E. Liberty Drive, Compliance Officer term Advisors L.P. and First
Suite 400 Trust Portfolios L.P.
Wheaton, IL 60187 o Since Fund and BondWave LLC
D.O.B.: 05/60 Inception (Software Development
Company/Investment Advisor);
Secretary, Stonebridge Advisors
LLC (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Senior Vice President
120 E. Liberty Drive, term (September 2005 to Present),
Suite 400 Vice President (April 2004 to
Wheaton, IL 60187 o Since Fund September 2005), First Trust
D.O.B: 02/70 Inception Advisors L.P. and First Trust
Portfolios L.P.
Coleen D. Lynch Assistant Vice o Indefinite Assistant Vice President
120 E. Liberty Drive, President term (January 2008 to Present),
Suite 400 First Trust Advisors L.P. and
Wheaton, IL 60187 o Since July First Trust Portfolios L.P.;
DOB: 07/58 2008 Vice President (May 1998 to
January 2008), Van Kampen
Asset Management and Morgan
Stanley Investment Management
Kristi A. Maher Assistant Secretary o Indefinite Deputy General Counsel (May
120 E. Liberty Drive, and Deputy Chief term 2007 to Present), Assistant
Suite 400 Compliance Officer General Counsel (March 2004
Wheaton, IL 60187 o Assistant to May 2007), First Trust
D.O.B.: 12/66 Secretary Advisors L.P. and First Trust
since Fund Portfolios L.P.
Inception
o Deputy Chief
Compliance Officer
since November
2009
__________________________
<FN>
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy
making function.
</FN>
Page 31
- --------------------------------------------------------------------------------
PRIVACY POLICY
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2010 (UNAUDITED)
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") value our relationship with you and 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:
o Information we receive from you or your broker-dealer, investment
advisor or financial representative through interviews, applications,
agreements or other forms;
o Information about your transactions with us, our affiliates or
others
o Information receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies."
For example, we may identify the pages on our website that your
browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required by law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians and
trustees, or that assist us in the distribution of investor materials
such as trustees, banks, financial representatives and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund.
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 go to www.ftportfolios.com, or contact us at (800)
621-1675 (First Trust Portfolios) or (800) 222-6822 (First Trust Advisors).
Page 32
[LOGO OMITTED] FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Four Corners Capital Management, LLC
555 South Flower Street, Suite 3300
Los Angeles, CA 90071
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153
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
Inside Back Cover
[BLANK BACK COVER]
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.
(e) Not applicable.
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 $50,500 for 2009 and
$50,500 for 2010.
(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 for 2009 and $0 for 2010.
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 2009 and $0 for 2010.
(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 $5,200 in 2009 and $5,200 in 2010. 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 2009 and $0 for 2010.
(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 $0 for 2009 and $0 for 2010.
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 $0 for 2009 and $0 for
2010.
(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 is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the
independent auditor's engagements for non-audit services with the Registrant's
adviser (not including a sub-adviser whose role is primarily portfolio
management and is sub-contracted or overseen by another investment adviser) and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the Registrant, if the
engagement relates directly to the operations and financial reporting of the
Registrant, subject to the de minimis exceptions for non-audit services
described in Rule 2-01 of Regulation S-X. If the independent auditor has
provided non-audit services to the Registrant's adviser (other than any
sub-adviser whose role is primarily portfolio management and is sub-contracted
with or overseen by another investment adviser) and any entity controlling,
controlled by or under common control with the investment adviser that provides
ongoing services to the Registrant that were not pre-approved pursuant to 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 2009 were
$5,200 and $6,000 for the Registrant and the Registrant's investment adviser,
respectively and for 2010 were $5,200 and $36,000 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.
PROXY VOTING GUIDELINES
First Trust Advisors L.P. (the "Adviser") serves as investment adviser
providing discretionary investment advisory services for separate managed
accounts, ERISA accounts and open- and closed-end investment companies (the
"Clients"). As part of these services, the Adviser may have responsibility for
proxy voting and related duties. In fulfilling these duties, the Adviser has
adopted the following policies and procedures:
1. It is the Adviser's policy to seek and to ensure that proxies are
voted on securities in a Client's account consistently and solely in the best
economic interests of the Client.
2. The Adviser shall be responsible for the oversight of Client proxy
voting processes 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 Clients. 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 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 Client. In addition, whenever a conflict of interest arises
between ISS and a company subject to a proxy vote, the Adviser will vote the
proxy without using the analyses of ISS and will consider the recommendation of
the company and what the Adviser believes to be in the best interests of the
Client. In addition, if the Adviser has actual knowledge of any other type of
material conflict of interest between itself and the respective Client 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. With
respect to open- and closed-end funds and variable annuity sub-accounts, if
there is a conflict of interest between fund shareholders and FTA, the fund's
principal underwriter, or sub-adviser, if applicable, FTA will vote the proxy
based on the recommendations of ISS to avoid such conflict of interest.
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.
6. If a Client 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
Client that it is not able to follow the Client's request.
7. FTA will monitor changes to the ISS guidelines to determine that
such guidelines continue to result in a voting policy that is in the best
interests of Clients.
8. In certain circumstances, where FTA has determined that it is
consistent with the Client's best interest, FTA will not take steps to ensure
that proxies are voted on securities in the Client's accounts. The following are
circumstances where this may occur:
(a) Limited Value. Proxies will not be required to be voted on
securities in a Client's account if the value of the Client's economic interest
in the securities is indeterminable or insignificant (less than $1,000). Proxies
will also not be required to be voted for any securities that are no longer held
by the Client's account.
(b) Securities Lending Program. When securities are out on loan, they
are transferred into the borrower's name and are voted by the borrower, in its
discretion. In most cases, FTA will not take steps to see that loaned securities
are voted. However, where FTA determines that a proxy vote, or other shareholder
action, is materially important to the Client's account, FTA will make a good
faith effort to recall the security for purposes of voting, understanding that
in certain cases, the attempt to recall the security may not be effective in
time for voting deadlines to be met.
(c) Unjustifiable Costs. In certain circumstances, after doing a
cost-benefit analysis, FTA may choose not to vote where the cost of voting a
Client's proxy would exceed any anticipated benefits to the Client of the proxy
proposal (e.g. foreign securities).
9. For certain open- or closed-end funds relying on Section 12(d)(1)(F)
of the 1940 Act, FTA will vote on proxies of securities of investment companies
held by such funds in the same proportion as all other holders of such
securities (i.e. mirror or echo voting) to the extent possible.
Amended: September 21, 2009
APPENDIX A
U.S. Proxy Voting Guidelines Concise Summary
(Digest of Selected Key Guidelines)
January 22, 2010
- --------------------------------------------------------------------------------
Routine/Miscellaneous:
Auditor Ratification
Vote FOR proposals to ratify auditors, unless any of the following apply:
o An auditor has a financial interest in or association with the company,
and is therefore not independent;
o There is reason to believe that the independent auditor has rendered an
opinion which is neither accurate nor indicative of the company's
financial position;
o 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
o Fees for non-audit services ("Other" fees) are excessive.
Non-audit fees are excessive if:
o Non-audit ("other") fees exceed audit fees + audit-related fees + tax
compliance/preparation fees
[GRAPHIC OMITTED]
Board of Directors:
Votes on director nominees should be determined on a CASE-BY-CASE basis.
Four fundamental principles apply when determining votes on director nominees:
o Board Accountability
o Board Responsiveness
o Director Independence
o Director Competence
Board Accountability
Problematic Takeover Defenses
VOTE WITHHOLD/AGAINST(1) the entire board of directors (except new nominees(2),
who should be considered on a CASE-by-CASE basis), if:
o 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;
o The company's poison pill has a "dead-hand" or "modified dead-hand"
feature. Vote withhold/against every year until this feature is removed;
o The board adopts a poison pill with a term of more than 12 months
("long-term pill"), or renews any existing pill, including any
"short-term" pill (12 months or less), without shareholder approval. A
commitment or policy that puts a newly-adopted pill to a binding
shareholder vote may potentially offset an adverse vote recommendation.
Review such companies with classified boards every year, and such
companies with annually-elected boards at least once every three years,
and vote AGAINST or WITHHOLD votes from all nominees if the company still
maintains a non-shareholder-approved poison pill. This policy applies to
all companies adopting or renewing pills after the announcement of this
policy (Nov 19, 2009);
o The board makes a material adverse change to an existing poison pill
without shareholder approval.
Vote CASE-By-CASE on all nominees if the board adopts a poison pill with a term
of 12 months or less ("short-term pill") without shareholder approval, taking
into account the following factors:
o The date of the pill`s adoption relative to the date of the next meeting
of shareholders- i.e. whether the company had time to put the pill on
ballot for shareholder ratification given the circumstances;
o The issuer`s rationale;
o The issuer's governance structure and practices; and
o The issuer's track record of accountability to shareholders.
(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.
(2) A "new nominee" is any current nominee who has not already been elected
by shareholders and who joined the board after the problematic action
in question transpired. If RMG cannot determine whether the nominee
joined the board before or after the problematic action transpired, the
nominee will be considered a "new nominee" if he or she joined the
board within the 12 months prior to the upcoming shareholder meeting.
Problematic Audit-Related Practices
Generally, vote AGAINST or WITHHOLD from the members of the Audit Committee if:
o The non-audit fees paid to the auditor are excessive (see discussion
under "Auditor Ratification");
o The company receives an adverse opinion on the company's financial
statements from its auditor; or
o 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 CASE-by-CASE on members of the Audit Committee and/or the full board if:
o Poor accounting practices are identified that rise to a level of serious
concern, such as: fraud; misapplication of GAAP; and material weaknesses
identified in Section 404 disclosures. Examine the severity, breadth,
chronological sequence and duration, as well as the company's efforts at
remediation or corrective actions, in determining whether
WITHHOLD/AGAINST votes are warranted.
Problematic Compensation Practices
VOTE WITHHOLD/AGAINST the members of the Compensation Committee and potentially
the full board if:
o There is a negative correlation between chief executive pay and company
performance (see Pay for Performance Policy);
o The company reprices underwater options for stock, cash, or other
consideration without prior shareholder approval, even if allowed in the
firm's equity plan;
o The company fails to submit one-time transfers of stock options to a
shareholder vote;
o The company fails to fulfill the terms of a burn rate commitment made to
shareholders;
o The company has problematic pay practices. Problematic pay practices may
warrant withholding votes from the CEO and potentially the entire board
as well.
Other Problematic Governance Practices
VOTE WITHHOLD/AGAINST the entire board of directors (except new nominees, who
should be considered on a CASE-by-CASE basis), if:
o The company's proxy indicates that not all directors attended 75 percent
of the aggregate board and committee meetings, but fails to provide the
required disclosure of the names of the director(s) involved. If this
information cannot be obtained, withhold from all incumbent directors;
o The board lacks accountability and oversight, coupled with sustained poor
performance relative to peers. Sustained poor performance is measured by
one- and three-year total shareholder returns in the bottom half of a
company's four-digit GICS industry group (Russell 3000 companies only).
Take into consideration the company's five-year total shareholder return
and five-year operational metrics. Problematic provisions include but are
not limited to:
- A classified board structure;
- A supermajority vote requirement;
- Majority vote standard for director elections with no carve out
for contested elections;
- The inability for shareholders to call special meetings;
- The inability for shareholders to act by written consent;
- A dual-class structure; and/or
- A non-shareholder approved poison pill.
Under extraordinary circumstances, vote AGAINST or WITHHOLD from directors
individually, committee members, or the entire board, due to:
o Material failures of governance, stewardship, or fiduciary
responsibilities at the company;
o Failure to replace management as appropriate; or
o gregious actions related to the director(s)' service on other boards
that raise substantial doubt about his or her ability to effectively
oversee management and serve the best interests of shareholders at any
company.
Board Responsiveness
Vote WITHHOLD/AGAINST the entire board of directors (except new nominees, who
should be considered on a CASE-by-CASE basis), if:
o 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);
o The board failed to act on a shareholder proposal that received approval
of the majority of shares cast for the previous two consecutive years (a
management proposal with other than a FOR recommendation by management
will not be considered as sufficient action taken);
o The board failed to act on takeover offers where the majority of the
shareholders tendered their shares; or
o 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 issue(s) that caused the high withhold/against
vote.
Director Independence
Vote WITHHOLD/AGAINST Inside Directors and Affiliated Outside Directors (per
the Categorization of Directors in the Summary Guidelines) when:
o The inside or affiliated outside director serves on any of the three key
committees: audit, compensation, or nominating;
o The company lacks an audit, compensation, or nominating committee so that
the full board functions as that committee;
o The company lacks a formal nominating committee, even if the board
attests that the independent directors fulfill the functions of such a
committee; or
o The full board is less than majority independent.
Director Competence
Vote AGAINST or WITHHOLD from individual directors who:
o Attend less than 75 percent of the board and committee meetings without a
valid excuse, such as illness, service to the nation, work on behalf of
the company, or funeral obligations. If the company provides meaningful
public or private disclosure explaining the director's absences, evaluate
the information on a CASE-BY-CASE basis taking into account the following
factors:
- Degree to which absences were due to an unavoidable conflict;
- Pattern of absenteeism; and
- Other extraordinary circumstances underlying the director's absence;
o Sit on more than six public company boards;
o Are CEOs of public companies who sit on the boards of more than two
public companies besides their own-- withhold only at their outside
boards.
[GRAPHIC OMITTED]
Voting for Director Nominees in Contested Elections
Vote CASE-BY-CASE on the election of directors in contested elections,
considering the following factors:
o Long-term financial performance of the target company relative to its
industry;
o Management's track record;
o Background to the proxy contest;
o Qualifications of director nominees (both slates);
o Strategic plan of dissident slate and quality of critique against
management;
o Likelihood that the proposed goals and objectives can be achieved
(both slates);
o Stock ownership positions.
[GRAPHIC OMITTED]
Independent Chair (Separate Chair/CEO)
Generally vote FOR shareholder proposals requiring that the chairman's position
be filled by an independent director, unless the company satisfies all of the
following criteria: The company maintains the following counterbalancing
features:
o Designated lead director, elected by and from the independent board
members with clearly delineated and comprehensive duties. (The role may
alternatively reside with a presiding director, vice chairman, or
rotating lead director; however the director must serve a minimum of one
year in order to qualify as a lead director.) 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;
o Two-thirds independent board;
o All independent key committees;
o Established governance guidelines;
o A company in the Russell 3000 universe must not have exhibited sustained
poor total shareholder return (TSR) performance, defined as one- and
three-year TSR in the bottom half of the company's four-digit GICS
industry group within the Russell 3000 only), unless there has been a
change in the Chairman/CEO position within that time;
o The company does not have any problematic governance or management
issues, examples of which include, but are not limited to:
- Egregious compensation practices;
- Multiple related-party transactions or other issues putting
director independence at risk;
- Corporate and/or management scandals;
- Excessive problematic corporate governance provisions; or
- Flagrant board or management actions with potential or realized
negative impact on shareholders.
[GRAPHIC OMITTED]
Shareholder Rights & Defenses:
Net Operating Loss (NOL) Protective Amendments
For management proposals to adopt a protective amendment for the stated purpose
of protecting a company's net operating losses ("NOLs"), the following factors
should be considered on a CASE-BY-CASE basis:
o The ownership threshold (NOL protective amendments generally prohibit
stock ownership transfers that would result in a new5-percent holder or
increase the stock ownership percentage of an existing five-percent
holder);
o The value of the NOLs;
o Shareholder protection mechanisms (sunset provision or commitment to
cause expiration of the protective amendment upon exhaustion or
expiration of the NOL);
o The company's existing governance structure including: board
independence, existing takeover defenses, track record of responsiveness
to shareholders, and any other problematic governance concerns; and
o Any other factors that may be applicable.
[GRAPHIC OMITTED]
Poison Pills- Shareholder Proposals to put Pill to a Vote and/or Adopt a
Pill Policy
Vote FOR shareholder proposals requesting that the company submit its poison
pill to a shareholder vote or redeem it UNLESS the company has: (1) A
shareholder approved poison pill in place; or (2) The company has adopted a
policy concerning the adoption of a pill in the future specifying that the board
will only adopt a shareholder rights plan if either:
o Shareholders have approved the adoption of the plan; or
o The board, in its exercise of its fiduciary responsibilities,
determines that it is in the best interest of shareholders under the
circumstances to adopt a pill without the delay in adoption that would
result from seeking stockholder approval (i.e., the "fiduciary out"
provision). A poison pill adopted under this fiduciary out will be put
to a shareholder ratification vote within 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.
If the shareholder proposal calls for a time period of less than 12 months for
shareholder ratification after adoption, vote FOR the proposal, but add the
caveat that a vote within 12 months would be considered sufficient
implementation.
[GRAPHIC OMITTED]
Poison Pills- Management Proposals to Ratify Poison Pill
Vote CASE-by-CASE on management proposals on poison pill ratification, focusing
on the features of the shareholder rights plan. Rights plans should contain the
following attributes:
o No lower than a 20% trigger, flip-in or flip-over;
o A term of no more than three years;
o No dead-hand, slow-hand, no-hand or similar feature that limits the
ability of a future board to redeem the pill;
o Shareholder redemption feature (qualifying offer clause); if the board
refuses to redeem the pill 90 days after a qualifying offer is announced,
10 percent of the shares may call a special meeting or seek a written
consent to vote on rescinding the pill.
In addition, the rationale for adopting the pill should be thoroughly explained
by the company. In examining the request for the pill, take into consideration
the company's existing governance structure, including: board independence,
existing takeover defenses, and any problematic governance concerns.
[GRAPHIC OMITTED]
Poison Pills- Management Proposals to ratify a Pill to preserve Net Operating
Losses (NOLs)
Vote CASE-BY-CASE on management proposals for poison pill ratification.For
management proposals to adopt a poison pill for the stated purpose of preserving
a company's net operating losses ("NOLs"), the following factors are considered
on a CASE-BY-CASE basis:
o The ownership threshold to transfer (NOL pills generally have a trigger
slightly below 5%);
o The value of the NOLs;
o The term;
o Shareholder protection mechanisms (sunset provision, or commitment to
cause expiration of the pill upon exhaustion or expiration of NOLs);
o The company's existing governance structure including: board
independence, existing takeover defenses, track record of responsiveness
to shareholders, and any other problematic governance concerns; and
o Any other factors that may be applicable.
[GRAPHIC OMITTED]
Shareholder Ability to Call Special Meetings
Vote AGAINST management or shareholder proposals to restrict or prohibit
shareholders' ability to call special meetings.
Generally vote FOR management or shareholder proposals that provide
shareholders with the ability to call special meetings taking into account
the following factors:
o Shareholders' current right to call special meetings;
o Minimum ownership threshold necessary to call special meetings (10%
preferred);
o The inclusion of exclusionary or prohibitive language;
o Investor ownership structure; and
o Shareholder support of and management's response to previous shareholder
proposals.
[GRAPHIC OMITTED]
Supermajority Vote Requirements
Vote AGAINST proposals to require a supermajority shareholder vote.
Vote FOR management or shareholder proposals to reduce supermajority vote
requirements. However, for companies with shareholder(s) who have significant
ownership levels, vote CASE-BY-CASE, taking into account:
o Ownership structure;
o Quorum requirements; and
o Supermajority vote requirements.
[GRAPHIC OMITTED]
Capital/Restructuring:
Common Stock Authorization
Vote CASE-BY-CASE on proposals to increase the number of shares of common stock
authorized for issuance. Take into account company-specific factors which
include, at a minimum, the following:
o Past Board Performance:
o The company's use of authorized shares during the last three years;
o One- and three-year total shareholder return; and
o The board's governance structure and practices;
o The Current Request:
o Disclosure in the proxy statement of the specific reasons for the
proposed increase;
o The dilutive impact of the request as determined through an
allowable cap generated by RiskMetrics' quantitative model, which
examines the company's need for shares and its three-year total
shareholder return; and
o Risks to shareholders of not approving the request.
Vote AGAINST proposals at companies with more than one class of common stock to
increase the number of authorized shares of the class that has superior voting
rights.
[GRAPHIC OMITTED]
Preferred Stock
Vote CASE-BY-CASE on proposals to increase the number of shares of preferred
stock authorized for issuance. Take into account company-specific factors that
include, at a minimum, the following:
o Past Board Performance:
o The company's use of authorized preferred shares during the last
three years;
o One-and three-year total shareholder return; and
o The board's governance structure and practices;
o The Current Request:
o Disclosure in the proxy statement of specific reasons for the
proposed increase;
o In cases where the company has existing authorized preferred stock,
the dilutive impact of the request as determined through an
allowable cap generated by RiskMetrics' quantitative model, which
examines the company's need for shares and three-year total
shareholder return; and
o Whether the shares requested are blank check preferred shares, and
whether they are declawed.
Vote AGAINST proposals at companies with more than one class or series of
preferred stock to increase the number of authorized shares of the class or
series that has superior voting rights.
[GRAPHIC OMITTED]
Mergers and Acquisitions
Vote CASE -BY- CASE on mergers and acquisitions. Review and evaluate the merits
and drawbacks of the proposed transaction, balancing various and sometimes
countervailing factors including:
o Valuation - Is the value to be received by the target shareholders (or
paid by the acquirer) reasonable? While the fairness opinion may provide
an initial starting point for assessing valuation reasonableness,
emphasis is placed on the offer premium, market reaction and strategic
rationale.
o Market reaction - How has the market responded to the proposed deal? A
negative market reaction should cause closer scrutiny of a deal.
o Strategic rationale - Does the deal make sense strategically? From where
is the value derived? Cost and revenue synergies should not be overly
aggressive or optimistic, but reasonably achievable. Management should
also have a favorable track record of successful integration of
historical acquisitions.
o Negotiations and process - Were the terms of the transaction negotiated
at arm's-length? Was the process fair and equitable? A fair process helps
to ensure the best price for shareholders. Significant negotiation "wins"
can also signify the deal makers' competency. The comprehensiveness of
the sales process (e.g., full auction, partial auction, no auction) can
also affect shareholder value.
o Conflict 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 change-in-control figure presented in the "RMG
Transaction Summary" section of this report is an aggregate figure that
can in certain cases be a misleading indicator of the true value transfer
from shareholders to insiders. Where such figure appears to be excessive,
analyze the underlying assumptions to determine whether a potential
conflict exists.
o Governance - Will the combined company have a better or worse governance
profile than the current governance profiles of the respective parties to
the transaction? If the governance profile is to change for the worse,
the burden is on the company to prove that other issues (such as
valuation) outweigh any deterioration in governance.
[GRAPHIC OMITTED]
Compensation:
Executive Pay Evaluation
Underlying all evaluations are five global principles that most investors
expect corporations to adhere to in designing and administering executive and
director compensation programs:
1. 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 link between pay and performance; the mix between fixed and
variable pay; performance goals; and equity-based plan costs;
2. Avoid arrangements that risk "pay for failure": This principle addresses
the appropriateness of long or indefinite contracts, excessive severance
packages, and guaranteed compensation;
3. 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);
4. 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;
5. 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.
[GRAPHIC OMITTED]
Equity Compensation Plans
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity
plan if any of the following factors apply:
o The total cost of the company's equity plans is unreasonable;
o The plan expressly permits the repricing of stock options/stock
appreciate rights (SARs) without prior shareholder approval;
o The CEO is a participant in the proposed equity-based compensation plan
and there is a disconnect between CEO pay and the company's performance
where over 50 percent of the year-over-year increase is attributed to
equity awards (see Pay-for-Performance);
o The company's three year burn rate exceeds the greater of 2% or the mean
plus one standard deviation of its industry group;
o Liberal Change of Control Definition: The plan provides for the
acceleration of vesting of equity awards even though an actual change in
control may not occur (e.g., upon shareholder approval of a transaction
or the announcement of a tender offer); or
o The plan is a vehicle for problematic pay practices.
[GRAPHIC OMITTED]
Other Compensation Proposals and Policies
Advisory Votes on Executive Compensation- Management Proposals (Management
Say-on-Pay) In general, the management say on pay (MSOP) ballot item is the
primary focus of voting on executive pay practices- dissatisfaction with
compensation practices can be expressed by voting against the MSOP rather than
withholding or voting against the compensation committee. However, if there is
no MSOP on which to express the dissatisfaction, then the secondary target will
be members of the compensation committee. In addition, in egregious cases, or if
the board fails to respond to concerns raised by a prior MSOP proposal; then
vote withhold or against compensation committee member (or, if the full board is
deemed accountable, to all directors). If the negative factors impact
equity-based plans, then vote AGAINST an equity-based plan proposal presented
for shareholder approval.
Evaluate executive pay and practices, as well as certain aspects of
outside director compensation, on a CASE-BY-CASE basis.
Vote AGAINST management say on pay (MSOP) proposals, AGAINST/WITHHOLD on
compensation committee members (or, in rare cases where the full board is
deemed responsible, all directors including the CEO), and/or AGAINST an
equity-based incentive plan proposal if:
o There is a misalignment between CEO pay and company performance (pay for
performance);
o The company maintains problematic pay practices;
o The board exhibits poor communication and responsiveness to shareholders.
Additional CASE-BY-CASE considerations for the management say on pay (MSOP)
proposals:
o Evaluation of performance metrics in short-term and long-term plans, as
discussed and explained in the Compensation Discussion & Analysis (CD&A).
Consider the measures, goals, and target awards reported by the company
for executives' short- and long-term incentive awards: disclosure,
explanation of their alignment with the company's business strategy, and
whether goals appear to be sufficiently challenging in relation to
resulting payouts;
o opportunities. Consider the rationale stated by the company for
constituents in its pay benchmarking peer group, as well as the benchmark
targets it uses to set or validate executives' pay (e.g., median, 75th
percentile, etc.,) to ascertain whether the benchmarking process is sound
or may result in pay "ratcheting" due to inappropriate peer group
constituents (e.g., much larger companies) or targeting (e.g., above
median); and
o Balance of performance-based versus non-performance-based pay. Consider
the ratio of performance-based (not including plain vanilla stock
options) vs. non-performance-based pay elements reported for the CEO's
latest reported fiscal year compensation, especially in conjunction with
concerns about other factors such as performance metrics/goals,
benchmarking practices, and pay-for-performance disconnects.
Pay for Performance
Evaluate the alignment of the CEO's pay with performance over time, focusing
particularly on companies that have underperformed their peers over a sustained
period. From a shareholders' perspective, performance is predominantly gauged by
the company's stock performance over time. Even when financial or operational
measures are utilized in incentive awards, the achievement related to these
measures should ultimately translate into superior shareholder returns in the
long-term.
Focus on companies with sustained underperformance relative to peers,
considering the following key factors:
o Whether a company's one-year and three-year total shareholder returns
("TSR") are in the bottom half of its industry group (i.e., four-digit
GICS - Global Industry Classification Group); and
o Whether the total compensation of a CEO who has served at least two
consecutive fiscal years is aligned with the company's total shareholder
return over time, including both recent and long-term periods.
If a company falls in the bottom half of its four-digit GICS, further analysis
of the CD&A is required to better understand the various pay elements and
whether they create or reinforce shareholder alignment. Also assess the CEO's
pay relative to the company's TSR over a time horizon of at least five years.
The most recent year-over-year increase or decrease in pay remains a key
consideration, but there will be additional emphasis on the LONG TERM TREND OF
CEO TOTAL COMPENSATION RELATIVE TO SHAREHOLDER RETURN. ALSO CONSIDER THE MIX OF
performance-based compensation relative to total compensation. In general,
standard stock options or time-vested restricted stock are not considered to be
performance-based. If a company provides performance-based incentives to its
executives, the company is highly encouraged to provide the complete disclosure
of the performance measure and goals (hurdle rate) so that shareholders can
assess the rigor of the performance program. The use of non-GAAP financial
metrics also makes it very challenging for shareholders to ascertain the rigor
of the program as shareholders often cannot tell the type of adjustments being
made and if the adjustments were made consistently. Complete and transparent
disclosure helps shareholders to better understand the company's pay for
performance linkage.
Problematic Pay Practices
The focus is on executive compensation practices that contravene the global pay
principles, including:
o Problematic practices related to non-performance-based compensation
elements;
o Incentives that may motivate excessive risk-taking; and
o Options Backdating.
Non-Performance based Compensation Elements
Companies adopt a variety of pay arrangements that may be acceptable in their
particular industries, or unique for a particular situation, and all companies
are reviewed on a case-by-case basis. However, there are certain adverse
practices that are particularly contrary to a performance-based pay philosophy,
including guaranteed pay and excessive or inappropriate non-performance-based
pay elements.
While not exhaustive, this is the list of practices that carry greatest weight
in this consideration and may result in negative vote recommendations on a
stand-alone basis. For more details, please refer to RMG's Compensation FAQ
document: http://www.riskmetrics.com/policy/2010_compensation_FAQ:
o Multi-year guarantees for salary increases, non-performance based
bonuses, and equity compensation;
o Including additional years of unworked service that result in significant
additional benefits, without sufficient justification, or including
long-term equity awards in the pension calculation;
o Perquisites for former and/or retired executives, and extraordinary
relocation benefits (including home buyouts) for current executives;
o Change-in-control payments exceeding 3 times base salary and target
bonus; change-in-control payments without job loss or substantial
diminution of duties ("Single Triggers"); new or materially amended
agreements that provide for "modified single triggers" (under which an
executive may voluntarily leave for any reason and still receive the
change-in-control severance package); new or materially amended
agreements that provide for an excise tax gross-up (including "modified
gross-ups");
o Tax Reimbursements related to executive perquisites or other payments
such as personal use of corporate aircraft, executive life insurance,
bonus, etc; (see also excise tax gross-ups above)
o Dividends or dividend equivalents paid on unvested performance shares or
units;
o Executives using company stock in hedging activities, such as "cashless"
collars, forward sales, equity swaps or other similar arrangements; or
o Repricing or replacing of underwater stock options/stock appreciation
rights without prior shareholder approval (including cash buyouts and
voluntary surrender/subsequent regrant of underwater options).
Incentives that may Motivate Excessive Risk-Taking
Assess company policies and disclosure related to compensation that could
incentivize excessive risk-taking, for example:
o Guaranteed bonuses;
o A single performance metric used for short- and long-term plans;
o Lucrative severance packages;
o High pay opportunities relative to industry peers;
o Disproportionate supplemental pensions; or
o Mega annual equity grants that provide unlimited upside with no downside
risk.
Factors that potentially mitigate the impact of risky incentives include
rigorous claw-back provisions and robust stock ownership/holding guidelines.
Options Backdating
Vote CASE-by-CASE on options backdating issues. Generally, when a company has
recently practiced options backdating, WITHHOLD from or vote AGAINST the
compensation committee, depending on the severity of the practices and the
subsequent corrective actions on the part of the board. When deciding on votes
on compensation committee members who oversaw questionable options grant
practices or current compensation committee members who fail to respond to the
issue proactively, consider several factors, including, but not limited to, the
following:
o Reason and motive for the options backdating issue, such as inadvertent
vs. deliberate grant date changes;
o Duration of options backdating;
o Size of restatement due to options backdating;
o Corrective actions taken by the board or compensation committee, such as
canceling or re-pricing backdated options, the recouping of option gains
on backdated grants; and
o grant schedule or window period for equity grants in the future.
A CASE-by-CASE analysis approach allows distinctions to be made between
companies that had "sloppy" plan administration versus those that acted
deliberately and/or committed fraud, as well as those companies that
subsequently took corrective action. Cases where companies have committed fraud
are considered most egregious.
Board Communications and Responsiveness
Consider the following factors on a CASE-BY-CASE basis when evaluating ballot
items related to executive pay:
o Poor disclosure practices, including:
- 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.
o Board's responsiveness to investor input and engagement on compensation
issues, for example:
- Failure to respond to majority-supported shareholder proposals on
executive pay topics; or
- Failure to respond to concerns raised in connection with significant
pposition to MSOP proposals.
[GRAPHIC OMITTED]
Option Exchange Programs/Repricing Options
Vote CASE-by-CASE on management proposals seeking approval to exchange/reprice
options, taking into consideration: o Historic trading patterns--the stock price
should not be so volatile that the options are likely to be back "in-the-money"
over the near term;
o Rationale for the re-pricing--was the stock price decline beyond
management's control?
o Is this a value-for-value exchange?
o Are surrendered stock options added back to the plan reserve?
o Option vesting--does the new option vest immediately or is there a
black-out period?
o erm of the option--the term should remain the same as that of the
replaced option;
o Exercise price--should be set at fair market or a premium to market;
o 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 total cost of equity plans and
its 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 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.
[GRAPHIC OMITTED]
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.
[GRAPHIC OMITTED]
Golden Coffins/Executive Death Benefits
Generally vote FOR proposals calling companies to adopt a policy of obtaining
shareholder approval for any future agreements and corporate policies that could
oblige the company to make payments or awards following the death of a senior
executive in the form of unearned salary or bonuses, accelerated vesting or the
continuation in force of unvested equity grants, perquisites and other payments
or awards made in lieu of compensation. This would not apply to any benefit
programs or equity plan proposals that the broad-based employee population is
eligible.
[GRAPHIC OMITTED]
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 the figures upon which incentive compensation is earned later turn out to
have been in error. This is line with the clawback provision in the Trouble
Asset Relief Program. Many companies have adopted policies that permit
recoupment in cases where fraud, misconduct, or negligence significantly
contributed to a restatement of financial results that led to the awarding of
unearned incentive compensation. RMG will take into consideration:
o If the company has adopted a formal recoupment bonus policy;
o If the company has chronic restatement history or material financial
problems; or
o If the company's policy substantially addresses the concerns raised by
the proponent.
[GRAPHIC OMITTED]
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 RMG favors stock ownership on the part of directors, the
company should determine the appropriate ownership requirement.
Vote on a CASE-BY-CASE on shareholder proposals asking companies to adopt
policies requiring Named Executive Officers to retain 75% of the shares acquired
through compensation plans while employed and/or for two years following the
termination of their employment, and to report to shareholders regarding this
policy. The following factors will be taken into account:
o Whether the company has any holding period, retention ratio, or officer
ownership requirements in place. These should consist of:
- Rigorous stock ownership guidelines, or
- A holding period requirement coupled with a significant long-term
ownership requirement, or
- A meaningful retention ratio,
o 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.
o Problematic pay practices, current and past, which may promote a
short-term versus a long-term focus.
A rigorous stock ownership guideline should be at least 10x base salary for the
CEO, with the multiple declining for other executives. A meaningful retention
ratio should constitute at least 50 percent of the stock received from equity
awards (on a net proceeds basis) held on a long-term basis, such as the
executive's tenure with the company or even a few years past the executive's
termination with the company.
[GRAPHIC OMITTED]
6. Social/Environmental Issues:
Overall Approach
When evaluating social and environmental shareholder proposals, RMG considers
the following factors:
o Whether adoption of the proposal is likely to enhance or protect
shareholder value;
o Whether the information requested concerns business issues that relate to
a meaningful percentage of the company's business as measured by sales,
assets, and earnings;
o The degree to which the company's stated position on the issues raised in
the proposal could affect its reputation or sales, or leave it vulnerable
to a boycott or selective purchasing;
o Whether the issues presented are more appropriately/effectively dealt
with through governmental or company-specific action;
o Whether the company has already responded in some appropriate manner to
the request embodied in the proposal;
o Whether the company's analysis and voting recommendation to shareholders
are persuasive;
o What other companies have done in response to the issue addressed in the
proposal;
o Whether the proposal itself is well framed and the cost of preparing the
report is reasonable;
o Whether implementation of the proposal's request would achieve the
proposal's objectives;
o Whether the subject of the proposal is best left to the discretion of the
board;
o Whether the requested information is available to shareholders either
from the company or from a publicly available source; and
o Whether providing this information would reveal proprietary or
confidential information that would place the company at a competitive
disadvantage.
[GRAPHIC OMITTED]
Board Diversity
Generally vote FOR requests for reports on the company's efforts to diversify
the board, unless:
o The gender and racial minority representation of the company's board is
reasonably inclusive in relation to companies of similar size and
business; and
o The board already reports on its nominating procedures and gender and
racial minority initiatives on the board and within the company.
Vote CASE-BY-CASE on proposals asking the company to increase the gender and
racial minority representation on its board, taking into account:
o The degree of existing gender and racial minority diversity on the
company's board and among its executive officers;
o The level of gender and racial minority representation that exists at the
company's industry peers;
o The company's established process for addressing gender and racial
minority board representation;
o Whether the proposal includes an overly prescriptive request to amend
nominating committee charter language;
o The independence of the company's nominating committee;
o The company uses an outside search firm to identify potential director
nominees; and
o Whether the company has had recent controversies, fines, or litigation
regarding equal employment practices.
[GRAPHIC OMITTED]
Gender Identity, Sexual Orientation, and Domestic Partner Benefits
Generally vote FOR proposals seeking to amend a company's EEO statement or
diversity policies to prohibit discrimination based on sexual orientation and/or
gender identity, 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. Decisions regarding benefits should
be left to the discretion of the company.
Greenhouse Gas (GHG) Emissions
Generally vote FOR proposals requesting a report on greenhouse gas (GHG)
emissions from company operations and/or products and operations, unless:
o The company already provides current, publicly-available information on
the impacts that GHG emissions may have on the company as well as
associated company policies and procedures to address related risks
and/or opportunities;
o The company's level of disclosure is comparable to that of industry
peers; and
o There are no significant, controversies, fines, penalties, or litigation
associated with the company's GHG emissions.
Vote CASE-BY-CASE on proposals that call for the adoption of GHG reduction
goals from products and operations, taking into account:
o Overly prescriptive requests for the reduction in GHG emissions by
specific amounts or within a specific time frame;
o Whether company disclosure lags behind industry peers;
o Whether the company has been the subject of recent, significant
violations, fines, litigation, or controversy related to GHG emissions;
o The feasibility of reduction of GHGs given the company's product line and
current technology and; o Whether the company already provides meaningful
disclosure on GHG emissions from its products and operations.
[GRAPHIC OMITTED]
Political Contributions and Trade Association Spending
Generally vote AGAINST proposals asking the company to affirm political
nonpartisanship in the workplace so long as:
o There are no recent, significant controversies, fines or litigation
regarding the company's political contributions or trade association
spending; and
o The company has procedures in place to ensure that employee contributions
to company-sponsored political action committees (PACs) are strictly
voluntary and prohibits coercion.
Vote AGAINST proposals to publish in newspapers and public media the company's
political contributions. 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:
o Recent significant controversy or litigation related to the company's
political contributions or governmental affairs; and
o 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 political 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.
[GRAPHIC OMITTED]
Labor and Human Rights Standards
Generally vote FOR proposals requesting a report on company or company supplier
labor and/or human rights standards and policies unless such information is
already publicly disclosed.
Vote CASE-BY-CASE on proposals to implement company or company supplier labor
and/or human rights standards and policies, considering:
o The degree to which existing relevant policies and practices are
disclosed;
o Whether or not existing relevant policies are consistent with
internationally recognized standards;
o Whether company facilities and those of its suppliers are monitored and
how;
o Company participation in fair labor organizations or other
internationally recognized human rights initiatives;
o Scope and nature of business conducted in markets known to have higher
risk of workplace labor/human rights abuse;
o Recent, significant company controversies, fines, or litigation regarding
human rights at the company or its suppliers;
o The scope of the request; and
o Deviation from industry sector peer company standards and practices.
[GRAPHIC OMITTED]
Sustainability Reporting
Generally vote FOR proposals requesting the company to report on its policies,
initiatives, and oversight mechanisms related to social, economic, and
environmental sustainability, unless:
o The company already discloses similar information through existing
reports or policies such as an Environment, Health, and Safety (EHS)
report; a comprehensive Code of Corporate Conduct; and/or a Diversity
Report; or
o The company has formally committed to the implementation of a reporting
program based on Global Reporting Initiative (GRI) guidelines or a
similar standard within a specified time frame
[GRAPHIC OMITTED]
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
INFORMATION PROVIDED AS OF AUGUST 2, 2010
Four Corners Capital Management, LLC ("Four Corners"), a Macquarie
Funds Group company, was founded in 2001 by a team of investment professionals
and an affiliate of Australia-based Macquarie Group Limited ("Macquarie") and
became a wholly-owned, indirect subsidiary of Macquarie in 2008. Macquarie Group
is a global provider of banking, financial, advisory, investment and funds
management services. Macquarie Funds Group, with over $200 billion in assets
under management (as of May 31, 2010) is the global asset management business of
Macquarie Group. Macquarie Funds Group offers a diverse range of products
including managed funds, funds-based structured products, hedge funds and fund
of funds. Four Corners managed approximately $2.1 billion of assets (as of May
31, 2010), 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, and high net worth and retail
investors. Four Corners is an investment advisor registered under the Investment
Advisers Act of 1940, as amended. Robert I. Bernstein, Managing Director and
Chief Investment Officer of Four Corners, and Drew R. Sweeney, Senior Vice
President of Four Corners, are co-portfolio managers of the registrant
Robert I. Bernstein, CFA, Chief Investment Officer, Four Corners
Capital Management, LLC: Mr. Bernstein is responsible for managing Four Corners'
investment activities. He has over 18 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.
Drew R. Sweeney, Senior Vice President, Four Corners Capital
Management, LLC: Mr. Sweeney's responsibilities include the co-portfolio
management of Four Corners' retail funds as well as coverage of the media and
entertainment, cable and satellite industries. Mr. Sweeney has 15 years of
investment experience including 12 years in senior secured loans and high-yield
bonds. Mr. Sweeney joined Four Corners in 2005 from American Express Asset
Management Group, Inc. where he was primarily responsible for managing
investments of senior secured loans and high-yield bonds in the gaming, lodging,
leisure, homebuilding, and building product sectors. Prior to joining American
Express, Mr. Sweeney worked at Four Corners and ING Capital Advisors LLC
managing investments of senior secured loans in the media sector. Previously,
Mr. Sweeney was an Associate at First Union Securities in the Financial Sponsors
and Diversified Industries Groups. Mr. Sweeney received an MBA from the
Kenan-Flagler Business School at the University of North Carolina at Chapel Hill
and a BS from Rutgers University.
(a)(2) Other Accounts Managed by Portfolio Manager(s) or Management Team
Member and Potential Conflicts of Interest as of May 31, 2009
- ----------------------------- ------------------------------------- -------------- ------------- -------------------- --------------
Total Assets
Total # of Accounts that
# of Managed that Advisory Fee
Name of Portfolio Manager Accounts Total Assets Advisory Fee Based Based on
or Team Member Type of Accounts Managed ($ millions) on Performance Performance
- ----------------------------- ------------------------------------- -------------- ------------- -------------------- --------------
1. Robert I. Bernstein Registered Investment Companies*: 2 $581.8 0 $0
------------------------------------- -------------- ------------- -------------------- --------------
Other Pooled Investment Vehicles: 3 $759.4 3 $759.4
------------------------------------- -------------- ------------- -------------------- --------------
Other Accounts: 9 $746.7 0 $0
- ----------------------------- ------------------------------------- -------------- ------------- -------------------- --------------
2. Drew R. Sweeney Registered Investment Companies*: 2 $581.8 0 $0
------------------------------------- -------------- ------------- -------------------- --------------
Other Pooled Investment Vehicles: 0 $0 0 $0
------------------------------------- -------------- ------------- -------------------- --------------
Other Accounts: 1 $40.2 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
INFORMATION PROVIDED AS OF AUGUST 2, 2010
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. Bonuses for all employees, including
the Portfolio Managers, are discretionary. In addition, the Portfolio Managers
have stock options of Macquarie. These options are in varying amounts and are
subject to certain vesting and other provisions of the Macquarie option plan.
Finally, the Portfolio Managers are Members of the entity that Macquarie
recently purchased, and there are certain payments associated with that purchase
which will be paid over time. A portion of those payments is based on achieving
certain revenue targets.
The Portfolio Managers' salaries are set at certain levels and may be
raised at the discretion of Macquarie. Bonuses are entirely discretionary and
are likely to be related to, among other things, business unit profitability and
personal performance. Compensation is determined 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 as of May 31, 2010
----------------------------------- ---------------------------------
Name of Portfolio Manager or Dollar ($) Range of Fund Shares
Team Member Beneficially Owned
----------------------------------- ---------------------------------
Robert I. Bernstein $0 (0 shares)
----------------------------------- ---------------------------------
Drew R. Sweeney $0 (0 shares)
----------------------------------- ---------------------------------
(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 20, 2010
------------------------
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 20, 2010
------------------------
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 20, 2010
------------------------
* Print the name and title of each signing officer under his or her signature.