As filed electronically with the Securities and Exchange Commission on
or about October 13, 2006
Registration Nos. 333-137063
811-21774
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________________________________
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 3 [ ] POST-EFFECTIVE AMENDMENT NO. ___
FIRST TRUST EXCHANGE-TRADED FUND
(Exact Name of Registrant as Specified in Charter)
__________________________________________
1001 Warrenville Road
Suite 300
Lisle, Illinois 60532
(Address of Principal Executive Offices) (Zip Code)
(630) 241-4141
(Registrant's Area Code and Telephone Number)
W. Scott Jardine
First Trust Portfolios L.P.
1001 Warrenville Road, Suite 300
Lisle, Illinois 60532
(Name and Address of Agent for Service)
__________________________________________
With copies to:
Eric F. Fess
Chapman and Cutler LLP
111 West Monroe Street
Chicago, Illinois 60603
__________________________________________
TITLE OF SECURITIES BEING REGISTERED:
Shares of beneficial interest ($0.01 par value per share) of the First
Trust Value Line(R) Dividend Index Fund, a Series of the Registrant.
THIS REGISTRATION STATEMENT WILL BECOME EFFECTIVE ON SUCH DATE DESIGNATED BY THE
REGISTRANT UPON THE FILING OF A FURTHER AMENDMENT OR AS THE SECURITIES AND
EXCHANGE COMMISSION MAY DETERMINE PURSUANT TO RULE 473.
Approximate date of proposed public offering: As soon as practicable
after the effective date of this Registration Statement.
No filing fee is required because an indefinite number of shares have
previously been registered pursuant to Rule 24f-2 under the Investment
Company Act of 1940.
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FIRST TRUST VALUE LINE(R) DIVIDEND FUND
A Message from the Fund's Chairman and Chief Executive Officer
October 13, 2006
Dear Shareholder:
I am writing to you to ask for your vote on a very important matter that
will significantly affect your investment in First Trust Value Line(R)
Dividend Fund ("FVD"). Enclosed is a combined proxy statement and
prospectus seeking your approval of a proposal at a Special Meeting of
Shareholders of FVD (the "Meeting").
Like many closed-end funds, shares of FVD have historically traded
at market prices that are significantly below their net asset value.
Since FVD's inception, FVD's Board of Trustees has regularly monitored
the trading discount and considered a variety of alternatives to reduce
or eliminate the discount. In addition, management of FVD has been
seeking to develop a viable approach to address the discount while
maintaining FVD's disciplined investment strategy. After considerable
efforts by the Board of Trustees and management, we are pleased to
present to shareholders for approval at the Meeting, a novel proposal
that the Board and management believe has the potential to significantly
reduce or eliminate the discount. The proposal involves the
reorganization (the "Reorganization") of FVD with and into First Trust
Value Line(R) Dividend Index Fund ("FVD ETF"), a newly created,
diversified series of First Trust Exchange-Traded Fund, an
exchange-traded investment company ("First Trust ETF"). Exchange-traded funds
("ETFs") are investment companies that seek investment results that correspond
generally to the performance of a given securities index. Because of the ETF
structure, shares of ETFs have historically traded at or very close to their net
asset values. FVD ETF is managed by First Trust Advisors L.P., the same
investment adviser that manages FVD, and will seek to replicate (before
expenses) the performance of an index sponsored and maintained by Value Line(R)
Publishing, Inc. (the "Index"). The Index's stock selection methodology is
substantially similar to FVD's investment strategy and, as a result, we expect
that on the date of the Reorganization, FVD's portfolio will be very similar to
the Index and FVD ETF's portfolio. Because of the similarity between FVD's
objective, rule-based investment process and the Index's Stock selection
methodology, FVD is uniquely situated to make this opportunity available to its
shareholders.
Through the Reorganization, your shares of FVD would be exchanged, on a
tax-free basis for federal income tax purposes, for shares of FVD ETF
with an equal aggregate net asset value, and you will become a
shareholder of FVD ETF.
In determining to recommend approval of this proposal, the Trustees of
FVD considered the following factors, among others:
o the Reorganization should significantly reduce or eliminate the
discount to net asset value at which shares of FVD have historically
traded;
o FVD ETF will have a lower management fee and lower total fund operating
expense ratio than FVD for at least two years following the
Reorganization (after expense waivers); and
o ETFs have favorable tax attributes and provide intra-day liquidity to
investors.
The Board of Trustees of FVD has unanimously approved the Agreement and
Plan of Reorganization (the "Plan") and recommends that FVD shareholders
vote "FOR" approval of the Plan and the Reorganization it contemplates.
A copy of the form of the Plan is attached as Exhibit A to the enclosed
Prospectus/Proxy Statement.
Included in this booklet are the following materials concerning the
upcoming shareholders' meeting:
o A Notice of Special Meeting of Shareholders, which summarizes the
proposal for which you are being asked to provide voting instructions;
and
o A Prospectus/Proxy Statement, which provides detailed information on
FVD ETF, the specific proposal being considered at the Meeting and why
the proposal is being made, including the differences between your
shares of FVD and the shares of FVD ETF that you will receive as a
result of the Reorganization.
While you are, of course, welcome to join us at the Meeting, most
shareholders cast their vote by filling out and signing the enclosed
proxy card, or by voting by telephone or through the Internet. We urge
you to review the enclosed materials thoroughly. Once you've determined
how you would like your interests to be represented, please promptly
complete, sign, date and return the enclosed proxy card, vote by
telephone or record your voting instructions on the Internet. A postage-
paid envelope is enclosed for mailing and telephone voting
instructions are listed at the top of your proxy card.
Your vote is very important. As a shareholder, you are entitled to cast
one vote for each share of FVD that you own. Please take a few moments
to read the enclosed materials and then cast your vote.
We appreciate your participation in this important Meeting. Thank you.
Sincerely yours,
James A. Bowen
Chairman of the Board of Trustees,
Chief Executive Officer and President
First Trust Value Line(R) Dividend Fund
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IF YOU NEED ANY ASSISTANCE, OR HAVE ANY QUESTIONS REGARDING THE PROPOSED
REORGANIZATION OR HOW TO VOTE YOUR SHARES, CALL (800) 761-6707 WEEKDAYS
FROM 9:00 A.M. TO 10:00 P.M. EASTERN STANDARD TIME.
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PLEASE NOTE THAT SHAREHOLDERS WHO HOLD FVD SHARES DIRECTLY AND NOT IN
"STREET NAME" THROUGH A BROKER-DEALER WILL RECEIVE A LETTER OF
TRANSMITTAL THAT PROVIDES ADDITIONAL INSTRUCTIONS REGARDING THE RECEIPT
OF THEIR REORGANIZATION SHARES. BECAUSE SHARES OF FVD ETF WILL NOT BE
CERTIFICATED, THESE SHAREHOLDERS WILL NEED TO DESIGNATE A BROKERAGE ACCOUNT
THAT WILL HOLD THE REORGANIZATION SHARES. IF A SHAREHOLDER DOES NOT DESIGNATE A
BROKERAGE ACCOUNT SUCH SHAREHOLDER MAY BE LIMITED IN THE ABILITY TO SELL THE
REORGANIZATION SHARES IN THE SECONDARY MARKET UNTIL SUCH ACCOUNT IS DESIGNATED.
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Questions and Answers
regarding the
Reorganization of
First Trust Value Line(R) Dividend Fund
with and into
First Trust Value Line(R) Dividend Index Fund
Q. What is happening?
A. Shareholders are being asked to approve an Agreement and Plan of
Reorganization (the "Plan") at a special meeting of shareholders (the
"Meeting") whereby all of the assets of First Trust Value Line(R)
Dividend Fund, a closed-end investment company ("FVD"), would be
transferred in a tax-free reorganization (the "Reorganization") to First
Trust Value Line(R) Dividend Index Fund ("FVD ETF"), an "exchange-traded
fund" or "ETF" that is a newly created, diversified series of First
Trust Exchange-Traded Fund ("First Trust ETF"), an open-end investment
company, pursuant to which shareholders of FVD would become shareholders
of FVD ETF. Like FVD, FVD ETF is managed by First Trust Advisors L.P.
("First Trust" or the "Adviser").
After carefully reviewing the proposal, FVD's Board of Trustees has
determined that the proposed Plan is in the best interests of FVD. The
Board recommends that you vote FOR the Plan and the Reorganization
contemplated thereby.
Q. Why has this Reorganization been proposed for FVD?
A. Shares of closed-end funds often trade at a discount from their net
asset value. Shares of FVD have historically traded at a significant
discount from their net asset value (including a discount of 8.01% on the
date FVD's Board of Trustees approved the Reorganization.) The Board of
Trustees and management of FVD have worked to develop a viable approach
to address the discounts. The Board of Trustees and management believe
that the Reorganization has the potential to significantly reduce or
eliminate the discount while maintaining FVD's disciplined investment
strategy. Through the Reorganization, FVD's shareholders would receive
FVD ETF shares with an aggregate net asset value equal to the aggregate
net asset value of their FVD shares as of the Closing Date referred to in
the Plan. FVD ETF, which will have no operations prior to the
Reorganization, has applied to list and trade its common shares on the
American Stock Exchange ("AMEX"). Although the trading prices of FVD ETF
shares on the AMEX may differ from the daily net asset value of FVD ETF's
shares, shares of exchange-traded funds ("ETFs") typically trade very
close to their net asset value, in part due to the creation unit and
redemption features of an ETF. Therefore, immediately after the
Reorganization, shares of FVD ETF are anticipated to trade at or close to
the net asset value of FVD shares immediately prior to the
Reorganization. The Reorganization should effectively eliminate the
discount at which FVD shares have historically traded.
In addition, FVD ETF will pay a lower management fee than FVD, and First
Trust has agreed to waive all or a portion of its fees and/or reimburse
or pay FVD ETF's operating expenses to the extent necessary to maintain
FVD ETF's total operating expenses (excluding interest expense, brokerage
commissions and other trading expenses, taxes and extraordinary expenses)
at 0.70% of average daily net assets per year for at least two years
following the Reorganization. Consequently, FVD ETF will have a lower
total operating expense ratio than FVD for at least two years following
the Reorganization.
Q. Will my shares continue to be listed on the AMEX?
A. FVD shares are currently listed and trading on the AMEX. FVD ETF has
applied to list and trade its shares on the AMEX.
Q. What is the difference between a closed-end fund and an ETF?
Closed-end Funds ETFs
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Closed-end funds, like FVD, generally do not redeem their Open-end funds (known generally as mutual funds), in general,
outstanding shares or engage in the continuous sale of issue shares that can be redeemed or sold back to the fund at the
new shares. Shares of closed-end investment companies fund's net asset value per share (less any applicable redemption
typically are traded on a securities exchange. Thus, fee or contingent deferred sales charge, neither of which will be
persons wishing to buy or sell closed-end fund shares charged by FVD ETF). Unlike conventional mutual funds, ETFs, like
generally must do so through a broker-dealer and pay or FVD ETF, trade their shares on a securities exchange, and persons
receive the market price per share (plus or minus any wishing to buy or sell shares generally must do so through a
applicable commissions). The market price may be more broker-dealer and pay and receive the market price per share (plus
(a premium) or less (a discount) than the net asset value or minus any applicable commissions). Unlike a closed-end fund,
per share of the closed-end fund. Closed-end funds have ETFs issue and redeem shares on a continuous basis, at net asset
greater flexibility than ETFs to make certain types of value, in large blocks consisting of a specified number of shares,
investments, and to use certain investment strategies, referred to as a "Creation Unit." Creation Units of FVD ETF will
such as financial leverage and investments in illiquid be issued and redeemed principally in-kind for securities included
securities. in the Value Line(R) Dividend Index (the "Index"). Except when
aggregated in Creation Units ("Creation Unit Aggregations"), FVD
ETF shares are not readily redeemable securities of FVD ETF.
These ETF features are designed to protect ongoing shareholders
from adverse effects that could arise from frequent cash creation
and redemption transactions such as those that occur in a
conventional mutual fund. In conventional mutual funds,
redemptions can have an adverse tax impact on taxable shareholders
because of a mutual fund's frequent need to sell portfolio
securities to obtain cash to meet fund redemptions. These sales
may generate taxable gains for the shareholders of the mutual
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fund, whereas the in-kind Creation Unit redemption mechanism of
FVD ETF generally will not lead to a tax event for FVD ETF or its
shareholders. As a practical matter, only broker-dealers, or
large institutional investors with creation and redemption
agreements called "Authorized Participants" ("APs"), can purchase
or redeem these Creation Units. As a result, shares of FVD ETF
will be traded on the AMEX to provide liquidity for purchasers of
FVD ETF shares in amounts less than the size of a Creation Unit
Aggregation. The market price of FVD ETF shares on the AMEX may
be equal to, more or less than the net asset value, but shares of
ETFs typically trade in a range closer to net asset value per
share than do shares of closed-end funds.
Q. Are the investment objectives and strategies of FVD ETF and FVD
similar?
A. The investment objectives and strategies of FVD ETF and FVD are
substantially similar, but have some important distinctions. FVD ETF
will seek investment results that correspond generally (before fees and
expenses) to an equity index called the Value Line(R) Dividend Index.
FVD generally has followed an investment strategy similar to the
methodology of the Index but is not required to replicate an index as
is the case with FVD ETF, which will normally invest at least 90% of its total
assets in common stocks that comprise the Index.
Q. Will I have to pay taxes as a result of the proposed Reorganization?
A. The Reorganization is expected to be a tax-free reorganization for
federal income tax purposes and will not occur unless FVD's counsel
provides a tax opinion to that effect. If you choose to sell your
shares before the Reorganization, the sale will generate taxable gain or
loss; therefore, you may wish to consult a tax advisor before doing so.
Of course, you also may be subject to periodic capital gains as a result
of the normal operations of FVD whether or not the proposed
Reorganization occurs.
FVD intends to pay a dividend of any realized undistributed net
investment income and capital gains, which may be substantial,
immediately prior to the closing of the Reorganization. The amount of
any dividend actually paid, if any, will depend on a number of factors,
such as changes in the value of FVD's holdings and the extent of
liquidation of securities between the date of the Meeting and the
closing of the Reorganization.
Q. Under the proposed Reorganization, will the value of my investment
change?
A. While the entity in which you own shares will change as a result of
the Reorganization of FVD into FVD ETF, the aggregate net asset value of
your FVD ETF shares immediately following the Reorganization will be the
same as the aggregate net asset value, rather than market value, of your
FVD shares immediately prior to the Reorganization. In addition, it is
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likely that the number of shares you own will not change as a result of
the Reorganization because your shares of FVD will be exchanged at the
net asset value per share of FVD ETF, which will probably be equal to
the net asset value per share of FVD at the time of the Reorganization.
Q. What vote is required to approve the proposed Reorganization?
A. Approval of the proposed Reorganization requires the affirmative vote
of the holders of a majority of FVD's outstanding voting securities, as
such term is defined in the Investment Company Act of 1940. A "majority
of the outstanding voting securities" means the lesser of (i) 67% of the
shares of FVD represented at a meeting at which more than 50% of the
outstanding shares of FVD are represented or (ii) more than 50% of the
outstanding shares of FVD.
Q. When would the proposed Reorganization be effective?
A. If approved, the Reorganization is expected to occur on or
about December 15, 2006 or as soon as reasonably practicable after
shareholder approval is obtained. Shortly after completion of the
Reorganization, shareholders of FVD at the time of the Reorganization
will receive notice indicating that the Reorganization was approved.
Q. Will FVD pay for the normal proxy solicitation and legal costs
associated with this solicitation?
A. No. First Trust will pay for the normal costs of the Reorganization,
such as proxy solicitation and legal costs; however, any extraordinary costs
will be paid by FVD.
Q. How can I vote?
A. You can vote in any one of three ways:
o By telephone, with a toll-free call to the number listed on your
proxy card;
o By mail, by sending the enclosed proxy card, signed and dated,
to us in the enclosed envelope; or
o In person, by attending the shareholder Meeting.
We encourage you to vote oby telephone, following the instructions that
appear on your proxy card. Whichever method you choose, please take the
time to read the full text of the enclosed Prospectus/Proxy Statement
before you vote.
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Q. Will I be able to continue to track my fund's performance in the
newspaper and on the Internet?
A. Yes. While the entity in which you own shares will change as a
result of the Reorganization, you will be able to track the performance
of FVD ETF through these means.
Q. If I hold FVD shares directly and not in "street name" through a
broker-dealer, how will I receive Reorganization Shares?
A. Because shares of FVD ETF will not be certificated, you will need to
establish a brokerage account that will hold your Reorganization Shares. You
will receive a letter of transmittal that provides additional instructions
regarding the receipt of your Reorganization Shares. If you do not designate a
brokerage account, you may be limited in your ability to sell your
Reorganization Shares in the secondary market until such account is designated.
Q. Whom should I call for additional information about this
Prospectus/Proxy Statement?
A. Please call The Altman Group, your fund's proxy solicitor, at 1-800-
761-6707.
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First Trust Value Line(R) Dividend Fund
1001 Warrenville Road, Suite 300
Lisle, Illinois 60532
Notice of Special Meeting of Shareholders
To be held on December 11, 2006
October 13, 2006
To the Shareholders of First Trust Value Line(R) Dividend Fund:
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of First Trust Value Line(R) Dividend Fund ("FVD"), a
Massachusetts business trust, will be held at the offices of First Trust
Advisors L.P., 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532,
on December 11, 2006, at 8:00 a.m. Central time, to consider the following
(the "Proposal"):
To approve an Agreement and Plan of Reorganization and the transactions
it contemplates, including the transfer of all of the assets of FVD to
First Trust Value Line(R) Dividend Index Fund ("FVD ETF"), in exchange
for shares of FVD ETF, the assumption by FVD ETF of all of the
liabilities of FVD and the distribution of such FVD ETF shares, on a
tax-free basis for federal income tax purposes, pro rata to the
shareholders of record of FVD in complete liquidation, dissolution and
termination of FVD.
The persons named as proxies will vote in their discretion on any other
business that may properly come before the Meeting and any adjournments
or postponements thereof.
Holders of record of shares of FVD at the close of business on
October 6, 2006 are entitled to notice of and to vote at the Meeting and
at any adjournments or postponements thereof.
By order of the Board of Trustees,
W. Scott Jardine
Secretary
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SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE MEETING ARE REQUESTED TO
PROMPTLY COMPLETE, SIGN, DATE AND RETURN THE PROXY CARD IN THE ENCLOSED
ENVELOPE WHICH DOES NOT REQUIRE POSTAGE IF MAILED IN THE CONTINENTAL
UNITED STATES. INSTRUCTIONS FOR THE PROPER EXECUTION OF PROXIES ARE SET
FORTH ON THE NEXT PAGE. IF YOU NEED ANY ASSISTANCE, OR HAVE ANY
QUESTIONS REGARDING THE PROPOSAL OR HOW TO VOTE YOUR SHARES, CALL (800)
761-6707 WEEKDAYS FROM 9:00 A.M. TO 10:00 P.M. EASTERN TIME.
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INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of assistance
to you and avoid the time and expense involved in validating your vote
if you fail to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party
signing should conform exactly to the name shown in the registration on
the proxy card.
3. All Other Accounts: The capacity of the individual signing the
proxy card should be indicated unless it is reflected in the form of
registration. For example:
Registration Valid Signature
Corporate Accounts
(1) ABC Corp. ABC Corp.,
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp. c/o John Doe, Treasurer John Doe
(4) ABC Corp. Profit Sharing Plan John Doe, Director
Partnership Accounts
(1) The XYZ Partnership Jane B. Smith, Partner
(2) Smith and Jones, Limited Partnership Jane B. Smith, General Partner
Trust Accounts
(1) ABC Trust Account Jane B. Doe, Director
(2) Jane B. Doe, Trustee u/t/d 12/28/78 Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust. f/b/o John B. Smith Jr.
UGMA/ UTMA John B. Smith
(2) Estate of John B. Smith John B. Smith, Jr., Executor
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IMPORTANT INFORMATION FOR SHAREHOLDERS OF
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
This document contains a Prospectus/Proxy Statement and a proxy card. A
proxy card is, in essence, a ballot. When you vote your proxy, it tells
us how to vote on your behalf on an important issue relating to your
fund. If you complete and sign the proxy card and return it to us in a
timely manner (or tell us how you want to vote by telephone, we'll vote
exactly as you tell us. If you simply sign and return the proxy card
without indicating how you wish to vote, we'll vote it in accordance with
the Trustees' recommendation on page 1 of the Prospectus/Proxy Statement.
We urge you to review the Prospectus/Proxy Statement carefully and
either fill out your proxy card and return it to us by mail or vote by
telephone. Your prompt return of the enclosed proxy card (or your voting
by telephone or through the Internet) may save the necessity and expense
of further solicitations.
We want to know how you would like to vote and welcome your comments.
Please take a few minutes to read these materials and return your proxy
card to us.
If you have any questions, please call The Altman Group, FVD's proxy
solicitor, at the special toll-free number we have set up for you (1-800-
761-6707).
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PROSPECTUS/PROXY STATEMENT
October 13, 2006
This Prospectus/Proxy Statement is being furnished in connection with a
Special Meeting of Shareholders (the "Meeting") called by the Board of
Trustees of the First Trust Value Line(R) Dividend Fund, a Massachusetts
business trust that is a closed-end investment company ("FVD"). At the
Meeting, you will be asked to approve the proposed Agreement and Plan of
Reorganization (the "Plan") and the transactions it contemplates, as
described in a concise manner in this Prospectus/Proxy Statement. This
Prospectus/Proxy Statement explains what you should know before voting
on the proposal described in this Prospectus/Proxy Statement or
investing in First Trust Value Line(R) Dividend Index Fund ("FVD ETF"),
an exchange-traded "index fund" that is a newly created, diversified
series of First Trust Exchange-Traded Fund ("First Trust ETF"), an open-
end management investment company. Please read it carefully and keep it
for future reference. Under the Plan, all of the assets and liabilities
of FVD would be transferred in a tax-free reorganization (the
"Reorganization") to FVD ETF. The transactions contemplated by the Plan
are described in further detail elsewhere herein. The principal
business address and phone number for both FVD and First Trust ETF is
1001 Warrenville Road, Suite 300, Lisle, Illinois 60532 and 1-630-241-
4141. FVD ETF and FVD are referred to herein collectively as the
"Funds," and each is referred to herein individually as a "Fund."
FVD ETF has applied to list and trade shares of FVD ETF on the American
Stock Exchange ("AMEX"). Shares of FVD ETF are not redeemable
individually and therefore liquidity for individual shareholders of FVD
ETF will be realized only through a sale on the AMEX at market prices
that may differ to some degree from the net asset value of the FVD ETF
shares. Reports, proxy materials and other information concerning the
Funds can be inspected at the AMEX.
The Board of Trustees of FVD has unanimously approved the Plan and the
Reorganization contemplated thereby as being in the best interests of
FVD and recommends that you vote FOR the approval of the Plan.
THE SECURITIES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
("SEC"), NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
ADDITIONAL INFORMATION ABOUT FVD ETF HAS BEEN FILED WITH THE SEC. THIS
INFORMATION, INCLUDING THE REORGANIZATION SAI (AS DEFINED BELOW), DATED
OCTOBER 13, 2006, AND THE FVD ETF SAI (AS DEFINED BELOW), IS AVAILABLE
UPON ORAL OR WRITTEN REQUEST AT NO CHARGE BY CONTACTING 1-800-988-5891
OR FIRST TRUST PORTFOLIOS L.P., 1001 WARRENVILLE ROAD, SUITE 300, LISLE,
ILLINOIS 60532.
FVD'S MOST RECENT ANNUAL AND SEMI-ANNUAL REPORTS ARE AVAILABLE UPON
REQUEST, WITHOUT CHARGE, BY WRITING TO FIRST TRUST ADVISORS L.P. AT 1001
WARRENVILLE ROAD, SUITE 300, LISLE, ILLINOIS 60532 OR BY CALLING (800)
988-5891.
The following documents have been filed with the SEC and are
incorporated into this Prospectus/Proxy Statement by reference:
(i) the prospectus of FVD ETF, dated October 13, 2006, relating
to shares of FVD ETF, a copy of which is attached to this
Prospectus/Proxy Statement;
(ii) the Statement of Additional Information relating to the proposed
Reorganization, dated October 13, 2006 (the "Reorganization
SAI");
(iii) the Statement of Additional Information of FVD ETF, dated
October 13, 2006, a copy of which is included with the Reorganization
SAI (the "FVD ETF SAI"); and
(iv) the financial statements and related independent registered
public accounting firm's report included in FVD's Annual Report to
Shareholders for the year ended May 31, 2006.
Shareholders may receive free copies of FVD's annual reports, semi-annual
reports, or the Reorganization SAI, request other information about FVD
or make shareholder inquiries by calling FVD at 1-800-988-5891.
Both Funds are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith
are required to file reports and other information with the SEC. You
may review and copy information about the Funds, including the
prospectuses and the statements of additional information, at the SEC's
public reference room at 100 F Street, NE, Washington, DC 20549. You
may call the SEC at 1-202-942-8090 for information about the operation
of the public reference room. You may obtain copies of this
information, with payment of a duplication fee, by electronic request at
the following e-mail address: publicinfo@sec.gov, or by writing the
SEC's Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, DC
20549-0102. You may also access reports and other information about the
Funds on the EDGAR database on the SEC's Internet website at
http://www.sec.gov.
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TABLE OF CONTENTS
INTRODUCTION 1
PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION 4
A. Synopsis 4
B. Investment Objectives and Risk Factors 11
C. Other Comparisons Between the Funds 15
D. Information About the Proposed Reorganization 19
ADDITIONAL INFORMATION 29
OTHER MATTERS TO COME BEFORE THE MEETING 32
Exhibit A. FORM OF AGREEMENT AND PLAN OF REORGANIZATION A-1
Exhibit B. FURTHER DISCLOSURE REGARDING FVD B-1
Appendix I. PROSPECTUS FOR FVD ETF
INTRODUCTION
This Prospectus/Proxy Statement, along with the Notice of Special
Meeting of Shareholders and the proxy card, is being mailed to
shareholders of FVD on or about October 16, 2006. Much of the
information is required to be disclosed under rules of the Securities
and Exchange Commission (the "SEC"); some of it is technical. If there
is anything you don't understand, please contact The Altman Group, FVD's
proxy solicitor, at 1-800-761-6707.
The Altman Group ("Altman") has been engaged to assist in the
solicitation of proxies for FVD, at an estimated cost to First Trust Advisors
L.P. (the "Adviser") of approximately $81,000, plus expenses. As the
Meeting date approaches, certain shareholders of FVD may receive a
telephone call from a representative of Altman if their votes have not
yet been received. Authorization to permit Altman to execute proxies may
be obtained by telephonic or electronically transmitted instructions from
shareholders of FVD. Proxies that are obtained telephonically will be
recorded in accordance with the procedures described below. The Trustees
believe that these procedures are reasonably designed to ensure that both
the identity of the shareholder casting the vote and the voting
instructions of the shareholder are accurately determined.
In all cases where a telephonic proxy is solicited, the Altman
representative is required to ask for each shareholder's full name and
address, or zip code, or both, and to confirm that the shareholder has
received the proxy materials in the mail. If the shareholder is a
corporation or other entity, the Altman representative is required to
ask for the person's title and confirmation that the person is
authorized to direct the voting of the shares. If the information
solicited agrees with the information provided to Altman, then the
Altman representative has the responsibility to explain the process,
read the Proposal on the proxy card, and ask for the shareholder's
instructions on the Proposal. Although the Altman representative is
permitted to answer questions about the process, he or she is not
permitted to recommend to the shareholder how to vote, other than to
read any recommendation set forth in this Prospectus/Proxy Statement.
Altman will record the shareholder's instructions on the proxy card.
Within 72 hours, the shareholder will be sent a letter or mailgram to
confirm his or her vote and asking the shareholder to call Altman
immediately if his or her instructions are not correctly reflected in
the confirmation.
Please see the instructions on your proxy card for telephone touch-tone
voting. Shareholders will have an opportunity to review their voting
instructions and make any necessary changes before submitting their
voting instructions and terminating their telephone call.
If the enclosed proxy card is properly executed and returned in time to
be voted at the Meeting, the shares represented thereby will be voted in
accordance with the instructions marked thereon. If no instructions are
marked on the enclosed proxy card, the shares represented thereby will
be voted at the discretion of the persons named on the proxy card.
Accordingly, unless instructions to the contrary are marked thereon, a
proxy will be voted FOR the approval of the Plan and FOR or AGAINST any
other matters as deemed appropriate. Any shareholder who has given a
proxy has the right to revoke it at any time prior to its exercise
either by attending the Meeting and voting his or her shares in person,
or by submitting a letter of revocation or a later-dated proxy to FVD at
the above address. Shareholders who intend to attend the Meeting will
need to show valid identification and proof of share ownership to be
admitted to the Meeting.
Under the By-Laws of FVD, a quorum for the transaction of business is
constituted by the presence in person or by proxy of the holders of
thirty-three and one-third percent (33-1/3%) of the voting power of the
outstanding shares of the Fund entitled to vote at the Meeting. For the
purposes of establishing whether a quorum is present, all shares present
and entitled to vote, including abstentions and broker non-votes (i.e.,
shares held by brokers or nominees as to which (i) instructions have not
been received from the beneficial owners or the persons entitled to vote
and (ii) the broker or nominee does not have discretionary voting power
on a particular matter), are counted.
Whether or not a quorum is present, the chair of the Meeting may adjourn
the Meeting from time to time until a quorum is present, or to allow more
time for the solicitation of proxies. In the event that a quorum is
present but sufficient votes in favor of the Proposal have not been
received, upon motion of the chair of the Meeting, the question of
adjournment may be submitted to a vote of the shareholders of FVD, and in
that case, any adjournment must be approved by the vote of holders of a
majority of the shares of FVD present and entitled to vote with respect
to the matter adjourned. Unless a proxy is otherwise limited in this
regard, any shares of FVD present and entitled to vote at the Meeting
that are represented by broker non-votes, may, at the discretion of the
proxies named therein, be voted in favor of adjournment.
Broker-dealer firms holding shares in "street name" for the benefit of
their customers and clients will request the instructions of such
customers and clients on how to vote their shares on the proposed
Reorganization and the election of Trustees. The New York Stock Exchange
(the "NYSE") has taken the position that broker-dealers that are members
of the NYSE and that have not received instructions from a customer prior
to the date specified in the broker-dealer's request for voting
instructions may not vote such customer's shares on the proposed
Reorganization. A signed proxy card or other authorization by a
beneficial owner of shares that does not specify how the beneficial
owner's shares are to be voted on the proposed Reorganization will be
voted at the discretion of the persons named on the proxy card and may be
voted by such persons FOR approval of the Plan.
The affirmative vote of a majority of the outstanding voting securities
of FVD is required to approve the Plan. The "vote of a majority of the
outstanding voting securities" is defined in the Investment Company Act
of 1940, as amended (the "1940 Act"), as the vote of the lesser of (i)
67% or more of the shares of the Fund present at the Meeting if the
holders of more than 50% of such outstanding shares are present in
person or represented by proxy; or (ii) more than 50% of such
outstanding shares of the Fund.
For purposes of determining the approval of the Plan, abstentions and
broker non-votes will have the effect of a vote against the Proposal.
- 2 -
Proxy solicitations will be made, beginning on or about __________,
2006, primarily by mail, but such solicitations may also be made by
telephone or personal interviews conducted by (i) officers of FVD; (ii)
The Altman Group, FVD's proxy solicitor that will provide proxy
solicitation services in connection with the Plan; (iii) First Trust
Advisors L.P. ("First Trust" or the "Adviser"), the investment adviser
of the Funds; (iv) PFPC Inc. ("PFPC"), the administrator, accounting
agent and transfer agent of FVD and a subsidiary of The PNC Financial
Services Group Inc.; or (v) any affiliates of those entities.
The normal expenses associated with the preparation of the Proposal
and of the proxy solicitation activities with respect thereto, including
the costs incurred in connection with the preparation of this
Prospectus/Proxy Statement and its enclosures, will be paid by First
Trust. First Trust will also reimburse brokerage firms and others for
their expenses in forwarding solicitation material to the beneficial
owners of Fund shares. The amount of these expenses is expected to be
approximately $226,000.
The close of business on October 6, 2006 has been fixed as the record
date (the "Record Date") for the determination of shareholders entitled
to notice of and to vote at the Meeting and any adjournments or
postponements thereof. On the Record Date, 32,088,000 shares of FVD
were outstanding. Shareholders of record on the Record Date are
entitled to one vote for each share of FVD the shareholder owns. On the
Record Date, FVD ETF had no shares outstanding.
- 3 -
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
It is proposed that all of the assets of FVD, a closed-end fund, be
transferred in a tax-free reorganization to FVD ETF, a newly created,
diversified series of First Trust ETF, in exchange for (a) the issuance
and delivery to FVD of shares of FVD ETF in Creation Unit Aggregations
(as defined below), with a value equal to the value of FVD's assets net
of liabilities and (b) the assumption by FVD ETF of all liabilities of
FVD.
As a result of the proposed Reorganization, each shareholder of FVD will
receive a number of shares of FVD ETF equal in net asset value as of the
Valuation Time (as defined below) to the total net asset value of such
shareholder's FVD shares. Following the consummation of the
Reorganization, the legal existence of FVD will be terminated.
LIKE SHARES OF FVD, SHARES OF FVD ETF ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
A. Synopsis
The responses to the questions that follow provide an overview of key
points typically of concern to shareholders considering a proposed
reorganization of investment companies. These responses are qualified
in their entirety by the remainder of this Prospectus/Proxy Statement,
which you should read carefully because it contains additional
information and further details regarding the proposed Reorganization.
1. What is being proposed?
The Trustees of FVD are recommending that shareholders approve the Plan
(as described below in Part D and the form of which is attached hereto as
Exhibit A) and the transactions contemplated by the Plan, which are
referred to as a "Reorganization" of FVD with and into FVD ETF. If
approved by shareholders of FVD, all of the assets of FVD will be
transferred to FVD ETF in exchange for (a) the issuance and delivery to
FVD of shares of FVD ETF ("Reorganization Shares") in "Creation Unit"
aggregations of 106,960 shares of FVD ETF, for purposes of the
Reorganization only, with an aggregate value equal to the value of FVD's
assets net of liabilities and (b) the assumption by FVD ETF of all of the
liabilities of FVD. Following the Reorganization, a Creation Unit of FVD
ETF shall consist of aggregations of 50,000 shares. Immediately following
the transfer, the Reorganization Shares received by FVD will be
distributed by FVD or its agent pro-rata, on a tax-free basis for federal
income tax purposes, to each of FVD's shareholders of record as of the
Valuation Time (as defined below on page ___) in complete dissolution,
liquidation and termination of FVD.
- 4 -
2. What will happen to my shares of FVD as a result of the
Reorganization?
As a result of the Reorganization, your shares of FVD, a closed-end
fund, will be exchanged for shares of FVD ETF, an exchange-traded "index
fund," with an equal aggregate net asset value as of the Valuation Time
(as defined below on page ___). As a shareholder of FVD ETF, it is
anticipated that you will still be able to sell your shares of FVD ETF
on the AMEX, and because ETFs generally trade at or very close to NAV,
you should be able to sell your FVD ETF shares at or close to NAV.
- 5 -
3. What is the difference between a closed-end fund and an ETF?
Closed-end Funds ETFs
- ---------------------------------------------------------------- -----------------------------------------------------------
Closed-end funds, like FVD, generally do not redeem their Open-end funds (known generally as mutual funds), in
outstanding shares or engage in the continuous sale of new general, issue shares that can be redeemed or sold back
shares. Shares of closed-end investment companies typically are to the fund at the fund's net asset value per share (less
traded on a securities exchange. Thus, persons wishing to buy or any applicable redemption fee or contingent deferred
sell closed-end fund shares generally must do so through a broker- sales charge). Unlike conventional mutual funds, ETFs,
dealer and pay or receive the market price per share (plus or like FVD ETF, trade their shares on a securities
minus any applicable commissions). The market price may be more exchange, and persons wishing to buy or sell shares
(a premium) or less (a discount) than the net asset value per generally must do so through a broker-dealer and pay and
share of the closed-end fund. Closed-end funds have greater receive the market price per share (plus or minus any
flexibility than ETFs to make certain types of investments, and applicable commissions). Unlike a closed-end fund, like
to use certain investment strategies, such as financial leverage FVD, ETFs issue and redeem shares on a continuous basis,
and investments in illiquid securities. at net asset value, in large blocks consisting of a
specified number of shares, referred to as a "Creation
Unit." Creation Units of FVD ETF will be issued and
redeemed principally in-kind for securities included in
the Index (as defined on page 8). Except when aggregated
in Creation Units, FVD ETF shares are not readily
redeemable securities of FVD ETF. These ETF features are
designed to protect ongoing shareholders from adverse
effects that could arise from frequent cash creation and
redemption transactions often subject to occurrence in a
conventional mutual fund. In conventional mutual funds,
redemptions can have an adverse tax impact on taxable
shareholders because of a mutual fund's frequent need to
sell portfolio securities to obtain cash to meet fund
redemptions. These sales may generate taxable gains for
the shareholders of the mutual fund, whereas the in-kind
Creation Unit redemption mechanism of FVD ETF generally
will not lead to a tax event for FVD ETF or its
shareholders. Unlike a closed-end fund, if an ETF
experiences material cash inflows, such ETF may be
unable to satisfy the qualified dividend income holding
period requirements for a portion of its dividends. As a
practical matter, only broker-dealers, or
- 6 -
large institutional investors with creation and redemption
agreements, called "Authorized Participants" ("APs"), can
purchase or redeem these Creation Units. As a result,
shares of FVD ETF will be traded on the AMEX to provide
liquidity for purchasers of FVD ETF shares in amounts less
than the size of a Creation Unit. The market price of FVD
ETF shares on the AMEX may be equal to, more or less than
the net asset value, but shares of ETFs typically trade in
a range closer to net asset value per share than do shares
of closed-end funds.
4. Why have the Trustees of FVD recommended that I approve the Plan
and the Reorganization it contemplates?
The Trustees considered the following factors, among others, in
determining to recommend that shareholders of FVD approve the Plan and
the Reorganization it contemplates:
o FVD shares have historically traded at a discount from net asset value
(including a discount of 8.01% at the close of trading on the date
FVD's Board of Trustees approved the Reorganization, a discount of
3.77% at the close of trading on the date the Reorganization was
announced and a discount of 2.64% at the close of trading on the Record
Date). FVD shareholders would receive FVD ETF shares with an aggregate
net asset value equal to the aggregate net asset value of their FVD
shares as of the Valuation Time (as defined below) pursuant to the
Reorganization. Shares of exchange-traded funds, such as FVD ETF,
typically trade at or very close to their net asset value.
o FVD ETF will have a lower management fee than FVD and FVD ETF's
investment adviser has agreed to cap expenses so that FVD ETF will have
a lower total fund operating expense ratio than FVD for at least two
years.
o ETFs have favorable tax attributes and provide the intra-day liquidity
to investors also provided by closed-end funds.
o First Trust would bear all normal expenses associated with the
Reorganization.
The Trustees of FVD recommend approval of the Plan and the Reorganization
it contemplates and have concluded that: (1) the Reorganization is in the
best interests of FVD and (2) the interests of the existing shareholders
of FVD will not be diluted as a result of the Reorganization.
Accordingly, the Trustees of FVD recommend approval of the Plan and the
Reorganization it contemplates.
- 7 -
5. How do the investment goals, policies and restrictions of FVD and
FVD ETF compare?
The investment goals, policies and restrictions of FVD and FVD ETF are similar,
but have some important distinctions. FVD ETF seeks investment results that
correspond generally (before fees and expenses) to an equity index called the
Value Line(R) Dividend Index (the "Index"). FVD primarily utilizes an investment
strategy that is substantially similar to the methodology of the Index to invest
its portfolio but is not required to replicate an index as is the case with FVD
ETF, each as discussed and summarized below. You should also note that the
investment objective of each Fund is fundamental and, as a result, can only be
changed with a vote of the majority of outstanding voting securities of that
Fund. A majority of the outstanding voting securities for each fund is the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
FVD FVD ETF
- -------------------------------------------------------- -------------------------------------------------------------------
FVD's investment objective is to provide total return The investment objective of FVD ETF is to seek investment results
through a combination of current income and capital that correspond generally to the price and yield (before the
appreciation. FVD seeks to accomplish its investment Fund's fees and expenses) of the Index. The Index seeks to
objective by investing in common stocks that pay above- outperform the S&P 500 Index.
average dividends and have the potential for capital
appreciation. Such common stocks are selected through FVD ETF will normally invest at least 90% of its total assets in
the application of a disciplined investment strategy. common stocks that comprise the Index. First Trust, as investment
adviser to the Fund, will seek to match the performance of the
Under normal market conditions, FVD invests substantially Index (before fees and expenses).
all (at least 80%) of its net assets in common stocks
that are selected through the application of a FVD ETF's investment objective is a fundamental policy and may not
disciplined investment strategy applied to the universe be changed without the approval of a "majority of the outstanding
of stocks to which Value Line(R) gives a Safety(TM) voting securities" of FVD ETF. A "majority of the outstanding
Ranking of #1 or #2 in the Value Line(R) Safety(TM) voting securities" means the lesser of (i) 67% of the shares
Ranking System. represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding
FVD's investment objective is a fundamental policy and shares. Please also see Part B - Investment Objectives and Risk
may not be changed without the approval of a "majority of Factors - below for a more detailed comparison of the Funds'
the outstanding voting securities." A "majority of the investment policies and restrictions.
outstanding voting securities" of FVD means the lesser of
(i) 67% of the shares represented at a meeting at which The composition of the investment portfolio of FVD ETF on a pro
more than 50% of the outstanding shares are represented forma combined basis, giving effect to the proposed Reorganization
or (ii) more than 50% of the outstanding shares. Please as of the date thereof, is expected to be substantially similar to
also see Part B - Investment Objectives and Risk Factors the portfolio of FVD immediately prior to giving effect to the
- - below for a more detailed comparison of the Funds' proposed Reorganization.
investment policies and restrictions.
FVD ETF's complete portfolio holdings as of the end of its fiscal
quarters will be sent to you as part of the Semi-Annual Report and
- 8 -
Annual Report of FVD ETF, respectively. FVD ETF's complete
portfolio holdings as of the end of the first and third fiscal
quarters will be filed on Form N-Q with the SEC. The FVD ETF SAI
includes a description of the Fund's policies and procedures with
respect to the disclosure of its portfolio holdings.
6. How do the management fees and expense ratios of FVD and FVD ETF
compare, and what are they estimated to be following the Reorganization?
The following tables summarize the comparative fees and expenses you may
pay when investing in FVD and the pro forma estimated expense ratios of
FVD ETF after consummation of the proposed Reorganization, based upon
First Trust's estimate of expenses that are expected to occur.
SHAREHOLDER FEES
(FEES THAT ARE PAID DIRECTLY FROM YOUR INVESTMENT)
FVD ETF
FVD Common Shares Common Shares
----------------- -------------
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of the offering price)......... None (1) None (2)
(1) As a closed-end fund, FVD trades on the AMEX and does not charge a
sales load or a redemption fee. When buying or selling FVD shares, investors
will incur customary brokerage commissions and charges.
(2) As an ETF, FVD ETF trades on the AMEX and does not charge a sales
load or a redemption fee on individual shares. When buying or selling
ETF shares investors will incur customary brokerage commissions and
charges. Purchasers of Creation Units of FVD ETF and shareholders
redeeming Creation Units of FVD ETF must pay a standard creation or
redemption transaction fee of $500, as applicable. However, if a
Creation Unit is purchased or redeemed outside the usual process through
the National Securities Clearing Corporation or for cash, a variable fee
of up to four times the standard creation or redemption transaction fee
(i.e., up to $2,000) will be charged.
The annual management fee for FVD is 0.65% of average net assets and the annual
management fee for FVD ETF is 0.50% of average net assets. As shown below, the
proposed Reorganization is expected to result in a lower total expense
ratio for shareholders of FVD. First Trust has contractually agreed to
waive fees and/or pay FVD ETF's operating expenses to the extent
necessary to prevent the operating expenses of FVD ETF (excluding
interest expense, brokerage commissions and other trading expenses,
taxes and extraordinary expenses) from exceeding 0.70% of average daily
net assets per year, for at least two years following the
Reorganization. However, there can be no assurance that the
Reorganization will result in expense savings.
- 9 -
ANNUAL FUND OPERATING EXPENSES(1)
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Distribution/ Other Total Annual Fund Less Expense Net Annual
Fee Service (12b-1) Expenses Operating Expenses Waiver/ Fund Operating
Fees Reimbursements Expenses
FVD
Common shares 0.65% 0% 0.28% 0.93% 0.00% 0.93%
FVD ETF
Common shares 0.50% 0%(2) 0.27%(4) 0.77% 0.07%(3) 0.70%(3)
FVD ETF
(Pro forma
combined)
Common shares 0.50% 0%(2) 0.27%(4) 0.77% 0.07%(3) 0.70%(3)
<FN>
(1) Expressed as a percentage of average net assets.
(2) FVD ETF has adopted a distribution and service (12b-1) plan pursuant
to which FVD ETF may bear a 12b-1 fee not to exceed 0.25% per annum of
FVD ETF's average daily net assets. However, no such fee is currently
paid by FVD ETF and FVD ETF does not currently anticipate paying 12b-1
fees.
(3) First Trust has agreed to waive fees and/or pay expenses of FVD ETF
to the extent necessary to prevent the annual operating expenses of FVD ETF
(excluding interest expense, brokerage commissions and other trading
expenses, taxes, and extraordinary expenses) from exceeding 0.70% of
average net assets (the "Expense Cap"), for at least two years
following the Reorganization. Expenses borne by First Trust are subject
to reimbursement by FVD ETF up to three years from the date the fee or
expense was incurred, but no reimbursement payment will be made by FVD
ETF if it would result in FVD ETF exceeding its Expense Cap.
(4) FVD ETF has not fully commenced operations as of the date of this
Prospectus/Proxy Statement. The "Other Expenses" listed in the table
are estimates based on the expenses FVD ETF expects to incur for its
full fiscal year.
</FN>
The tables are provided to help you understand the expenses of investing
in each Fund and your share of the operating expenses that each Fund
incurs and that First Trust expects FVD ETF to incur in the first year
following the Reorganization.
EXAMPLES
The following examples translate the expenses shown in the preceding
table into dollar amounts. By doing this, you can more easily compare
the costs of investing in the Funds. The examples make certain
assumptions. They assume that you invest $10,000 in a Fund for the time
periods shown and reinvest all dividends and distributions. They also
assume a 5% return on your investment each year and that a Fund's
operating expenses remain the same. The examples are hypothetical; your
actual costs may be higher or lower.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
FVD
Common shares $95 $301 $527 $1,199
FVD ETF
Common shares(1) $72 $234 $421 $978
FVD ETF
(Pro forma
combined)
Common shares(1) $72 $234 $421 $978
(1) Includes one year of capped expenses in the "1 Year" period and two
years of capped expenses in the "3 Years," "5 Years" and "10 Years"
periods.
- 10 -
7. What are the federal income tax consequences of the proposed
Reorganization?
For federal income tax purposes, no gain or loss is expected to be
recognized by FVD or its shareholders as a direct result of the
Reorganization. Any capital gains realized prior to the Reorganization
will be distributed to FVD's shareholders as capital gain dividends (to
the extent of net realized long-term capital gains distributed) and/or
ordinary dividends (to the extent of net realized short-term capital
gains distributed) during or with respect to the year of sale, and such
distributions will be taxable to shareholders. For more information,
please see "Information About the Proposed Reorganization - Federal
Income Tax Consequences," below.
8. Will my dividends be affected by the Reorganization?
FVD currently pays dividends from net investment income monthly and distributes
realized capital gains, if any, to shareholders annually. FVD ETF expects to pay
net investment income dividends on a quarterly basis and realized capital gains,
if any, annually. FVD ETF will not establish a dividend reinvestment plan such
as the one that FVD currently has in place, but dividends may be reinvested
automatically in additional FVD ETF shares only if the broker through whom you
hold such shares makes this option available. Such shares will generally be
reinvested by the broker based upon the market-price of those shares and
investors may be subject to brokerage commissions charged by the broker.
9. Do the procedures for purchasing, selling or redeeming shares of
the two Funds differ?
Yes. Shares of FVD are traded and listed on the AMEX and investors may
purchase or sell FVD shares on the AMEX. Former FVD shareholders who become
shareholders of FVD ETF as a result of the Reorganization may also trade their
FVD ETF shares on the AMEX. Unlike conventional mutual funds, ETFs like FVD ETF
issue and redeem shares on a continuous basis, at net asset value, only in
"Creation Units," i.e. large specified blocks of shares (each a "Creation Unit
Aggregation"). Creation Units of FVD ETF will be issued and redeemed principally
in- kind for securities included in the Index. Following the Reorganization, a
Creation Unit Aggregation of FVD ETF shall consist of 50,000 shares. Except in
Creation Unit Aggregations, FVD ETF shares are not individually redeemable
securities of FVD ETF and shareholders of FVD ETF owning fewer shares than a
Creation Unit Aggregation will be unable to redeem their shares. Liquidity for
such individual shareholders of FVD ETF will be realized only through the sale
of FVD ETF shares on the AMEX. First Trust Portfolios L.P. will serve as the
principal underwriter of Creation Unit Aggregations of FVD ETF. The procedures
for purchasing and redeeming Creation Unit Aggregation of FVD ETF may be found
in the FVD ETF Prospectus dated October 13, 2006, incorporated by reference into
this Prospectus/Proxy Statement, and attached hereto as Appendix I.
- 11 -
10. How will I be notified of the outcome of the Reorganization?
If the Reorganization is approved by shareholders of FVD, you will
receive confirmation after the Reorganization is completed, indicating
the number of shares of FVD ETF you are receiving. Otherwise, you will
be notified in the next shareholder report of FVD.
11. Will the number of shares I own change?
While you will not own shares in the same entity, the number of shares
you own will most likely not change. In addition, the total value of
the shares of FVD ETF you receive as a result of the Reorganization will
equal the total value of the shares of FVD that you hold at the
Valuation Time (as defined below).
12. What percentage vote is required to approve the proposed
Reorganization?
Approval of the Reorganization will require the affirmative vote of the
holders of a majority of the outstanding voting securities of FVD, i.e.,
the lesser of (i) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are represented or (ii) more
than 50% of the outstanding shares.
13. If I hold FVD shares directly and not in "street name" through a
broker-dealer, how will I receive Reorganization Shares?
Because shares of FVD ETF will not be certificated, you will need to
designate a brokerage account that will hold your Reorganization Shares. You
will receive a letter of transmittal that proves additional instructions
regarding the receipt of your Reorganization Shares. If you do not designate a
brokerage account, you may be limited in your ability to sell your
Reorganization Shares in the secondary market until such account is designated.
The Trustees of FVD believe that the proposed Reorganization is in the
best interests of FVD. Accordingly, the Trustees recommend that
shareholders vote FOR approval of the Plan and the Reorganization it
contemplates.
B. Investment Objectives and Risk Factors
What are the main investment strategies and related risks of FVD ETF and
how do they compare with those of FVD?
Investment Objectives and Policies. As noted above, the investment goals
of FVD ETF are substantially similar to those of FVD, but have some
important distinctions. Please note that despite the differences in
investment objectives of FVD ETF and FVD, the Funds' investment approaches
are substantially similar. The investment objectives of FVD ETF and FVD
are set forth below.
- 12 -
INVESTMENT OBJECTIVES AND POLICIES
FVD FVD ETF
- -------------------------------------------------------- ------------------------------------------------------------------
FVD's investment objective is to provide total return The investment objective of FVD ETF is to seek investment results
through a combination of current income and capital that correspond generally to the price and yield (before the
appreciation. FVD seeks to accomplish its objective by Fund's fees and expenses) of an equity index called the Value
investing in common stocks that pay above-average Line(R) Dividend Index. The Index seeks to outperform the S&P 500
dividends and have the potential for capital Index. The Index is sponsored and maintained by Value Line(R)
appreciation. Such common stocks will be selected Publishing, Inc. ("Value Line(R)"), which is not affiliated with
through the application of a disciplined investment First Trust, FVD ETF or FVD. Value Line(R) has licensed to First
strategy. Trust the right to use the Index and certain Value Line(R)
trademarks, trade names and Value Line(R) systems. First Trust in
FVD's investment strategy is applied to the universe of turn, has sublicensed these rights to FVD ETF. There can be no
stocks to which Value Line(R) gives a Safety(TM) Ranking assurance that FVD ETF's investment objective will be achieved.
of #1 and #2 in the Value Line(R) Safety(TM) Ranking
System. FVD's investment strategy is comprised of the FVD ETF, using an "indexing" investment approach, attempts to
following three steps: replicate, before expenses, the performance of the Index. The
Index is designed to objectively identify and select those stocks
Step 1. Determine the universe of all stocks ranked #1 from the universe of stocks of which Value Line(R) gives a
and #2 for Safety(TM) by Value Line(R) (from which FVD Safety(TM) Ranking of #1 in the Value Line(R) Safety(TM) Ranking
excludes the stocks of master limited partnerships and Systems and have the potential to pay above average dividends and
registered investment companies). capital appreciation. First Trust seeks a correlation of 0.95 or
better (before expenses) between FVD ETF's performance and the
Step 2. From the universe of stocks determined in Step performance of the Index; a figure of 1.00 would represent perfect
1, select those companies with a higher than average correlation. First Trust will regularly monitor its tracking
dividend yield, as compared to the dividend yield of the accuracy and will use the investment techniques described below in
Standard & Poor's 500 Composite Stock Price Index ("S&P seeking to maintain an appropriate correlation. Because FVD is
500 Index") as of the close of regular session trading on not required to replicate the Index as closely as FVD ETF, First
the New York Stock Exchange ("NYSE") on the business day Trust, as FVD's investment adviser, has more discretion when
preceding the date the Fund's investment strategy is building FVD's portfolio than when acting as investment adviser to
applied. FVD ETF. There can be no assurance that FVD ETF's investment
strategy will be successful.
Step 3. From the stocks determined in Step 2, eliminate
those companies with an equity market capitalization (as FVD ETF will normally invest at least 90% of its total assets in
- 13 -
of the close of regular session trading on the NYSE on common stocks that comprise the Index. First Trust, as investment
the business day preceding the date FVD's investment adviser of the Fund, will seek to match the performance of the
strategy is applied) of less than $1 billion. Index.
Upon commencement of FVD's investment operations, FVD In seeking to achieve FVD ETF's objective, FVD ETF generally will
invested equal amounts in each of the stocks selected invest in all of the stocks comprising the Index in proportion to
through application of FVD's investment strategy as of their weightings in the Index. However, under various
the last Friday of the month coinciding with the circumstances, it may not be possible or practicable to purchase
commencement of FVD's investment operations. Thereafter, all of those stocks in those weightings. In those circumstances,
on the last Friday of each month the Adviser reapplies FVD ETF may purchase a sample of stocks in the Index. First Trust
FVD's investment strategy and, on or about such date, may choose to overweight certain stocks in the Index, purchase
makes portfolio adjustments to match any changes made to securities not in the Index which First Trust believes are
the common stocks selected through this application of appropriate to substitute for certain securities in the Index or
the investment strategy, regardless of any income tax utilize various combinations of the above techniques or futures or
consequences to shareholders. At such time, FVD's other derivative instruments in seeking to track the Index. FVD ETF
portfolio is rebalanced so that each stock is equally may sell stocks that are represented in the Index in anticipation of
weighted at such time. their removal from the Index or purchase stocks not represented in
the Index in anticipation of their addition to the Index.
FVD ETF's Index Construction. First Trust is responsible for
implementing FVD ETF's overall investment strategy, including the
allocation and periodic reallocation of FVD ETF's net assets among the
common stocks in which FVD ETF invests in order to replicate and
correlate to the Index as discussed above. In this capacity, First
Trust will generally seek to invest FVD ETF's net assets in the common
stocks of companies included in the Index.
The Index is a modified equal-dollar weighted index comprised of U.S.
exchange-listed securities of companies that pay above-average dividends and
have the potential for capital appreciation. The inception date of the Index
was June 1, 2006. On July 26, 2006, there were 180 stocks that
comprised the Index.
The Index is designed to objectively identify and select those stocks
from the universe of stocks of which Value Line(R), Inc. ("Value
Line(R)") gives a Safety(TM) Ranking of #1 or #2 in the Value Line(R)
Safety(TM) Ranking System and have the potential to pay above average
dividends and capital appreciation. This Index seeks to provide market out-
performance and to reduce risk by incorporating Value Line(R)'s Safety(TM)
Ranking into the investment process. The stock selection methodology for
the Index is substantially similar to that utilized by FVD. Similar to
FVD, the Index begins with the universe of stocks that Value Line(R)
gives a Safety(TM) Ranking of #1 or #2 using the Value Line(R)
Safety(TM) Ranking System. All registered investment companies and
limited partnerships are removed from this universe. From those stocks,
Value Line(R) selects those companies with a higher than average
dividend yield, as compared to the dividend yield of the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500 Index"). Value Line(R)
then eliminates those companies with an equity market capitalization of
less than $1 billion. All the components of the Index are equally weighted.
- 14 -
After the initial selection of securities, the Index is rebalanced on
the application of the above model on a monthly basis. The Index divisor was
initially determined to yield a benchmark value of 1000.00 at the close of
trading on July 3, 2006. FVD ETF expects to make changes to its portfolio
shortly after changes to the Index are released to the public. The holdings of
FVD ETF and the composition and compilation methodology of the Index will be
available on FVD ETF's website at www.ftportfolios.com. Value Line(R)'s updated
rankings are released weekly on its website at www.valueline.com.
Value Line(R) is not affiliated with FVD, FVD ETF or with First Trust. FVD ETF
is entitled to use the Index pursuant to a sublicensing arrangement with First
Trust, which in turn has a licensing agreement with Value Line(R).
VALUE LINE PUBLISHING, INC.'S ("VLPI") ONLY RELATIONSHIP TO FIRST TRUST
ADVISORS L.P. ("FTA") IS VLPI'S LICENSING TO FTA OF CERTAIN VLPI TRADEMARKS AND
TRADE NAMES AND THE VALUE LINE DIVIDEND INDEX (THE "INDEX"), WHICH ARE COMPOSED
BY VLPI WITHOUT REGARD TO FTA, THE FIRST TRUST VALUE LINE DIVIDEND INDEX FUND
PRODUCT OR ANY INVESTOR. VLPI HAS NO OBLIGATION TO TAKE THE NEEDS OF FTA OR ANY
INVESTOR IN THE PRODUCT INTO CONSIDERATION IN COMPOSING THE INDEX. THE PRODUCT
RESULTS MAY DIFFER FROM THE HYPOTHETICAL OR PUBLISHED RESULTS OF THE INDEX. VLPI
IS NOT RESPONSIBLE FOR HOW FTA MAKES USE OF INFORMATION SUPPLIED BY VLPI. VLPI
IS NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE DETERMINATION OF THE
PRICES AND COMPOSITION OF THE PRODUCT OR THE TIMING OF THE ISSUANCE FOR SALE OF
THE PRODUCT OR IN THE CALCULATION OF THE EQUATIONS BY WHICH THE PRODUCT IS TO BE
CONVERTED INTO CASH. VLPI MAKES NO WARRANTY CONCERNING THE INDEX, EXPRESS OR
IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY PERSON'S INVESTMENT
PORTFOLIO, OR ANY IMPLIED WARRANTIES ARISING FROM USAGE OF TRADE, COURSE OF
DEALING OR COURSE OF PERFORMANCE, AND VLPI MAKES NO WARRANTY AS TO THE POTENTIAL
PROFITS OR ANY OTHER BENEFITS THAT MAY BE ACHIEVED BY USING THE INDEX OR ANY
INFORMATION OR MATERIALS GENERATED THEREFROM. VLPI DOES NOT WARRANT THAT THE
INDEX WILL MEET ANY REQUIREMENTS OR BE ACCURATE OR ERROR-FREE. VLPI ALSO DOES
NOT GUARANTEE ANY USES, INFORMATION, DATA OR OTHER RESULTS GENERATED FROM THE
INDEX OR PRODUCT. VLPI HAS NO OBLIGATION OR LIABILITY (I) IN CONNECTION WITH THE
ADMINISTRATION, MARKETING OR TRADING OF THE PRODUCT; OR (II) FOR ANY LOSS,
DAMAGE, COST OR EXPENSE SUFFERED OR INCURRED BY ANY INVESTOR OR OTHER PERSON OR
ENTITY IN CONNECTION WITH THIS PRODUCT, AND IN NO EVENT SHALL VLPI BE LIABLE FOR
ANY LOST PROFITS OR OTHER CONSEQUENTIAL, SPECIAL, PUNITIVE, INCIDENTAL, INDIRECT
OR EXEMPLARY DAMAGES IN CONNECTION WITH THE INDEX OR THE PRODUCT.
VALUE LINE IS A REGISTERED TRADEMARK OF VALUE LINE, INC. OR VALUE LINE
PUBLISHING, INC. THAT ARE LICENSED TO FIRST TRUST ADVISORS L.P. THE FIRST TRUST
VALUE LINE(R) DIVIDEND INDEX FUND PRODUCT IS NOT SPONSORED, RECOMMENDED, SOLD OR
PROMOTED BY VALUE LINE PUBLISHING, INC., VALUE LINE, INC., VALUE LINE
SECURITIES, INC. OR ANY OF THEIR AFFILIATES. FIRST TRUST ADVISORS L.P. IS NOT
AFFILIATED WITH ANY VALUE LINE COMPANY.
Diversification Status. FVD and FVD ETF have both elected to be classified
as diversified funds. With certain exceptions, a diversified fund may not,
with respect to 75% of total assets, invest more than 5% of total assets in
the securities of a single issuer or invest in more than 10% of the
outstanding voting securities of such issuer.
Tax Efficient Product Structure. Unlike many conventional mutual funds,
shares of FVD ETF are traded throughout the day on the AMEX whereas
mutual funds are typically only bought and sold at closing NAVs. The
shares of FVD ETF have been designed to be tradable in the secondary
market on the AMEX on an intra-day basis, and to be created and redeemed
principally in-kind in Creation Units at each day's next calculated NAV.
These arrangements are designed to protect ongoing shareholders from
adverse effects on FVD ETF that could arise from frequent cash creation
and redemption transactions. In a conventional mutual fund, redemptions
can have an adverse tax impact on taxable shareholders because of the
mutual fund's need to sell portfolio securities to obtain cash to meet
fund redemptions. These sales may generate taxable gains for the
shareholders of the mutual fund, whereas the FVD ETF shares' in-kind
redemption mechanism generally will not lead to a tax event for FVD ETF
or its ongoing shareholders.
Please see the FVD ETF Prospectus incorporated by reference and included
herein as Appendix I for additional information regarding FVD ETF's
investment policies and strategies, and for further information
regarding the Index.
Risk Factors
Risk is inherent in all investing. As investment companies following
similar trading strategies, many of the risks applicable to an
investment in FVD are also applicable to an investment in FVD ETF.
Shares of each Fund will change in value, and you could lose money by
investing in a Fund. The Funds may not achieve their investment
objectives. An investment in a Fund is not a deposit with a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation
or any other government agency. An investment in a Fund involves risks
similar to those of investing in any fund of equity securities traded on
an exchange. The following specific factors have been identified as the
principal risks of investing in FVD ETF.
Market Risk
One of the principal risks of investing in a Fund is market risk.
Market risk is the risk that a particular stock owned by FVD ETF or
stocks in general may fall in value. Shares of FVD ETF are subject to
market fluctuations caused by such factors as economic, political,
- 15 -
regulatory or market developments, changes in interest rates and
perceived trends in stock prices. Overall, stock values could decline
or could underperform other investments.
Index Tracking Risk
You should anticipate that the value of the shares of FVD ETF will
decline, more or less, in correlation with any decline in the value of
the Index.
Non-Correlation Risk
FVD ETF's return may not match the return of the Index for a number of
reasons. For example, FVD ETF incurs operating expenses not applicable
to the Index, and may incur costs in buying and selling securities,
especially when rebalancing FVD ETF's securities holdings to reflect
changes in the composition of the Index. In addition, FVD ETF's
portfolio holdings may not exactly replicate the securities included in
the Index or the ratios between the securities included in the Index.
FVD ETF may not be fully invested at times, either as a result of cash
flows into FVD ETF or reserves of cash held by FVD ETF to meet
redemptions and expenses. If FVD ETF utilizes a sampling approach or
invests in futures or other derivative positions, its return may not
correlate as well with the return of the Index, as would be the case if
it purchased all of the stocks in the Index with the same weightings as
the Index. While First Trust seeks to have a correlation of 0.95 or
better, before expenses, between FVD ETF's performance and the
performance of the Index, there can be no assurance that First Trust
will be able to achieve such a correlation. Accordingly, FVD ETF's
performance may correlate to a lesser extent and may possibly vary
substantially from the performance of the Index.
Replication Management Risk
FVD ETF is also exposed to additional market risk due to its policy of
investing principally in the securities included in the Index. As a
result of this policy, securities held by FVD ETF will generally not be
bought or sold in response to market fluctuations and the securities may
be issued by companies concentrated in a particular industry. As a
result of this policy, FVD ETF would generally not sell a stock because
the stock's issuer is in financial trouble, unless that stock is removed
or is anticipated to be removed from the Index.
Small Cap and Mid-Cap Company Risk
FVD ETF may invest in small capitalization and mid-capitalization
companies. Such companies may be more vulnerable to adverse general
market or economic developments, and their securities may be less liquid
and may experience greater price volatility than larger, more
established companies as a result of several factors, including limited
trading volumes, products or financial resources, management
inexperience and less publicly available information. Accordingly, such
companies are generally subject to greater market risk than larger, more
established companies.
- 16 -
Concentration
FVD ETF will be concentrated in the securities of a given industry if
the Index is concentrated in such industry. A concentration makes FVD
ETF more susceptible to any single occurrence affecting the industry or
sector and may subject FVD ETF to greater market risk than more
diversified funds.
Tax Risk
FVD's counsel is giving an opinion that the Reorganization will be a tax-
free reorganization for federal income tax purposes. See "Information
About the Proposed Reorganization - Federal Income Tax Consequences" on
page __. However, no ruling is being sought from the Internal Revenue
Service (the "IRS") to determine whether the IRS in fact agrees with the
opinion of FVD's counsel. The opinion of FVD's counsel is not binding
upon the IRS, and the IRS could take a position different from that
reflected in the opinion. The opinion does not address state or foreign
tax consequences of the Reorganization, which could vary from state to
state and country to country. The opinion relies upon the current
statute and regulations, portions of which have been changed recently
and have not yet been subject to full and complete interpretation by the
courts. In addition, tax laws and rules may change in the future, and
some changes may apply retroactively. The opinion only addresses
current law.
The opinion also relies on certain representations by the parties to the
Reorganization as to current facts and future behavior. If such
representations are not in fact correct, the Reorganization could be
viewed as a taxable sale of the assets of FVD to FVD ETF resulting in
gain recognition to FVD. No reserves are being created to fund any such
tax liability, and it is not anticipated that any portion of the
distribution of shares will be designated as a capital gain
distribution. Under such circumstances, the shareholders of FVD would
individually owe taxes on the gain recognized in the Reorganization, and
potentially for their proportionate portion of the taxes of FVD.
See the FVD ETF Prospectus (incorporated herein by reference and attached
hereto as Appendix I) for additional information regarding risks.
C. Other Comparisons Between the Funds
The following information provides shareholders of FVD with more
information about FVD ETF and how FVD ETF compares with FVD.
Adviser and Portfolio Managers. First Trust is the investment adviser
for each Fund. Under the supervision of the Board of Trustees of each
Fund, First Trust, with headquarters at 1001 Warrenville Road, Suite
300, Lisle, Illinois 60532, makes each Fund's investment decisions. First Trust
also is responsible for selecting brokers and dealers and for negotiating
brokerage commissions and dealer charges.
First Trust is a limited partnership with one limited partner, Grace
Partners of DuPage L.P., and one general partner, The Charger
Corporation. Grace Partners of DuPage L.P. is a limited partnership
- 17 -
with one general partner, The Charger Corporation, and a number of
limited partners. The Charger Corporation is an Illinois corporation
controlled by the Robert Donald Van Kampen family.
First Trust serves as adviser or sub-adviser for 24 mutual fund
portfolios, ten exchange-traded fund portfolios and 14 closed-end fund
portfolios and is also the portfolio supervisor of certain unit
investment trusts sponsored by First Trust Portfolios L.P. ("FTP"), 1001
Warrenville Road, Lisle, Illinois 60532. FTP specializes in the
underwriting, trading and distribution of unit investment trusts and
other securities. FTP is the principal underwriter of FVD ETF.
The same advisory team at First Trust will be responsible for the
portfolio management of FVD ETF as is responsible for the portfolio
management of FVD. There is no one individual primarily responsible for
portfolio management decisions for FVD ETF. Investments are made under
the direction of a committee (the "Investment Committee"). The Investment
Committee consists of Daniel J. Lindquist, Robert F. Carey, Jon C.
Erickson, David G. McGarel, Roger F. Testin and Stan Ueland. Mr.
Lindquist re-joined First Trust over two years ago after serving as Chief
Operating Officer of Mina Capital Management LLC and Samaritan Asset
Management LLC from 2000 to 2003 and is a Senior Vice President of First
Trust and FTP. Mr. Lindquist is Chairman of the Investment Committee and
presides over Investment Committee meetings and began working at First
Trust on April 26, 2004. Mr. Carey is the Chief Investment Officer and
Senior Vice President of First Trust and Senior Vice President of FTP and
began working at First Trust on September 27, 1991. As First Trust's
Chief Investment Officer, Mr. Carey consults with the Investment
Committee on market conditions and First Trust's general investment
philosophy. Mr. Erickson is a Senior Vice President of First Trust and
FTP and began working at First Trust on March 21, 1994. As the head of
First Trust's Equity Research Group, Mr. Erickson is responsible for
determining the securities to be purchased and sold by funds that do not
utilize quantitative investment strategies. Mr. McGarel is a Senior Vice
President of First Trust and FTP and began working at First Trust on
August 15, 1997. As the head of First Trust's Strategy Research Group,
Mr. McGarel is responsible for developing and implementing quantitative
investment strategies for those funds that have investment policies that
require them to follow such strategies. Since August 2001, Mr. Testin has
been a Senior Vice President of First Trust and began working at First
Trust on August 27, 2001. Prior to joining First Trust, Mr. Testin was an
analyst for Dolan Capital Management. As the head of First Trust's
Portfolio Management Group, Mr. Testin is responsible for executing the
instructions of the Strategy Research Group and Equity Research Group in
each Fund's portfolio. Mr. Ueland has been a Vice President of First
Trust and FTP since August 2005. At First Trust, he plays an integral
role in executing the investment strategies of each portfolio of
exchange-traded funds advised by First Trust. Before joining First Trust,
Mr. Ueland was vice president of sales at BondWave LLC from May 2004
through August 2005, an account executive for Mina Capital Management LLC
and Samaritan Asset Management LLC from January 2003 through May 2004,
and a sales consultant at Oracle Corporation from January 1997 through
January 2003. For additional information concerning First Trust,
including a description of the services provided to FVD ETF, see the FVD
ETF SAI. In addition, the FVD ETF SAI provides additional information
about the compensation of members of the Investment Committee, other
- 18 -
accounts managed by members of the Investment Committee and the ownership
of securities of members of the Investment Committee in FVD ETF.
First Trust will receive annual investment advisory fees from FVD ETF
equal to 0.50% of FVD ETF's average daily net assets, and currently
receives annual investment advisory fees from FVD equal to 0.65% of
FVD's average daily net assets.
FVD ETF is responsible for all of its expenses, including the investment
advisory fees, costs of transfer agency, custody, fund administration,
legal, audit and other services, interest, taxes, brokerage commissions
and other expenses connected with the execution of portfolio
transactions, paying for its sublicensing fees related to the Index, any
distribution fees or expenses, and extraordinary expenses. First Trust
has agreed to waive fees and/or pay FVD ETF's expenses to the extent
necessary to prevent the operating expenses of FVD ETF (excluding
interest expense, brokerage commissions and other trading expenses,
taxes and extraordinary expenses) from exceeding 0.70% of average daily
net assets per year (the "Expense Cap"), for at least two years
following the Reorganization. Expenses borne by First Trust are subject
to reimbursement by FVD ETF up to three years from the date the fee or
expense was incurred, but no reimbursement payment will be made by FVD
ETF if it would result in FVD ETF exceeding its Expense Cap.
Distribution and Service Fees. FVD shares are not subject to any 12b-1
distribution and service fees, nor are any 12b-1 fees currently being
paid by FVD ETF.
The Board of Trustees of First Trust ETF, of which FVD ETF is a series,
has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under
the 1940 Act. In accordance with its Rule 12b-1 plan, FVD ETF is
authorized to pay an amount up to 0.25% of its average daily net assets
each year to reimburse FTP for amounts expended to finance activities
primarily intended to result in the sale of Creation Units or the
provision of investor services. FTP may also use this amount to
compensate securities dealers or other persons that are APs for
providing distribution assistance, including broker-dealer and
shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by FVD ETF, and there are no plans to impose
these fees. However, in the event 12b-1 fees are charged in the future, because
these fees are paid out of FVD ETF's assets, over time these fees would increase
the cost of your investment and may cost you more than certain other types of
sales charges.
Trustees and Officers. The Trustees of First Trust ETF (of which FVD
ETF is a series) are the same as those of FVD. The following
individuals comprise the Board of Trustees of both First Trust ETF and
FVD: James A. Bowen, Richard E. Erickson, Thomas R. Kadlec, Robert F.
Keith and Niel B. Nielson. In addition, the officers of First Trust ETF
are the same as those of FVD.
Independent Registered Public Accounting Firm ("Auditor"). Deloitte &
Touche LLP serves as Auditor for both FVD ETF and FVD.
- 19 -
Charter Documents. FVD is organized as a Massachusetts business trust
governed by Massachusetts law. FVD ETF is a diversified series of First
Trust ETF, a Massachusetts business trust governed by Massachusetts law.
FVD is governed by a Declaration of Trust, dated as of June 11, 2003.
First Trust ETF is governed by a Declaration of Trust, dated as of
August 8, 2003. Each charter document is sometimes referred to herein
as the Declaration. Additional information about each of the
Declarations is provided below.
Shareholders of FVD and FVD ETF have a number of rights in common.
Except with respect to the differences described below, the Declarations
are substantially identical. Shares of beneficial interest of each Fund
entitle their holders to one vote per share and fractional shares
entitle their holders to a proportional fractional vote. Unlike FVD,
First Trust ETF is permitted to have more than one series, and currently
there are eight series existing in addition to FVD ETF. In some
circumstances all of the series vote together, but a separate vote will
be taken by the shareholders of FVD ETF on matters affecting FVD ETF as
a series when so required under the 1940 Act. If a matter affects only
a particular series of First Trust ETF and does not affect FVD ETF, only
the required vote by that applicable series shall be required. For
example, a change in a fundamental investment policy for FVD ETF would
be voted upon only by shareholders of FVD ETF.
Shareholder meetings of First Trust ETF and FVD must be called when
required by the 1940 Act to elect Trustees. Shareholder meetings of FVD
also may be called by the Chairman of the Board of Trustees or the
President and may be called upon written request of at least 66-2/3% of
the Trustees. Shareholder meetings of FVD ETF also may be called by a
majority of the Trustees. Shareholder meetings of both FVD and FVD ETF
also shall be called by any Trustee upon written request, which shall
specify the purpose or purposes for which such meeting is to be called,
of shareholders holding shares representing in the aggregate not less
than (i) 50%, in the case of FVD, and (ii) one-third, in the case of FVD
ETF, of the voting power of the outstanding shares entitled to vote on
the matters specified in such written request. Because of AMEX rules,
FVD is required to hold annual shareholder meetings at which Trustees of
FVD are elected. FVD ETF is not subject to the same annual meeting
requirement.
Neither Fund's common shares have preemptive rights. Mutual funds, in general,
issue shares that can be redeemed or sold back to the fund at the fund's
net asset value per share (less any applicable redemption fee). Unlike
conventional mutual funds, ETFs like FVD ETF issue and redeem shares on
a continuous basis, at net asset value, only in large specified blocks
of shares (each a "Creation Unit Aggregation.") Creation Units of FVD
ETF will be issued and redeemed principally in-kind for securities
included in the Index. Following the Reorganization, a Creation Unit
Aggregation of FVD ETF shall consist of 50,000 shares. Except in
Creation Unit Aggregations, FVD ETF shares are not individually
redeemable securities of FVD ETF. Shares of FVD ETF will be listed and
traded on the AMEX under the ticker symbol "FVD" to provide liquidity
for individual shareholders of FVD ETF shares in amounts less than the
size of a Creation Unit Aggregation. As closed-end fund shareholders,
FVD shareholders have no similar right to redeem shares of FVD, but
shares of FVD also are listed on the AMEX and may be purchased or sold
on that exchange.
- 20 -
Shareholders of FVD ETF are entitled to dividends as declared by its
Trustees, and if First Trust ETF were liquidated, each shareholder of
FVD ETF would be entitled to receive pro rata the distributable assets
of First Trust ETF attributable to shares of FVD ETF. FVD's present
policy is to, distribute its net investment income monthly and its net
realized capital gains annually, if any. FVD ETF intends to distribute
its net investment income quarterly and its realized capital gains,
annually, if any.
Under Massachusetts law, shareholders could, in certain circumstances,
be held personally liable for the obligations of a Fund. However, each
of the Declarations contains an express disclaimer of shareholder
liability for debts or obligations of the Funds and requires that notice
of such limited liability be given in each agreement, obligation or
instrument entered into or executed by the Funds or the Trustees. Each
of the Declarations further provides for indemnification for all claims
and liabilities of any shareholder held personally liable for the
obligations of a Fund solely by reason of being or having been a
shareholder of a Fund.
As noted above, unlike FVD, First Trust ETF issues its shares in more than one
series. All consideration received by FVD ETF for the issue or sale of shares of
FVD ETF, together with all assets in which such consideration is invested or
reinvested, and all income, earnings, profits and proceeds, including proceeds
from the sale, exchange or liquidation of assets, are held and accounted for
separately from the other assets of First Trust ETF, subject only to the rights
of creditors of FVD ETF, and belong irrevocably to FVD ETF for all purposes.
Additional series of First Trust ETF may be established by the Trustees from
time to time. Shares of FVD ETF may be issued in classes, with such relative
rights and preferences as may be determined by the Trustees from time to time.
In general, each Declaration provides that reorganizations,
consolidations, or sales, leases or exchanges of all or substantially
all of the assets of a Fund requires the affirmative vote of the holders
of two-thirds of all the votes entitled to be cast on the matter;
provided, however, that if such transaction has already been authorized
by the affirmative vote of two-thirds of the Trustees, then the
affirmative vote of the "majority of the outstanding voting securities"
in accordance with the 1940 Act, as described above, is required. Each
Declaration also permits such action without the vote of shareholders,
if prior to such reorganization, consolidation or sale, the acquiring
fund is not an operating entity.
The Declaration of FVD specifically authorizes the issuance of preferred
shares, and if such shares are issued, they may be senior to the common
shares as to rights to dividends and distributions and upon termination,
and have separate voting rights on certain matters as required by the
1940 Act. The Declaration of First Trust ETF (of which FVD ETF is a
series) permits the issuance of shares in classes, but such classes are
not entitled to the preferences granted to preferred shares in the
Declaration of FVD. However, the Declaration of First Trust ETF
authorizes the issuance of series of shares, of which FVD ETF is one,
while the Declaration of FVD only authorizes the issuance of classes of
shares.
The amendment procedures contained in both Declarations are
substantially similar, except that amendments to First Trust ETF's
Declaration require the approval of the requisite percentage vote of all
- 21 -
series or classes of First Trust ETF, rather than the requisite
percentage vote of shares of FVD ETF only.
Certain provisions of FVD's Declaration could have the effect of
limiting the ability of other entities or persons to acquire control of
FVD. The affirmative vote or consent of the holders of 66-2/3% of the
shares of FVD is required to authorize certain transactions, including
under certain circumstances a conversion into an open-end company or a
merger or consolidation of FVD with or into another entity unless the
transaction is approved by two-thirds of the Trustees. These provisions
would make it more difficult to change the management of FVD and could
have the effect of depriving shareholders of an opportunity to sell
their shares at a premium over prevailing market prices by discouraging
a third party from seeking to obtain control of FVD in a tender offer or
similar transaction.
Except as required by the 1940 Act, AMEX rules or as described above,
the Trustees of FVD and of First Trust ETF (of which FVD ETF is a
series) need not call meetings of the shareholders for the election or
re-election of Trustees. Subject to the limits of the 1940 Act,
vacancies may be filled by a majority of the standing Trustees. The
Declarations provide that, subject to the limits of the 1940 Act, any
Trustee of First Trust ETF or FVD may be removed with or without cause
by (a) three-quarters of the Trustees or (b) a vote of two-thirds of the
outstanding shares of FVD or First Trust ETF, as applicable.
Quorum for a shareholder meeting of First Trust ETF (of which FVD ETF is
a series) and FVD is the presence in person or by proxy of 33-1/3% of
the voting power of the outstanding shares entitled to vote or, when a
matter requires a separate vote by series or class, then 33-1/3% of the
voting power of the outstanding shares entitled to vote of that series
or class shall constitute a quorum as to the matter being voted upon by
that series or class.
The foregoing is a very general summary of certain provisions of the
Declarations governing FVD and FVD ETF. It is qualified in its entirety
by reference to the charter documents themselves.
D. Information About the Proposed Reorganization
General. The shareholders of FVD are being asked to approve a
Reorganization of FVD with and into FVD ETF pursuant to the proposed
Agreement and Plan of Reorganization between FVD and First Trust ETF on
behalf of its series, FVD ETF (the "Plan"), the form of which is
attached to this Prospectus/Proxy Statement as Exhibit A.
The Reorganization is structured as a transfer of all of the assets of
FVD to FVD ETF in exchange for the assumption by FVD ETF of all of the
liabilities of FVD and for the issuance and delivery to FVD of
Reorganization Shares equal in aggregate value to the net value of the
assets transferred to FVD ETF.
After the receipt of the Reorganization Shares in Creation Unit
Aggregations of 106,960 shares (for purposes of the Reorganization
only), FVD or its agent will distribute the Reorganization Shares to its
shareholders of record, on a pro rata basis, in proportion to their
existing shareholdings as of the Valuation Time (as defined on page __),
- 22 -
in complete liquidation of FVD, and the legal existence of FVD will be
terminated. Each shareholder of FVD will receive a number of full or fractional
Reorganization Shares equal in value at the Valuation Time (as defined on page
___) to the aggregate value of the shareholder's FVD shares. Please note that
shareholders who hold FVD shares directly and not in "street name" through a
broker-dealer will receive a letter of transmittal that provides additional
instructions regarding the receipt of their Reorganization Shares. Because
shares of FVD ETF will not be certificated, these shareholders will need to
designate a brokerage account that will hold their Reorganization Shares. If a
shareholder does not designate a brokerage account, such shareholder may be
limited in the ability to sell the Reorganization Shares in the secondary market
until such account is designated. Following the Reorganization, a Creation Unit
Aggregation shall consist of 50,000 shares of FVD ETF.
Prior to the date of the Reorganization, FVD may have to sell certain of
its investments that are not consistent with the current constituents of the
Index and declare a taxable distribution that, together with all previous
distributions, will have the effect of distributing to shareholders all of its
net investment income and net realized capital gains, if any, through the date
of the Reorganization. The sale of such investments may increase the taxable
distribution to shareholders of FVD occurring prior to the Reorganization above
that which they would have received absent the Reorganization. As of October 6,
2006, First Trust did not believe that any securities held by FVD were
inconsistent with the Index.
The Trustees of FVD have voted to approve the Plan and the proposed
Reorganization contemplated thereby and to recommend that shareholders
of FVD also approve the Plan. The transactions contemplated by the Plan
and the related matters described therein will be consummated only if
approved by the holders of the lesser of (i) 67% of FVD's shares
represented at the Meeting, if more than 50% of the outstanding shares
of FVD are represented at the Meeting or (ii) more than 50% of FVD's
outstanding shares.
In the event that the Reorganization does not receive the required
shareholder approval to approve the Plan, FVD will continue to be
managed as a separate fund in accordance with its current investment
objective and policies, and the Trustees of FVD may consider such
alternatives as may be in the best interests of FVD, including the
possible liquidation of FVD.
Background and Trustees' Considerations Relating to the Proposed
Reorganization.
The Trustees of FVD had, at each regularly scheduled Board meeting
beginning in December 2003, discussed the discount to net asset value at
which FVD shares, and shares of closed-end funds in general, have
traded. They reviewed the investment performance of FVD, shareholder
activity in FVD shares and possible methods to reduce or eliminate the
discount at which FVD shares have traded. Following the regularly
scheduled quarterly meeting on June 12, 2006, FVD was contacted by a
significant investor in FVD (the "Major Shareholder") and informed that,
due to concerns about FVD's discount, he and a group of other
shareholders intended to submit a competing slate of nominees to serve
as trustees at the Fund's annual meeting. Thereafter, the Board
convened a special meeting at which the Board approved an open-market
repurchase program and a level monthly dividend distribution policy as
measures to address the discount, and FVD issued a press release on June
26, 2006 describing these actions. The First Trust representatives
reported on the market reaction to the announcement of the open-market
repurchase program and the level monthly dividend distribution policy at
another special Board meeting held on June 30, 2006. At this meeting,
- 23 -
representatives of First Trust also informed the Trustees that they were
considering the feasibility of a transaction like the Reorganization,
since the Board was familiar with this possible response to the discount
due to extensive discussions that had been held on such a proposal for
another closed-end fund managed by First Trust that also was trading at
a discount. In the meantime, the Fund received notice on June 28, 2006
from the Major Shareholder of his group's intention to nominate a
different slate of nominees to serve as trustees at the 2006 annual
shareholder meeting.
First Trust first discussed the actual terms and conditions of the
proposed Reorganization with the Trustees of FVD at a special meeting
held on July 26, 2006. Although the repurchase program and revised
dividend policy was effective in reducing the discount of FVD, a
substantial discount remained in the trading price of FVD shares. In
light of the persistent discount, the ongoing discussions between Fund
counsel and the staff of the SEC (the "Staff") concerning another First
Trust closed-end fund that also was trading at a discount engaging in a
proposed reorganization, the substantial similarity between the proposed
reorganizations and the recent developments with the Major Shareholder,
First Trust had determined to submit the proposed Reorganization to the
Trustees for approval at this meeting. As they had at previous Board
meetings, at the July 26, 2006 meeting, the Trustees discussed the
discount to net asset value at which FVD shares have traded. They also
reviewed the market response to the open-market share repurchase
program. In addition, the Trustees considered discussions between
representatives of First Trust and the Major Shareholder.
Based upon foregoing and the considerations discussed below, on July 26,
2006, the Trustees of FVD, including all of the Trustees who are not
"interested persons" of FVD (as defined in the 1940 Act) (the
"Independent Trustees"), approved the proposed Reorganization and
recommended its approval to shareholders.
In determining to recommend that the shareholders of FVD vote to approve
the Reorganization, the Trustees considered, among others, the factors
described below:
o Reduction of Discount. The proposed Reorganization may have the effect
of producing a reduction of FVD's discount (for shareholders of record
who become shareholders of FVD ETF as a result of the Reorganization).
The Trustees noted that FVD's shares have historically traded at a
discount from their net asset value. The Trustees considered that if the
Reorganization is approved, FVD shareholders would receive FVD ETF
shares with an aggregate net asset value equal to the net asset value of
their FVD shares held as of the Valuation Time (as defined below). The
Trustees considered that ETFs historically trade at or very close to
their net asset value, and noted that after the Reorganization, current
shareholders of FVD who become shareholders of FVD ETF as part of the
Reorganization should be able to sell their Reorganization Shares at or
close to the NAV of their previously held FVD shares, thus effectively
reducing or eliminating FVD's discount.
o Comparison of Fees and Expense Ratios. The Trustees considered
comparative expense information of FVD and FVD ETF, including
- 24 -
comparisons between the current expense ratio for FVD and the estimated
pro forma operating expense ratio of FVD ETF, and between the estimated
operating expense ratio of FVD ETF and the current expense ratios of two
other ETFs comparable to the proposed FVD ETF. The Trustees in
particular noted that the management fee of FVD ETF would be lower than
FVD's management fee and that the estimated operating expense ratio of
FVD ETF is expected to be lower than the current expense ratio of FVD.
o Fee Waiver/Expense Cap. The Trustees noted that First Trust has agreed
to waive all or a portion of its management fees and/or reimburse or pay
operating expenses of FVD ETF to the extent necessary to maintain FVD
ETF's total operating expenses at 0.70% of average daily net assets per
year, for at least two years following the Reorganization, excluding
interest expense, brokerage commissions and other trading expenses,
taxes and extraordinary expenses for at least two years following the
Reorganization.
o Benefits of the ETF Structure. The Trustees considered the favorable tax
attributes of ETFs, that shareholders of FVD who become shareholders of
FVD ETF as a result of the Reorganization will continue to receive the
benefit of intra-day liquidity and that ETFs can generally remain fully
invested because they do not redeem individual shares and typically
redeem Creation Unit Aggregations on an in-kind basis.
o Expenses of the Reorganization. The Trustees noted that First Trust
would bear all normal costs of the Reorganization, and that FVD would
bear any extraordinary costs of the Reorganization.
o Elimination of Proxy Contest and Related Expenses. The Trustees
considered the costs and expenses of a proxy contest to FVD and also
considered the proposed Reorganization as a possible alternative method
to reducing or eliminating the discount at which shares of FVD trade as
a method that would likely be favored by the Major Shareholder and his
group.
In addition to the foregoing, the Trustees of FVD also considered the
following:
o The terms and conditions of the Reorganization and whether the
Reorganization would result in the dilution of the interests of FVD's
existing shareholders in light of the basis on which shares of FVD ETF
will be issued to FVD in Creation Unit Aggregations as contemplated in
the Reorganization;
o The compatibility of FVD's and FVD ETF's investment objectives, policies
and restrictions and the composition of the current FVD portfolio and
the expected FVD ETF portfolio; and
o The tax consequences of the Reorganization on FVD and its shareholders;
the Reorganization is expected to be a tax-free reorganization for
federal income tax purposes and the receipt by FVD shareholders of
shares of FVD ETF as a result of the Reorganization is expected to be
a tax-free transaction.
- 25 -
Based upon all of the foregoing considerations, the Trustees approved
the proposed Plan and the Reorganization contemplated thereby and
determined that the proposed Reorganization would be in the best
interests of FVD. The Trustees also determined that the interests of
FVD's existing shareholders would not be diluted as a result of the
transactions contemplated by the Reorganization. The Trustees of FVD,
including the Independent Trustees, unanimously recommend that
shareholders of FVD approve the Reorganization.
Agreement and Plan of Reorganization. The proposed Reorganization will
be governed by the Plan, the form of which is attached as Exhibit A.
The Plan provides that FVD ETF will acquire all of the assets of FVD in
exchange for the assumption by FVD ETF of all liabilities of FVD and for
the issuance of Creation Units representing the Reorganization Shares
equal in value to the value of the transferred assets net of assumed
liabilities. The Creation Units representing the Reorganization Shares
will be issued on the next full business day (the "Closing Date")
following the time as of which FVD's shares are valued for determining
net asset value for the Reorganization (which is expected to be 4:00 p.m.
Eastern time on December 15, 2006, or such other date and time as may be
agreed upon by the parties (the "Valuation Time")). The following
discussion of the Plan is qualified in its entirety by the full text of
the Plan.
FVD will transfer all of its assets to FVD ETF, and in exchange, FVD ETF
will assume all liabilities of FVD, including without limitation FVD's
indemnification obligations to its trustees and officers, and deliver to FVD a
number of Creation Units representing the Reorganization Shares having an
aggregate net asset value equal to the value of the assets of FVD attributable
to common shares of FVD, less the value of the liabilities of FVD assumed by FVD
ETF attributable to common shares of FVD. Immediately following the transfer of
assets on the Exchange Date, FVD or its agent will distribute pro rata to its
shareholders of record as of the Valuation Time the Reorganization Shares
received by FVD. As a result of the Reorganization, each shareholder of FVD will
receive a number of Reorganization Shares equal in aggregate value as of the
Valuation Time to the value of the FVD common shares surrendered by the
shareholder. This distribution will be accomplished by the establishment of
accounts on the share records of FVD ETF in the name of such FVD shareholders of
record, each account representing the respective number of Reorganization Shares
due to the respective shareholder. No certificates for Reorganization Shares
will be issued.
The Trustees of FVD and the Trustees of First Trust ETF, of which FVD
ETF and a series, (who are the same individuals) have determined that
the proposed Reorganization is in the best interests of their respective
Fund and that the interests of their respective Fund's existing
shareholders will not be diluted as a result of the transactions
contemplated by the Reorganization.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan. The Plan may be terminated and the Reorganization
abandoned (i) by mutual agreement of FVD ETF and FVD, (ii) by either
party if the Reorganization shall not be have occurred on or before
January 31, 2007 unless such date has been extended by mutual agreement
of the parties or (iii) by either party if the other party shall have
materially breached its obligations under the Plan or made a material
and intentional misrepresentation therein or in connection therewith. If
shareholders of FVD approve the Reorganization, both Funds agree to
- 26 -
coordinate their respective portfolios from the date of the Plan up to
and including the Closing Date in order that the investments of FVD as
of the time of the Reorganization will meet as closely as practicable
the investment objective, policies and restrictions of FVD ETF.
The normal costs of the Reorganization including legal expenses, proxy
printing and proxy solicitation expenses will be borne by First Trust.
Any extraordinary costs of the Reorganization will be borne by FVD.
Extraordinary costs are those costs that are neither foreseen nor normally
associated with a reorganization.
First Trust (but not FVD) has entered into a Corporate Finance Services
and Consulting Agreement with A.G. Edwards & Sons, Inc. ("A.G. Edwards")
and has agreed to pay from its own assets a fee to A.G. Edwards relating
to FVD. This fee is payable quarterly at the annual rate of 0.15% of
FVD's average daily net assets. A.G. Edwards provides information and
research under this agreement. First Trust does not intend to pay such
a fee to A.G. Edwards in connection with FVD ETF and, therefore, the
Reorganization may represent a cost savings to First Trust if approved.
Description of the Reorganization Shares. The Reorganization Shares
will be issued to FVD in Creation Unit Aggregations in accordance with
the Plan described above. Reorganization Shares will thereafter be
distributed to FVD's shareholders by FVD or its agent in accordance with
the Plan as described above. The Reorganization Shares will be shares
of beneficial interest, $0.01 par value per share, of FVD ETF.
The common shares of FVD are currently listed and traded on the AMEX
under the symbol FVD. If the Reorganization is approved, FVD shares
will no longer be listed on the AMEX and FVD will be dissolved,
liquidated and terminated as provided in the Plan. FVD ETF has applied
to list and trade its shares on the AMEX and FVD will be terminated.
Reports, proxy materials and other information concerning FVD ETF and
FVD may be inspected at the offices of the AMEX, 86 Trinity Place, New
York, New York 10006.
For more information on the characteristics of the Reorganization
Shares, please see the FVD ETF prospectus, a copy of which is included
with this Prospectus/Proxy Statement as Appendix I.
Federal Income Tax Consequences. As a condition to each Fund's obligation to
consummate the Reorganization, each Fund will receive a tax opinion from Chapman
and Cutler LLP (which opinion would be based on certain factual representations
and certain customary assumptions), to the effect that, on the basis of the
existing provisions of the Code, current administrative rules and court
decisions, for federal income tax purposes:
(i) the acquisition by FVD ETF of all of the assets of FVD solely in
exchange for Creation Units representing Reorganization Shares and the
assumption by FVD ETF of all of the liabilities of FVD, followed by the
distribution by FVD to its shareholders of Reorganization Shares in
complete liquidation of FVD, all pursuant to the Plan, constitutes a
reorganization within the meaning of Section 368(a) of the Code, and FVD
and FVD ETF will each be a "party to a reorganization" within the meaning
of Section 368(b) of the Code;
- 27 -
(ii) under Section 361 of the Code, FVD will not recognize gain or
loss upon the transfer of FVD's assets to FVD ETF in exchange for
Reorganization Shares and the assumption of FVD's liabilities by FVD ETF,
and FVD will not recognize gain or loss upon the distribution to FVD's
shareholders of the Reorganization Shares in liquidation of FVD;
(iii) under Section 354 of the Code, shareholders of FVD will not
recognize gain or loss on the receipt of Reorganization Shares solely in
exchange for FVD shares;
(iv) under Section 358 of the Code, the aggregate basis of the
Reorganization Shares received by each shareholder of FVD will be the same
as the aggregate basis of FVD shares exchanged therefor;
(v) under Section 1223(1) of the Code, the holding period of the
Reorganization Shares received by each FVD shareholder will include the
holding periods of FVD shares exchanged therefor, provided that the FVD
shareholder held the FVD shares at the time of the Reorganization as a
capital asset;
(vi) under Section 1032 of the Code, FVD ETF will not recognize gain
or loss upon the receipt of assets of FVD in exchange for Reorganization
Shares and the assumption by FVD ETF of all of the liabilities of FVD;
(vii) under Section 362(b) of the Code, the basis of the assets of FVD
transferred to FVD ETF in the Reorganization will be the same in the hands
of FVD ETF as the basis of such assets in the hands of FVD immediately
prior to the transfer;
(viii) under Section 1223(2) of the Code, the holding periods of the
assets of FVD transferred to FVD ETF in the Reorganization in the hands of
FVD ETF will include the periods during which such assets were held by FVD;
and
(ix) FVD ETF will succeed to and take into account the items of FVD
described in Section 381(c) of the Code, subject to the conditions and
limitations specified in Sections 381, 382, 383 and 384 of the Code and the
regulations thereunder.
While shareholders are not expected to recognize any gain or loss upon
the exchange of their shares in the Reorganization, differences in the
Funds' portfolio turnover rates, net investment income and net realized
capital gains may result in future taxable distributions to shareholders
arising indirectly from the Reorganization.
If the Plan is approved by shareholders of FVD, FVD will declare a
distribution to its shareholders of all undistributed realized net
investment income (computed without regard to the deduction for
dividends paid) and undistributed realized net capital gains (after
reduction by any capital loss carryforwards) prior to the Closing (as
defined in the Plan), and such distributions will be taxable to
shareholders.
- 28 -
This description of the federal income tax consequences of the
Reorganization is made without regard to the particular facts and
circumstances of any shareholder. Shareholders are urged to consult
their own tax advisors as to the specific consequences to them of the
Reorganization, including the applicability and effect of state, local,
non-U.S. and other tax laws.
Capitalization. The following table sets forth the unaudited
capitalization of each Fund as of October 6, 2006 and of FVD ETF on a pro
forma basis, giving effect to the proposed acquisition of assets at net
asset value as of that date:(1)
FVD FVD ETF Pro Forma FVD ETF Pro
Adjustments Forma Combined
Net Assets:
Common Shares $559,143,695 $0 $0 $559,143,695
Total Net assets $559,143,695 $0 $0 $559,143,695
Shares outstanding:
Common Shares 32,088,000 0 0 32,088,000
Net Asset Value per share:
Common Shares $17.43 $0 $0 $17.43
<FN>
(1) Assumes the Reorganization had been consummated on October 6, 2006, and
is for information purposes only. No assurance can be given as to how
many shares of FVD ETF will be received by the shareholders of FVD on
the date the Reorganization takes place, and the foregoing should not be
relied upon to reflect the number of shares of FVD ETF that actually
will be received on or after such date.
</FN>
The Board of Trustees of FVD, including the Independent Trustees,
unanimously recommends that shareholders of FVD vote to approve the
Reorganization by voting FOR approval of the Plan.
ADDITIONAL INFORMATION
Investment Adviser and Administrator. First Trust Advisors L.P., 1001
Warrenville Road, Suite 300, Lisle, Illinois 60532, serves as FVD's
investment adviser.
PFPC acts as FVD's administrator and accounting agent and is located at
4400 Computer Drive, Westborough, Massachusetts 01581. PFPC is a
leading provider of full service mutual fund shareholder and record
keeping services. In addition to its mutual fund transfer agent and
record keeping services, PFPC provides other services through its own
subsidiary business units.
Calculation Agent. First Trust has entered into an agreement with
AMEX pursuant to which AMEX will serve as the calculation agent for the
Index. As the calculation agent, AMEX will be responsible for the
management of the day-to-day operations of the Index on behalf of Value
Line(R) including calculating the value of the Index every 15 seconds,
widely disseminating the Index value every 15 seconds and tracking
corporate actions resulting in Index adjustments.
Share Ownership of FVD and FVD ETF. Based solely on information First Trust
obtained from filings available on the SEC's EDGAR website, the following
persons owned beneficially or of record 5% or more of FVD's shares.
[ADD ADDRESSES]
-29-
Common Shares
Name Owned
- ---- -------------
Western Group (as defined below) 3,207,875(1)
QVT Financial LP 3,253,400(2)
1 Pursuant to an amended Schedule 13D dated August 31, 2006 filed with the SEC
by Arthur D. Lipson, Western Investment LLC ("WILLC"), Western Investment
Hedged Partners LP ("WIHP"), Western Investment Total Return Master Fund
Ltd. ("WITR"), Western Investment Activism Partners LLC ("WIAP"), Benchmark
Plus Institutional Partners, L.L.C. ("BPIP"), Benchmark Plus Management,
L.L.C. ("BPM"), Benchmark Plus Partners L.L.C. ("BPP"), Paradigm Partners,
N.W., Inc. ("PPNW"), Matthew S. Crouse, Robert Ferguson, Scott Franzblau,
Michael Dunmire, James R. Merchant and Philip Cooper (collectively, the
"Western Group"), the Western Group beneficially owns shares of FVD as
follows:
As of the close of business on August 31, 2006 WIHP, WITR, WIAP, BPIP and
BPP beneficially owned 951,010, 143,000, 947,565, 722,100 and 443,200 common
shares, respectively. WILLC beneficially owned 2,041,575 common shares. Mr.
Lipson beneficially owned 2,042,575 common shares. Mr. Franzblau
beneficially owned 722,100 common shares. Messrs. Ferguson and Dunmire
beneficially owned 1,165,300 common shares.
As the general partner, managing member or investment manager, as the case
may be, of WIHP, WITR and WIAP, WILLC may be deemed to beneficially own the
2,041,575 common shares beneficially owned in the aggregate by WIHP, WITR
and WIAP. As the managing member of WILLC, Mr. Lipson may be deemed to
beneficially own the 2,041,575 common shares beneficially owned by WILLC. As
the managing member of BPIP, BPM may be deemed to beneficially own the
722,100 common shares beneficially owned by BPIP. As the managing members of
BPM, Messrs. Franzblau, Ferguson and Dunmire may be deemed to beneficially
own the 722,100 common shares beneficially owned by BPM. As the managing
member of BPP, PPNW may be deemed to beneficially own the 443,200 common
shares beneficially owned by BPP. As the sole officers and directors of
PPNW, Messrs. Ferguson and Dunmire may be deemed to beneficially own the
443,200 common shares beneficially owned by PPNW.
Based on the amended Schedule 13D dated August 31, 2006, none of Messrs.
Crouse, Merchant or Cooper beneficially owns any common shares.
2 Pursuant to an amended Schedule 13G dated September 11, 2006 filed by QVT
Financial LP ("QVT Financial") with the SEC: QVT Financial is the investment
manager for QVT Fund LP (the "Fund"), which beneficially owns 836,600 common
shares, QVT Overseas Ltd., which beneficially owns 959,379 common shares and
for QVT Associates LP, which beneficially owns 859,797 common shares. QVT
Financial is also the investment manager for a separate discretionary
account managed for Deutsche Bank AG (the "Separate Account"), which holds
597,624 common shares. QVT Financial has the power to direct the vote and
disposition of the common shares held by the Fund, QVT Overseas Ltd., QVT
Associates LP and the Separate Account. Accordingly, QVT Financial may be
deemed to be the beneficial owner of an aggregate amount of 3,253,400 common
shares, consisting of the shares owned by the Fund, QVT Overseas Ltd. and
QVT Associates LP and the shares held in the Separate Account. QVT Financial
GP LLC, as General Partner of QVT Financial, may be deemed to beneficially
own the same number of common shares reported by QVT Financial.
As of May 31, 2006, the Trustees and executive officers as a group beneficially
owned 6,477.288 shares of FVD, which is less than 1% of FVD's outstanding
shares. No shares of FVD ETF are outstanding.
Western Letter Agreement. In June 2006, FVD received notice from Arthur
D. Lipson, referred to as the "Major Shareholder" previously, of his intent to
nominate five nominees to serve as Trustees of FVD at its 2006 annual
meeting of shareholders. On August 31, 2006, Arthur D. Lipson and the
Western Group entered into a Letter Agreement with FVD (the "Letter Agreement")
in which the FVD and Mr. Lipson and the Western Group agreed to take or refrain
from taking certain actions including the following:
- 30 -
o Mr. Lipson and the Western Group withdrew their notice (the "Nomination
Letter") nominating five nominees for election as Trustees of FVD at the
2006 annual meeting of shareholders and an associated request to inspect
the shareholders list and other corporate records of FVD.
o FVD agreed that the next meeting of shareholders of FVD will be a
special meeting of shareholders (the "Special Meeting") to be held on or
prior to February 15, 2007 for the purpose of approving the
Reorganization, subject to compliance with applicable laws, rules and
regulations.
o FVD agreed that the only business to be conducted at the Special Meeting
will be the approval of the Reorganization and any matters related
thereto, subject to compliance with applicable laws, rules and
regulations. Without limiting the generality of the foregoing, FVD
agreed that it will not present to the shareholders a proposal to elect
Trustees of FVD at the Special Meeting.
o The parties agreed that if either (a) the Reorganization is not approved
by the shareholders at the Special Meeting, (b) the Reorganization does
not take place substantially in accordance with the terms described in
the press release regarding the Reorganization of FVD issued on July 28,
2006 (the "Press Release") by March 31, 2007, (c) FVD files preliminary
proxy materials with respect to, or announces that it will hold, a
meeting of shareholders for the purpose of electing Trustees, or (d) FVD
breaches any material provision of the Letter Agreement, the Nomination
Letter shall be deemed to have been resubmitted to the Secretary of FVD
and the nomination of candidates set forth in such Nomination Letter
shall be accepted by FVD as being sufficient under the By-Laws of FVD,
and such candidates shall be eligible to be considered for election at
the next meeting of shareholders held for the purpose of electing
Trustees.
o FVD agreed that, to the extent the Reorganization is not approved by the
shareholders by February 15, 2007 or the Reorganization does not take
place by March 31, 2007 substantially in accordance with the terms
described in the Press Release, FVD shall promptly call an annual
meeting of shareholders to be held within 90 days thereafter for the
purpose of electing Trustees.
o FVD agreed that from the date of the Letter Agreement through the date
of the next meeting of shareholders called for the purpose of electing
Trustees, if any, it will not (i) amend its Declaration of Trust or By-
Laws of FVD so as to limit the Western Group's ability to nominate or
elect a slate of Trustees at such a meeting, including amending the
quorum requirements set forth in Article III, Section 2 of the By-Laws
of FVD and the number of shares required to vote to elect a Trustee set
forth in Section 6.6 of FVD's Declaration of Trust; (ii) increase the
number of Trustees serving in office above five (5) persons; or (iii)
adopt a shareholders rights plan whereby any member of the Western Group
would be deemed an "Acquiring Person" so long as the aggregate number of
shares of voting securities of the Fund beneficially owned by the
Western Group does not exceed the greater of (a) the aggregate number of
shares of FVD beneficially owned by members of the Western Group as of
the date of the Letter Agreement or (b) if the aggregate amount of
- 31 -
voting securities of the Fund increases from the amount outstanding on
the date of the Letter Agreement, the percentage of outstanding voting
securities of the Fund deemed beneficially owned in the aggregate by the
Western Group on the date of the Letter Agreement.
o Except as expressly set forth in the Letter Agreement, each member of
the Western Group agreed, until the earliest of the occurrence of any
event enumerated in subparagraphs (a) through (d) of the fourth bullet
point above (the "Effective Period"), or upon the consummation of the
Reorganization, that it will not, and will cause its affiliates and
associates not to, directly or indirectly, alone or in concert with
others, unless specifically requested in writing by the Chairman and
President of FVD or by a resolution of a majority of the Trustees of FVD
currently in office, take any of the actions set forth below (or take
any action that would require FVD to make an announcement regarding any
of the following):
o effect, seek, offer, engage in, propose (whether publicly or
otherwise) or cause or participate in, or assist any other person to
effect, seek, engage in, offer or propose (whether publicly or
otherwise) or participate in (other than as specifically contemplated by
the Letter Agreement) any "solicitation" of "proxies" (as such terms are
defined in the rules and regulations promulgated under the Exchange Act
but without regard to the exclusion set forth in Rule 14a-1(1)(2)(iv)
from the definition of "solicitation"), whether or not relating to the
election or removal of Trustees, with respect to FVD or any transaction
relating to FVD, or any action resulting in the Western Group or any
member of the Western Group or any of their respective affiliates or
associates becoming a "participant" in any "election contest" (as such
terms are defined in the rules and regulations promulgated under the
Exchange Act) with respect to FVD;
o propose any matter for submission to a vote of shareholders of
FVD;
o grant any proxy with respect to any shares of FVD (other than to
proxies designated by the Board of Trustees of FVD);
o execute any written consent with respect to any shares of FVD;
o form, join or participate in a "group" (within the meaning of
Section 13(d)(3) of the Exchange Act) with respect to any shares of FVD
or deposit any shares of FVD in a voting trust or subject any shares of
FVD to any arrangement or agreement with respect to the voting of
such shares of FVD or other agreement having similar effect (in
each case except between a member of the Western Group and its
affiliates);
o seek, alone or in concert with others, (i) to call a meeting of
shareholders of FVD; (ii) representation on the Board of Trustees of
FVD; (iii) the removal of any member of the Board of Trustees of FVD; or
(iv) to control or influence the management or policies of FVD; or
- 32 -
o except as specifically contemplated by the Letter Agreement, enter
into any discussions, negotiations, arrangements or understandings with
any person with respect to any of the foregoing, or advise, assist,
encourage or seek to persuade others to take any action with respect to
any of the foregoing.
o None of the foregoing covenants in the prior bullet point shall be
construed to prevent the Western Group from soliciting FVD's
shareholders in favor of FVD's proposal to engage in the Reorganization.
o Each member of the Western Group covenants and agrees that during the
Effective Period it will not, and will cause its affiliates and
associates not to (and will not advise, assist or encourage others to),
vote against any proposal proposed by management to the shareholders of
FVD. Each member of the Western Group covenants and agrees that during
the Effective Period it will, and will cause its affiliates and
associates to, vote each of the shares of FVD held by such persons on
the record date of the related meeting in favor of the Reorganization.
o Except for pledges in existence as of the date of the Letter Agreement,
each member of the Western Group agreed that during the Effective
Period, it shall not (i) sell, transfer, tender, pledge, encumber,
assign or otherwise dispose of (collectively, a "Transfer"), or enter
into any contract, option or other agreement with respect to, or consent
to, a Transfer of, any or all of the Western Group's shares of FVD;
provided, however that any member of the Western Group may Transfer any
or all of its shares of FVD to one of its affiliates that agrees in
writing to be bound by the terms of the Letter Agreement and, with the
consent of FVD (which consent shall not be unreasonably withheld), may
pledge or encumber any shares of FVD so long as such pledge or
encumbrance would not impair its obligations under the Letter Agreement;
or (ii) take any action that would have the effect of preventing,
impeding, interfering with or adversely affecting its ability to perform
its obligations under the Letter Agreement; provided, however, that no
member of the Western Group shall be bound by the restrictions contained
in (i) above subsequent to the consummation of the Reorganization.
Shareholder Proposals. FVD's By-Laws require that in order to nominate
persons to FVD's Board or to present any other permitted proposal for
action by shareholders at an annual meeting of shareholders, a
shareholder must provide advance written notice to the Secretary of FVD,
which notice must be delivered to or mailed and received at FVD's
principal executive offices not later than the close of business on the
45th day nor earlier than the close of business on the 60th day prior to
the first anniversary date of the date of the release of the proxy
statement for the preceding year's annual meeting of shareholders;
provided that in the event that the date of the annual meeting to which
such shareholder's notice relates is more than 30 days before or more
than 30 days after such anniversary date, for notice by the shareholder
to be timely it must be so delivered not later than the close of
business on the later of the 45th day prior to such annual meeting or
the 10th day following the day on which public announcement of the date
of such annual meeting is first made by FVD. The shareholder's notice
must contain detailed information specified in FVD's By-Laws. The date
of the release of this combined Prospectus/Proxy Statement is expected
to be October 16, 2006.
- 33 -
As a general matter, FVD ETF does not intend to hold regular annual or special
meetings of its shareholders. To be considered for presentation at FVD's 2007
annual meeting, a shareholder proposal submitted pursuant to Rule 14a-8 of the
1934 Act must be received at the offices of the Fund at 1001 Warrenville Road,
Suite 300, Lisle, Illinois 60532, not later than June 15, 2007. If the
Reorganization is approved, the matter shall be moot because it is not likely
that FVD will hold further shareholder meetings.
Timely submission of a proposal does not mean that such proposal will be
included in FVD's proxy statement.
Shareholder Communications. Shareholders of FVD who want to communicate
with the Board of Trustees or any individual Trustee should write FVD to
the attention of FVD Secretary, W. Scott Jardine, First Trust Portfolios
L.P., 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532. The
letter should indicate that you are an FVD shareholder. If the
communication is intended for a specific Trustee and so indicates, it
will be sent only to that Trustee. If a communication does not indicate
a specific Trustee it will be sent to the chair of the Nominating and
Governance Committee and the outside counsel to the Independent Trustees
for further distribution as deemed appropriate by such persons.
Fiscal Year. The fiscal year end for FVD is May 31. The fiscal year
end for FVD ETF is December 31.
Annual Report Delivery. Annual reports will be sent to shareholders of
record of FVD ETF or, if the Reorganization is not approved, FVD
following the applicable Fund's next fiscal year end. The applicable
Fund will furnish, without charge, a copy of its annual report and/or
semi-annual report as available upon request. Such written or oral
requests should be directed to the applicable Fund at 1001 Warrenville
Road, Suite 300, Lisle, Illinois 60532 or by calling (800) 988-5891.
Please note that only one annual report or proxy statement may be
delivered to two or more shareholders of a fund who share an address,
unless such fund has received instructions to the contrary. To request
a separate copy of an annual report or proxy statement, or for
instructions as to how to request a separate copy of such documents or
as to how to request a single copy if multiple copies of such documents
are received, shareholders should contact FVD at the address and phone
number set forth above. Pursuant to a request, a separate copy will be
delivered promptly.
General. A list of shareholders entitled to be present and to vote at
the Meeting will be available at the offices of FVD, 1001 Warrenville
Road, Suite 300, Lisle, Illinois 60532, for inspection by any
shareholder during regular business hours beginning two days after the
date of the Notice of Special Meeting of Shareholders included with this
Prospectus/Proxy Statement.
Failure of a quorum to be present at the Meeting will necessitate
adjournment and will subject FVD to additional expense. The chair of
the meeting may call for an adjournment of the Meeting to permit further
- 34 -
solicitation of proxies with respect to the proposal if he or she
determines that adjournment and further solicitation is reasonable and
in the best interests of the shareholders.
OTHER MATTERS TO COME BEFORE THE MEETING
No business other than the matters described above is expected to come
before the Meeting, but should any other matter requiring a vote of
shareholders arise, including any question as to an adjournment or
postponement of the Meeting, the persons named on the enclosed proxy
card will vote thereon according to their best judgment in the interests
of FVD.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO
NOT EXPECT TO ATTEND THE MEETING ARE THEREFORE URGED TO COMPLETE, SIGN,
DATE AND RETURN THE PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
- -------------------------------------------------------------------------------
IF YOU NEED ANY ASSISTANCE, OR HAVE ANY QUESTIONS REGARDING THE PROPOSAL
OR HOW TO VOTE YOUR SHARES, CALL (800) 761-6707 WEEKDAYS FROM 9:00 A.M.
TO 10:00 P.M. EASTERN TIME.
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE NOTE THAT SHAREHOLDERS WHO HOLD FVD SHARES DIRECTLY AND NOT IN
"STREET NAME" THROUGH A BROKER-DEALER WILL RECEIVE A LETTER OF
TRANSMITTAL THAT PROVIDES ADDITIONAL INSTRUCTIONS REGARDING THE RECEIPT
OF REORGANIZATION SHARES. BECAUSE SHARES OF FVD ETF WILL NOT BE CERTIFICATED,
THESE SHAREHOLDERS WILL NEED TO DESIGNATE A BROKERAGE ACCOUNT THAT WILL HOLD
THE REORGANIZATION SHARES. IF A SHAREHOLDER DOES NOT DESIGNATE A BROKERAGE
ACCOUNT, SUCH SHAREHOLDER MAY BE LIMITED IN THE ABILITY TO SELL THE
REORGANIZATION SHARES IN THE SECONDARY MARKET UNTIL SUCH ACCOUNT IS DESIGNATED.
- --------------------------------------------------------------------------------
- 35 -
EXHIBIT A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this ___ day of __________, 2006, by and among First Trust Exchange-
Traded Fund, a Massachusetts business trust (the "Acquiring Trust"), on
behalf of its series, First Trust Value Line(R) Dividend Index Fund (the
"Acquiring Fund"), First Trust Value Line(R) Dividend Fund, a
Massachusetts business trust (the "Acquired Fund" and, together with the
Acquiring Fund, each a "Fund" and collectively the "Funds"), and, for
purposes of Section 10.2 of the Agreement only, First Trust Advisors
L.P. ("First Trust"), an Illinois limited partnership. The principal
place of business of the Acquiring Trust, the Acquired Fund and First
Trust is 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532.
This Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of the transfer of
all of the assets of the Acquired Fund to the Acquiring Fund in exchange
for shares of beneficial interest (par value $0.01 per share) of the
Acquiring Fund (the "Acquiring Fund Shares"), the assumption by the
Acquiring Fund of all of the liabilities of the Acquired Fund and the
distribution of the Acquiring Fund Shares received by the Acquired Fund
pro rata to the shareholders of record of the Acquired Fund in complete
liquidation, dissolution and termination of the Acquired Fund as
provided herein, all upon the terms and conditions hereinafter set forth
in this Agreement.
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and
agree as follows:
ARTICLE 1. ACQUIRING FUND SHARES, THE TRANSFER OF ALL ACQUIRED FUND ASSETS,
THE ASSUMPTION OF ALL ACQUIRED FUND LIABILITIES AND THE LIQUIDATION,
DISSOLUTION AND TERMINATION OF THE ACQUIRED FUND
Section 1.1 Subject to the terms and conditions herein set forth and
on the basis of the representations and warranties contained herein, the
Acquired Fund agrees to transfer to the Acquiring Fund all of the
Acquired Fund's assets as set forth in Section 1.2, and the Acquiring
Fund agrees in consideration therefor (i) to deliver to the Acquired
Fund, either directly or through its agent, that number of Acquiring
Fund Shares determined by dividing the value of the Acquired Fund's
assets net of any liabilities of the Acquired Fund with respect to the
common shares of the Acquired Fund, computed in the manner and as of the
time and date set forth in Section 2.1, by the net asset value of one
Acquiring Fund Share, computed in the manner and as of the time and date
set forth in Section 2.2; and (ii) to assume all of the liabilities of
the Acquired Fund, including without limitation the Acquired Fund's
indemnification obligations to its trustees and officers. Acquiring
Fund Shares shall be delivered to the Acquired Fund in "Creation Unit"
aggregations only ("Creation Units"), meaning specified blocks of
____________ Acquiring Fund Shares ("Creation Unit Aggregations"). The
Acquired Fund directly or through an agent will distribute the Acquiring
A-1
Fund Shares received by the Acquired Fund pro rata to the Acquired Fund
shareholders of record as of the Valuation Time (as defined below). All
Acquiring Fund Shares delivered to the Acquired Fund shall be delivered
at net asset value without a sales load, commission, transaction fee or
other similar fee being imposed. Such transactions shall take place at
the closing provided for in Section 3.1 (the "Closing").
Section 1.2 The assets of the Acquired Fund to be acquired by the
Acquiring Fund (the "Assets") shall consist of all assets, including,
without limitation, all cash, cash equivalents, securities, commodities
and futures interests and dividends or interest or other receivables
that are owned by the Acquired Fund and any deferred or prepaid expenses
shown on the unaudited statement of assets and liabilities of the
Acquired Fund prepared as of the effective time of the Closing in
accordance with accounting principles generally accepted in the United
States of America ("GAAP") applied consistently with those of the
Acquired Fund's most recent audited statement of assets and liabilities.
Section 1.3 The Acquired Fund will endeavor, to the extent
practicable, to discharge all of its liabilities and obligations that
are accrued prior to the Closing Date as defined in Section 3.1.
Section 1.4 On or as soon as practicable prior to the Closing Date as
defined in Section 3.1, the Acquired Fund will declare and pay to its
shareholders of record one or more dividends and/or other distributions
so that it will have distributed substantially all of its investment
company taxable income (computed without regard to any deduction for
dividends paid) and realized net capital gain, if any, for the current
taxable year through the Closing Date.
Section 1.5 Immediately after the transfer of Assets provided for in
Section 1.1, the Acquired Fund will distribute to the Acquired Fund's
shareholders of record (the "Acquired Fund Shareholders") determined as
of the Valuation Time (as defined in Section 2.1), on a pro rata basis,
the Acquiring Fund Shares received by the Acquired Fund pursuant to
Section 1.1 and will completely liquidate, dissolve and terminate. The
Funds may appoint an agent to assist the Acquiring Fund and/or the
Acquired Fund in the distribution of the Acquiring Fund Shares received
by the Acquired Fund in Creation Unit Aggregations to the Acquired Fund
Shareholders. The distribution, liquidation, dissolution and termination
referenced in this Section 1.5 will be accomplished with respect to the
common shares of the Acquired Fund by the transfer of the Acquiring Fund
Shares received by the Acquired Fund in Creation Unit Aggregations then
credited to the account of the Acquired Fund on the books of the
Acquiring Fund to open accounts on the share records of the Acquiring
Fund in the names of the Acquired Fund Shareholders. The Acquiring Fund
shall have no obligation to inquire as to the validity, propriety or
correctness of such records, but shall assume that such transaction is
valid, proper and correct. The aggregate net asset value of Acquiring
Fund Shares to be so credited to the Acquired Fund Shareholders shall be
equal to the aggregate net asset value of the Acquired Fund common shares
owned by such shareholders as of the Valuation Time. All issued and
outstanding common shares of the Acquired Fund, and certificates
representing such shares, if any, will simultaneously be cancelled on the
books of the Acquired Fund. The Acquiring Fund will not issue
certificates representing Acquiring Fund Shares.
A-2
Section 1.6 Ownership of Acquiring Fund Shares will be shown on the
books of the Acquiring Fund. Shares of the Acquiring Fund will be issued
in the manner described in the Acquiring Fund's then-current prospectus
and statement of additional information.
Section 1.7 Any reporting responsibility of the Acquired Fund
including, without limitation, the responsibility for filing of
regulatory reports, tax returns, or other documents with the Securities
and Exchange Commission (the "Commission"), any state securities
commission, and any federal, state or local tax authorities or any other
relevant regulatory authority, is and shall remain the responsibility of
the Acquired Fund.
Section 1.8 All books and records of the Acquired Fund, including all
books and records required to be maintained under the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, shall be available to the Acquiring Fund from and after the
Closing Date and shall be turned over to the Acquiring Fund as soon as
practicable following the Closing Date.
ARTICLE 2. VALUATION
Section 2.1 The value of the Assets and the liabilities of the
Acquired Fund shall be computed as of the close of regular trading on
The New York Stock Exchange (the "NYSE") on the business day immediately
preceding the Closing Date, as defined in Section 3.1 (the "Valuation
Time"), after the declaration and payment of any dividends and/or other
distributions on or before that date, using the valuation procedures
approved by the Board of Trustees of the Acquiring Trust and set forth
in the Acquiring Fund's then-current prospectus or statement of
additional information, copies of which have been or will be delivered
to the Acquired Fund prior to the Closing Date.
Section 2.2 The net asset value of an Acquiring Fund Share shall be
the net asset value per share computed as of the Valuation Time using
the valuation procedures referred to in Section 2.1. Notwithstanding
anything to the contrary contained in this Agreement, in the event that,
as of the Valuation Time, there are no Acquiring Fund Shares issued and
outstanding, then, for purposes of this Agreement, the per share net
asset value of Acquiring Fund Shares shall be equal to the net asset
value of a common share of the Acquired Fund.
Section 2.3 The number of Acquiring Fund Shares to be issued in
consideration for the Assets shall be determined by dividing the value
of the Assets net of liabilities with respect to common shares of the
Acquired Fund, determined in accordance with Section 2.1, by the net
asset value of an Acquiring Fund Share as determined in accordance with
Section 2.2. Such Acquiring Fund Shares shall be issued to the Acquired
Fund only in Creation Unit Aggregations of __________ Acquiring Fund
Shares, or in multiples thereof.
Section 2.4 All computations of value hereunder shall be made by or
under the direction of each Fund's respective pricing agent, if
applicable, in accordance with its regular practice and the requirements
of the 1940 Act and shall be subject to confirmation by each Fund's
Independent Registered Public Accounting Firm upon the reasonable
request of the other Fund.
A-3
ARTICLE 3. CLOSING AND CLOSING DATE
Section 3.1 The Closing of the transactions contemplated by this
Agreement shall be ____________, 2006, or such later date as the parties
may agree in writing (the "Closing Date"). All acts taking place at the
Closing shall be deemed to take place simultaneously as of 8:00 a.m.,
Central time, on the Closing Date, unless otherwise agreed to by the
parties. The Closing shall be held at the offices of counsel to the
Acquiring Fund, or at such other place and time as the parties may agree.
Section 3.2 The Acquired Fund shall deliver to the Acquiring Fund on
the Closing Date a schedule of Assets.
Section 3.3 The Acquired Fund shall cause PFPC Trust Company ("PFPC
Trust Co."), custodian for the Acquired Fund, to deliver at the Closing
a certificate of an authorized officer stating that (a) the Assets shall
have been delivered in proper form to The Bank of New York ("BONY"),
custodian for the Acquiring Fund, at or prior to the Closing Date and
(b) all necessary taxes in connection with the delivery of the Assets,
including all applicable federal and state stock transfer stamps, if
any, have been paid or provision for payment has been made. The
Acquired Fund's portfolio securities represented by a certificate or
other written instrument shall be presented by the custodian for the
Acquired Fund to the custodian for the Acquiring Fund for examination no
later than five business days preceding the Closing Date and transferred
and delivered by the Acquired Fund as of the Closing Date by the
Acquired Fund for the account of Acquiring Fund duly endorsed in proper
form for transfer in such condition as to constitute good delivery
thereof. The Acquired Fund's portfolio securities and instruments
deposited with a securities depository, as defined in Rule 17f-4 under
the 1940 Act, shall be delivered as of the Closing Date by book entry in
accordance with the customary practices of such depositories and the
custodian for the Acquiring Fund. The cash to be transferred by the
Acquired Fund shall be delivered by wire transfer of federal funds on
the Closing Date.
Section 3.4 PFPC Inc. (or its designee) ("PFPC Inc."), as transfer
agent for the Acquired Fund, shall deliver at the Closing a certificate
of an authorized officer stating that its records contain the names and
addresses of the Acquired Fund Shareholders and the number and
percentage ownership (to three decimal places) of outstanding Acquired
Fund common shares owned by each such Acquired Fund Shareholder
immediately prior to the Closing. The Acquiring Fund shall issue and
deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Acquired Fund or provide evidence
satisfactory to the Acquired Fund that such Acquiring Fund Shares have
been credited to the Acquired Fund's account on the books of the
Acquiring Fund. At the Closing, each party shall deliver to the other
such bills of sale, checks, assignments, share certificates, if any,
receipts or other documents as such other party or its counsel may
reasonably request to effect the transactions contemplated by this
Agreement. The cash to be transferred by the Acquiring Fund shall be
delivered by wire transfer of federal funds on the Closing Date.
Section 3.5 In the event that immediately prior to the Valuation Time
(a) the NYSE or another primary trading market for portfolio securities
of the Acquiring Fund or the Acquired Fund shall be closed to trading or
trading thereupon shall be restricted, or (b) trading or the reporting
A-4
of trading on such Exchange or elsewhere shall be disrupted so that, in
the judgment of the Board members of either party to this Agreement,
accurate appraisal of the value of the shares of the Acquired Fund is
impracticable, the Closing Date shall be postponed until the first
business day after the day when trading shall have been fully resumed
and reporting shall have been restored.
Section 3.6 The liabilities of the Acquired Fund to be assumed by the
Acquiring Fund shall include all of the Acquired Fund's liabilities,
debts, obligations, and duties of whatever kind or nature, whether
absolute, accrued, contingent, or otherwise, whether or not arising in
the ordinary course of business, whether or not determinable at the
Closing Date, and whether or not specifically referred to in this
Agreement, including without limitation the Acquired Fund's
indemnification obligations to its trustees and officers.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES
Section 4.1 The Acquired Fund represents and warrants to the
Acquiring Trust, on behalf of the Acquiring Fund, as follows:
(a) The Acquired Fund is a Massachusetts business trust duly
organized and validly existing under the laws of the Commonwealth of
Massachusetts with power under the Acquired Fund's Declaration of Trust
to own all of its properties and assets and to carry on its business as
it is now being conducted and, subject to approval of shareholders of
the Acquired Fund, to carry out the Agreement. The Acquired Fund is
qualified to do business in all jurisdictions in which it is required to
be so qualified, except jurisdictions in which the failure to so qualify
would not have a material adverse effect on the Acquired Fund. The
Acquired Fund has all material federal, state and local authorizations
necessary to own all of the properties and assets and to carry on its
business as now being conducted, except authorizations which the failure
to so obtain would not have a material adverse effect on the Acquired
Fund;
(b) The Acquired Fund is registered with the Commission as a
closed-end management investment company under the 1940 Act, and such
registration is in full force and effect and the Acquired Fund is in
compliance in all material respects with the 1940 Act and the rules and
regulations thereunder;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquired
Fund of the transactions contemplated herein, except such as have been
obtained under the Securities Act of 1933, as amended (the "1933 Act"),
the Securities Exchange Act of 1934, as amended (the "1934 Act"), the
1940 Act, the American Stock Exchange ("AMEX") and such as may be
required by state securities laws;
(d) The Acquired Fund is not, and the execution, delivery and
performance of this Agreement by the Acquired Fund will not result (i)
in violation of Massachusetts law or of the Acquired Fund's Declaration
of Trust or By-Laws, (ii) in a violation or breach of, or constitute a
default under, any material agreement, indenture, instrument, contract,
lease or other undertaking to which the Acquired Fund is a party or by
which it is bound, and the execution, delivery and performance of this
A-5
Agreement by the Acquired Fund will not result in the acceleration of
any obligation, or the imposition of any penalty, under any agreement,
indenture, instrument, contract, lease, judgment or decree to which the
Acquired Fund is a party or by which it is bound, or (iii) in the
creation or imposition of any lien, charge or encumbrance on any
property or assets of the Acquired Fund;
(e) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquired Fund or any
properties or assets held by it. The Acquired Fund knows of no facts
which might form the basis for the institution of such proceedings which
would materially and adversely affect its business and is not a party to
or subject to the provisions of any order, decree or judgment of any
court or governmental body which materially and adversely affects its
business or its ability to consummate the transactions herein
contemplated;
(f) The Statements of Assets and Liabilities, Operations, and
Changes in Net Assets, the Financial Highlights, and the Investment
Portfolio of the Acquired Fund at and for the year ended May 31, 2006,
have been audited by Deloitte & Touche LLP, Independent Registered
Public Accounting Firm, and are in accordance with GAAP consistently
applied, and such statements (a copy of each of which has been furnished
to the Acquiring Fund) present fairly, in all material respects, the
financial position of the Acquired Fund as of such date in accordance
with GAAP and there are no known contingent liabilities of the Acquired
Fund required to be reflected on the Statement of Assets and Liabilities
(including the notes thereto) in accordance with GAAP as of such date
not disclosed therein;
(g) Since May 31, 2006, there has not been any material adverse
change in the Acquired Fund's financial condition, assets, liabilities
or business other than changes occurring in the ordinary course of
business, or any incurrence by the Acquired Fund of indebtedness
maturing more than one year from the date such indebtedness was incurred
except as otherwise disclosed to and accepted in writing by the
Acquiring Fund. For purposes of this subsection (g), a decline in net
asset value per common share of the Acquired Fund due to declines in the
market values of securities in the Acquired Fund's portfolio or the
discharge of Acquired Fund liabilities shall not constitute a material
adverse change;
(h) At the date hereof and at the Closing Date, all federal and
other tax returns and reports of the Acquired Fund required by law to
have been filed by such dates (including any extensions) shall have been
filed and are or will be correct in all material respects, and all
federal and other taxes shown as due or required to be shown as due on
said returns and reports shall have been paid or provision shall have
been made for the payment thereof, and, to the best of the Acquired
Fund's knowledge, no such return is currently under audit and no
assessment has been asserted with respect to such returns;
(i) For each taxable year of its operation (including the taxable
year ending on the Closing Date), the Acquired Fund has met the
requirements of Subchapter M of the Code for qualification as a
regulated investment company and has elected to be treated as such, has
been eligible to and has computed its federal income tax under Section
852 of the Code, and will have distributed all of its investment company
A-6
taxable income and net capital gain (as defined in the Code) that has
accrued through the Closing Date;
(j) All issued and outstanding common shares of the Acquired Fund
(i) have been offered and sold in every state and the District of
Columbia in compliance in all material respects with applicable
registration requirements of the 1933 Act and state securities laws,
(ii) are, and on the Closing Date will be, duly and validly issued and
outstanding, fully paid and non-assessable and not subject to preemptive
or dissenter's rights and (iii) will be held at the time of the Closing
by the persons and in the amounts set forth in the records of PFPC Inc.,
as provided in Section 3.4. The Acquired Fund does not have outstanding
any options, warrants or other rights to subscribe for or purchase any
of the Acquired Fund common shares, nor is there outstanding any
security convertible into any of the Acquired Fund common shares;
(k) At the Closing Date, the Acquired Fund will have good and
valid title to the Acquired Fund's assets to be transferred to the
Acquiring Fund pursuant to Section 1.2 and full right, power, and
authority to sell, assign, transfer and deliver such assets hereunder
free of any liens or other encumbrances, except those liens or
encumbrances as to which the Acquiring Fund has received notice at or
prior to the Closing, and upon delivery and payment for such assets, the
Acquiring Fund will acquire good and valid title thereto, subject to no
restrictions on the full transfer thereof, including such restrictions
as might arise under the 1933 Act and the 1940 Act, except those
restrictions as to which the Acquiring Fund has received notice and
necessary documentation at or prior to the Closing;
(l) The execution, delivery and performance of this Agreement will
have been duly authorized prior to the Closing Date by all necessary
action on the part of the Board members of the Acquired Fund (including
the determinations required by Rule 17a-8(a) under the 1940 Act), and,
subject to the approval of the Acquired Fund Shareholders, this
Agreement constitutes a valid and binding obligation of the Acquired
Fund, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and other laws relating to or affecting
creditors' rights and to general equity principles;
(m) The information to be furnished by the Acquired Fund for use
in applications for orders, registration statements or proxy materials
or for use in any other document filed or to be filed with any federal,
state or local regulatory authority (including NASD, Inc. (the "NASD")),
which may be necessary in connection with the transactions contemplated
hereby, shall be accurate and complete in all material respects and
shall comply in all material respects with federal securities and other
laws and regulations applicable thereto;
(n) During the offering of the Acquired Fund's common shares, the
prospectus and statement of additional information of the Acquired Fund
conformed in all material respects to the applicable requirements of the
1933 Act and the 1940 Act and the rules and regulations of the
Commission thereunder and did not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not materially misleading; and
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(o) The Registration Statement referred to in Section 5.7, insofar
as it relates to the Acquired Fund, will, on the effective date of the
Registration Statement and on the Closing Date, (i) comply in all
material respects with the provisions and regulations of the 1933 Act,
the 1934 Act and the 1940 Act, as applicable, and (ii) not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which such statements are
made, not materially misleading; provided, however, that the
representations and warranties in this Section shall not apply to
statements in or omissions from the Registration Statement made in
reliance upon and in conformity with information that was furnished or
should have been furnished by the Acquiring Trust on behalf of the
Acquiring Fund for use therein.
Section 4.2. The Acquiring Trust, on behalf of the Acquiring Fund,
represents and warrants to the Acquired Fund as follows:
(a) The Acquiring Trust is a Massachusetts business trust duly
organized and validly existing under the laws of the Commonwealth of
Massachusetts with power under the Acquiring Trust's Declaration Trust
to own all of its properties and assets and to carry on its business as
it is now being conducted and to carry out the Agreement. The Acquiring
Fund is a separate series of the Acquiring Trust duly designated in
accordance with the applicable provisions of the Acquiring Trust's
Declaration of Trust. The Acquiring Trust and Acquiring Fund are
qualified to do business in all jurisdictions in which they are required
to be so qualified, except jurisdictions in which the failure to so
qualify would not have a material adverse effect on the Acquiring Trust
or Acquiring Fund. The Acquiring Fund has all material federal, state
and local authorizations necessary to own all of the properties and
assets and to carry on its business as now being conducted, except
authorizations which the failure to so obtain would not have a material
adverse effect on the Acquiring Fund;
(b) The Acquiring Trust is registered with the Commission as an
open-end management investment company under the 1940 Act, and such
registration is in full force and effect, the Acquiring Trust is in
compliance in all material respects with the 1940 Act and the rules and
regulations thereunder, and the Acquiring Trust (solely with respect to
the Acquiring Fund) and the Acquiring Fund will at the Closing Date be
in compliance in all material respects with the 1940 Act and the rules
and regulations thereunder;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquiring
Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act, the 1940 Act, the AMEX and
such as may be required by state securities laws;
(d) The Acquiring Trust is not, and the execution, delivery
and performance of this Agreement by the Acquiring Trust will not result
(i) in violation of Massachusetts law or of the Acquiring Trust's
Declaration of Trust or By-Laws, (ii) in a violation or breach of, or
constitute a default under, any material agreement, indenture, exemptive
order, instrument, contract, lease or other undertaking known to counsel
to which the Acquiring Fund is a party or by which it is bound, and the
execution, delivery and performance of this Agreement by the Acquiring
Fund will not result in the acceleration of any obligation, or the
imposition of any penalty, under any agreement, indenture, instrument,
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contract, lease, judgment or decree to which the Acquiring Fund is a
party or by which it is bound, or (iii) in the creation or imposition of
any lien, charge or encumbrance on any property or assets of the
Acquiring Fund;
(e) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any
properties or assets held by it. The Acquiring Fund knows of no facts
which might form the basis for the institution of such proceedings which
would materially and adversely affect its business and is not a party to
or subject to the provisions of any order, decree or judgment of any
court or governmental body which materially and adversely affects its
business or its ability to consummate the transactions herein
contemplated;
(f) Since ____________, 2006, there has not been any material
adverse change in the Acquiring Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by the Acquiring Fund of
indebtedness maturing more than one year from the date such indebtedness
was incurred except as otherwise disclosed to and accepted in writing by
the Acquired Fund. For purposes of this subsection (f), a decline in
net asset value per share of the Acquiring Fund, the discharge of
Acquiring Fund liabilities, or the redemption of Acquiring Fund shares
by Acquiring Fund shareholders shall not constitute a material adverse
change;
(g) At the date hereof and at the Closing Date, all federal and
other tax returns and reports of the Acquiring Fund required by law to
have been filed by such dates (including any extensions) shall have been
filed and are or will be correct in all material respects, and all
federal and other taxes shown as due or required to be shown as due on
said returns and reports shall have been paid or provision shall have
been made for the payment thereof, and, to the best of the Acquiring
Fund's knowledge, no such return is currently under audit and no
assessment has been asserted with respect to such returns;
(h) For each taxable year of its operation, the Acquiring Fund has
met the requirements of Subchapter M of the Code for qualification as a
regulated investment company and has elected to be treated as such, has
been eligible to and has computed its federal income tax under Section
852 of the Code, and will do so for the taxable year including the
Closing Date;
(i) All issued and outstanding shares of the Acquiring Fund (i)
have been offered and sold in every state and the District of Columbia
in compliance in all material respects with applicable registration
requirements of the 1933 Act and state securities laws and (ii) are, and
on the Closing Date will be, duly and validly issued and outstanding,
fully paid and non-assessable, and not subject to preemptive or
dissenter's rights. The Acquiring Fund does not have outstanding any
options, warrants or other rights to subscribe for or purchase any of
the Acquiring Fund shares, nor is there outstanding any security
convertible into any of the Acquiring Fund Shares;
(j) The Acquiring Fund Shares to be issued and delivered to the
account of the Acquired Fund on the books of the Acquiring Fund, for the
accounts on the share records of the Acquiring Fund in the names of the
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Acquired Fund Shareholders, pursuant to the terms of this Agreement,
will at the Closing Date have been duly authorized and, when so issued
and delivered, will be duly and validly issued and outstanding Acquiring
Fund Shares, and will be fully paid and non-assessable;
(k) At the Closing Date, the Acquiring Fund will have good and
valid title to the Acquiring Fund's assets, free of any liens or other
encumbrances;
(l) The execution, delivery and performance of this Agreement will
have been duly authorized prior to the Closing Date by all necessary
action on the part of the Board members of the Acquiring Trust
(including the determinations required by Rule 17a-8(a) under the 1940
Act), and this Agreement will constitute a valid and binding obligation
of the Acquiring Trust, on behalf of the Acquiring Fund, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and other
laws relating to or affecting creditors' rights and to general equity
principles;
(m) The information to be furnished by the Acquiring Fund for use
in applications for orders, registration statements or proxy materials
or for use in any other document filed or to be filed with any federal,
state or local regulatory authority (including the NASD), which may be
necessary in connection with the transactions contemplated hereby, shall
be accurate and complete in all material respects and shall comply in
all material respects with federal securities and other laws and
regulations applicable thereto;
(n) At the Closing Date, the current prospectus and statement of
additional information of the Acquiring Fund will conform in all
material respects to the applicable requirements of the 1933 Act and the
1940 Act and the rules and regulations of the Commission thereunder and
will not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not materially misleading;
(o) The Registration Statement referred to in Section 5.7, only
insofar as it relates to the Acquiring Fund, will, on the effective date
of the Registration Statement and on the Closing Date, (i) comply in all
material respects with the provisions and regulations of the 1933 Act,
the 1934 Act, and the 1940 Act and (ii) not contain any untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not materially
misleading; provided, however, that the representations and warranties
in this Section shall not apply to statements in or omissions from the
Registration Statement made in reliance upon and in conformity with
information that was furnished or should have been furnished by the
Acquired Fund for use therein; and
(p) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the
1940 Act and such of the state securities laws as may be necessary in
order to continue its operations after the Closing Date.
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ARTICLE 5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
Section 5.1 The Acquiring Fund and the Acquired Fund each covenants
to operate its business in the ordinary course between the date hereof
and the Closing Date, it being understood that (a) such ordinary course
of business will include (i) the declaration and payment of customary
dividends and other distributions and (ii) such changes as are
contemplated by the Funds' normal operations; and (b) each Fund shall
retain exclusive control of the composition of its portfolio until the
Closing Date. No party shall take any action that would, or reasonably
would be expected to, result in any of its representations and
warranties set forth in this Agreement being or becoming untrue in any
material respect. The Acquired Fund and Acquiring Fund covenant and
agree to coordinate the respective portfolios of the Acquired Fund and
Acquiring Fund from the date of the Agreement up to and including the
Closing Date in order that, at Closing, when the Assets are transferred
to the Acquiring Fund and added to the Acquiring Fund's portfolio, the
resulting portfolio will meet the Acquiring Fund's investment objective,
policies and restrictions, as set forth in the Acquiring Fund's
prospectus, a copy of which has been or will be, at or prior to the
Closing Date, delivered to the Acquired Fund.
Section 5.2 Upon reasonable notice, the Acquiring Trust's officers
and agents shall have reasonable access to the Acquired Fund's books and
records necessary to maintain current knowledge of the Acquired Fund and
to ensure that the representations and warranties made by the Acquired
Fund are accurate.
Section 5.3 The Acquired Fund covenants to call a meeting of the
Acquired Fund shareholders entitled to vote thereon to consider and act
upon this Agreement and to take all other reasonable action necessary to
obtain approval of the transactions contemplated herein.
Section 5.4 The Acquired Fund covenants that the Acquiring Fund
Shares to be issued hereunder are not being acquired for the purpose of
making any distribution thereof other than in accordance with the terms
of this Agreement.
Section 5.5 The Acquired Fund covenants that it will assist the
Acquiring Fund in obtaining such information as the Acquiring Fund
reasonably requests concerning the beneficial ownership of the Acquired
Fund common shares.
Section 5.6 Subject to the provisions of this Agreement, the
Acquiring Fund and the Acquired Fund will each take, or cause to be
taken, all actions, and do or cause to be done, all things reasonably
necessary, proper, and/or advisable to consummate and make effective the
transactions contemplated by this Agreement.
Section 5.7 Each Fund covenants to prepare in compliance with the
1933 Act, the 1934 Act and the 1940 Act a registration statement on Form
N-14 (the "Registration Statement") in connection with the meeting of
the Acquired Fund Shareholders to consider approval of this Agreement
and the transactions contemplated herein. The Acquiring Trust will file
the Registration Statement, including a proxy statement, with the
Commission. The Acquired Fund will provide the Acquiring Fund with
information reasonably necessary for the preparation of a proxy
statement which will be part of a prospectus of the Acquiring Fund, all
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to be included in the Registration Statement, in compliance in all
material respects with the 1933 Act, the 1934 Act and the 1940 Act.
Section 5.8 The Acquired Fund covenants that it will, from time to
time, as and when reasonably requested by the Acquiring Fund, execute
and deliver or cause to be executed and delivered all such assignments
and other instruments, and will take or cause to be taken such further
action as the Acquiring Fund may reasonably deem necessary or desirable
in order to vest in and confirm the Acquiring Fund's title to and
possession of all the assets and otherwise to carry out the intent and
purpose of this Agreement.
Section 5.9 The Acquiring Fund covenants to use all reasonable
efforts to obtain the approvals and authorizations required by the 1933
Act and 1940 Act, and such of the state securities laws as it deems
appropriate in order to continue its operations after the Closing Date
and to consummate the transactions contemplated herein; provided,
however, that the Acquiring Fund may take such actions it reasonably
deems advisable after the Closing Date as circumstances change.
Section 5.10 The Acquiring Fund covenants that it will, from time to
time, as and when reasonably requested by the Acquired Fund, execute and
deliver or cause to be executed and delivered all such assignments,
assumption agreements, releases, and other instruments, and will take or
cause to be taken such further action, as the Acquired Fund may
reasonably deem necessary or desirable in order to (i) vest and confirm
to the Acquired Fund title to and possession of all Acquiring Fund
shares to be transferred to the Acquired Fund pursuant to this Agreement
and (ii) assume the liabilities from the Acquired Fund.
Section 5.11 As soon as reasonably practicable after the Closing, the
Acquired Fund shall make a liquidating distribution to its shareholders
consisting of the Acquiring Fund Shares received at the Closing.
Section 5.12 The Acquiring Fund and the Acquired Fund shall each use
its reasonable best efforts to fulfill or obtain the fulfillment of the
conditions precedent to effect the transactions contemplated by this
Agreement as promptly as practicable.
Section 5.13 The intention of the parties is that the transaction
will qualify as a Reorganization within the meaning of Section 368(a) of
the Code. Neither the Acquiring Trust, the Acquiring Fund nor the
Acquired Fund shall take any action, or cause any action to be taken
(including, without limitation, the filing of any tax return) that is
inconsistent with such treatment or results in the failure of the
transaction to qualify as a Reorganization within the meaning of Section
368(a) of the Code. At or prior to the Closing Date, the Acquiring
Trust, the Acquiring Fund and the Acquired Fund will take such action,
or cause such action to be taken, as is reasonably necessary to enable
Chapman and Cutler LLP to render the tax opinion contemplated herein in
Section 8.5.
Section 5.14 At or immediately prior to the Closing, the Acquired
Fund will declare and pay to its shareholders a dividend or other
distribution in an amount large enough so that it will have distributed
substantially all (and in any event not less than 98%) of its investment
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company taxable income (computed without regard to any deduction for
dividends paid) and realized net capital gain, if any, for the current
taxable year through the Closing Date.
ARTICLE 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to consummate the transactions
provided for herein shall be subject, at its election, to the
performance by the Acquiring Fund of all the obligations to be performed
by it hereunder on or before the Closing Date, and, in addition thereto,
the following further conditions:
Section 6.1 All representations and warranties of the Acquiring
Trust, on behalf of the Acquiring Fund, contained in this Agreement
shall be true and correct in all material respects as of the date hereof
and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date, with the same force and effect
as if made on and as of the Closing Date; and there shall be (i) no
pending or threatened litigation brought by any person (other than the
Acquired Fund, its adviser or any of their affiliates) against the
Acquiring Fund or its investment adviser(s), Board members or officers
arising out of this Agreement and (ii) no facts known to the Acquiring
Fund which the Acquiring Fund reasonably believes might result in such
litigation.
Section 6.2 The Acquiring Fund shall have delivered to the Acquired
Fund on the Closing Date a certificate executed in its name by the
Acquiring Trust's President or a Vice President, in a form reasonably
satisfactory to the Acquired Fund and dated as of the Closing Date, to
the effect that the representations and warranties of the Acquiring
Trust made in this Agreement are true and correct on and as of the
Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as the
Acquired Fund shall reasonably request.
Section 6.3 The Acquired Fund shall have received on the Closing Date
opinions of Chapman and Cutler LLP and Bingham McCutchen LLP, as
applicable, in a form reasonably satisfactory to the Acquired Fund, and
dated as of the Closing Date, to the effect that:
(a) the Acquiring Trust has been formed and is legally existing as a
Massachusetts business trust;
(b) the Acquiring Trust has the power as a business trust to carry on
its business as presently conducted in accordance with the description
thereof in the Registration Statement referred to in Section 5.7;
(c) the Agreement has been duly authorized, executed and delivered by
the Acquiring Trust, on behalf of the Acquiring Fund, and constitutes a
valid and legally binding obligation of the Acquiring Trust, on behalf
of the Acquiring Fund, enforceable in accordance with its terms, subject
to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and laws of general applicability relating to or affecting
creditors' rights and to general equity principles;
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(d) the execution and delivery of the Agreement did not, and the
issuance and delivery to the Acquired Fund of Acquiring Fund Shares
pursuant to the Agreement will not, violate the Acquiring Trust's
Declaration of Trust or By-Laws; and
(e) to the knowledge of such counsel, and without any independent
investigation, (i) the Acquiring Fund is not subject to any litigation
or other proceedings that might have a materially adverse effect on the
operations of the Acquiring Fund, (ii) the Acquiring Trust is duly
registered as an investment company with the Commission and is not
subject to any stop order, and (iii) all regulatory consents,
authorizations, approvals or filings required to be obtained or made by
the Acquiring Fund under the federal laws of the United States or the
laws of the Commonwealth of Massachusetts for the issuance of Acquiring
Fund Shares, pursuant to the Agreement have been obtained or made.
The delivery of such opinion is conditioned upon receipt by either
Chapman and Cutler LLP or Bingham McCutchen LLP, as the case may be, of
customary representations it shall reasonably request of each of the
Acquiring Trust and the Acquired Fund.
Section 6.4 The Acquiring Fund shall have performed all of the
covenants and complied with all of the provisions required by this
Agreement to be performed or complied with by the Acquiring Fund on or
before the Closing Date.
Section 6.5 The Acquiring Trust, on behalf of the Acquiring Fund,
shall have entered into an investment management agreement calling for
an annual fee of 0.50% of average daily net assets, and entered into an
expense cap agreement with First Trust limiting the annual expenses of
the Acquiring Fund to 0.70% for a two-year period commencing upon the
Closing Date in a form reasonably satisfactory to the Acquired Fund.
ARTICLE 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to consummate the transactions
provided for herein shall be subject, at its election, to the
performance by the Acquired Fund of all of the obligations to be
performed by it hereunder on or before the Closing Date and, in addition
thereto, the following further conditions:
Section 7.1 All representations and warranties of the Acquired Fund
contained in this Agreement shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date,
with the same force and effect as if made on and as of the Closing Date;
and there shall be (i) no pending or threatened litigation brought by
any person (other than the Acquiring Fund, its adviser or any of their
affiliates) against the Acquired Fund or its investment adviser(s),
Board members or officers arising out of this Agreement and (ii) no
facts known to the Acquired Fund which the Acquired Fund reasonably
believes might result in such litigation.
Section 7.2 The Acquired Fund shall have delivered to the Acquiring
Fund a statement of the Acquired Fund's assets and liabilities as of the
Closing Date, certified by the Treasurer of the Acquired Fund.
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Section 7.3 The Acquired Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by the
Acquired Fund's President or a Vice President, in a form reasonably
satisfactory to the Acquiring Trust, on behalf of the Acquiring Fund,
and dated as of the Closing Date, to the effect that the representations
and warranties of the Acquired Fund made in this Agreement are true and
correct on and as of the Closing Date, except as they may be affected by
the transactions contemplated by this Agreement, and as to such other
matters as the Acquiring Fund shall reasonably request.
Section 7.4 The Acquiring Fund shall have received on the Closing
Date opinions of Chapman and Cutler LLP and Bingham McCutchen LLP, as
applicable, in a form reasonably satisfactory to the Acquiring Fund, and
dated as of the Closing Date, to the effect that:
(a) the Acquired Fund has been formed and is legally existing as
a Massachusetts business trust;
(b) the Acquired Fund has the power to carry on its business as
presently conducted in accordance with the description thereof in the
Acquired Fund's registration statement under the 1940 Act;
(c) the Agreement has been duly authorized, executed and delivered by
the Acquired Fund, and constitutes a valid and legally binding
obligation of the Acquired Fund, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and laws of general applicability relating to
or affecting creditors' rights and to general equity principles;
(d) the execution and delivery of the Agreement did not, and the
transfer of the Assets to the Acquiring Fund in exchange for Acquiring
Fund Shares pursuant to the Agreement will not, violate the Acquired
Fund's Declaration of Trust or By-Laws; and
(e) to the knowledge of such counsel, and without any independent
investigation, (i) the Acquired Fund is not subject to any litigation or
other proceedings that might have a materially adverse effect on the
operations of the Acquired Fund, (ii) the Acquired Fund is registered as
an investment company with the Commission and is not subject to any stop
order, and (iii) all regulatory consents, authorizations, approvals or
filings required to be obtained or made by the Acquired Fund, under the
federal laws of the United States or the laws of the Commonwealth of
Massachusetts for the exchange of the Acquired Fund's assets for
Acquiring Fund Shares, pursuant to the Agreement have been obtained or
made.
The delivery of such opinion is conditioned upon receipt by either
Chapman and Cutler LLP or Bingham McCutchen LLP, as the case may be, of
customary representations it shall reasonably request of each of the
Acquiring Trust and the Acquired Fund.
Section 7.5 The Acquired Fund shall have performed all of the
covenants and complied with all of the provisions required by this
Agreement to be performed or complied with by the Acquired Fund on or
before the Closing Date.
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ARTICLE 8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE ACQUIRED FUND
If any of the conditions set forth below have not been met on or before
the Closing Date with respect to the Acquired Fund or the Acquiring
Fund, the other party to this Agreement shall, at its option, not be
required to consummate the transactions contemplated by this Agreement:
Section 8.1 This Agreement and the transactions contemplated herein
shall have been approved by the requisite vote of the holders of the
outstanding common shares of the Acquired Fund in accordance with the
provisions of the Acquired Fund's Declaration of Trust and By-Laws,
applicable Massachusetts law, the rules of the AMEX and the 1940 Act,
and certified copies of the resolutions evidencing such approval shall
have been delivered to the Acquiring Fund. Notwithstanding anything
herein to the contrary, neither the Acquiring Fund nor the Acquired Fund
may waive the conditions set forth in this Section 8.1.
Section 8.2 On the Closing Date, no action, suit or other proceeding
shall be pending or to its knowledge threatened before any court or
governmental agency in which it is sought to restrain or prohibit, or
obtain material damages or other relief in connection with, this
Agreement or the transactions contemplated herein.
Section 8.3 All consents of other parties and all other consents,
orders and permits of federal, state and local regulatory authorities
and the AMEX deemed necessary by the Acquiring Fund or the Acquired Fund
to permit consummation, in all material respects, of the transactions
contemplated hereby shall have been obtained, except where failure to
obtain any such consent, order or permit would not involve a risk of a
material adverse effect on the assets or properties of the Acquiring
Fund or the Acquired Fund, provided that either party hereto may for
itself waive any of such conditions.
Section 8.4 The Registration Statement shall have become effective
under the 1933 Act and no stop orders suspending the effectiveness
thereof shall have been issued and, to the best knowledge of the parties
hereto, no investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the 1933 Act.
Section 8.5 The parties shall have received an opinion of Chapman and
Cutler LLP addressed to each of the Acquiring Fund and the Acquired
Fund, in a form reasonably satisfactory to each such party to this
Agreement, substantially to the effect that, based upon certain facts,
assumptions and representations of the parties, for federal income tax
purposes: (i) the acquisition by Acquiring Fund of all of the assets of
Acquired Fund solely in exchange for Acquiring Fund Shares and the
assumption by Acquiring Fund of all of the liabilities of Acquired Fund,
followed by the distribution by Acquired Fund to its shareholders of
Acquiring Fund Shares in complete liquidation of Acquired Fund, all
pursuant to the Agreement, constitutes a Reorganization within the
meaning of Section 368(a) of the Code, and Acquiring Fund and Acquired
Fund will each be a "party to a Reorganization" within the meaning of
Section 368(b) of the Code; (ii) under Section 361 of the Code, Acquired
Fund will not recognize gain or loss upon the transfer of its assets to
Acquiring Fund in exchange for Acquiring Fund Shares and the assumption
of the Acquired Fund liabilities by Acquiring Fund, and Acquired Fund
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will not recognize gain or loss upon the distribution to its
shareholders of the Acquiring Fund Shares in liquidation of Acquired
Fund; (iii) under Section 354 of the Code, shareholders of Acquired Fund
will not recognize gain or loss on the receipt of Acquiring Fund Shares
solely in exchange for Acquired Fund shares; (iv) under Section 358 of
the Code, the aggregate basis of the Acquiring Fund Shares received by
each shareholder of Acquired Fund will be the same as the aggregate
basis of Acquired Fund shares exchanged therefor; (v) under Section
1223(1) of the Code, the holding period of the Acquiring Fund Shares
received by each Acquired Fund shareholder will include the holding
period of Acquired Fund shares exchanged therefor, provided that the
Acquired Fund shareholder held the Acquired Fund shares at the time of
the Reorganization as a capital asset; (vi) under Section 1032 of the
Code, Acquiring Fund will not recognize gain or loss upon the receipt of
assets of Acquired Fund in exchange for Acquiring Fund Shares and the
assumption by Acquiring Fund of all of the liabilities of Acquired Fund;
(vii) under Section 362(b) of the Code, the basis of the assets of
Acquired Fund transferred to Acquiring Fund in the Reorganization will
be the same in the hands of Acquiring Fund as the basis of such assets
in the hands of Acquired Fund immediately prior to the transfer; (viii)
under Section 1223(2) of the Code, the holding periods of the assets of
Acquired Fund transferred to Acquiring Fund in the Reorganization in the
hands of Acquiring Fund will include the periods during which such
assets were held by Acquired Fund; and (ix) Acquiring Fund will succeed
to and take into account the items of Acquired Fund described in Section
381(c) of the Code, subject to the conditions and limitations specified
in Sections 381, 382, 383 and 384 of the Code and the regulations
thereunder. The delivery of such opinion is conditioned upon receipt by
Chapman and Cutler LLP of representations it shall request of each of
the Acquiring Trust and Acquired Fund. Notwithstanding anything herein
to the contrary, neither the Acquiring Fund nor the Acquired Fund may
waive the condition set forth in this Section 8.5.
Section 8.6 The Assets shall constitute at least 90% of the fair
market value of the net assets, and at least 70% of the fair market
value of the gross assets, held by the Acquired Fund immediately before
the Closing (excluding for these purposes assets used to pay the
dividends and other distributions paid pursuant to Section 1.4).
ARTICLE 9. INDEMNIFICATION
Section 9.1 The Acquiring Fund agrees to indemnify and hold harmless
the Acquired Fund and each of the Acquired Fund's Board members and
officers from and against any and all losses, claims, damages,
liabilities or expenses (including, without limitation, the payment of
reasonable legal fees and reasonable costs of investigation) to which
jointly and severally, the Acquired Fund or any of its Board members or
officers may become subject, insofar as any such loss, claim, damage,
liability or expense (or actions with respect thereto) arises out of or
is based on any breach by the Acquiring Fund of any of its
representations, warranties, covenants or agreements set forth in this
Agreement.
Section 9.2 The Acquired Fund agrees to indemnify and hold harmless
the Acquiring Fund and each of the Acquiring Trust's Board members and
officers from and against any and all losses, claims, damages,
liabilities or expenses (including, without limitation, the payment of
reasonable legal fees and reasonable costs of investigation) to which
jointly and severally, the Acquiring Trust or any of its Board members
or officers may become subject, insofar as any such loss, claim, damage,
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liability or expense (or actions with respect thereto) arises out of or
is based on any breach by the Acquired Fund of any of its
representations, warranties, covenants or agreements set forth in this
Agreement.
ARTICLE 10. FEES AND EXPENSES
Section 10.1 Each of the Acquiring Trust, on behalf of the Acquiring
Fund, and the Acquired Fund represents and warrants to the other that it
has no obligations to pay any brokers or finders fees in connection with
the transactions provided for herein.
Section 10.2 First Trust will bear the normal expenses associated
with the Reorganization. The Acquired Fund will bear any transaction
costs payable by the Acquired Fund in connection with sales of certain
of its assets, if any, as designated by the Acquiring Fund, in
anticipation of the Reorganization, and any extraordinary expenses
associated with the Reorganization.
ARTICLE 11. ENTIRE AGREEMENT
The Acquiring Fund and the Acquired Fund agree that neither party has
made any representation, warranty or covenant not set forth herein and
that this Agreement constitutes the entire agreement between the parties.
ARTICLE 12. TERMINATION
This Agreement may be terminated and the transactions contemplated
hereby may be abandoned (i) by mutual agreement of the parties, or (ii)
by either party if the Closing shall not have occurred on or before
January 31, 2007, unless such date is extended by mutual agreement of
the parties, or (iii) by either party if the other party shall have
materially breached its obligations under this Agreement or made a
material and intentional misrepresentation herein or in connection
herewith. In the event of any such termination, this Agreement shall
become void and there shall be no liability hereunder on the part of any
party or their respective Board members or officers, except under
Section 10.2 and except for any such material breach or intentional
misrepresentation, as to each of which all remedies at law or in equity
of the party adversely affected shall survive.
ARTICLE 13. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner
as may be mutually agreed upon in writing by any authorized officer of
the Acquired Fund and any authorized officer of the Acquiring Fund;
provided, however, that following the meeting of the Acquired Fund
Shareholders called by the Acquired Fund pursuant to Section 5.3 of this
Agreement, no such amendment may have the effect of changing the
provisions for determining the number of the Acquiring Fund Shares to be
issued to the Acquired Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
A-18
ARTICLE 14. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be deemed
duly given if delivered by hand (including by Federal Express or similar
express courier) or transmitted by facsimile or three days after being
mailed by prepaid registered or certified mail, return receipt
requested, addressed to the Acquired Fund and the Acquiring Fund, 1001
Warrenville Road, Suite 300, Lisle, Illinois 60532, Attn: W. Scott
Jardine, with a copy to Chapman and Cutler LLP, 111 West Monroe Street,
Chicago, Illinois 60603, Attn: Eric F. Fess, or to any other address
that the Acquired Fund or the Acquiring Fund shall have last designated
by notice to the other party.
ARTICLE 15. HEADINGS; COUNTERPARTS; ASSIGNMENT; LIMITATION OF LIABILITY
Section 15.1 The Article and Section headings contained in this
Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement.
Section 15.2 This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original.
Section 15.3 This Agreement shall bind and inure to the benefit of
the parties hereto and their respective successors and assigns, but no
assignment or transfer hereof or of any rights or obligations hereunder
shall be made by any party without the written consent of the other
party. Nothing herein expressed or implied is intended or shall be
construed to confer upon or give any person, firm or corporation, other
than the parties hereto and the shareholders of the Acquiring Fund and
the Acquired Fund and their respective successors and assigns, any
rights or remedies under or by reason of this Agreement.
Section 15.4 Notwithstanding anything to the contrary contained in
this Agreement, the obligations, agreements, representations and
warranties with respect to the Acquiring Fund shall constitute the
obligations, agreements, representations and warranties of the Acquiring
Fund only (the "Obligated Fund"), and in no event shall any other series
of the Acquiring Trust or the assets of any such series be held liable
with respect to the breach or other default by the Obligated Fund of its
obligations, agreements, representations and warranties as set forth
herein. All parties hereto are expressly put on notice of each of the
Acquired Fund and the Acquiring Trust's Declaration of Trust and all
amendments thereto, a copy of each of which is on file with the
Secretary of the Commonwealth of Massachusetts, and the limitations of
shareholder and trustee liability contained therein. This Agreement is
executed on behalf of each of the Acquired Fund and the Acquiring Trust,
on behalf of the Acquiring Fund, by each of the Acquired Fund's and
Acquiring Trust's officers as officers and not individually and the
obligations imposed upon each of the Acquired Fund and the Acquiring
Trust by this Agreement are not binding upon any of the Acquired Fund or
the Acquiring Trust's Trustees, officers or shareholders individually
but are binding only upon the assets and property of the respective
Funds, and persons dealing with the Funds must look solely to the assets
of the respective Funds and those assets belonging to the subject Fund,
for the enforcement of any claims.
A-19
Section 15.5 This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the Commonwealth of
Massachusetts, without regard to its principles of conflicts of laws.
A-20
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed as of the date first referenced above by an authorized
officer and attested by its Secretary or Assistant Secretary.
Attest: FIRST TRUST EXCHANGE-TRADED FUND,
on behalf of FIRST TRUST VALUE LINE(R)
DIVIDEND INDEX FUND
/s/ W. Scott Jardine /s/ James A. Bowen
- --------------------- ---------------------------------------
Secretary By: James A. Bowen
Its: President
Attest: FIRST TRUST VALUE LINE(R) DIVIDEND FUND
/s/ W. Scott Jardine /s/ James A. Bowen
- --------------------- ---------------------------------------
Secretary By: James A. Bowen
Its: President
Attest: FIRST TRUST ADVISORS L.P.
(for purposes of Section 10.2 only)
/s/ W. Scott Jardine /s/ James A. Bowen
- --------------------- ---------------------------------------
Secretary By: James A. Bowen
Its: President
A-21
EXHIBIT B
FURTHER DISCLOSURE REGARDING FVD
Per Share Price Data. For FVD, the following table sets forth, on a
quarterly basis, the high and low net asset values of the shares, the
high and low sales prices of the shares, and the high and low
discount/premium to net asset value for the periods indicated.
Premium
(Discount) as % of
Market Price Net Asset Value Net Asset Value
------------------ ------------------ ---------------------
Period (Calendar Year) High Low High Low High Low
- -------------------------------------- ----- ----- ----- ----- ------ -------
2006
First Quarter $14.78 $14.00 $16.83 $16.15 (10.80%) (13.42%)
Second Quarter 15.07 14.08 17.00 16.18 (9.16%) (14.72%)
Third Quarter 16.94 14.65 17.47 16.34 (2.71%) (10.34%)
Fourth Quarter (through October 6, 2006) 17.02 16.79 17.49 17.28 (2.31%) (2.84%)
2005
First Quarter $15.11 $14.15 $17.37 $16.51 (10.80%) (15.06%)
Second Quarter 14.83 14.04 17.58 16.49 (14.43%) (16.21%)
Third Quarter 15.26 14.72 18.14 17.44 (14.89%) (16.24%)
Fourth Quarter 15.66 13.88 18.03 15.92 (12.44%) (15.86%)
2004
First Quarter $14.84 $14.13 $16.40 $15.60 (6.17%) (10.98%)
Second Quarter 14.60 13.00 16.39 15.39 (9.07%) (16.13%)
Third Quarter 14.65 13.74 16.82 15.94 (12.33%) (14.64%)
Fourth Quarter 15.48 14.35 17.99 16.64 (9.92%) (14.46%)
2003
Third Quarter (inception August 27, 2003) $15.04 $14.00 $14.52 $14.23 5.25% (1.82%)
Fourth Quarter 14.65 13.58 15.68 14.51 (0.34%) (9.63%)
FVD's common shares have historically traded at an amount less than
their net asset value.
As of October 6, 2006, FVD's net asset value was $17.43 per share, and the
closing price of its shares on the AMEX was $16.97 per share (reflecting a 2.64%
discount). Recently FVD's market discount has narrowed. Management believes that
this is attributable to market activity following the announcement of the
proposed Reorganization. Should the Reorganization not occur, the discount at
which FVD's shares have tended to trade is likely to return to more typical
levels. The discount level of FVD shares at the time of the Reorganization
cannot be predicted.
APPENDIX I
CURRENT FUND PROSPECTUS FOR FVD ETF
[GRAPHIC OMITTED] [LOGO OMITTED] FIRST TRUST
ADVISORS L.P.
FIRST TRUST VALUE LINE(R)
DIVIDEND INDEX FUND
October 13, 2006
Front Cover
FIRST TRUST VALUE LINE(R)
DIVIDEND INDEX FUND
PROSPECTUS
October 13, 2006
First Trust Value Line(R) Dividend Index Fund (the "Fund") is a series
of a registered management investment company that is offering its
shares (the "Shares") through this Prospectus. Unlike many investment
companies, the Fund has applied to list the Shares on the American Stock
Exchange. Accordingly, the market prices for the Shares may be different
from their net asset value. The Fund will normally issue and redeem the
Shares only in large blocks consisting of 50,000 Shares ("Creation
Units"). Generally, Creation Units are issued and redeemed principally
in-kind for securities included in the Value Line(R) Dividend Index.
Except when aggregated in Creation Units, the Shares are exchange-listed
and are not redeemable securities of the Fund.
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy or accuracy of this
Prospectus. Any representation to the contrary is a criminal offense.
NOT FDIC INSURED. MAY LOSE VALUE.
NO BANK GUARANTEE.
Table of Contents
Introduction-First Trust Value Line(R) Dividend Index Fund 3
Who Should Invest in the Fund 3
Tax Efficient Product Structure 3
Investment Objective, Strategies and Risks 3
Additional Investment Strategies 7
Additional Risks of Investing in the Fund 8
Fund Organization 9
Management of the Fund 9
How to Buy and Sell Shares 10
Creations, Redemptions and Transaction Fees 11
Dividends, Distributions and Taxes 13
Federal Tax Matters 13
Distribution Plan 15
Net Asset Value 16
Fund Service Providers 17
Disclaimers 17
Additional Index Information 18
Other Information 19
Page 2
Introduction-
First Trust Value Line(R) Dividend Index Fund
The Fund is a series of the First Trust Exchange-Traded Fund (the
"Trust"), an investment company and an exchange-traded "index fund." The
investment objective of the Fund is to seek investment results that
correspond generally to the price and yield (before the Fund's fees and
expenses) of an equity index called the Value Line(R) Dividend Index
(the "Index"). First Trust Advisors L.P. ("First Trust") is the
investment adviser for the Fund.
The Shares are expected to list and trade on the American Stock Exchange
("AMEX"), under the ticker symbol "FVD," at market prices that may
differ to some degree from the net asset value ("NAV") of the Shares.
Unlike conventional mutual funds, the Fund normally issues and redeems
Shares on a continuous basis, at NAV, only in large specified blocks
consisting of 50,000 Shares called a "Creation Unit." Creation Units are
issued and redeemed principally in-kind for securities included in the
Index. Except when aggregated in Creation Units, Shares are not
redeemable securities of the Fund.
Who Should Invest in the Fund
The Fund is designed for investors who seek a relatively low-cost
approach for investing in a portfolio of equity securities of companies
in the Index. The Fund may be suitable for long-term investment in the
market represented by the Index and may also be used as an asset
allocation tool or as a speculative trading instrument.
Tax Efficient Product Structure
Unlike many conventional mutual funds, the Shares are traded throughout
the day on the AMEX whereas mutual funds are typically only bought and
sold at closing NAVs. The Shares have been designed to be tradable in
the secondary market on the AMEX on an intra-day basis, and to be
created and redeemed principally in-kind in Creation Units at each day's
next calculated NAV. These arrangements are designed to protect ongoing
shareholders from adverse effects on the Fund that could arise from
frequent cash creation and redemption transactions. In a conventional
mutual fund, redemptions can have an adverse tax impact on taxable
shareholders because of the mutual fund's need to sell portfolio
securities to obtain cash to meet fund redemptions. These sales may
generate taxable gains for the shareholders of the mutual fund, whereas
the Shares' in-kind redemption mechanism generally will not lead to a
tax event for the Fund or its ongoing shareholders.
Investment Objective, Strategies and Risks
Investment Objective
The Fund seeks investment results that correspond generally to the price
and yield (before the Fund's fees and expenses) of an equity index
called the Value Line(R) Dividend Index.
Principal Investment Strategies
The Fund will normally invest at least 90% of its total assets in common
stocks that comprise the Index. First Trust will seek to match the
performance of the Index (before the Fund's fees and expenses). The
Index is designed to objectively identify and select those stocks from
the universe of stocks of which Value Line, Inc.(R) ("Value Line(R)")
Page 3
gives a Safety(TM) Ranking of #1 or #2 in the Value Line(R) Safety(TM)
Ranking System and have the potential to pay above average dividends and
capital appreciation.
The Fund, using an "indexing" investment approach, attempts to
replicate, before expenses, the performance of the Index. First Trust
seeks a correlation of 0.95 or better (before expenses) between the
Fund's performance and the performance of the Index; a figure of 1.00
would represent perfect correlation. First Trust will regularly monitor
the Fund's tracking accuracy and will use the investment techniques
described below in seeking to maintain an appropriate correlation.
In seeking to achieve the Fund's objective, the Fund generally will
invest in all of the stocks comprising the Index in proportion to their
weightings in the Index. However, under various circumstances, it may
not be possible or practicable to purchase all of those stocks in those
weightings. In those circumstances, the Fund may purchase a sample of
stocks in the Index. There may also be instances in which First Trust
may choose to overweight certain stocks in the Index, purchase
securities not in the Index which First Trust believes are appropriate
to substitute for certain securities in the Index, use futures or other
derivative instruments, or utilize various combinations of the above
techniques in seeking to track the Index. The Fund may sell stocks that
are represented in the Index in anticipation of their removal from the
Index or purchase stocks not represented in the Index in anticipation of
their addition to the Index.
Index Construction
The Index is a modified equal-dollar weighted index comprised of U.S.
exchange-listed securities of companies that pay above-average dividends
and have potential for capital appreciation. The inception date of the
Index was July 3, 2006. On July 26, 2006, there were 180 stocks that
comprised the Index.
The Index begins with the universe of stocks that Value Line(R) gives a
Safety(TM) Ranking of #1 or #2 using the Value Line(R) Safety(TM)
Ranking System. All registered investment companies, limited
partnerships and foreign securities not listed in the U.S. are removed
from this universe. From those stocks, Value Line(R) selects those
companies with a higher than average dividend yield, as compared to the
indicated dividend yield of the Standard & Poor's 500 Composite Stock
Price Index. Value Line(R) then eliminates those companies with an
equity market capitalization of less than $1 billion. When the Index is
initially configured or reconfigured (as noted below), the Index seeks
to be equally weighted in each of the securities in the Index.
After the initial selection of securities, the Index is rebalanced on
the application of the above model on a monthly basis. The Index divisor
was initially determined to yield a benchmark value of 1,000.00 at the
close of trading on July 3, 2006. The holdings of the Fund and the
composition and compilation methodology of the Index will be available
on the Fund's website at www.ftportfolios.com. Value Line(R)'s updated
rankings are released weekly on its website at www.valueline.com.
Principal Risks of Investing in the Fund
Risk is inherent in all investing. The Fund's Shares will change in
value, and loss of money is a risk of investing in the Fund. The Fund
may not achieve its objective. An investment in the Fund is not a
deposit with a bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. An
investment in the Fund involves risks similar to those of investing in
any fund of equity securities traded on exchanges. The following
specific risk factors have been identified as the principal risks of
investing in the Fund.
Market Risk. One of the principal risks of investing in the Fund is
market risk. Market risk is the risk that a particular stock owned by the
Fund, Fund Shares or stocks in general may fall in value. Shares are
subject to market fluctuations caused by such factors as economic,
political, regulatory or market developments, changes in interest rates
Page 4
and perceived trends in stock prices. Overall stock values could decline
generally or could underperform other investments.
Index Tracking Risk. You should anticipate that the value of the Shares
will decline, more or less, in correlation with any decline in the value
of the Index.
Non-Correlation Risk. The Fund's return may not match the return of the
Index for a number of reasons. For example, the Fund incurs operating
expenses not applicable to the Index, and may incur costs in buying and
selling securities, especially when rebalancing the Fund's securities
holdings to reflect changes in the composition of the Index. In addition,
the Fund's portfolio holdings may not exactly replicate the securities
included in the Index or the ratios between the securities included in
the Index.
The Fund may not be fully invested at times, either as a result of cash
flows into the Fund or reserves of cash held by the Fund to meet
redemptions and expenses. If the Fund utilizes a sampling approach or
invests in futures or other derivative positions, its return may not
correlate as well with the return of the Index, as would be the case if
it purchased all of the stocks in the Index with the same weightings as
the Index. While First Trust seeks to have a correlation of 0.95 or
better, before expenses, between the Fund's performance and the
performance of the Index, there can be no assurance that the Fund will
be able to achieve such a correlation. Accordingly, the Fund's
performance may correlate to a lesser extent and may possibly vary
substantially from the performance of the Index.
Replication Management Risk. The Fund is also exposed to additional
market risk due to its policy of investing principally in the securities
included in the Index. As a result of this policy, securities held by the
Fund will generally not be bought or sold in response to market
fluctuations and the securities may be issued by companies concentrated
in a particular industry. As a result of this policy, the Fund would
generally not sell a stock because the stock's issuer was in financial
trouble, unless that stock is removed or is anticipated to be removed
from the Index.
Small-Cap and Mid-Cap Company Risk. The Fund may invest in small
capitalization and mid capitalization companies. Such companies may be
more vulnerable to adverse general market or economic developments, and
their securities may be less liquid and may experience greater price
volatility than larger, more established companies as a result of several
factors, including limited trading volumes, products or financial
resources, management inexperience and less publicly available
information. Accordingly, such companies are generally subject to greater
market risk than larger, more established.
Concentration Risk. The Fund will be concentrated in the securities of a
given industry if the Index is concentrated in such industry. A
concentration makes the Fund more susceptible to any single occurrence
affecting the industry or sector and may subject the Fund to greater
market risk than more diversified funds.
Intellectual Property Risk. The Fund relies on a license from Value
Line(R) that permits the Fund to use Value Line(R)'s Index and associated
trade names and trademarks ("Intellectual Property") in connection with
the name and investment strategies of the Fund. Such license may be
terminated by the licensor, and as a result, the Fund may lose its
ability to use the Intellectual Property. There is also no guarantee that
Value Line(R) has all rights to license the Intellectual Property to
First Trust, on behalf of the Fund. Accordingly, in the event the license
is terminated or Value Line(R) does not have rights to license the
Intellectual Property, it may have a significant effect on the operation
of the Fund.
See "Additional Risks of Investing in the Fund" for additional
information regarding risks.
Page 5
How the Fund Has Performed
The Fund has not yet commenced operations and, therefore, does not have
a performance history.
What Are the Costs of Investing?
This table describes the fees and expenses that you may pay if you buy
and hold Shares of the Fund.(1)
Shareholder Transaction Expenses(2)(3)
(Fees paid directly from your investments) None*
Annual Fund Operating Expenses(4)
(Expenses that are deducted from the Fund's assets)
Management Fees 0.50%
Distribution and Service (12b-1) Fees(5) 0.00%
Other Expenses 0.27%
Total Annual Fund Operating Expenses 0.77%
Fee Waivers and Expense Reimbursement(6) 0.07%
Net Annual Fund Operating Expenses 0.70%
- -----------------
(1) The Fund had not fully commenced operations as of the date of this
Prospectus. The "Other Expenses" listed in the table are estimates
based on the expenses the Fund expects to incur for an annual
period or on an annual basis.
(2) When buying or selling exchange-traded Shares through a broker, you
will incur customary brokerage commissions and charges.
(3) Purchasers of Creation Units and parties redeeming Creation Units
must pay a standard creation or redemption transaction fee of $500,
as applicable. However, if a Creation Unit is purchased or redeemed
outside the usual process through the National Securities Clearing
Corporation or for cash, a variable fee of up to four times the
standard creation or redemption transaction fee (i.e., up to
$2,000) will be charged.
(4) Expressed as a percentage of average net assets.
(5) The Fund has adopted a distribution and service (12b-1) plan
pursuant to which the Fund may bear a 12b-1 fee not to exceed 0.25%
per annum of the Fund's average daily net assets. However, no such
fee is currently paid by the Fund and the Fund does not currently
anticipate paying 12b-1 fees.
(6) First Trust has agreed to waive fees and/or pay Fund expenses to
the extent necessary to prevent the operating expenses of the Fund
(excluding interest expense, brokerage commissions and other
trading expenses, taxes, and extraordinary expenses) from exceeding
0.70% of average net assets per year (the "Expense Cap"), at least
until two years after the initial issuance of Fund Shares. Expenses
borne by First Trust are subject to reimbursement by the Fund up to
three years from the date the fee or expense was incurred, but no
reimbursement payment will be made by the Fund if it would result
in the Fund exceeding its Expense Cap.
* See "Creation Transaction Fees and Redemption Transaction Fees"
below.
Example
This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other funds. This example does
not take into account brokerage commissions that you pay when purchasing
or selling Shares of the Fund.
The example assumes that you invest $10,000 in the Fund for the time
periods indicated and then you retain the Shares or sell all of your
Shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or
lower, your costs, based on these assumptions, would be:
1 Year 3 Years
$72 $234
Page 6
Creation Transaction Fees and Redemption Transaction Fees
The Fund normally issues and redeems Shares at NAV only in large blocks
of 50,000 Shares (each block of 50,000 Shares called a "Creation Unit")
or multiples thereof. As a practical matter, only broker-dealers or
large institutional investors with creation and redemption agreements,
called "Authorized Participants" ("APs"), can purchase or redeem these
Creation Units. Purchasers of Creation Units at NAV must pay a standard
Creation Transaction Fee of $500 per transaction (regardless of the
number of Creation Units involved). Normally, the value of a Creation
Unit as of the first creation of such Creation Unit was approximately
$1,000,000. An AP who holds Creation Units and wishes to redeem at NAV
would also pay a standard redemption fee of $500 for each redemption
transaction (regardless of the number of Creation Units involved). See
"Creations, Redemptions and Transaction Fees" later in the Prospectus.
APs who hold Creation Units in inventory will also indirectly pay Fund
expenses. Assuming an investment in a Creation Unit of $1,000,000 and a
5% return each year, assuming that the Fund's operating expenses remain
the same, and assuming brokerage costs are not included, the total costs
would be $8,175 if the Creation Unit is redeemed after one year and
$24,410 if the Creation Unit is redeemed after three years.
If a Creation Unit is purchased or redeemed outside the usual process
through the National Securities Clearing Corporation or for cash, a
variable fee of up to four times the standard Creation or Redemption
Transaction Fee (i.e., up to $2,000) may be charged to the AP making the
transaction.
The creation fee, redemption fee and variable fee are not expenses of
the Fund and do not impact the Fund's expense ratio.
Additional Investment Strategies
The investment objective of the Fund is a fundamental policy that may be
changed only with shareholder approval. Each of the other policies
described herein constitutes a non-fundamental policy that may be
changed by the Board of Trustees without shareholder approval. Certain
other fundamental policies of the Fund are set forth in the Statement of
Additional Information ("SAI") under "Investment Objective and Policies."
Equity Securities
The Fund invests primarily in equity securities of U.S. issuers.
Eligible equity securities include common stocks and warrants to
purchase common stocks. In addition, the Fund may invest in equity
securities of foreign issuers listed on any national exchange, including
depositary receipts that represent foreign common stocks deposited with
a custodian.
Short-Term Investments
The Fund may invest in cash equivalents or other short-term investments
including, U.S. government securities, commercial paper, repurchase
agreements, money-market funds or similar fixed-income securities with
remaining maturities of one year or less. For more information on short-
term investments, see the SAI.
Futures and Options
The Fund may use various investment strategies designed to hedge against
changes in the values of securities the Fund owns or expects to purchase
or to hedge against interest rate or currency exchange rate changes. The
securities used to implement these strategies include financial futures
contracts, options, forward contracts, options on financial futures and
stock index options.
Page 7
Delayed Delivery Securities
The Fund may buy or sell securities on a when-issued or delayed-delivery
basis, paying for or taking delivery of the securities at a later date,
normally within 15 to 45 days of the trade. Such transactions involve an
element of risk because the value of the securities to be purchased may
decline before the settlement date.
Disclosure of Portfolio Holdings
A description of the policies and procedures with respect to the
disclosure of the Fund's portfolio securities is included in the Fund's
SAI.
Additional Risks of Investing in the Fund
Risk is inherent in all investing. Investing in the Fund involves risk,
including the risk that you may lose all or part of your investment.
There can be no assurance that the Fund will meet its stated objective.
Before you invest, you should consider the following risks.
Trading Issues
Trading in Shares on the AMEX may be halted due to market conditions or
for reasons that, in the view of the AMEX, make trading in Shares
inadvisable. In addition, trading in Shares on the AMEX is subject to
trading halts caused by extraordinary market volatility pursuant to the
AMEX "circuit breaker" rules. There can be no assurance that the
requirements of the AMEX necessary to maintain the listing of the Fund
will continue to be met or will remain unchanged.
Fluctuation of Net Asset Value
The net asset value of the Fund's Shares will generally fluctuate with
changes in the market value of the Fund's holdings. The market prices of
Shares will generally fluctuate in accordance with changes in net asset
value as well as the relative supply of and demand for Shares on the
AMEX. First Trust cannot predict whether Shares will trade below, at or
above their net asset value. Price differences may be due, in large
part, to the fact that supply and demand forces at work in the secondary
trading market for Shares will be closely related to, but not identical
to, the same forces influencing the prices of the stocks of the Fund
trading individually or in the aggregate at any point in time. However,
given that Shares can be purchased and redeemed in Creation Units
(unlike shares of many closed-end funds, which frequently trade at
appreciable discounts from, and sometimes at premiums to, their net
asset value), First Trust believes that large discounts or premiums to
the net asset value of Shares should not be sustained.
Inflation
Inflation risk is the risk that the value of assets or income from
investments will be less in the future as inflation decreases the value
of money. As inflation increases, the value of the Fund's assets can
decline as can the value of the Fund's distributions. Common stock
prices may be particularly sensitive to rising interest rates, as the
cost of capital rises and borrowing costs increase.
Investment Strategy
The Fund is exposed to additional market risk due to its policy of
investing principally in the securities included in the Index. As a
result of this policy, securities held by the Fund will generally not be
bought or sold in response to market fluctuations. This policy may
subject investors to greater market risk than other mutual funds.
Page 8
Fund Organization
The Fund is a series of an investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund is
treated as a separate mutual fund with its own investment objective and
policies. The Trust is organized as a Massachusetts business trust. Its
Board of Trustees (the "Board") is responsible for its overall
management and direction. The Board elects the Trust's officers and
approves all significant agreements, including those with the investment
adviser, custodian and fund administrative and accounting agent.
Management of the Fund
First Trust Advisors L.P. ("First Trust"), 1001 Warrenville Road, Lisle,
Illinois 60532, is the investment adviser to the Fund. In this capacity,
First Trust is responsible for the selection and ongoing monitoring of
the securities in the Fund's portfolio and certain other services
necessary for the management of the portfolio.
First Trust is a limited partnership with one limited partner, Grace
Partners of DuPage L.P., and one general partner, The Charger
Corporation. Grace Partners of DuPage L.P. is a limited partnership with
one general partner, The Charger Corporation, and a number of limited
partners. The Charger Corporation is an Illinois corporation controlled
by the Robert Donald Van Kampen family. First Trust discharges its
responsibilities subject to the policies of the Board of Trustees of the
Trust.
First Trust serves as adviser or sub adviser for 24 mutual fund
portfolios, ten exchange-traded fund portfolios and 14 closed-end funds
and is also the portfolio supervisor of certain unit investment trusts
sponsored by First Trust Portfolios L.P. ("FTP"), 1001 Warrenville Road,
Lisle, Illinois 60532. FTP specializes in the underwriting, trading and
distribution of unit investment trusts and other securities. FTP is the
principal underwriter of the Fund's Shares.
There is no one individual primarily responsible for portfolio
management decisions for the Fund. Investments are made under the
direction of a committee (the "Investment Committee"). The Investment
Committee consists of Daniel J. Lindquist, Robert F. Carey, Jon C.
Erickson, David G. McGarel, Roger F. Testin and Stan Ueland. Mr.
Lindquist rejoined First Trust in April 2004 after serving as Chief
Operating Officer of Mina Capital Management LLC from January 2004 to
April 2004 and Samaritan Asset Management LLC from 2000 to 2003 and is a
Senior Vice President of First Trust and FTP. Mr. Lindquist is Chairman
of the Investment Committee and presides over Investment Committee
meetings. Mr. Lindquist is responsible for overseeing the implementation
of the Fund's investment strategies. Mr. Carey is the Chief Investment
Officer and Senior Vice President of First Trust and Senior Vice
President of FTP. As First Trust's Chief Investment Officer, Mr. Carey
consults with the Investment Committee on market conditions and First
Trust's general investment philosophy. Mr. Erickson is a Senior Vice
President of First Trust and FTP. As the head of First Trust's Equity
Research Group, Mr. Erickson is responsible for determining the
securities to be purchased and sold by funds that do not utilize
quantitative investment strategies. Mr. McGarel is a Senior Vice
President of First Trust and FTP. As the head of First Trust's Strategy
Research Group, Mr. McGarel is responsible for developing and
implementing quantitative investment strategies for those funds that
have investment policies that require them to follow such strategies.
Mr. Testin is a Senior Vice President of First Trust. Prior to joining
First Trust, Mr. Testin was an analyst for Dolan Capital Management. Mr.
Testin is the head of First Trust's Portfolio Management Group. Mr.
Ueland has been a Vice President of First Trust and FTP since August
2005. At First Trust, he plays an important role in executing the
investment strategies of each portfolio of exchange-traded funds advised
by First Trust. Before joining First Trust, Mr. Ueland was vice
Page 9
president of sales at BondWave LLC from May 2004 through August 2005, an
account executive for Mina Capital Management LLC and Samaritan Asset
Management LLC from January 2003 through May 2004, and a sales
consultant at Oracle Corporation from January 1997 through January 2003.
For additional information concerning First Trust, including a
description of the services provided to the Fund, see the Fund's SAI. In
addition, the SAI provides additional information about the compensation
of Investment Committee members, other accounts managed by members of
the Investment Committee and ownership by members of the Investment
Committee of securities in the Fund.
First Trust will receive fees from the Fund equal to 0.50% of the Fund's
average daily net assets. A discussion regarding the approval of the
Investment Management Agreement will be available in the Fund's annual
report to Shareholders for the fiscal year ending December 31, 2006.
The Fund is responsible for all of its expenses, including the
investment advisory fees, costs of transfer agency, custody, fund
administration, legal, audit and other services, interest, taxes,
brokerage commissions and other expenses connected with the execution of
portfolio transactions, paying for its sublicensing fees related to the
Index, any distribution fees or expenses, and extraordinary expenses.
First Trust has agreed to waive fees and/or pay Fund expenses to the
extent necessary to prevent the operating expenses of the Fund
(excluding interest expense, brokerage commissions and other trading
expenses, taxes and extraordinary expenses) from exceeding 0.70% of
average daily net assets per year, at least until two years after the
initial issuance of Fund Shares. Expenses borne by First Trust are
subject to reimbursement by the Fund up to three years from the date the
fee or expense was incurred, but no reimbursement payment will be made
by the Fund if it would result in the Fund exceeding its Expense Cap.
How to Buy and Sell Shares
Shares will be issued or redeemed by the Fund at net asset value per
Share only in Creation Unit size. See "Creations, Redemptions and
Transaction Fees."
Most investors will buy and sell Shares of the Fund in secondary market
transactions through brokers. Shares of the Fund will be listed for
trading on the secondary market on the AMEX. Shares can be bought and
sold throughout the trading day like other publicly traded shares. There
is no minimum investment. Although Shares are generally purchased and
sold in "round lots" of 100 Shares, brokerage firms typically permit
investors to purchase or sell Shares in smaller "odd lots," at no per-
Share price differential. When buying or selling Shares through a
broker, you will incur customary brokerage commissions and charges, you
may receive less than the net asset value of the Shares, and you may pay
some or all of the spread between the bid and the offer price in the
secondary market on each leg of a round trip (purchase and sale)
transaction. The Fund will trade under the AMEX symbol "FVD." Share
prices are reported in dollars and cents per Share.
Investors may acquire Shares directly from the Fund, and shareholders
may tender their Shares for redemption directly to the Fund, only in
Creation Units of 50,000 Shares, as discussed in the "Creations,
Redemptions and Transaction Fees" section below.
Book Entry
Shares are held in book-entry form, which means that no Share
certificates are issued. The Depository Trust Company ("DTC") or its
nominee is the record owner of all outstanding Shares of the Fund and is
recognized as the owner of all Shares for all purposes.
Investors owning Shares are beneficial owners as shown on the records of
DTC or its participants. DTC serves as the securities depository for all
Shares. Participants in DTC include securities brokers and dealers,
banks, trust companies, clearing corporations and other institutions
Page 10
that directly or indirectly maintain a custodial relationship with DTC.
As a beneficial owner of Shares, you are not entitled to receive
physical delivery of Share certificates or to have Shares registered in
your name, and you are not considered a registered owner of Shares.
Therefore, to exercise any right as an owner of Shares, you must rely
upon the procedures of DTC and its participants. These procedures are
the same as those that apply to any other stocks that you hold in book-
entry or "street name" form.
Fund Share Trading Prices
The trading prices of Shares of the Fund on the AMEX may differ from the
Fund's daily NAV and can be affected by market forces of supply and
demand, economic conditions and other factors.
The AMEX intends to disseminate the approximate value of Shares of the
Fund every 15 seconds. This approximate value should not be viewed as a
"real-time" update of the NAV per Share of the Fund because the
approximate value may not be calculated in the same manner as the NAV,
which is computed once a day, generally at the end of the business day.
The Fund is not involved in, or responsible for, the calculation or
dissemination of the approximate value and the Fund does not make any
warranty as to its accuracy.
Frequent Purchases and Redemptions of the Fund's Shares
The Fund imposes no restrictions on the frequency of purchases and
redemptions. In determining not to approve a written, established
policy, the Board evaluated the risks of market timing activities by the
Fund's shareholders. The Board considered that, unlike traditional
mutual funds, the Fund issues and redeems its Shares at net asset value
per Share for a basket of securities intended to mirror the Fund's
portfolio, plus a small amount of cash, and the Fund's Shares may be
purchased and sold on the AMEX at prevailing market prices. Given this
structure, the Board determined that (a) it is unlikely that market
timing would be attempted by the Fund's shareholders and (b) any
attempts to market time the Fund by shareholders would not be expected
to negatively impact the Fund or its shareholders.
Creations, Redemptions and Transaction Fees
Investors such as market makers, large investors and institutions who
wish to deal in Creation Units directly with the Fund must have entered
into an authorized participant agreement with the principal underwriter
and the transfer agent, or purchase through a dealer that has entered
into such an agreement. Set forth below is a brief description of the
procedures applicable to purchases and redemptions of Creation Units.
For more detailed information see "Creation and Redemption of Creation
Unit Aggregations" in the SAI.
Purchase
In order to purchase Creation Units of the Fund, an investor must
generally deposit a designated portfolio of equity securities
constituting a substantial replication, or a representation, of the
stocks included in the Fund's Index (the "Deposit Securities") and
generally make a small cash payment referred to as the "Cash Component."
The list of the names and the numbers of shares of the Deposit
Securities is made available by the Fund's custodian through the
facilities of the National Securities Clearing Corporation ("NSCC"),
immediately prior to the opening of business each day of the AMEX. The
Cash Component represents the difference between the net asset value of
a Creation Unit and the market value of the Deposit Securities.
Orders must be placed in proper form by or through an AP which is either
(i) a "Participating Party," i.e., a broker-dealer or other participant
in the Clearing Process of the Continuous Net Settlement System of the
Page 11
NSCC (the "Clearing Process") or (ii) a participant of DTC ("DTC
Participant") that has entered into an agreement with the principal
underwriter and the transfer agent, with respect to purchases and
redemptions of Creation Units. All orders must be placed for one or more
whole Creation Units of Shares of the Fund and must be received by the
principal underwriter in proper form no later than the close of regular
trading on the AMEX (ordinarily 4:00 p.m., Eastern time) ("Closing
Time") in order to receive that day's closing net asset value per Share.
In the case of custom orders, as further described in the SAI, the order
must be received by the principal underwriter no later than 3:00 p.m.,
Eastern time. A custom order may be placed by an AP in the event that
the Fund permits or requires the substitution of an amount of cash to be
added to the Cash Component to replace any Deposit Security which may
not be available in sufficient quantity for delivery or which may not be
eligible for trading by such AP or the investor for which it is acting
or any other relevant reason. See "Creation and Redemption of Creation
Unit Aggregations" in the SAI.
A fixed creation transaction fee of $500 (the "Creation Transaction
Fee") is applicable to each transaction regardless of the number of
Creation Units purchased in the transaction. An additional charge of up
to four times the Creation Transaction Fee (i.e., up to $2,000) may be
imposed with respect to transactions effected outside of the Clearing
Process (through a DTC Participant) or to the extent that cash is used
in lieu of securities to purchase Creation Units. See "Creation and
Redemption of Creation Unit Aggregations" in the SAI. The price for each
Creation Unit will equal the daily NAV per Share times the number of
Shares in a Creation Unit plus the fees described above and, if
applicable, any transfer taxes.
Shares of the Fund may be issued in advance of receipt of all Deposit
Securities subject to various conditions including a requirement to
maintain on deposit with the Fund cash at least equal to 115% of the
market value of the missing Deposit Securities. See "Creation and
Redemption of Creation Unit Aggregations" in the SAI.
Legal Restrictions on Transactions in Certain Stocks
An investor subject to a legal restriction with respect to a particular
stock required to be deposited in connection with the purchase of a
Creation Unit may, at the Fund's discretion, be permitted to deposit an
equivalent amount of cash in substitution for any stock which would
otherwise be included in the Deposit Securities applicable to the
purchase of a Creation Unit. For more details, see "Creation and
Redemption of Creation Unit Aggregations" in the SAI.
Redemption
The Fund's custodian makes available immediately prior to the opening of
business each day of the AMEX, through the facilities of the NSCC, the
list of the names and the numbers of shares of the Fund's portfolio
securities that will be applicable that day to redemption requests in
proper form ("Fund Securities"). Fund Securities received on redemption
may not be identical to Deposit Securities, which are applicable to
purchases of Creation Units. Unless cash redemptions are available or
specified for the Fund, the redemption proceeds consist of the Fund
Securities, plus cash in an amount equal to the difference between the
net asset value of Shares being redeemed as next determined after
receipt by the transfer agent of a redemption request in proper form,
and the value of the Fund Securities (the "Cash Redemption Amount"),
less the applicable redemption fee and, if applicable, any transfer
taxes. Should the Fund Securities have a value greater than the net
asset value of Shares being redeemed, a compensating cash payment to the
Fund equal to the differential, plus the applicable redemption fee and,
if applicable, any transfer taxes will be required to be arranged for by
or on behalf of the redeeming shareholder. Investors should expect to
incur brokerage and other costs in connection with assembling a
sufficient number of Fund Shares to constitute a redeemable Creation
Unit. For more details, see "Creation and Redemption of Creation Unit
Aggregations" in the SAI.
Page 12
An order to redeem Creation Units of the Fund may only be effected by or
through an AP. An order to redeem must be placed for one or more whole
Creation Units and must be received by the transfer agent in proper form
no later than the close of regular trading on the AMEX (ordinarily 4:00
p.m., Eastern time) in order to receive that day's closing net asset
value per Share. In the case of custom orders, as further described in
the SAI, the order must be received by the transfer agent no later than
3:00 p.m., Eastern time.
A fixed redemption transaction fee of $500 (the "Redemption Transaction
Fee") is applicable to each redemption transaction regardless of the
number of Creation Units redeemed in the transaction. A variable charge
of up to four times the Redemption Transaction Fee (i.e., up to $2,000)
may be charged to approximate additional expenses incurred by the Fund
with respect to redemptions effected outside of the Clearing Process or
to the extent that redemptions are for cash. The Fund reserves the right
to effect redemptions in cash. A shareholder may request a cash
redemption in lieu of securities, however, the Fund may, in its
discretion, reject any such request. See "Creation and Redemption of
Creation Unit Aggregations" in the SAI.
Dividends, Distributions and Taxes
Dividends from net investment income, if any, are declared and paid
quarterly. The Fund distributes its net realized capital gains, if any,
to shareholders annually.
Distributions in cash may be reinvested automatically in additional
whole Shares only if the broker through whom you purchased Shares makes
such option available. Such Shares will generally be reinvested by the
broker based upon the market price of those Shares and investors may be
subject to brokerage commissions charged by the broker.
Federal Tax Matters
This section summarizes some of the main U.S. federal income tax
consequences of owning Shares of the Fund. This section is current as of
the date of this Prospectus. Tax laws and interpretations change
frequently, and these summaries do not describe all of the tax
consequences to all taxpayers. For example, these summaries generally do
not describe your situation if you are a corporation, a non-U.S. person,
a broker-dealer, or other investor with special circumstances. In
addition, this section does not describe your state, local or foreign
tax consequences.
This federal income tax summary is based in part on the advice of
counsel to the Fund. The Internal Revenue Service could disagree with
any conclusions set forth in this section. In addition, counsel to the
Fund was not asked to review, and has not reached a conclusion with
respect to the federal income tax treatment of the assets to be included
in the Fund. This may not be sufficient for you to use for the purpose
of avoiding penalties under federal tax law.
As with any investment, you should seek advice based on your individual
circumstances from your own tax adviser.
Fund Status
The Fund intends to qualify as a "regulated investment company" under
the federal tax laws. If the Fund qualifies as a regulated investment
company and distributes its income as required by the tax law, the Fund
generally will not pay federal income taxes.
Page 13
Distributions
Fund distributions are generally taxable. After the end of each year,
you will receive a tax statement that separates your Fund's
distributions into two categories, ordinary income distributions and
capital gains dividends. Ordinary income distributions are generally
taxed at your ordinary tax rate, however, as further discussed below,
certain ordinary income distributions received from the Fund may be
taxed at the capital gains tax rates. Generally, you will treat all
capital gains dividends as long-term capital gains regardless of how
long you have owned your shares. To determine your actual tax liability
for your capital gains dividends, you must calculate your total net
capital gain or loss for the tax year after considering all of your
other taxable transactions, as described below. In addition, the Fund
may make distributions that represent a return of capital for tax
purposes and thus will generally not be taxable to you. The tax status
of your distributions from the Fund is not affected by whether you
reinvest your distributions in additional Shares or receive them in
cash. The income from the Fund that you must take into account for
federal income tax purposes is not reduced by amounts used to pay a
deferred sales fee, if any. The tax laws may require you to treat
distributions made to you in January as if you had received them on
December 31 of the previous year.
Dividends Received Deduction
A corporation that owns shares generally will not be entitled to the
dividends received deduction with respect to many dividends received
from the Fund because the dividends received deduction is generally not
available for distributions from regulated investment companies.
However, certain ordinary income dividends on shares that are
attributable to qualifying dividends received by the Fund from certain
corporations may be designated by the Fund as being eligible for the
dividends received deduction.
Capital Gains and Losses and Certain Ordinary Income Dividends
If you are an individual, the maximum marginal federal tax rate for net
capital gain is generally 15% (generally 5% for certain taxpayers in the
10% and 15% tax brackets). These capital gains rates are generally
effective for taxable years beginning before January 1, 2011. For later
periods, if you are an individual, the maximum marginal federal tax rate
for net capital gain is generally 20% (10% for certain taxpayers in the
10% and 15% tax brackets). The 20% rate is reduced to 18% and the 10%
rate is reduced to 8% for long-term capital gains from most property
acquired after December 31, 2000 with a holding period of more than five
years.
Net capital gain equals net long-term capital gain minus net short-term
capital loss for the taxable year. Capital gain or loss is long-term if
the holding period for the asset is more than one year and is short-term
if the holding period for the asset is one year or less. You must
exclude the date you purchase your shares to determine your holding
period. However, if you receive a capital gain dividend from the Fund
and sell your Shares at a loss after holding it for six months or less,
the loss will be recharacterized as long-term capital loss to the extent
of the capital gain dividend received. The tax rates for capital gains
realized from assets held for one year or less are generally the same as
for ordinary income. The Internal Revenue Code treats certain capital
gains as ordinary income in special situations.
Ordinary income dividends received by an individual shareholder from a
regulated investment company such as the Fund are generally taxed at the
same rates that apply to net capital gain (as discussed above), provided
certain holding period requirements are satisfied and provided the
dividends are attributable to qualifying dividends received by the Fund
itself. These special rules relating to the taxation of ordinary income
dividends from regulated investment companies generally apply to taxable
years beginning before January 1, 2011. The Fund will provide notice to
its shareholders of the amount of any distribution which may be taken
into account as a dividend which is eligible for the capital gains tax
rates.
Page 14
Sale of Shares
If you sell your Shares, you will generally recognize a taxable gain or
loss. To determine the amount of this gain or loss, you must subtract
your tax basis in your Shares from the amount you receive in the
transaction. Your tax basis in your Shares is generally equal to the
cost of your Shares, generally including sales charges. In some cases,
however, you may have to adjust your tax basis after you purchase your
Shares.
Taxes on Purchase and Redemption of Creation Units
If you exchange equity securities for Creation Units you will generally
recognize a gain or a loss. The gain or loss will be equal to the
difference between the market value of the Creation Units at the time
and your aggregate basis in the securities surrendered and the Cash
Component paid. If you exchange Creation Units for equity securities you
will generally recognize a gain or loss equal to the difference between
your basis in the Creation Units and the aggregate market value of the
securities received and the Cash Redemption Amount. The Internal Revenue
Service, however, may assert that a loss realized upon an exchange of
securities for Creation Units cannot be deducted currently under the
rules governing "wash sales," or on the basis that there has been no
significant change in economic position.
Deductibility of Fund Expenses
Expenses incurred and deducted by the Fund will generally not be treated
as income taxable to you.
Foreign Tax Credit
If your Fund invests in any foreign securities, the tax statement that
you receive may include an item showing foreign taxes your Fund paid to
other countries. In this case, dividends taxed to you will include your
share of the taxes your Fund paid to other countries. You may be able to
deduct or receive a tax credit for your share of these taxes.
Foreign Investors
If you are a foreign investor (i.e., an investor other than a U.S.
citizen or resident or a U.S. corporation, partnership, estate or
trust), you should be aware that, generally, subject to applicable tax
treaties, distributions from the Fund will be characterized as dividends
for federal income tax purposes (other than dividends which the Fund
designates as capital gain dividends) and will be subject to U.S. income
taxes, including withholding taxes, subject to certain exceptions
described below. However, distributions received by a foreign investor
from the Fund that are properly designated by the Fund as capital gain
dividends may not be subject to U.S. federal income taxes, including
withholding taxes, provided that the Fund makes certain elections and
certain other conditions are met. In the case of dividends with respect
to taxable years of the Fund beginning prior to 2008, distributions from
the Fund that are properly designated by the Fund as an interest-related
dividend attributable to certain interest income received by the Fund or
as a short-term capital gain dividend attributable to certain net short-
term capital gain income received by the Fund may not be subject to U.S.
federal income taxes, including withholding taxes when received by
certain foreign investors, provided that the Fund makes certain
elections and certain other conditions are met.
Distribution Plan
FTP serves as the distributor of Creation Units for the Fund on an
agency basis. FTP does not maintain a secondary market in Shares.
Page 15
The Board of Trustees has adopted a Distribution and Service Plan
pursuant to Rule 12b-1 under the 1940 Act. In accordance with its Rule
12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its
average daily net assets each year to reimburse FTP for amounts expended
to finance activities primarily intended to result in the sale of
Creation Units or the provision of investor services. FTP may also use
this amount to compensate securities dealers or other persons that are
APs for providing distribution assistance, including broker-dealer and
shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and there are no plans to
impose these fees. However, in the event 12b-1 fees are charged in the
future, because these fees are paid out of the Fund's assets, over time
these fees will increase the cost of your investment and may cost you
more than certain other types of sales charges.
Net Asset Value
The Fund's NAV is determined as of the close of trading (normally 4:00
p.m., Eastern time) on each day the New York Stock Exchange is open for
business. NAV is calculated for the Fund by taking the market price of
the Fund's total assets, including interest or dividends accrued but not
yet collected, less all liabilities, and dividing such amount by the
total number of Shares outstanding. The result, rounded to the nearest
cent, is the net asset value per Share. All valuations are subject to
review by the Board of Trustees or its delegate.
In determining NAV, expenses are accrued and applied daily and
securities and other assets are generally valued as set forth below.
Common stocks and other equity securities listed on any national or
foreign exchange or on NASDAQ will be valued at the last sale price for
all exchanges other than NASDAQ, and the official closing price for
NASDAQ, on the exchange or system in which they are principally traded
on the valuation date. If there are no transactions on the valuation
day, securities traded principally on an exchange or on NASDAQ will be
valued at the mean between the most recent bid and ask prices. Equity
securities traded in the over-the-counter market are valued at their
closing bid prices. Fixed income securities with a remaining maturity of
60 days or more will be valued by the Fund accounting agent using a
pricing service. When price quotes are not available, fair market value
is based on prices of comparable securities. Fixed income securities
maturing within 60 days are valued by the Fund accounting agent on an
amortized cost basis. The value of any portfolio security held by a Fund
for which reliable market quotations are not readily available or if a
valuation is deemed inappropriate will be determined by the Board of
Trustees or its designee in a manner that most fairly reflects the fair
market value of the security on the valuation date.
Certain securities may not be able to be priced by pre-established
pricing methods. Such securities may be valued by the Board of Trustees
or its delegate at fair value. These securities generally include but
are not limited to, restricted securities (securities which may not be
publicly sold without registration under the Securities Act of 1933) for
which a pricing service is unable to provide a market price; securities
whose trading has been formally suspended; a security whose market price
is not available from a pre-established pricing source; a security with
respect to which an event has occurred that is likely to materially
affect the value of the security after the market has closed but before
the calculation of Fund NAV or make it difficult or impossible to obtain
a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's "fair value." As a
general principal, the current "fair value" of a security would appear
to be the amount which the owner might reasonably expect to receive for
the security upon its current sale. The use of fair value prices by the
Fund generally results in the prices used by the Fund differing from the
closing sale prices on the applicable exchange and fair value prices may
not reflect the actual value of a security. A variety of factors may be
considered in determining the fair value of such securities. See the SAI
for details.
Page 16
Fund Service Providers
The Bank of New York is the administrator, custodian and fund accounting
and transfer agent for the Fund. Chapman and Cutler LLP, 111 West Monroe
Street, Chicago, Illinois 60603, serves as legal counsel to the Fund.
First Trust has entered into an agreement with AMEX pursuant to which
AMEX will serve as the calculation agent for the Index. As the
calculation agent, AMEX will be responsible for the management of the
day-to-day operations of the Index on behalf of Value Line(R), including
calculating the value of the Index every 15 seconds, widely
disseminating the Index value every 15 seconds and tracking corporate
actions resulting in Index adjustments.
Disclaimers
First Trust does not guarantee the accuracy and/or the completeness of
the Index or any data included therein, and First Trust shall have no
liability for any errors, omissions or interruptions therein. First
Trust makes no warranty, express or implied, as to results to be
obtained by the Fund, owners of the Shares of the Fund or any other
person or entity, from the use of the Index or any data included
therein. First Trust makes no express or implied warranties, and
expressly disclaims all warranties of merchantability or fitness for a
particular purpose or use with respect to the Index or any data included
therein. Without limiting any of the foregoing, in no event shall First
Trust have any liability for any special, punitive, direct, indirect or
consequential damages (including lost profits) arising out of matters
relating to the use of the Index, even if notified of the possibility of
such damages.
"Value Line(R)" and "Value Line(R) Dividend Index" are trademarks of
Value Line(R), Inc. and have been licensed for use for certain purposes
by First Trust on behalf of the Fund. The Fund, based on the Value
Line(R) Equity Allocation IndexSM, is not sponsored, endorsed, sold, or
promoted by Value Line(R), Inc., and Value Line(R) makes no
representation regarding the advisability of investing in the Fund.
VALUE LINE PUBLISHING, INC.'S ("VLPI") ONLY RELATIONSHIP TO FIRST TRUST
ADVISORS L.P. ("FTA") IS VLPI'S LICENSING TO FTA OF CERTAIN VLPI
TRADEMARKS AND TRADE NAMES AND THE VALUE LINE DIVIDEND INDEX (THE
"INDEX"), WHICH ARE COMPOSED BY VLPI WITHOUT REGARD TO FTA, THE FIRST
TRUST VALUE LINE DIVIDEND INDEX FUND PRODUCT OR ANY INVESTOR. VLPI HAS
NO OBLIGATION TO TAKE THE NEEDS OF FTA OR ANY INVESTOR IN THE PRODUCT
INTO CONSIDERATION IN COMPOSING THE INDEX. THE PRODUCT RESULTS MAY
DIFFER FROM THE HYPOTHETICAL OR PUBLISHED RESULTS OF THE INDEX. VLPI IS
NOT RESPONSIBLE FOR HOW FTA MAKES USE OF INFORMATION SUPPLIED BY VLPI.
VLPI IS NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE
DETERMINATION OF THE PRICES AND COMPOSITION OF THE PRODUCT OR THE TIMING
OF THE ISSUANCE FOR SALE OF THE PRODUCT OR IN THE CALCULATION OF THE
EQUATIONS BY WHICH THE PRODUCT IS TO BE CONVERTED INTO CASH. VLPI MAKES
NO WARRANTY CONCERNING THE INDEX, EXPRESS OR IMPLIED, INCLUDING, BUT NOT
LIMITED TO, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR ANY PERSON'S INVESTMENT PORTFOLIO, OR ANY IMPLIED
WARRANTIES ARISING FROM USAGE OF TRADE, COURSE OF DEALING OR COURSE OF
PERFORMANCE, AND VLPI MAKES NO WARRANTY AS TO THE POTENTIAL PROFITS OR
ANY OTHER BENEFITS THAT MAY BE ACHIEVED BY USING THE INDEX OR ANY
INFORMATION OR MATERIALS GENERATED THEREFROM. VLPI DOES NOT WARRANT THAT
Page 17
THE INDEX WILL MEET ANY REQUIREMENTS OR BE ACCURATE OR ERROR-FREE. VLPI
ALSO DOES NOT GUARANTEE ANY USES, INFORMATION, DATA OR OTHER RESULTS
GENERATED FROM THE INDEX OR PRODUCT. VLPI HAS NO OBLIGATION OR LIABILITY
(I) IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR TRADING OF THE
PRODUCT; OR (II) FOR ANY LOSS, DAMAGE, COST OR EXPENSE SUFFERED OR
INCURRED BY ANY INVESTOR OR OTHER PERSON OR ENTITY IN CONNECTION WITH
THIS PRODUCT, AND IN NO EVENT SHALL VLPI BE LIABLE FOR ANY LOST PROFITS
OR OTHER CONSEQUENTIAL, SPECIAL, PUNITIVE, INCIDENTAL, INDIRECT OR
EXEMPLARY DAMAGES IN CONNECTION WITH THE INDEX OR THE PRODUCT.
"VALUE LINE" IS A REGISTERED TRADEMARK OF VALUE LINE, INC. OR VALUE LINE
PUBLISHING, INC. THAT IS LICENSED TO FTA. THE FIRST TRUST VALUE LINE(R)
DIVIDEND INDEX FUND PRODUCT IS NOT SPONSORED, RECOMMENDED, SOLD OR
PROMOTED BY VALUE LINE PUBLISHING, INC., VALUE LINE, INC., VALUE LINE
SECURITIES, INC. OR ANY OF THEIR AFFILIATES. FTA IS NOT AFFILIATED WITH
ANY VALUE LINE COMPANY.
Additional Index Information
Daily historical Index values are calculated by AMEX. The Index includes
the universe of stocks that Value Line(R) gives a Safety(TM) Ranking of
#1 or #2 using the Value Line(R) Safety(TM) Ranking System. Value
Line(R)'s updated rankings are released every Monday morning on its
website at www.valueline.com.
The Value Line(R) Safety(TM) Ranking System
The Value Line(R) Safety(TM) Ranking System was introduced in its
present form in the mid-1960s. Each week Value Line(R) assigns a
Safety(TM) rank to each of the approximately 1,700 stocks in the Value
Line(R) universe. According to information published by Value Line(R),
the Value Line(R) Safety(TM) rank measures the total risk of a stock
relative to the other stocks in the Value Line(R) universe. According to
information published by Value Line(R), the Value Line(R) Safety(TM)
rank is determined as follows: the Value Line(R) Safety(TM) rank is
derived from two equally weighted measurements, a stock's Price
Stability rank and the Financial Strength rating of a company, each of
which as determined by Value Line(R).
Value Line(R) measures the volatility of each of the stocks in the Value
Line(R) universe through means of its Price Stability score. A stock's
Price Stability score is based on a ranking of the standard deviation of
weekly percent changes in the price of a stock over the last five years.
Standard deviation is the measure of dispersion of historical returns
around a mean rate of return, and a lower standard deviation indicates
less volatility. To determine standard deviation, each week Value
Line(R) compares the common stock prices of each of the companies in the
Value Line(R) universe to their prices as of the previous week. Value
Line(R) performs this calculation for each weekly period over the
previous five years and based on these calculations determines the
standard deviation over this five year period of each stock in the Value
Line(R) universe. Based on the standard deviations scores, Value Line(R)
places each of the companies in the Value Line(R) universe into 20
separate groups consisting of an approximately equal number of
companies. Value Line(R) reports Price Stability on a scale of 100
(highest) to 5 (lowest) in increments of 5. Stocks which receive a Price
Stability rank of 100 by Value Line(R) represent the 5% of the companies
in the Value Line(R) universe with the lowest standard deviation,
whereas stocks which receive a Price Stability rank of 5 represent the
5% of the companies in the Value Line(R) universe with the highest
standard deviation.
Page 18
A company's Financial Strength rating is Value Line(R)'s measure of the
company's financial condition, and is reported on a scale of A++
(highest) to C (lowest). According to Value Line(R), it looks at a
number of balance sheet and income statement factors in assigning the
Financial Strength ratings. These include, but are not limited to, a
company's long-term debt to total capital ratio, short-term debt, the
amount of cash on hand, the level of net income, the level and growth of
sales over time, and the consistency of sales, profits and returns on
capital and equity over an extended timeframe. Value Line(R) also looks
at the type of industry a company is in, a company's position and
performance within an industry, and the cyclical nature of an industry.
Finally, Value Line(R) considers a company's share price movement.
According to Value Line(R), sharp declines in price in a short period of
time (especially in a relatively stable equity market environment) can
signal a future financial reversal while a rising stock price with no
takeover news may be a sign of improving fundamentals. Based upon the
foregoing, Value Line(R) assigns the highest Financial Strength scores
to what Value Line(R) determines to be the largest companies with the
strongest balance sheets.
Value Line(R) assigns Safety(TM) ranks on a scale from 1 (safest) to 5
(riskiest). The number of stocks in each category from 1 to 5 is not
fixed. According to information published by Value Line(R), stocks
ranked #1 (Highest) for Safety(TM), as a group, are (in Value Line(R)'s
opinion) the safest, most stable, and least risky investments relative
to the Value Line(R) universe, which accounts for about 95% of the
market volume of all stocks in the U.S., and stocks ranked #2 (Above
Average) for Safety(TM), as a group, are safer and less risky than most.
Value Line,(R) Inc., founded in 1931, is known for The Value Line
Investment Survey,(R) a widely used independent investment service. The
Value Line Investment Survey(R) is a comprehensive source of
information, covering approximately 1,700 stocks, more than 90
industries, the overall stock market and the economy. According to
information published by Value Line,(R) when selecting stocks for the
Value Line(R) Investment Survey, Value Line(R)'s stated primary goal is
to choose issues that will be of most interest to their subscribers. In
this regard, Value Line(R) has stated that it looks for actively traded
stocks, with reasonably large market capitalizations. Value Line(R) has
stated that it also attempts to provide broad industry coverage and will
add stocks in industries that they think are underrepresented or that
are in new industries that they have not previously followed. According
to information published by Value Line,(R) the companies selected for
the Value Line(R) Investment Survey are chosen based on the following
criteria: (i) market capitalization should be at least $400 million;
(ii) the stock should trade for at least $10 per share at the time of
selection; (iii) the stock's float must be more than 10 million shares.
The Fund expects to make changes to its portfolio shortly after changes
to the Index are released to the public. Investors will be able to
access the holdings of the Fund and the composition and compilation
methodology of the Index through the Fund's website at
www.ftportfolios.com.
In the event that Value Line(R) no longer calculates the Index, the
Index license is terminated or the identity or character of the Index is
materially changed, the Board of Trustees will seek to engage a
replacement index. However, if that proves to be impracticable, the
Board of Trustees will take whatever action it deems to be in the best
interests of the Fund. The Board of Trustees will also take whatever
action it deems to be in the best interests of the Fund if the Fund's
Shares are delisted.
Other Information
For purposes of the 1940 Act, the Fund is treated as a registered
investment company and the acquisition of Shares by other investment
companies is subject to the restrictions of Section 12(d)(1) of the 1940
Act.
Page 19
Continuous Offering
The Fund will issue, on a continuous offering basis, its Shares in one
or more groups of a fixed number of Fund Shares (each such group of such
specified number of individual Fund Shares, a "Creation Unit
Aggregation"). The method by which Creation Unit Aggregations of Fund
Shares are created and traded may raise certain issues under applicable
securities laws. Because new Creation Unit Aggregations of Shares are
issued and sold by the Fund on an ongoing basis, a "distribution," as
such term is used in the Securities Act of 1933, as amended (the
"Securities Act"), may occur at any point. Broker-dealers and other
persons are cautioned that some activities on their part may, depending
on the circumstances, result in their being deemed participants in a
distribution in a manner which could render them statutory underwriters
and subject them to the prospectus delivery requirement and liability
provisions of the Securities Act.
For example, a broker-dealer firm or its client may be deemed a
statutory underwriter if it takes Creation Unit Aggregations after
placing an order with FTP, breaks them down into constituent Shares and
sells such Shares directly to customers, or if it chooses to couple the
creation of a supply of new Shares with an active selling effort
involving solicitation of secondary market demand for Shares. A
determination of whether one is an underwriter for purposes of the
Securities Act must take into account all the facts and circumstances
pertaining to the activities of the broker-dealer or its client in the
particular case, and the examples mentioned above should not be
considered a complete description of all the activities that could lead
to a characterization as an underwriter.
Broker-dealer firms should also note that dealers who are not
"underwriters" but are effecting transactions in Shares, whether or not
participating in the distribution of Shares, are generally required to
deliver a prospectus. This is because the prospectus delivery exemption
in Section 4(3) of the Securities Act is not available in respect of
such transactions as a result of Section 24(d) of the 1940 Act. The
Trust, on behalf of the Fund, however, has received from the Securities
and Exchange Commission an exemption from the prospectus delivery
obligation in ordinary secondary market transactions under certain
circumstances, on the condition that purchasers are provided with a
product description of the Shares. As a result, broker-dealer firms
should note that dealers who are not underwriters but are participating
in a distribution (as contrasted with ordinary secondary market
transactions) and thus dealing with the Shares that are part of an
overallotment within the meaning of Section 4(3)(a) of the Securities
Act would be unable to take advantage of the prospectus delivery
exemption provided by Section 4(3) of the Securities Act. Firms that
incur a prospectus delivery obligation with respect to Shares are
reminded that, under the Securities Act Rule 153, a prospectus delivery
obligation under Section 5(b)(2) of the Securities Act owed to an
exchange member in connection with a sale on the AMEX is satisfied by
the fact that the prospectus is available at the AMEX upon request. The
prospectus delivery mechanism provided in Rule 153 is only available
with respect to transactions on an exchange.
For More Information
For more detailed information on the Fund, several additional sources of
information are available to you. The SAI, incorporated by reference
into this prospectus, contains detailed information on the Fund's
policies and operation. The Fund's most recent SAI and certain other
information are available free of charge by calling the Fund at (800)
621-1675, on the Fund's website at www.ftportfolios.com or through your
financial adviser. Shareholders may call the toll-free number above with
any inquiries.
You may obtain this and other Fund information, including the Codes of
Ethics adopted by First Trust, FTP and the Fund, directly from the
Securities and Exchange Commission. Information on the Securities and
Exchange Commission's website is free of charge. Visit the Securities
and Exchange Commission's on-line EDGAR database at http://www.sec.gov
or in person at the Securities and Exchange Commission's Public
Reference Room in Washington, DC, or call the Securities and Exchange
Commission at (202) 551-5850 for information on the Public Reference
Page 20
Room. You may also request Fund information by writing to the Securities
and Exchange Commission's Public Reference Section, 100 F Street, N.E.,
Washington, DC 20549 or by sending an electronic request, along with a
duplication fee to publicinfo@sec.gov.
Page 21
[GRAPHIC OMITTED] FIRST TRUST VALUE LINE(R)
DIVIDEND INDEX FUND
1001 Warrenville Road
Suite 300
Lisle, Illinois 60532
(800) 621-1675
www.ftportfolios.com
SEC File #: 333-125751
811-21774
Back Cover
FIRST TRUST VALUE LINE(R)
DIVIDEND INDEX FUND,
A SERIES OF
FIRST TRUST EXCHANGE-TRADED FUND
1001 WARRENVILLE ROAD, SUITE 300
LISLE, ILLINOIS 60532
TELEPHONE: (630) 241-4141
STATEMENT OF ADDITIONAL INFORMATION
FUND
This Statement of Additional Information is not a prospectus but should
be read in conjunction with the Prospectus/Proxy Statement dated October
13, 2006 of First Trust Value Line(R) Dividend Index Fund (the "Fund")
for use in connection with the Special Meeting of Shareholders (the
"Special Meeting") of First Trust Value Line(R) Dividend Fund, to be held
on December 11, 2006. At the Special Meeting, shareholders of First Trust
Value Line(R) Dividend Fund will be asked to approve the reorganization
of First Trust Value Line(R) Dividend Fund, a closed-end fund, with and
into the Fund, a series of First Trust Exchange-Traded Fund (the
"Reorganization") as described in the Prospectus/Proxy Statement. Copies
of the Prospectus/Proxy Statement may be obtained at no charge by writing
the Fund at the address shown above or by calling 1-800-988-5891.
Unless otherwise indicated, capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the
Prospectus/Proxy Statement.
A Statement of Additional Information for the Fund dated October 13, 2006
has been filed with the Securities and Exchange Commission and is
attached hereto as Appendix I which is incorporated herein by this
reference. Financial statements of First Trust Value Line(R) Dividend
Fund for its most recent fiscal year are attached hereto as Appendix II
and are incorporated herein by this reference.
The date of this Statement of Additional Information is October 13, 2006.
TABLE OF CONTENTS
Fund History 1
Description of the Fund and Its Investments and Risks 1
Management of the Fund 1
Control Persons and Principal Holders of Securities 1
Investment Advisory and Other Services 1
Portfolio Managers 1
Brokerage Allocation and Other Practices 2
Capital Stock and Other Securities 2
Purchase, Redemption and Pricing of Shares 2
Taxation of the Fund 2
Underwriters 2
Financial Statements 2
Appendix I - First Trust Value Line(R) Dividend Index Fund
Statement of Additional Information dated
October 13, 2006.
Appendix II - First Trust Value Line(R) Dividend Fund Financial
Statements dated May 31, 2006 as
included in the Fund's Annual Report.
Only the financial statements included therein
shall be incorporated by reference.
FUND HISTORY
This Statement of Additional Information relates to First Trust Value
Line(R) Dividend Index Fund, a series of First Trust Exchange-Traded
Fund. The Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940
Act"). For further information concerning the Fund in general see the
headings "General Description of the Trust and the Fund" in the
Statement of Additional Information attached hereto as Appendix I.
DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
For a discussion of the Fund's investment objectives and techniques and
related investment policies, see heading "Investment Objective and
Policies" in the Fund's Statement of Additional Information attached
hereto as Appendix I. For a discussion of the fundamental and
nonfundamental investment policies of the Fund adopted by the Fund's
Board of Trustees, see heading "Investment Objective and Policies" in
the Fund's Statement of Additional Information attached hereto as
Appendix I.
MANAGEMENT OF THE FUND
For a disclosure of the names and a brief occupational biography of each
of the Fund's trustees and officers, identifying those who are
interested persons of the Fund, see heading "Fund Management" in the
Fund's Statement of Additional Information attached hereto as Appendix I.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
For a discussion of the persons who control the Fund, persons who own
beneficially 5% or more of the Fund's outstanding equity securities and
percentage of the Fund's equity securities owned by all officers,
directors, and members of any advisory board of the Fund as a group, see
heading "Control Persons and Principal Holders of Securities" in the
Fund's Statement of Additional Information attached hereto as Appendix I.
INVESTMENT ADVISORY AND OTHER SERVICES
For a discussion of the Fund's advisory and management-related services
agreements and plans of distribution, see headings "Fund Management" and
"Custodian, Transfer Agent and Fund Accounting Agent; Distributor and
Index Provider," in the Fund's Statement of Additional Information
attached hereto as Appendix I.
PORTFOLIO MANAGERS
For a discussion of Portfolio Managers' management activities,
compensation and ownership of securities in the Fund, see heading "Fund
Management" in the Fund's Statement of Additional Information attached
hereto as Appendix I.
Page 1
BROKERAGE ALLOCATION AND OTHER PRACTICES
For a discussion of the Fund's brokerage policy, see heading "Creation
and Redemption of Creation Unit Aggregations" in the Fund's Statement of
Additional Information attached hereto as Appendix I.
CAPITAL STOCK AND OTHER SECURITIES
For a discussion of the Fund's authorized securities and the
characteristics of the Fund's shares of beneficial interest, see
headings "General Description of the Trust and the Fund" and "Additional
Information" in the Fund's Statement of Additional Information attached
hereto as Appendix I.
PURCHASE, REDEMPTION AND PRICING OF SHARES
For a description of the purchase and redemption procedures for the
Fund's shares and a discussion of the Fund's valuation and pricing
procedures, see headings "Creation and Redemption of Creation Unit
Aggregations" and "Net Asset Value" in the Fund's Statement of
Additional Information attached hereto as Appendix I.
TAXATION OF THE FUND
For a discussion of any tax information relating to ownership of the
Fund's shares, see heading "Federal Tax Matters" in the Fund's Statement
of Additional Information attached hereto as Appendix I.
UNDERWRITERS
For a discussion of the Fund's underwriters, see heading "Custodian,
Transfer Agent and Fund Accounting Agent; Distributor and Index
Provider" in the Fund's Statement of Additional Information attached
hereto as Appendix I.
FINANCIAL STATEMENTS
Financial information is not presented for the Fund, as the Fund
currently has no material assets and will not commence a public offering
of its shares until the Reorganization has been consummated. Audited
financial statements for First Trust Value Line(R) Dividend Fund for its
most recent fiscal year, and the report thereon by Deloitte & Touche LLP,
independent auditors, are attached hereto as Appendix II and are
incorporated by reference herein. Pro forma financial statements are
not presented as First Trust Value Line(R) Dividend Fund is being
reorganized with and into the newly created Fund, which does not have
material assets or liabilities.
Appendix I - First Trust Value Line(R) Dividend Index Fund Statement of
Additional Information dated October 13, 2006.
STATEMENT OF ADDITIONAL INFORMATION
INVESTMENT COMPANY ACT FILE NO. 811-21774
FIRST TRUST EXCHANGE-TRADED FUND
FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX FUND
FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND
DATED OCTOBER 13, 2006
This Statement of Additional Information is not a Prospectus. It should
be read in conjunction with the Prospectus dated October 13, 2006 (the
"Prospectus") for the First Trust Value Line(R) Equity Allocation Index Fund and
First Trust Value Line(R) Dividend Index Fund, each a series of the First Trust
Exchange-Traded Fund (the "Trust"), as it may be revised from time to time.
Capitalized terms used herein that are not defined have the same meaning as in
the Prospectus, unless otherwise noted. A copy of the Prospectus may be obtained
without charge by writing to the Trust's Distributor, First Trust Portfolios
L.P., 1001 Warrenville Road, Lisle, Illinois 60532 or by calling toll free at
(800) 621-1675.
TABLE OF CONTENTS
GENERAL DESCRIPTION OF THE TRUST AND THE FUNDS................................1
EXCHANGE LISTING AND TRADING..................................................2
INVESTMENT OBJECTIVE AND POLICIES.............................................3
INVESTMENT STRATEGIES.........................................................4
SUBLICENSE AGREEMENT.........................................................14
INVESTMENT RISKS.............................................................14
FUNDS MANAGEMENT.............................................................18
CUSTODIAN, DISTRIBUTOR, TRANSFER AGENT, FUND ACCOUNTING AGENT, INDEX
PROVIDER AND EXCHANGE...........................................29
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES..........................32
ADDITIONAL INFORMATION.......................................................32
PROXY VOTING POLICIES AND PROCEDURES.........................................33
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS........................34
FEDERAL TAX MATTERS..........................................................44
DETERMINATION OF NAV.........................................................50
DIVIDENDS AND DISTRIBUTIONS..................................................51
MISCELLANEOUS INFORMATION....................................................52
GENERAL DESCRIPTION OF THE TRUST AND THE FUNDS
The Trust was organized as a Massachusetts business trust on August 8,
2003 and is authorized to issue an unlimited number of shares in one or more
series or "Funds." The Trust is an open-end management investment company,
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Trust currently offers Shares in ten series, including the First
Trust Value Line(R) Equity Allocation Index Fund and First Trust Value Line(R)
Dividend Index Fund (each, the "Fund," and together the "Funds"), each a
diversified series. This Statement of Additional Information relates only to the
Funds. The shares of the Funds are referred to herein as "Shares" or "Fund
Shares." Each series of the Trust represents a beneficial interest in a separate
portfolio of securities and other assets, with its own objective and policies.
The Board of Trustees of the Trust has the right to establish
additional series in the future, to determine the preferences, voting powers,
rights and privileges thereof and to modify such preferences, voting powers,
rights and privileges without shareholder approval. Shares of any series may
also be divided into one or more classes at the discretion of the Board of
Trustees.
The Trust or any series or class thereof may be terminated at any time
by the Board of Trustees upon written notice to the shareholders.
Each Share has one vote with respect to matters upon which a
shareholder vote is required consistent with the requirements of the 1940 Act
and the rules promulgated thereunder. Shares of all series of the Trust vote
together as a single class except as otherwise required by the 1940 Act, or if
the matter being voted on affects only a particular series, and, if a matter
affects a particular series differently from other series, the shares of that
series will vote separately on such matter.
The Trust's Declaration of Trust provides that by becoming a
shareholder of the Funds, each shareholder shall be expressly held to have
agreed to be bound by the provisions of the Declaration. The Declaration may,
except in limited circumstances, be amended or supplemented by the Trustees
without shareholder vote. The holders of Fund Shares are required to disclose
information on direct or indirect ownership of Fund Shares as may be required to
comply with various laws applicable to each Fund, and ownership of Fund Shares
may be disclosed by a Fund if so required by law or regulation. In addition,
pursuant to the Declaration, the Trustees may, in their discretion, require the
Trust to redeem Shares held by any shareholder for any reason under terms set by
the Trustees. The Trust's Declaration also provides that shareholders may not
bring suit on behalf of a Fund without first requesting that the Trustees bring
such suit unless there would be irreparable injury to such Fund, or if a
majority of the Trustees have a personal financial interest in the action.
Trustees are not considered to have a personal financial interest by virtue of
being compensated for their services as Trustees.
The Trust is not required and does not intend to hold annual meetings
of shareholders.
Under Massachusetts law applicable to Massachusetts business trusts,
shareholders of such a trust may, under certain circumstances, be held
personally liable as partners for its obligations. However, the Declaration of
Trust of the Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust and requires that notice of this disclaimer be
given in each agreement, obligation or instrument entered into or executed by
the Trust or the Trustees. The Trust's Declaration of Trust further provides for
indemnification out of the assets and property of the Trust for all losses and
expenses of any shareholder held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust or a Fund itself was unable to meet its
obligations.
The Funds are managed by First Trust Advisors L.P. (the "Adviser" or
"First Trust").
The Funds offer and issue Shares at net asset value ("NAV") only in
aggregations of a specified number of Shares (each a "Creation Unit" or a
"Creation Unit Aggregation"), generally in exchange for a basket of equity
securities (the "Deposit Securities") included in the Index (as hereinafter
defined), together with the deposit of a specified cash payment (the "Cash
Component"). The Shares have been approved for listing and secondary trading on
the American Stock Exchange (the "AMEX") subject to notice of issuance. Fund
Shares will trade on the AMEX at market prices that may be below, at or above
NAV. Shares are redeemable only in Creation Unit Aggregations and, generally, in
exchange for portfolio securities and a specified cash payment. Normally,
Creation Units are aggregations of 50,000 Shares.
The Trust reserves the right to offer a "cash" option for creations and
redemptions of Fund Shares, although it has no current intention of doing so.
Fund Shares may be issued in advance of receipt of Deposit Securities subject to
various conditions including a requirement to maintain on deposit with the Trust
cash at least equal to 115% of the market value of the missing Deposit
Securities. See the "Creation and Redemption of Creation Unit Aggregations"
section. In each instance of such cash creations or redemptions, transaction
fees may be imposed that will be higher than the transaction fees associated
with in-kind creations or redemptions. In all cases, such fees will be limited
in accordance with the requirements of the SEC applicable to management
investment companies offering redeemable securities.
EXCHANGE LISTING AND TRADING
There can be no assurance that the requirements of the AMEX necessary
to maintain the listing of Shares of a Fund will continue to be met. The AMEX
may, but is not required to, remove the Shares of a Fund from listing if (i)
following the initial 12-month period beginning at the commencement of trading
of a Fund, there are fewer than 50 beneficial owners of the Shares of a Fund for
30 or more consecutive trading days; (ii) the value of the Index is no longer
calculated or available; or (iii) such other event shall occur or condition
exist that, in the opinion of the AMEX, makes further dealings on the AMEX
inadvisable. The AMEX will remove the Shares of a Fund from listing and trading
upon termination of such Fund.
As in the case of other stocks traded on the AMEX, broker's commissions
on transactions will be based on negotiated commission rates at customary
levels.
-2-
The Funds reserve the right to adjust the price levels of Shares in the
future to help maintain convenient trading ranges for investors. Any adjustments
would be accomplished through stock splits or reverse stock splits, which would
have no effect on the net assets of a Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus describes the investment objective and policies of each
Fund. The following supplements the information contained in the Prospectus
concerning the investment objective and policies of the Funds.
The Funds are also subject to the following fundamental policies, which
may not be changed without approval of the holders of a majority of the
outstanding voting securities of a Fund:
(1) A Fund may not issue senior securities, except as
permitted under the 1940 Act.
(2) A Fund may not borrow money, except that a Fund may (i)
borrow money from banks for temporary or emergency purposes (but not
for leverage or the purchase of investments) and (ii) engage in other
transactions permissible under the 1940 Act that may involve a
borrowing (such as obtaining short-term credits as are necessary for
the clearance of transactions, engaging in delayed-delivery
transactions, or purchasing certain futures, forward contracts and
options), provided that the combination of (i) and (ii) shall not
exceed 33-1/3% of the value of a Fund's total assets (including the
amount borrowed), less a Fund's liabilities (other than borrowings).
(3) A Fund will not underwrite the securities of other
issuers except to the extent a Fund may be considered an underwriter
under the Securities Act of 1933 (the "1933 Act") in connection with
the purchase and sale of portfolio securities.
(4) A Fund will not purchase or sell real estate or interests
therein, unless acquired as a result of ownership of securities or
other instruments (but this shall not prohibit a Fund from purchasing
or selling securities or other instruments backed by real estate or of
issuers engaged in real estate activities).
(5) A Fund may not make loans to other persons, except
through (i) the purchase of debt securities permissible under a Fund's
investment policies, (ii) repurchase agreements, or (iii) the lending
of portfolio securities, provided that no such loan of portfolio
securities may be made by a Fund if, as a result, the aggregate of such
loans would exceed 33-1/3% of the value of a Fund's total assets.
(6) A Fund may not purchase or sell physical commodities
unless acquired as a result of ownership of securities or other
instruments (but this shall not prevent a Fund from purchasing or
selling options, futures contracts, forward contracts or other
-3-
derivative instruments, or from investing in securities or other
instruments backed by physical commodities).
(7) As to 75% of its total assets, invest more than 5% of the
value of its total assets in the securities of any one issuer (other
than obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities).
(8) Invest 25% or more of the value of its total assets in
securities of issuers in any one industry or group of industries,
except to the extent that the Index that a Fund replicates,
concentrates in an industry or group of industries. This restriction
does not apply to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
Except for restriction (2), if a percentage restriction is adhered to
at the time of investment, a later increase in percentage resulting from a
change in market value of the investment or the total assets will not constitute
a violation of that restriction.
The foregoing fundamental policies of the Funds may not be changed
without the affirmative vote of the majority of the outstanding voting
securities of each Fund. The 1940 Act defines a majority vote as the vote of the
lesser of (i) 67% or more of the voting securities represented at a meeting at
which more than 50% of the outstanding securities are represented; or (ii) more
than 50% of the outstanding voting securities. With respect to the submission of
a change in an investment policy to the holders of outstanding voting securities
of a Fund, such matter shall be deemed to have been effectively acted upon with
respect to a Fund if a majority of the outstanding voting securities of a Fund
vote for the approval of such matter, notwithstanding that (1) such matter has
not been approved by the holders of a majority of the outstanding voting
securities of any other series affected by such matter, and (2) such matter has
not been approved by the vote of a majority of the outstanding voting
securities.
In addition to the foregoing fundamental policies, the Funds are also
subject to strategies and policies discussed herein which, unless otherwise
noted, are non-fundamental restrictions and policies which may be changed by the
Board of Trustees.
INVESTMENT STRATEGIES
Under normal circumstances, each Fund will invest at least 90% of its
total assets in common stocks that comprise either the Value Line(R) Equity
Allocation Index or the Value Line(R) Dividend Index, respectively (each, the
"Index"). Funds' Shareholders are entitled to 60 days' notice prior to any
change in this non-fundamental investment policy.
TYPES OF INVESTMENTS
Warrants: A Fund may invest in warrants. Warrants acquired by a Fund
entitle it to buy common stock from the issuer at a specified price and time.
They do not represent ownership of the securities but only the right to buy
them. Warrants are subject to the same market risks as stocks, but may be more
-4-
volatile in price. A Fund's investment in warrants will not entitle it to
receive dividends or exercise voting rights and will become worthless if the
warrants cannot be profitably exercised before their expiration date.
Delayed-Delivery Transactions: A Fund may from time to time purchase
securities on a "when-issued" or other delayed-delivery basis. The price of
securities purchased in such transactions is fixed at the time the commitment to
purchase is made, but delivery and payment for the securities take place at a
later date. Normally, the settlement date occurs within 45 days of the purchase.
During the period between the purchase and settlement, no payment is made by a
Fund to the issuer and no interest is accrued on debt securities or dividend
income is earned on equity securities. Delayed-delivery commitments involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in value of a
Fund's other assets. While securities purchased in delayed-delivery transactions
may be sold prior to the settlement date, a Fund intends to purchase such
securities with the purpose of actually acquiring them. At the time a Fund makes
the commitment to purchase a security in a delayed-delivery transaction, it will
record the transaction and reflect the value of the security in determining its
net asset value. The Funds do not believe that net asset value will be adversely
affected by purchases of securities in delayed-delivery transactions.
A Fund will earmark or maintain in a segregated account cash, U.S.
Government securities, and high-grade liquid debt securities equal in value to
commitments for delayed-delivery securities. Such earmarked or segregated
securities will mature or, if necessary, be sold on or before the settlement
date. When the time comes to pay for delayed-delivery securities, a Fund will
meet its obligations from then-available cash flow, sale of the securities
earmarked or held in the segregated account described above, sale of other
securities, or, although it would not normally expect to do so, from the sale of
the delayed-delivery securities themselves (which may have a market value
greater or less than the Fund's payment obligation).
Illiquid Securities: A Fund may invest in illiquid securities (i.e.,
securities that are not readily marketable). For purposes of this restriction,
illiquid securities include, but are not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may only be resold pursuant to Rule 144A under the 1933
Act, as amended, but that are deemed to be illiquid; and repurchase agreements
with maturities in excess of seven days. However, a Fund will not acquire
illiquid securities if, as a result, such securities would comprise more than
15% of the value of a Fund's net assets. The Board of Trustees or its delegates
has the ultimate authority to determine, to the extent permissible under the
federal securities laws, which securities are liquid or illiquid for purposes of
this 15% limitation. The Board of Trustees has delegated to First Trust the
day-to-day determination of the illiquidity of any equity or fixed-income
security, although it has retained oversight and ultimate responsibility for
such determinations. Although no definitive liquidity criteria are used, the
Board of Trustees has directed First Trust to look to factors such as (i) the
nature of the market for a security (including the institutional private resale
market; the frequency of trades and quotes for the security; the number of
dealers willing to purchase or sell the security; and the amount of time
normally needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer), (ii) the terms of certain securities or other
-5-
instruments allowing for the disposition to a third party or the issuer thereof
(e.g., certain repurchase obligations and demand instruments), and (iii) other
permissible relevant factors.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the 1933 Act. Where registration is required, a
Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time a Fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
a Fund might obtain a less favorable price than that which prevailed when it
decided to sell. Illiquid securities will be priced at fair value as determined
in good faith under procedures adopted by the Board of Trustees. If, through the
appreciation of illiquid securities or the depreciation of liquid securities, a
Fund should be in a position where more than 15% of the value of its net assets
are invested in illiquid securities, including restricted securities which are
not readily marketable, a Fund will take such steps as is deemed advisable, if
any, to protect liquidity.
Money Market Funds: A Fund may invest in shares of money market funds
to the extent permitted by the 1940 Act.
Temporary Investments: A Fund may, without limit as to percentage of
assets, purchase U.S. Government securities or short-term debt securities to
keep cash on hand fully invested or for temporary defensive purposes. Short-term
debt securities are securities from issuers having a long-term debt rating of at
least A or higher by Standard & Poor's Ratings Group ("S&P"), Moody's Investors
Service, Inc. ("Moody's") or Fitch, Inc. ("Fitch") and having a maturity of one
year or less.
Short-term debt securities are defined to include, without limitation,
the following:
(1) U.S. Government securities, including bills, notes and
bonds differing as to maturity and rates of interest, which are either
issued or guaranteed by the U.S. Treasury or by U.S. Government
agencies or instrumentalities. U.S. Government agency securities
include securities issued by (a) the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of United States, Small
Business Administration, and the Government National Mortgage
Association, whose securities are supported by the full faith and
credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose
securities are supported by the right of the agency to borrow from the
U.S. Treasury; (c) Fannie Mae, whose securities are supported by the
discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and (d) the Student Loan
Marketing Association, whose securities are supported only by its
credit. While the U.S. Government provides financial support to such
U.S. Government-sponsored agencies or instrumentalities, no assurance
can be given that it always will do so since it is not so obligated by
law. The U.S. Government, its agencies, and instrumentalities do not
guarantee the market value of their securities, and consequently, the
value of such securities may fluctuate.
-6-
(2) Certificates of deposit issued against funds deposited in
a bank or savings and loan association. Such certificates are for a
definite period of time, earn a specified rate of return, and are
normally negotiable. If such certificates of deposit are
non-negotiable, they will be considered illiquid securities and be
subject to a Fund's 15% restriction on investments in illiquid
securities. Pursuant to the certificate of deposit, the issuer agrees
to pay the amount deposited plus interest to the bearer of the
certificate on the date specified thereon. Under current FDIC
regulations, the maximum insurance payable as to any one certificate of
deposit is $100,000; therefore certificates of deposit purchased by a
Fund may not be fully insured.
(3) Bankers' acceptances which are short-term credit
instruments used to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an
importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on
its maturity date. The acceptance may then be held by the accepting
bank as an asset or it may be sold in the secondary market at the going
rate of interest for a specific maturity.
(4) Repurchase agreements, which involve purchases of debt
securities. In such an action, at the time a Fund purchases the
security, it simultaneously agrees to resell and redeliver the security
to the seller, who also simultaneously agrees to buy back the security
at a fixed price and time. This assures a predetermined yield for a
Fund during its holding period since the resale price is always greater
than the purchase price and reflects an agreed upon market rate. The
period of these repurchase agreements will usually be short, from
overnight to one week. Such actions afford an opportunity for a Fund to
invest temporarily available cash. A Fund may enter into repurchase
agreements only with respect to obligations of the U.S. Government, its
agencies or instrumentalities; certificates of deposit; or bankers
acceptances in which a Fund may invest. In addition, a Fund may only
enter into repurchase agreements where the market value of the
purchased securities/collateral equals at least 100% of principal
including accrued interest and is marked-to-market daily. The risk to a
Fund is limited to the ability of the seller to pay the agreed-upon sum
on the repurchase date; in the event of default, the repurchase
agreement provides that the affected Fund is entitled to sell the
underlying collateral. If the value of the collateral declines after
the agreement is entered into, however, and if the seller defaults
under a repurchase agreement when the value of the underlying
collateral is less than the repurchase price, a Fund could incur a loss
of both principal and interest. A Fund, however, intends to enter into
repurchase agreements only with financial institutions and dealers
believed by First Trust to present minimal credit risks in accordance
with criteria established by the Board of Trustees. First Trust will
review and monitor the creditworthiness of such institutions. First
Trust monitors the value of the collateral at the time the action is
entered into and at all times during the term of the repurchase
agreement. First Trust does so in an effort to determine that the value
of the collateral always equals or exceeds the agreed-upon repurchase
price to be paid to a Fund. If the seller were to be subject to a
federal bankruptcy proceeding, the ability of a Fund to liquidate the
collateral could be delayed or impaired because of certain provisions
of the bankruptcy laws.
-7-
(5) Bank time deposits, which are monies kept on deposit with
banks or savings and loan associations for a stated period of time at a
fixed rate of interest. There may be penalties for the early withdrawal
of such time deposits, in which case the yields of these investments
will be reduced.
(6) Commercial paper, which are short-term unsecured
promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes
are direct lending arrangements between a Fund and a corporation. There
is no secondary market for the notes. However, they are redeemable by a
Fund at any time. The portfolio manager will consider the financial
condition of the corporation (e.g., earning power, cash flow, and other
liquidity ratios) and will continuously monitor the corporation's
ability to meet all of its financial obligations, because a Fund's
liquidity might be impaired if the corporation were unable to pay
principal and interest on demand. A Fund may only invest in commercial
paper rated A-1 or better by S&P, Prime-1 or higher by Moody's or Fitch
2 or higher by Fitch.
PORTFOLIO TURNOVER
A Fund buys and sells portfolio securities in the normal course of its
investment activities. The proportion of a Fund's investment portfolio that is
sold and replaced with new securities during a year is known as a Fund's
portfolio turnover rate. A turnover rate of 100% would occur, for example, if a
Fund sold and replaced securities valued at 100% of its net assets within one
year. Active trading would result in the payment by a Fund of increased
brokerage costs and expenses.
HEDGING STRATEGIES
General Description of Hedging Strategies
A Fund may engage in hedging activities. First Trust may cause a Fund
to utilize a variety of financial instruments, including options, forward
contracts, futures contracts (hereinafter referred to as "Futures" or "Futures
Contracts"), and options on Futures Contracts to attempt to hedge a Fund's
holdings.
Hedging or derivative instruments on securities generally are used to
hedge against price movements in one or more particular securities positions
that a Fund owns or intends to acquire. Such instruments may also be used to
"lock-in" realized but unrecognized gains in the value of portfolio securities.
Hedging instruments on stock indices, in contrast, generally are used to hedge
against price movements in broad equity market sectors in which a Fund has
invested or expects to invest. Hedging strategies, if successful, can reduce the
risk of loss by wholly or partially offsetting the negative effect of
unfavorable price movements in the investments being hedged. However, hedging
strategies can also reduce the opportunity for gain by offsetting the positive
effect of favorable price movements in the hedged investments. The use of
hedging instruments is subject to applicable regulations of the SEC, the several
options and Futures exchanges upon which they are traded, the Commodity Futures
-8-
Trading Commission (the "CFTC") and various state regulatory authorities. In
addition, a Fund's ability to use hedging instruments may be limited by tax
considerations.
General Limitations on Futures and Options Transactions
The Trust has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the National Futures
Association, the Futures industry's self-regulatory organization. A Fund will
not enter into Futures and options transactions if the sum of the initial margin
deposits and premiums paid for unexpired options exceeds 5% of a Fund's total
assets. In addition, a Fund will not enter into Futures Contracts and options
transactions if more than 30% of its net assets would be committed to such
instruments.
The foregoing limitations are not fundamental policies of a Fund and
may be changed without shareholder approval as regulatory agencies permit.
Various exchanges and regulatory authorities have undertaken reviews of options
and Futures trading in light of market volatility. Among the possible actions
that have been presented are proposals to adopt new or more stringent daily
price fluctuation limits for Futures and options transactions and proposals to
increase the margin requirements for various types of Futures transactions.
Asset Coverage for Futures and Options Positions
A Fund will comply with the regulatory requirements of the SEC and the
CFTC with respect to coverage of options and Futures positions by registered
investment companies and, if the guidelines so require, will earmark or set
aside cash, U.S. Government securities, high grade liquid debt securities and/or
other liquid assets permitted by the SEC and CFTC in a segregated custodial
account in the amount prescribed. Securities earmarked or held in a segregated
account cannot be sold while the Futures or options position is outstanding,
unless replaced with other permissible assets, and will be marked-to-market
daily.
Stock Index Options
A Fund may purchase stock index options, sell stock index options in
order to close out existing positions, and/or write covered options on stock
indices for hedging purposes. Stock index options are put options and call
options on various stock indices. In most respects, they are identical to listed
options on common stocks. The primary difference between stock options and index
options occurs when index options are exercised. In the case of stock options,
the underlying security, common stock, is delivered. However, upon the exercise
of an index option, settlement does not occur by delivery of the securities
comprising the index. The option holder who exercises the index option receives
an amount of cash if the closing level of the stock index upon which the option
is based is greater than, in the case of a call, or less than, in the case of a
put, the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the stock index and the exercise price
of the option expressed in dollars times a specified multiple.
-9-
A stock index fluctuates with changes in the market values of the
stocks included in the index. For example, some stock index options are based on
a broad market index, such as the Standard & Poor's 500 or the Value Line(R)
Composite Indices or a more narrow market index, such as the Standard & Poor's
100. Indices may also be based on an industry or market segment. Options on
stock indices are currently traded on the following exchanges: the Chicago Board
Options Exchange, the New York Stock Exchange ("NYSE"), the AMEX, the Pacific
Stock Exchange, and the Philadelphia Stock Exchange.
A Fund's use of stock index options is subject to certain risks.
Successful use by a Fund of options on stock indices will be subject to the
ability of First Trust to correctly predict movements in the directions of the
stock market. This requires different skills and techniques than predicting
changes in the prices of individual securities. In addition, a Fund's ability to
effectively hedge all or a portion of the securities in its portfolio, in
anticipation of or during a market decline through transactions in put options
on stock indices, depends on the degree to which price movements in the
underlying index correlate with the price movements of the securities held by a
Fund. Inasmuch as a Fund's securities will not duplicate the components of an
index, the correlation will not be perfect. Consequently, a Fund will bear the
risk that the prices of its securities being hedged will not move in the same
amount as the prices of its put options on the stock indices. It is also
possible that there may be a negative correlation between the index and a Fund's
securities, which would result in a loss on both such securities and the options
on stock indices acquired by a Fund.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the options
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot be
reflected in the options markets. The purchase of options is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. The
purchase of stock index options involves the risk that the premium and
transaction costs paid by a Fund in purchasing an option will be lost as a
result of unanticipated movements in prices of the securities comprising the
stock index on which the option is based.
Certain Considerations Regarding Options
There is no assurance that a liquid secondary market on an options
exchange will exist for any particular option, or at any particular time, and
for some options no secondary market on an exchange or elsewhere may exist. If a
Fund is unable to close out a call option on securities that it has written
before the option is exercised, a Fund may be required to purchase the optioned
securities in order to satisfy its obligation under the option to deliver such
securities. If a Fund is unable to effect a closing sale transaction with
respect to options on securities that it has purchased, it would have to
exercise the option in order to realize any profit and would incur transaction
costs upon the purchase and sale of the underlying securities.
The writing and purchasing of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation between
the options and securities markets may detract from the effectiveness of
-10-
attempted hedging. Options transactions may result in significantly higher
transaction costs and portfolio turnover for a Fund.
Futures Contracts
A Fund may enter into Futures Contracts, including index Futures as a
hedge against movements in the equity markets, in order to hedge against changes
on securities held or intended to be acquired by a Fund or for other purposes
permissible under the Commodity Exchange Act (the "CEA"). A Fund's hedging may
include sales of Futures as an offset against the effect of expected declines in
stock prices and purchases of Futures as an offset against the effect of
expected increases in stock prices. A Fund will not enter into Futures Contracts
which are prohibited under the CEA and will, to the extent required by
regulatory authorities, enter only into Futures Contracts that are traded on
national Futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal interest rate Futures exchanges
in the United States are the Board of Trade of the City of Chicago and the
Chicago Mercantile Exchange. Futures exchanges and trading are regulated under
the CEA by the CFTC.
An interest rate Futures Contract provides for the future sale by one
party and purchase by another party of a specified amount of a specific
financial instrument (e.g., a debt security) or currency for a specified price
at a designated date, time and place. An index Futures Contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index Futures
Contract was originally written. Transaction costs are incurred when a Futures
Contract is bought or sold and margin deposits must be maintained. A Futures
Contract may be satisfied by delivery or purchase, as the case may be, of the
instrument or by payment of the change in the cash value of the index. More
commonly, Futures Contracts are closed out prior to delivery by entering into an
offsetting transaction in a matching Futures Contract. Although the value of an
index might be a function of the value of certain specified securities, no
physical delivery of those securities is made. If the offsetting purchase price
is less than the original sale price, a gain will be realized. Conversely, if
the offsetting sale price is more than the original purchase price, a gain will
be realized; if it is less, a loss will be realized. The transaction costs must
also be included in these calculations. There can be no assurance, however, that
a Fund will be able to enter into an offsetting transaction with respect to a
particular Futures Contract at a particular time. If a Fund is not able to enter
into an offsetting transaction, a Fund will continue to be required to maintain
the margin deposits on the Futures Contract.
Margin is the amount of funds that must be deposited by a Fund with its
custodian in a segregated account in the name of the Futures commission merchant
in order to initiate Futures trading and to maintain a Fund's open positions in
Futures Contracts. A margin deposit is intended to ensure a Fund's performance
of the Futures Contract.
The margin required for a particular Futures Contract is set by the
exchange on which the Futures Contract is traded and may be significantly
modified from time to time by the exchange during the term of the Futures
Contract. Futures Contracts are customarily purchased and sold on margins that
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may range upward from less than 5% of the value of the Futures Contract being
traded.
If the price of an open Futures Contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on the
Futures Contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
Futures Contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to a Fund. In computing daily net asset value, a Fund
will mark to market the current value of its open Futures Contracts. A Fund
expects to earn interest income on its margin deposits.
Because of the low margin deposits required, Futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the Futures Contract is deposited as margin, a subsequent 10%
decrease in the value of the Futures Contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the Future Contracts were closed out.
Thus, a purchase or sale of a Futures Contract may result in losses in excess of
the amount initially invested in the Futures Contract. However, a Fund would
presumably have sustained comparable losses if, instead of the Futures Contract,
it had invested in the underlying financial instrument and sold it after the
decline.
Most United States Futures exchanges limit the amount of fluctuation
permitted in Futures Contract prices during a single trading day. The day limit
establishes the maximum amount that the price of a Futures Contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
Futures Contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures Contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of Futures positions
and subjecting some Futures traders to substantial losses.
There can be no assurance that a liquid market will exist at a time
when the Fund seeks to close out a Futures position. A Fund would continue to be
required to meet margin requirements until the position is closed, possibly
resulting in a decline in a Fund's net asset value. In addition, many of the
contracts discussed above are relatively new instruments without a significant
trading history. As a result, there can be no assurance that an active secondary
market will develop or continue to exist.
A public market exists in Futures Contracts covering a number of
indices, including, but not limited to, the S&P 500 Index, the S&P 100 Index,
the NASDAQ 100 Index(R), the Value Line(R) Composite Index and the New York
Stock Exchange Composite Index.
-12-
Options on Futures
A Fund may also purchase or write put and call options on Futures
Contracts and enter into closing transactions with respect to such options to
terminate an existing position. A Futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a Futures Contract at a specified exercise price prior to the
expiration of the option. Upon exercise of a call option, the holder acquires a
long position in the Futures Contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is true. Prior to
exercise or expiration, a Futures option may be closed out by an offsetting
purchase or sale of a Futures option of the same series.
A Fund may use options on Futures Contracts in connection with hedging
strategies. Generally, these strategies would be applied under the same market
and market sector conditions in which a Fund uses put and call options on
securities or indices. The purchase of put options on Futures Contracts is
analogous to the purchase of puts on securities or indices so as to hedge a
Fund's securities holdings against the risk of declining market prices. The
writing of a call option or the purchasing of a put option on a Futures Contract
constitutes a partial hedge against declining prices of securities which are
deliverable upon exercise of the Futures Contract. If the price at expiration of
a written call option is below the exercise price, a Fund will retain the full
amount of the option premium which provides a partial hedge against any decline
that may have occurred in a Fund's holdings of securities. If the price when the
option is exercised is above the exercise price, however, a Fund will incur a
loss, which may be offset, in whole or in part, by the increase in the value of
the securities held by a Fund that were being hedged. Writing a put option or
purchasing a call option on a Futures Contract serves as a partial hedge against
an increase in the value of the securities a Fund intends to acquire.
As with investments in Futures Contracts, a Fund is required to deposit
and maintain margin with respect to put and call options on Futures Contracts
written by it. Such margin deposits will vary depending on the nature of the
underlying Futures Contract (and the related initial margin requirements), the
current market value of the option, and other Futures positions held by a Fund.
A Fund will earmark or set aside in a segregated account at a Fund's custodian,
liquid assets, such as cash, U.S. Government securities or other high-grade
liquid debt obligations equal in value to the amount due on the underlying
obligation. Such segregated assets will be marked-to-market daily, and
additional assets will be earmarked or placed in the segregated account whenever
the total value of the earmarked or segregated assets falls below the amount due
on the underlying obligation.
The risks associated with the use of options on Futures Contracts
include the risk that a Fund may close out its position as a writer of an option
only if a liquid secondary market exists for such options, which cannot be
assured. A Fund's successful use of options on Futures Contracts depends on
First Trust's ability to correctly predict the movement in prices of Futures
Contracts and the underlying instruments, which may prove to be incorrect. In
addition, there may be imperfect correlation between the instruments being
hedged and the Futures Contract subject to the option. For additional
information, see "Futures Contracts." Certain characteristics of the Futures
market might increase the risk that movements in the prices of Futures Contracts
or options on Futures Contracts might not correlate perfectly with movements in
-13-
the prices of the investments being hedged. For example, all participants in the
Futures and options on Futures Contracts markets are subject to daily variation
margin calls and might be compelled to liquidate Futures or options on Futures
Contracts positions whose prices are moving unfavorably to avoid being subject
to further calls. These liquidations could increase the price volatility of the
instruments and distort the normal price relationship between the Futures or
options and the investments being hedged. Also, because of initial margin
deposit requirements, there might be increased participation by speculators in
the Futures markets. This participation also might cause temporary price
distortions. In addition, activities of large traders in both the Futures and
securities markets involving arbitrage, "program trading," and other investment
strategies might result in temporary price distortions.
SUBLICENSE AGREEMENT
Each Fund has entered into a sublicense agreement (the "Sublicense
Agreement") with First Trust that grants a Fund a non-exclusive and
non-transferable sublicense to use certain intellectual property of Value
Line(R) in connection with the issuance, distribution, marketing and/or
promotion of each Fund. Pursuant to the Sublicense Agreement, each Fund has
agreed to be bound by certain provisions of a product license agreement between
Value Line(R) Publishing Inc. and First Trust (the "Product License Agreement").
Pursuant to the Product License Agreement, First Trust will pay Value Line(R) an
annual license fee of 15 basis points of the average daily NAV of each Fund.
INVESTMENT RISKS
Overview
An investment in the Funds should be made with an understanding of the
risks which an investment in common stocks entails, including the risk that the
financial condition of the issuers of the equity securities or the general
condition of the common stock market may worsen and the value of the equity
securities and therefore the value of a Fund may decline. A Fund may not be an
appropriate investment for those who are unable or unwilling to assume the risks
involved generally with an equity investment. The past market and earnings
performance of any of the equity securities included in a Fund is not predictive
of their future performance. Common stocks are especially susceptible to general
stock market movements and to volatile increases and decreases of value as
market confidence in and perceptions of the issuers change. These perceptions
are based on unpredictable factors including expectations regarding government,
economic, monetary and fiscal policies, inflation and interest rates, economic
expansion or contraction, and global or regional political, economic or banking
crises. First Trust cannot predict the direction or scope of any of these
factors. Shareholders of common stocks have rights to receive payments from the
issuers of those common stocks that are generally subordinate to those of
creditors of, or holders of debt obligations or preferred stocks of, such
issuers.
Shareholders of common stocks of the type held by a Fund have a right
to receive dividends only when and if, and in the amounts, declared by the
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issuer's board of directors and have a right to participate in amounts available
for distribution by the issuer only after all other claims on the issuer have
been paid. Common stocks do not represent an obligation of the issuer and,
therefore, do not offer any assurance of income or provide the same degree of
protection of capital as do debt securities. The issuance of additional debt
securities or preferred stock will create prior claims for payment of principal,
interest and dividends which could adversely affect the ability and inclination
of the issuer to declare or pay dividends on its common stock or the rights of
holders of common stock with respect to assets of the issuer upon liquidation or
bankruptcy. The value of common stocks is subject to market fluctuations for as
long as the common stocks remain outstanding, and thus the value of the equity
securities in a Fund will fluctuate over the life of a Fund and may be more or
less than the price at which they were purchased by a Fund. The equity
securities held in a Fund may appreciate or depreciate in value (or pay
dividends) depending on the full range of economic and market influences
affecting these securities, including the impact of a Fund's purchase and sale
of the equity securities and other factors.
Holders of common stocks incur more risk than holders of preferred
stocks and debt obligations because common stockholders, as owners of the
entity, have generally inferior rights to receive payments from the issuer in
comparison with the rights of creditors of, or holders of debt obligations or
preferred stocks issued by, the issuer. Cumulative preferred stock dividends
must be paid before common stock dividends and any cumulative preferred stock
dividend omitted is added to future dividends payable to the holders of
cumulative preferred stock. Preferred stockholders are also generally entitled
to rights on liquidation which are senior to those of common stockholders.
ADDITIONAL RISKS OF INVESTING IN THE FUNDS
Liquidity
Whether or not the equity securities in a Fund are listed on a
securities exchange, the principal trading market for the equity securities may
be in the over-the-counter market. As a result, the existence of a liquid
trading market for the equity securities may depend on whether dealers will make
a market in the equity securities. There can be no assurance that a market will
be made for any of the equity securities, that any market for the equity
securities will be maintained or that there will be sufficient liquidity of the
equity securities in any markets made. The price of the equity securities held
by a Fund will be adversely affected if trading markets for the equity
securities are limited or absent.
Small Capitalization and Mid Capitalization Companies
The equity securities in a Fund may include small cap and mid cap
company stocks. Small cap and mid cap company stocks have customarily involved
more investment risk than large capitalization stocks. Small cap and mid cap
companies may have limited product lines, markets or financial resources; may
lack management depth or experience; and may be more vulnerable to adverse
general market or economic developments than large cap companies. Some of these
-15-
companies may distribute, sell or produce products that have recently been
brought to market and may be dependent on key personnel.
The prices of small cap and mid cap company securities are often more
volatile than prices associated with large cap company issues, and can display
abrupt or erratic movements at times, due to limited trading volumes and less
publicly available information. Also, because small cap and mid cap companies
normally have fewer shares outstanding and these shares trade less frequently
than large cap companies, it may be more difficult for a Fund which contains
these equity securities to buy and sell significant amounts of such shares
without an unfavorable impact on prevailing market prices. The securities of
small cap and mid cap companies are often traded over-the-counter and may not be
traded in the volumes typical of a national securities exchange.
Intellectual Property Risk
Each Fund relies on a license from Value Line(R) that permits the Fund
to use Value Line(R)'s Index and associated trade names and trademarks
("Intellectual Property") in connection with the name and investment
strategies of the Funds. Such license may be terminated by the licensor,
and as a result, a Fund may lose its ability to use the Intellectual
Property. There is also no guarantee that Value Line(R) has all rights to
license the use of the Intellectual Property to First Trust, on behalf of
the Funds. Accordingly, in the event the license is terminated or Value
Line(R) does not have rights to license the Intellectual Property, it may
have a significant effect on the operation of a Fund.
RISKS AND SPECIAL CONSIDERATIONS CONCERNING DERIVATIVES
In addition to the foregoing, the use of derivative instruments
involves certain general risks and considerations as described below.
(1) Market Risk. Market risk is the risk that the value of
the underlying assets may go up or down. Adverse movements in the value
of an underlying asset can expose a Fund to losses. Market risk is the
primary risk associated with derivative transactions. Derivative
instruments may include elements of leverage and, accordingly,
fluctuations in the value of the derivative instrument in relation to
the underlying asset may be magnified. The successful use of derivative
instruments depends upon a variety of factors, particularly the
portfolio manager's ability to predict movements of the securities,
currencies, and commodities markets, which may require different skills
than predicting changes in the prices of individual securities. There
can be no assurance that any particular strategy adopted will succeed.
A decision to engage in a derivative transaction will reflect the
portfolio manager's judgment that the derivative transaction will
provide value to a Fund and its shareholders and is consistent with a
Fund's objective, investment limitations, and operating policies. In
making such a judgment, the portfolio manager will analyze the benefits
and risks of the derivative transactions and weigh them in the context
of a Fund's overall investments and investment objective.
(2) Credit Risk. Credit risk is the risk that a loss may be
sustained as a result of the failure of a counterparty to comply with
the terms of a derivative instrument. The counterparty risk for
-16-
exchange-traded derivatives is generally less than for
privately-negotiated or over-the-counter ("OTC") derivatives, since
generally a clearing agency, which is the issuer or counterparty to
each exchange-traded instrument, provides a guarantee of performance.
For privately-negotiated instruments, there is no similar clearing
agency guarantee. In all transactions, a Fund will bear the risk that
the counterparty will default, and this could result in a loss of the
expected benefit of the derivative transactions and possibly other
losses to a Fund. A Fund will enter into transactions in derivative
instruments only with counterparties that First Trust reasonably
believes are capable of performing under the contract.
(3) Correlation Risk. Correlation risk is the risk that there
might be an imperfect correlation, or even no correlation, between
price movements of a derivative instrument and price movements of
investments being hedged. When a derivative transaction is used to
completely hedge another position, changes in the market value of the
combined position (the derivative instrument plus the position being
hedged) result from an imperfect correlation between the price
movements of the two instruments. With a perfect hedge, the value of
the combined position remains unchanged with any change in the price of
the underlying asset. With an imperfect hedge, the value of the
derivative instrument and its hedge are not perfectly correlated. For
example, if the value of a derivative instrument used in a short hedge
(such as writing a call option, buying a put option or selling a
Futures Contract) increased by less than the decline in value of the
hedged investments, the hedge would not be perfectly correlated. This
might occur due to factors unrelated to the value of the investments
being hedged, such as speculative or other pressures on the markets in
which these instruments are traded. The effectiveness of hedges using
instruments on indices will depend, in part, on the degree of
correlation between price movements in the index and the price
movements in the investments being hedged.
(4) Liquidity Risk. Liquidity risk is the risk that a
derivative instrument cannot be sold, closed out, or replaced quickly
at or very close to its fundamental value. Generally, exchange
contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out
with the other party to the transaction. A Fund might be required by
applicable regulatory requirements to maintain assets as "cover,"
maintain segregated accounts, and/or make margin payments when it takes
positions in derivative instruments involving obligations to third
parties (i.e., instruments other than purchase options). If a Fund is
unable to close out its positions in such instruments, it might be
required to continue to maintain such assets or accounts or make such
payments until the position expires, matures, or is closed out. These
requirements might impair a Fund's ability to sell a security or make
an investment at a time when it would otherwise be favorable to do so,
or require that a Fund sell a portfolio security at a disadvantageous
time. A Fund's ability to sell or close out a position in an instrument
prior to expiration or maturity depends upon the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the counterparty to enter into a transaction closing out
the position. Due to liquidity risk, there is no assurance that any
-17-
derivatives position can be sold or closed out at a time and price that
is favorable to a Fund.
(5) Legal Risk. Legal risk is the risk of loss caused by the
unenforceability of a party's obligations under the derivative. While a
party seeking price certainty agrees to surrender the potential upside
in exchange for downside protection, the party taking the risk is
looking for a positive payoff. Despite this voluntary assumption of
risk, a counterparty that has lost money in a derivative transaction
may try to avoid payment by exploiting various legal uncertainties
about certain derivative products.
(6) Systemic or "Interconnection" Risk. Systemic or
interconnection risk is the risk that a disruption in the financial
markets will cause difficulties for all market participants. In other
words, a disruption in one market will spill over into other markets,
perhaps creating a chain reaction. Much of the OTC derivatives market
takes place among the OTC dealers themselves, thus creating a large
interconnected web of financial obligations. This interconnectedness
raises the possibility that a default by one large dealer could create
losses for other dealers and destabilize the entire market for OTC
derivative instruments.
FUNDS MANAGEMENT
The general supervision of the duties performed for the Funds under the
investment management agreement is the responsibility of the Board of Trustees.
There are five Trustees of the Trust, one of whom is an "interested person" (as
the term is defined in the 1940 Act) and four of whom are Independent Trustees.
The Trustees set broad policies for the Funds, choose the Trust's officers and
hire the Trust's investment adviser. The officers of the Trust manage its day to
day operations and are responsible to the Trust's Board of Trustees. The
following is a list of the Trustees and officers of the Trust and a statement of
their present positions and principal occupations during the past five years,
the number of portfolios each Trustee oversees and the other directorships they
hold, if applicable.
NUMBER OF
TERM OF OFFICE PORTFOLIOS IN OTHER
AND YEAR FIRST FUND COMPLEX TRUSTEESHIPS
NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY HELD BY
AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE TRUSTEE
Trustee who is an Interested
Person of the Trust
- -----------------------------
James A. Bowen(1)* President, Indefinite term President, First 36 Portfolios Trustee of
1001 Warrenville Road, Chairman of the Trust Portfolios and Wheaton College
Suite 300 Board, Chief 2005 First Trust Advisors;
Lisle, IL 60532 Executive Officer Chairman of the Board
D.O.B.: 09/55 and Trustee of Directors, Bond
Wave, LLC and
Stonebridge Advisors LLC
-18-
Trustees who are not Interested
Persons of the Trust
- -------------------------------
NUMBER OF
TERM OF OFFICE PORTFOLIOS IN OTHER
AND YEAR FIRST FUND COMPLEX TRUSTEESHIPS
NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY HELD BY
AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE TRUSTEE
Richard E. Erickson Trustee Indefinite term Physician, President 36 Portfolios None
c/o First Trust Advisors Wheaton Orthopedics;
L.P. 2005 Co-Owner, Co-Director
1001 Warrenville Road, Sports Med Center for
Suite 300 Fitness; Limited
Lisle, IL 60532 Partner Gundersen
D.O.B.: 04/51 Real Estate Partnership
Thomas R. Kadlec Trustee Indefinite term President, ADM 36 Portfolios None
c/o First Trust Advisors Derivatives, Inc.
L.P. 2005 (May 2005 to Present);
1001 Warrenville Road, Vice President,
Suite 300 Chief Financial
Lisle, IL 60532 Officer (1990 to
D.O.B.: 11/57 Present), ADM Investor
Services, Inc.
(Futures Commission
Merchant); Registered
Representative (2000
to Present), Segerdahl &
Company, Inc., an NASD
member (Broker-Dealer)
Robert F. Keith Trustee Indefinite term President Hibs 24 Portfolios None
c/o First Trust Advisors Enterprises Financial
L.P. and Management
1001 Warrenville Road, o 2006 Consulting (2003 to
Suite 300 Present); Aramark
Lisle, IL 60532 Service Master
D.O.B.: 11/56 Management Services
(2001 to 2003);
President and Chief
Operating Officer,
Service Master
Management Services
(1998 to 2003)
Niel B. Nielson Trustee Indefinite term President (2002 to 36 Portfolios Director of
c/o First Trust Advisors Present), Covenant Good News
L.P. 2005 College; Associate Publishers
1001 Warrenville Road, Pastor (1997 to 2002), - Crossway Books;
Suite 300 College Church in Wheaton Covenant
Lisle, IL 60532 Transport Inc.
D.O.B.: 03/54
Officers of the Trust
- ---------------------
Mark R. Bradley Treasurer, Indefinite term Chief Financial N/A N/A
1001 Warrenville Road, Controller, Chief Officer, Managing
Suite 300 Financial Officer 2005 Director, First Trust
Lisle, IL 60532 and Chief Portfolios and First
D.O.B.: 11/57 Accounting Officer Trust Advisors; Chief
Financial Officer,
Bond Wave LLC and
Stonebridge Advisors LLC
Susan M. Brix Assistant Vice Indefinite term Representative, First N/A N/A
1001 Warrenville Road, President Trust Portfolios;
Suite 300 2005 Assistant Portfolio
Lisle, IL 60532 Manager, First Trust
D.O.B.: 01/60 Advisors
Robert F. Carey Vice President Indefinite term Senior Vice President, N/A N/A
1001 Warrenville Road, First Trust Portfolios
Suite 300 2005 and First Trust Advisors
Lisle, IL 60532
D.O.B.: 07/63
-19-
NUMBER OF
TERM OF OFFICE PORTFOLIOS IN OTHER
AND YEAR FIRST FUND COMPLEX TRUSTEESHIPS
NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY HELD BY
AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE TRUSTEE
James M. Dykas Assistant Indefinite term Vice President, First N/A N/A
1001 Warrenville Road, Treasurer Trust Portfolios L.P.
Suite 300 2005 (January 2005 to
Lisle, IL 60532 present); Executive
D.O.B.: 01/66 Director of Van
Kampen Asset
Management and Morgan
Stanley Investment
Management (December
2002 to January
2005); Vice President,
Van Kampen Asset
Management and Morgan
Stanley Investment
Management (December 2000
to December 2002)
W. Scott Jardine Secretary and Indefinite term General Counsel, N/A N/A
1001 Warrenville Road, Chief Compliance First Trust
Suite 300 Officer 2005 Portfolios and First
Lisle, IL 60532 Trust Advisors;
D.O.B.: 05/60 Secretary, Bond Wave,
LLC and Stonebridge
Advisors LLC
Daniel J. Lindquist Vice President Indefinite term Senior Vice President, N/A N/A
1001 Warrenville Road, First Trust Advisors,
Suite 300 2005 L.P.; Senior Vice
Lisle, IL 60532 President, First Trust
D.O.B.: 02/70 Portfolios L.P. (April
2004 to present); Chief
Operating Officer,
Mina Capital Management,
LLC (January 2004 to
April 2004); Chief
Operating Officer,
Samaritan Asset
Management Service, Inc.
Kristi A. Maher Assistant Indefinite term Assistant General N/A N/A
1001 Warrenville Road, Secretary Counsel (March 2004
Suite 300 2005 to Present), First
Lisle, IL 60532 Trust Portfolios and
D.O.B.: 12/66 First Trust Advisors
L.P.; Associate (1995
to March 2004),
Chapman and Cutler LLP
Roger Testin Vice President Indefinite term Senior Vice N/A N/A
1001 Warrenville Road, President, First
Suite 300 2005 Trust Advisors L.P.
Lisle, IL 60532 (August 2001 to
D.O.B.: 06/66 Present), Senior Vice
President, First
Trust Portfolios L.P.
(August 2004 to
Present); Analyst
(1998 to 2001), Dolan
Capital Management
- --------------------
<FN>
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position of President of First Trust, investment adviser of the Funds.
</FN>
The Board of Trustees of the Trust has four standing committees: the
Executive Committee (and Pricing and Dividend Committee), the Nominating and
Governance Committee, the Valuation Committee and the Audit Committee. The
Executive Committee, which meets between Board meetings, is authorized to
exercise all powers of and to act in the place of the Board of Trustees to the
extent permitted by the Trust's Declaration of Trust and By-laws. The members of
the Executive Committee shall also serve as a special committee of the Board
known as the Pricing and Dividend Committee which is authorized to exercise all
of the powers and authority of the Board in respect of the declaration and
setting of dividends. Messrs. Kadlec and Bowen are members of the Executive
Committee. During the last fiscal year, the Executive Committee held one
meeting.
-20-
The Nominating and Governance Committee is responsible for appointing
and nominating non-interested persons to the Trust's Board of Trustees. Messrs.
Erickson, Nielson, Kadlec and Keith are members of the Nominating and Governance
Committee. If there is no vacancy on the Board of Trustees, the Board will not
actively seek recommendations from other parties, including Shareholders. When a
vacancy on the Board occurs and nominations are sought to fill such vacancy, the
Nominating and Governance Committee may seek nominations from those sources it
deems appropriate in its discretion, including Shareholders of the Funds. To
submit a recommendation for nomination as a candidate for a position on the
Board, Shareholders of the Funds shall mail such recommendation to W. Scott
Jardine at the Funds' address, 1001 Warrenville Road, Suite 300, Lisle, Illinois
60532. Such recommendation shall include the following information: (a) evidence
of Fund ownership of the person or entity recommending the candidate (if a Fund
Shareholder); (b) a full description of the proposed candidate's background,
including his or her education, experience, current employment and date of
birth; (c) names and addresses of at least three professional references for the
candidate; (d) information as to whether the candidate is an "interested person"
in relation to a Fund, as such term is defined in the 1940 Act, and such other
information that may be considered to impair the candidate's independence; and
(e) any other information that may be helpful to the Committee in evaluating the
candidate. If a recommendation is received with satisfactorily completed
information regarding a candidate during a time when a vacancy exists on the
Board or during such other time as the Nominating and Governance Committee is
accepting recommendations, the recommendation will be forwarded to the Chair of
the Nominating and Governance Committee and the outside counsel to the
Independent Trustees. Recommendations received at any other time will be kept on
file until such time as the Nominating and Governance Committee is accepting
recommendations, at which point they may be considered for nomination. During
the last fiscal year, the Nominating and Governance Committee held two meetings.
The Valuation Committee is responsible for the oversight of the pricing
procedures of the Funds. Messrs. Erickson, Kadlec, Nielson and Keith are members
of the Valuation Committee. During the last fiscal year, the Valuation Committee
held one meeting.
The Audit Committee is responsible for overseeing the Funds' accounting
and financial reporting process, the system of internal controls, audit process
and evaluating and appointing independent auditors (subject also to Board
approval). Messrs. Erickson, Kadlec, Keith and Nielson serve on the Audit
Committee. During the last fiscal year, the Audit Committee held two meetings.
Messrs. Erickson, Kadlec, Nielson and Bowen are also trustees of First
Defined Portfolio Fund, LLC, an open-end fund advised by First Trust with 12
portfolios, and Messrs. Erickson Nielson, Kadlec, Keith and Bowen are trustees
of the First Trust Value Line(R) 100 Fund, First Trust Value Line(R) Dividend
Fund, First Trust/Four Corners Senior Floating Rate Income Fund, First
Trust/Four Corners Senior Floating Rate Income Fund II, Macquarie/First Trust
Global Infrastructure/Utilities Dividend & Income Fund, First Trust/Value
Line(R) & Ibbotson Equity Allocation Fund, Energy Income and Growth Fund, First
Trust/Fiduciary Asset Management Covered Call Fund, First Trust/Aberdeen Global
Opportunity Income Fund, First Trust/FIDAC Mortgage Income Fund, First Trust
Strategic High Income Fund, First Trust Strategic High Income Fund II, First
Page 21
Trust Tax-Advantaged Preferred Income Fund and First Trust/Aberdeen Emerging
Opportunity Fund, closed-end funds advised by First Trust, and First Trust
Exchange-Traded Fund II. None of the Trustees who are not "interested persons"
of the Trust, nor any of their immediate family members, has ever been a
director, officer or employee of, or consultant to, First Trust, First Trust
Portfolios or their affiliates. In addition, Mr. Bowen and the other officers of
the Trust hold the same positions with the First Defined Portfolio Fund, LLC,
First Trust Exchange-Traded Fund II, First Trust Value Line(R) 100 Fund, First
Trust Value Line(R) Dividend Fund, First Trust/Four Corners Senior Floating Rate
Income Fund, First Trust/Four Corners Senior Floating Rate Income Fund II,
Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund,
First Trust/Value Line(R) & Ibbotson Equity Allocation Fund, Energy Income and
Growth Fund, First Trust/Fiduciary Asset Management Covered Call Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income
Fund, First Trust Strategic High Income Fund, First Trust Strategic High Income
Fund II, First Trust Tax-Advantaged Preferred Income Fund and First
Trust/Aberdeen Emerging Opportunity Fund (collectively, with the Trust, the
"First Trust Fund Complex") as they hold with the Trust.
Each investment company in the First Trust Fund Complex pays each
Trustee who is not an officer or employee of First Trust, any sub-adviser or any
of their affiliates ("Independent Trustees") an annual retainer of $10,000,
which includes compensation for all board and committee meetings. No additional
meeting fees are paid in connection with board or committee meetings.
Additionally, Mr. Kadlec is paid annual compensation of $10,000 to serve as the
Lead Trustee, with such compensation paid by the funds in the First Trust Fund
Complex and divided among those funds. Until January 1, 2006, additional fees of
$1,000 and $5,000 were paid to Independent Trustees for special board meetings
and non-regular committee meetings, respectively. These additional fees were
shared by the funds in the First Trust Fund Complex that participated in the
particular meeting and were not per fund fees. Trustees are also reimbursed for
travel and out-of-pocket expenses in connection with all meetings.
The following table sets forth estimated compensation to be paid by a
Fund projected during a Fund's first full fiscal year to each of the Trustees
and estimated total compensation to be paid to each of the Trustees by the First
Trust Fund Complex for a full calendar year. A Fund has no retirement or pension
plans. The officers and Trustees who are "interested persons" as designated
above serve without any compensation from a Fund.
ESTIMATED TOTAL COMPENSATION
ESTIMATED AGGREGATE FROM THE FIRST TRUST
NAME OF TRUSTEE COMPENSATION FROM FUND (1) FUND COMPLEX(2)
James A. Bowen $0 $0
Richard E. Erickson $1,652 $140,000
Thomas R. Kadlec $1,770 $150,000
Niel B. Nielson $1,652 $140,000
Robert F. Keith(3) $1,652 $130,000
- --------------------
(1) The compensation estimated to be paid by a Fund to the Trustees for the full
fiscal year for services to a Fund.
(2) The total estimated compensation to be paid to Messrs. Erickson, Kadlec and
Nielson, Independent Trustees, from a Fund and the First Trust Fund Complex
for a full calendar year is based on estimated compensation to be paid to
-22-
these Trustees for a full calendar year for services as Trustees to the
Trust and the First Defined Portfolio Fund, LLC, an open-end fund (with 12
portfolios) advised by First Trust, plus estimated compensation to be paid
to these trustees by the First Value Line(R) 100 Fund the First Trust/Four
Corners Senior Floating Rate Income Fund, the First Trust/Four Corners
Senior Floating Rate Income Fund II, the Macquarie/First Trust Global
Infrastructure/Utilities Dividend & Income Fund, the Energy Income and
Growth Fund, the First Trust/Fiduciary Asset Management Covered Call Fund,
the First Trust/Aberdeen Global Opportunity Income Fund, the First
Trust/FIDAC Mortgage Income Fund, the First Trust Strategic High Income
Fund, First Trust Strategic High Income Fund II, the First Trust
Tax-Advantaged Preferred Income Fund and the First Trust/Aberdeen Emerging
Opportunity Fund. The total estimated compensation to be paid to Mr. Keith,
an Independent Trustee, from the Fund and the other funds in the First Trust
Fund Complex for a full calendar year is based on estimated compensation to
be paid to Mr. Keith for a full calendar year for his service as Trustee to
the Trust, and estimated compensation to be paid to this trustee by the
First Trust Value Line(R) 100 Fund, the First Trust/Four Corners Senior
Floating Rate Income Fund, the First Trust/Four Corners Senior Floating Rate
Income Fund , the First Trust/Four Corners Senior Floating Rate Income Fund
II, the Macquarie/First Trust Global Infrastructure/Utilities Dividend &
Income Fund, the First Trust/Fiduciary Asset Management Covered Call Fund,
the First Trust/Aberdeen Global Opportunity Income Fund, the First
Trust/FIDAC Mortgage Income Fund, the First Trust Strategic High Income
Fund, the First Trust Strategic High Income Fund II, the First Trust
Tax-Advantaged Preferred Income Fund and the First Trust/Aberdeen Emerging
Opportunity Fund.
(3) Mr. Keith's actual total compensation for 2006 will be less than the
estimated amount because he joined the Board of Trustees on June 12, 2006.
The Trust has no employees. Its officers are compensated by First
Trust.
The following table sets forth the dollar range of equity securities
beneficially owned by the Trustees in a Fund and in other funds overseen by the
Trustees in the First Trust Fund Complex as of December 31, 2005:
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN
DOLLAR RANGE OF ALL REGISTERED INVESTMENT COMPANIES
EQUITY SECURITIES OVERSEEN BY TRUSTEE IN
TRUSTEE IN A FUND FIRST TRUST FUND COMPLEX
Mr. Bowen None Over $100,000
Mr. Erickson None $50,001-$100,000
Mr. Kadlec None $50,001-$100,000
Mr. Keith(1) None $0-$10,000
Mr. Nielson None $10,001-$50,000
- ------------------------
(1) Mr. Keith became Trustee on June 12, 2006.
As of the date of this SAI, the Trustees of the Trust who are not
"interested persons" of the Trust and immediate family members do not own
beneficially or of record any class of securities of an investment adviser or
principal underwriter of a Fund or any person directly or indirectly
controlling, controlled by, or under common control with an investment adviser
or principal underwriter of a Fund.
The Board of Trustees, including the Independent Trustees, unanimously
approved the Investment Management Agreement (the "Agreement") for the Funds for
an initial two-year term at a meeting held on July 26, 2006. The Board of
-23-
Trustees determined that the Agreement is in the best interests of the Funds in
light of the services, expenses and such other matters as the Board considered
to be relevant in the exercise of its reasonable business judgment.
Investment Adviser. First Trust provides investment tools and
portfolios for advisers and investors. First Trust is committed to theoretically
sound portfolio construction and empirically verifiable investment management
approaches. Its asset management philosophy and investment discipline is deeply
rooted in the application of intuitive factor analysis and model implementation
to enhance investment decisions.
First Trust acts as investment adviser for and manages the investment
and reinvestment of the assets of the Funds. First Trust also administers the
Trust's business affairs, provides office facilities and equipment and certain
clerical, bookkeeping and administrative services, and permits any of its
officers or employees to serve without compensation as Trustees or officers of
the Trust if elected to such positions.
Pursuant to an Investment Management Agreement between First Trust and
the Trust, each Fund has agreed to pay an annual management fee equal to 0.50%
of its average daily net assets.
A Fund is responsible for all its expenses, including the investment
advisory fees, costs of transfer agency, custody, fund administration, legal,
audit and other services, interest, taxes, sublicensing fees, brokerage
commissions and other expenses connected with executions of portfolio
transactions, any distribution fees or expenses and extraordinary expenses.
First Trust has agreed to waive fees and/or pay Fund expenses to the extent
necessary to prevent the operating expenses of a Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes and
extraordinary expenses) from exceeding 0.70% of average net assets until two
years after the issuance of Fund Shares. Expenses borne by First Trust are
subject to reimbursement by a Fund up to three years from the date the fee or
expense was incurred, but no reimbursement payment will be made by a Fund if it
would result in a Fund exceeding its expense cap.
Under the Investment Management Agreement, First Trust shall not be
liable for any loss sustained by reason of the purchase, sale or retention of
any security, whether or not such purchase, sale or retention shall have been
based upon the investigation and research made by any other individual, firm or
corporation, if such recommendation shall have been selected with due care and
in good faith, except loss resulting from willful misfeasance, bad faith, or
gross negligence on the part of First Trust in the performance of its
obligations and duties, or by reason of its reckless disregard of its
obligations and duties. The Investment Management Agreement continues until
October 13, 2008 and thereafter only if approved annually by the Board,
including a majority of the Independent Trustees. The Agreement terminates
automatically upon assignment and is terminable at any time without penalty as
to a Fund by the Board, including a majority of the Independent Trustees, or by
vote of the holders of a majority of a Fund's outstanding voting securities on
60 days' written notice to First Trust, or by First Trust on 60 days' written
notice to a Fund.
First Trust is located at 1001 Warrenville Road, Lisle, Illinois 60532.
-24-
Investment Committee. The Investment Committee of First Trust is
primarily responsible for the day-to-day management of a Fund. There are
currently six members of the Investment Committee, as follows:
POSITION WITH LENGTH OF SERVICE PRINCIPAL OCCUPATION
NAME FIRST TRUST WITH FIRST TRUST DURING PAST FIVE YEARS
Daniel J. Lindquist Senior Vice President 2 years Senior Vice President, First
Trust Advisors L.P.; Senior
Vice President First Trust
Portfolios L.P. (April 2004 to
present); Chief Operating
Officer, Mina Capital
Management, LLC (January 2004
to April 2004); Chief
Operating Officer, Samaritan
Asset Management Service, Inc.
(April 2000 to January 2004)
Robert F. Carey Chief Investment Officer 15 years Chief Investment Officer and
and Senior Vice President Senior Vice President of First
Trust; Senior Vice President
of First Trust Portfolios L.P.
Jon C. Erickson Senior Vice President 13 years Senior Vice President of First
Trust and First Trust
Portfolios L.P. (August 2002
to present); Vice President of
First Trust and First Trust
Portfolios L.P. (March 1994 to
August 2002)
David G. McGarel Senior Vice President 9 years Senior Vice President of First
Trust and First Trust
Portfolios L.P. (August 2002
to present); Vice President of
First Trust and First Trust
Portfolios L.P. (August 1997
to August 2002)
Roger F. Testin Senior Vice President 5 years Senior Vice President of First
Trust and First Trust
Portfolios L.P. (August 2001
to present); Analyst, Dolan
Capital Management (1998 to
2001)
-25-
POSITION WITH LENGTH OF SERVICE PRINCIPAL OCCUPATION
NAME FIRST TRUST WITH FIRST TRUST DURING PAST FIVE YEARS
Stan Ueland Vice President 1 year Vice President of First Trust
and First Trust Portfolios
(August 2005 to present); Vice
President; Bond Wave LLC (May
2004 - August 2005); Account
Executive, Mina Capital
Management LLC and Samaritan
Asset Management LLC (January
2003 through May 2004); Sales
Consultant, Oracle Corporation
(January 1997 through January
2003)
Daniel J. Lindquist: As Senior Vice President of First Trust, Mr.
Lindquist is Chairman of the Investment Committee and presides over Investment
Committee meetings. Mr. Lindquist is also responsible for overseeing the
implementation of a Fund's investment strategies.
David G. McGarel: As the head of First Trust's Strategy Research Group,
Mr. McGarel is responsible for developing and implementing quantitative
investment strategies for those funds that have investment policies that require
them to follow such strategies.
Jon C. Erickson: As the head of First Trust's Equity Research Group,
Mr. Erickson is responsible for determining the securities to be purchased and
sold by funds that do not utilize quantitative investment strategies.
Roger F. Testin: Mr. Testin is the head of First Trust's Portfolio
Management Group.
Robert F. Carey: As First Trust's Chief Investment Officer, Mr. Carey
consults with the Investment Committee on market conditions and First Trust's
general investment philosophy.
Stan Ueland: Mr. Ueland is a Vice President of First Trust and FTP and
plays an important role in executing the investment strategies of each portfolio
of exchange-traded funds advised by First Trust.
Compensation. The compensation structure for each member of the
Investment Committee is based upon a fixed salary as well as a discretionary
bonus determined by the management of First Trust. Salaries are determined by
management and are based upon an individual's position and overall value to the
firm. Bonuses are also determined by management and are based upon an
individual's overall contribution to the success of the firm and the
profitability of the firm. Salaries and bonuses for members of the Investment
Committee are not based upon criteria such as Fund performance or the value of
assets included in the Funds' portfolios. In addition, Mr. Carey, Mr. Erickson
and Mr. McGarel also have an indirect ownership stake in the firm and will
therefore receive their allocable share of ownership-related distributions.
-26-
The Investment Committee manages the investment vehicles with the
number of accounts and assets, as of December 31, 2005, set forth in the table
below:
ACCOUNTS MANAGED BY INVESTMENT COMMITTEE
REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES
INVESTMENT COMMITTEE NUMBER OF ACCOUNTS NUMBER OF ACCOUNTS
MEMBER ($ ASSETS) ($ ASSETS)
Robert F. Carey 26 ($1,406,000,000) 0 ($0)
Roger F. Testin 26 ($1,406,000,000) 2 ($51,000,000)
Jon C. Erickson 26 ($1,406,000,000) 0 ($0)
David G. McGarel 26 ($1,406,000,000) 0 ($0)
Daniel J. Lindquist 26 ($1,406,000,000) 0 ($0)
None of the accounts managed by the Investment Committee pay an
advisory fee that is based upon the performance of the account. In addition,
First Trust believes that there are no material conflicts of interest that may
arise in connection with the Investment Committee's management of the Funds'
investments and the investments of the other accounts managed by the Investment
Committee. However, because the investment strategy of a Fund and the investment
strategies of many of the other accounts managed by the Investment Committee are
based on fairly mechanical investment processes, the Investment Committee may
recommend that certain clients sell and other clients buy a given security at
the same time. In addition, because the investment strategies of a Fund and
other accounts managed by the Investment Committee generally result in the
clients investing in readily available securities, First Trust believes that
there should not be material conflicts in the allocation of investment
opportunities between a Fund and other accounts managed by the Investment
Committee. None of the members of the Investment Committee own interests in a
Fund.
First Trust is responsible for decisions to buy and sell securities for
a Fund and for the placement of a Fund's securities business, the negotiation of
the commissions to be paid on brokered transactions, the prices for principal
trades in securities, and the allocation of portfolio brokerage and principal
business. It is the policy of First Trust to seek the best execution at the best
security price available with respect to each transaction, and with respect to
brokered transactions in light of the overall quality of brokerage and research
services provided to First Trust and its clients. The best price to a Fund means
the best net price without regard to the mix between purchase or sale price and
commission, if any. Purchases may be made from underwriters, dealers, and, on
occasion, the issuers. Commissions will be paid on a Fund's Futures and options
transactions, if any. The purchase price of portfolio securities purchased from
an underwriter or dealer may include underwriting commissions and dealer
spreads. A Fund may pay mark-ups on principal transactions. In selecting
broker/dealers and in negotiating commissions, First Trust considers, among
other things, the firm's reliability, the quality of its execution services on a
continuing basis and its financial condition. Fund portfolio transactions may be
effected with broker/dealers who have assisted investors in the purchase of
Shares.
-27-
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services a
commission for effecting a transaction in excess of the amount of commission
another broker or dealer would have charged for effecting the transaction.
Brokerage and research services include (a) furnishing advice as to the value of
securities, the advisability of investing, purchasing or selling securities, and
the availability of securities or purchasers or sellers of securities, (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and custody).
In light of the above, in selecting brokers, First Trust may consider
investment and market information and other research, such as economic,
securities and performance measurement research, provided by such brokers, and
the quality and reliability of brokerage services, including execution
capability, performance, and financial responsibility. Accordingly, the
commissions charged by any such broker may be greater than the amount another
firm might charge if First Trust determines in good faith that the amount of
such commissions is reasonable in relation to the value of the research
information and brokerage services provided by such broker to First Trust or the
Trust. First Trust believes that the research information received in this
manner provides a Fund with benefits by supplementing the research otherwise
available to the Fund. The Investment Management Agreement provides that such
higher commissions will not be paid by the Funds unless the adviser determines
in good faith that the amount is reasonable in relation to the services
provided. The investment advisory fees paid by a Fund to First Trust under the
Investment Management Agreement are not reduced as a result of receipt by First
Trust of research services. First Trust has advised the Board that it does not
use soft dollars.
First Trust places portfolio transactions for other advisory accounts
advised by it, and research services furnished by firms through which a Fund
effects their securities transactions may be used by First Trust in servicing
all of its accounts; not all of such services may be used by First Trust in
connection with a Fund. First Trust believes it is not possible to measure
separately the benefits from research services to each of the accounts
(including a Fund) advised by it. Because the volume and nature of the trading
activities of the accounts are not uniform, the amount of commissions in excess
of those charged by another broker paid by each account for brokerage and
research services will vary. However, First Trust believes such costs to a Fund
will not be disproportionate to the benefits received by a Fund on a continuing
basis. First Trust seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by a Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to a Fund. In making
such allocations between a Fund and other advisory accounts, the main factors
considered by First Trust are the respective investment objectives, the relative
size of portfolio holding of the same or comparable securities, the availability
of cash for investment and the size of investment commitments generally held.
Administrator. The Bank of New York ("BONY") serves as Administrator
for the Funds. Its principal address is 101 Barclay St., New York, NY 10286.
-28-
BONY serves as Administrator for the Trust pursuant to a Fund
Administration and Accounting Agreement. Under such agreement, BONY is obligated
on a continuous basis, to provide such administrative services as the Board
reasonably deems necessary for the proper administration of the Trust and the
Funds. BONY will generally assist in all aspects of the Trust's and the Funds'
operations; supply and maintain office facilities (which may be in BONY's own
offices), statistical and research data, data processing services, clerical,
accounting, bookkeeping and record keeping services (including, without
limitation, the maintenance of such books and records as are required under the
1940 Act and the rules thereunder, except as maintained by other agency agents),
internal auditing, executive and administrative services, and stationery and
office supplies; prepare reports to shareholders or investors; prepare and file
tax returns; supply financial information and supporting data for reports to and
filings with the SEC and various state Blue Sky authorities; supply supporting
documentation for meetings of the Board; provide monitoring reports and
assistance regarding compliance with the Declaration of Trust, by-laws,
investment objectives and policies and with federal and state securities laws;
and negotiate arrangements with, and supervise and coordinate the activities of,
agents and others to supply services.
Pursuant to the Fund Administration and Accounting Agreement, the Trust
has agreed to indemnify the Administrator for certain liabilities, including
certain liabilities arising under the federal securities laws, unless such loss
or liability results from negligence or willful misconduct in the performance of
its duties.
Pursuant to the Fund Administration and Accounting Agreement between
BONY and the Trust, the Funds have agreed to pay such compensation as is
mutually agreed from time to time and such out-of-pocket expenses as incurred by
BONY in the performance of its duties. This fee is subject to reduction for
assets over $1 billion.
CUSTODIAN, DISTRIBUTOR, TRANSFER AGENT, FUND ACCOUNTING AGENT, INDEX PROVIDER
AND EXCHANGE
Custodian. BONY, as custodian for the Funds pursuant to a Custody
Agreement, holds the Funds' assets. BONY also serves as transfer agent of the
Funds pursuant to a Transfer Agency and Service Agreement. As Fund accounting
agent, BONY calculates the net asset value of Shares and calculates net income
and realized capital gains or losses. BONY may be reimbursed by the Funds for
its out-of-pocket expenses.
Distributor. First Trust Portfolios L.P. is the Distributor of the Fund
Shares. Its principal address is 1001 Warrenville Road, Lisle, Illinois 60532.
The Distributor has entered into a Distribution Agreement with the Trust
pursuant to which it distributes Fund Shares. Shares are continuously offered
for sale by the Funds through the Distributor only in Creation Unit
Aggregations, as described in the Prospectus and below under the heading
"Creation and Redemption of Creation Units."
12b-1 Plan. The Trust has adopted a Plan of Distribution pursuant to
Rule 12b-1 under the 1940 Act (the "Plan") pursuant to which the Funds may
reimburse the Distributor up to a maximum annual rate of 0.25% its average daily
net assets.
-29-
Under the Plan and as required by Rule 12b-1, the Trustees will receive
and review after the end of each calendar quarter a written report provided by
the Distributor of the amounts expended under the Plan and the purpose for which
such expenditures were made.
The Plan was adopted in order to permit the implementation of the
Funds' method of distribution. However, no such fee is currently charged to the
Funds, and there are no plans in place to impose such a fee.
Aggregations. Fund Shares in less than Creation Unit Aggregations are
not distributed by the Distributor. The Distributor will deliver the Prospectus
and, upon request, this SAI to persons purchasing Creation Unit Aggregations and
will maintain records of both orders placed with it and confirmations of
acceptance furnished by it. The Distributor is a broker-dealer registered under
the Securities Exchange Act of 1934 (the "Exchange Act") and a member of the
National Association of Securities Dealers, Inc. ("NASD").
The Distribution Agreement provides that it may be terminated as to the
Funds at any time, without the payment of any penalty, on at least 60 days'
written notice by the Trust to the Distributor (i) by vote of a majority of the
Independent Trustees or (ii) by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Funds. The Distribution Agreement
will terminate automatically in the event of its assignment (as defined in the
1940 Act).
The Distributor may also enter into agreements with securities dealers
("Soliciting Dealers") who will solicit purchases of Creation Unit Aggregations
of Fund Shares. Such Soliciting Dealers may also be Participating Parties (as
defined in "Procedures for Creation of Creation Unit Aggregations" below) and
DTC Participants (as defined in "DTC Acts as Securities Depository for Fund
Shares" below).
Index Provider. The Index each Fund seeks to track is compiled by
Value Line(R).
Value Line(R) is not affiliated with the Funds or with First Trust.
Each Fund is entitled to use the Index pursuant to a sublicensing arrangement
with First Trust, which in turn has a licensing agreement with Value Line(R).
VALUE LINE PUBLISHING, INC.'S ("VLPI") ONLY RELATIONSHIP TO FIRST TRUST
ADVISORS L.P. ("FTA") WITH RESPECT TO THE FUNDS IS VLPI'S LICENSING TO FTA OF
CERTAIN VLPI TRADEMARKS AND TRADE NAMES AND THE VALUE LINE EQUITY ALLOCATION
INDEX AND THE VALUE LINE DIVIDEND INDEX (EACH, THE "INDEX"), WHICH ARE COMPOSED
BY VLPI WITHOUT REGARD TO FTA, THE FIRST TRUST VALUE LINE EQUITY ALLOCATION
INDEX FUND PRODUCT, THE FIRST TRUST VALUE LINE DIVIDEND INDEX FUND PRODUCT OR
ANY INVESTOR. VLPI HAS NO OBLIGATION TO TAKE THE NEEDS OF FTA OR ANY INVESTOR IN
THE PRODUCT INTO CONSIDERATION IN COMPOSING THE INDEX. THE PRODUCT RESULTS MAY
DIFFER FROM THE HYPOTHETICAL OR PUBLISHED RESULTS OF THE INDEX. VLPI IS NOT
-30-
RESPONSIBLE FOR HOW FTA MAKES USE OF INFORMATION SUPPLIED BY VLPI. VLPI IS NOT
RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE DETERMINATION OF THE PRICES AND
COMPOSITION OF THE PRODUCT OR THE TIMING OF THE ISSUANCE FOR SALE OF THE PRODUCT
OR IN THE CALCULATION OF THE EQUATIONS BY WHICH THE PRODUCT IS TO BE CONVERTED
INTO CASH. VLPI MAKES NO WARRANTY CONCERNING THE INDEX, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR ANY PERSON'S INVESTMENT PORTFOLIO, OR ANY
IMPLIED WARRANTIES ARISING FROM USAGE OF TRADE, COURSE OF DEALING OR COURSE OF
PERFORMANCE, AND VLPI MAKES NO WARRANTY AS TO THE POTENTIAL PROFITS OR ANY OTHER
BENEFITS THAT MAY BE ACHIEVED BY USING THE INDEX OR ANY INFORMATION OR MATERIALS
GENERATED THEREFROM. VLPI DOES NOT WARRANT THAT THE INDEX WILL MEET ANY
REQUIREMENTS OR BE ACCURATE OR ERROR-FREE. VLPI ALSO DOES NOT GUARANTEE ANY
USES, INFORMATION, DATA OR OTHER RESULTS GENERATED FROM THE INDEX OR PRODUCT.
VLPI HAS NO OBLIGATION OR LIABILITY (I) IN CONNECTION WITH THE ADMINISTRATION,
MARKETING OR TRADING OF THE PRODUCT; OR (II) FOR ANY LOSS, DAMAGE, COST OR
EXPENSE SUFFERED OR INCURRED BY ANY INVESTOR OR OTHER PERSON OR ENTITY IN
CONNECTION WITH THIS PRODUCT, AND IN NO EVENT SHALL VLPI BE LIABLE FOR ANY LOST
PROFITS OR OTHER CONSEQUENTIAL, SPECIAL, PUNITIVE, INCIDENTAL, INDIRECT OR
EXEMPLARY DAMAGES IN CONNECTION WITH THE INDEX OR THE PRODUCT.
VALUE LINE IS A REGISTERED TRADEMARK OF VALUE LINE, INC. OR VALUE LINE
PUBLISHING, INC. THAT ARE LICENSED TO FIRST TRUST ADVISORS L.P. THE FIRST TRUST
VALUE LINE(R) EQUITY ALLOCATION INDEX FUND PRODUCT OR THE FIRST TRUST VALUE
LINE(R) DIVIDEND INDEX FUND IS NOT SPONSORED, RECOMMENDED, SOLD OR PROMOTED BY
VALUE LINE PUBLISHING, INC., VALUE LINE, INC., VALUE LINE SECURITIES, INC. OR
ANY OF THEIR AFFILIATES. FIRST TRUST ADVISORS L.P. IS NOT AFFILIATED WITH ANY
VALUE LINE COMPANY.
First Trust has entered into an agreement with AMEX pursuant to which
AMEX will serve as the calculation agent for the Index. As the calculation
agent, AMEX will be responsible for the management of the day-to-day
operations of the Index on behalf of Value Line(R), including calculating the
value of the Index every 15 seconds, widely disseminating the Index value every
15 seconds and tracking corporate actions resulting in Index adjustments.
Exchange. The only relationships that the AMEX has with First Trust or
the Distributor of the Funds in connection with the Funds are that the AMEX
lists the Shares of the Fund pursuant to its Listing Agreement with the Trust
and serves as the calculation agent for each Index. The AMEX is not responsible
for and has not participated in the determination of pricing or the timing of
the issuance or sale of the Shares of the Funds or in the determination or
calculation of the asset value of the Funds. The AMEX has no obligation or
liability in connection with the administration, marketing or trading of the
Funds.
-31
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of the date of this SAI, the Trustees and officers of the Trust
owned, in the aggregate, less than 1% of the interests of a Fund.
ADDITIONAL INFORMATION
Book Entry Only System. The following information supplements and
should be read in conjunction with the section in the Prospectus entitled "Book
Entry."
DTC Acts as Securities Depository for Fund Shares. Shares of the Funds
are represented by securities registered in the name of DTC or its nominee, Cede
& Co., and deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust company, was created to hold securities of
its participants (the "DTC Participants") and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities,
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
a number of its DTC Participants and by the New York Stock Exchange ("NYSE"),
the AMEX and the NASD. Access to the DTC system is also available to others such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a DTC Participant, either directly or indirectly
(the "Indirect Participants").
Beneficial ownership of Shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and Indirect
Participants. Ownership of beneficial interests in Shares (owners of such
beneficial interests are referred to herein as "Beneficial Owners") is shown on,
and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records of DTC Participants
(with respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase and sale of
Shares.
Conveyance of all notices, statements and other communications to
Beneficial Owners is effected as follows. Pursuant to a letter agreement between
DTC and the Trust, DTC is required to make available to the Trust upon request
and for a fee to be charged to the Trust a listing of the Shares of the Funds
held by each DTC Participant. The Trust shall inquire of each such DTC
Participant as to the number of Beneficial Owners holding Shares, directly or
indirectly, through such DTC Participant. The Trust shall provide each such DTC
Participant with copies of such notice, statement or other communication, in
such form, number and at such place as such DTC Participant may reasonably
request, in order that such notice, statement or communication may be
transmitted by such DTC Participant, directly or indirectly, to such Beneficial
Owners. In addition, the Trust shall pay to each such DTC Participants a fair
-32-
and reasonable amount as reimbursement for the expenses attendant to such
transmittal, all subject to applicable statutory and regulatory requirements.
Fund distributions shall be made to DTC or its nominee, as the
registered holder of all Fund Shares. DTC or its nominee, upon receipt of any
such distributions, shall immediately credit DTC Participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
Shares of the Funds as shown on the records of DTC or its nominee. Payments by
DTC Participants to Indirect Participants and Beneficial owners of Shares held
through such DTC Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a "street name," and will be the
responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspect of the
records relating to or notices to Beneficial Owners, or payments made on account
of beneficial ownership interests in such Shares, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests, or for any other aspect of the relationship between DTC and the DTC
Participants or the relationship between such DTC Participants and the Indirect
Participants and Beneficial Owners owning through such DTC Participants.
DTC may decide to discontinue providing its service with respect to
Shares at any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action to find a replacement for DTC to
perform its functions at a comparable cost.
PROXY VOTING POLICIES AND PROCEDURES
The Trust has adopted a proxy voting policy that seeks to ensure that
proxies for securities held by the Funds are voted consistently and solely in
the best economic interests of the Funds.
A senior member of First Trust is responsible for oversight of the
Funds' proxy voting process. First Trust has engaged the services of
Institutional Shareholder Services, Inc. ("ISS"), to make recommendations to
First Trust on the voting of proxies relating to securities held by the Funds.
ISS provides voting recommendations based upon established guidelines and
practices. First Trust reviews ISS recommendations and frequently follows the
ISS recommendations. However, on selected issues, First Trust may not vote in
accordance with the ISS recommendations when First Trust believes that specific
ISS recommendations are not in the best interests of the Funds. If First Trust
manages the assets of a company or its pension plan and any of First Trust's
clients hold any securities of that company, First Trust will vote proxies
relating to such company's securities in accordance with the ISS recommendations
to avoid any conflict of interest. If a client requests First Trust to follow
specific voting guidelines or additional guidelines, First Trust will review the
request and inform the client only if First Trust is not able to follow the
client's request.
First Trust has adopted the ISS Proxy Voting Guidelines. While these
guidelines are not intended to be all-inclusive, they do provide guidance on
First Trust's general voting policies.
-33-
Information regarding how the Funds vote future proxies relating to
portfolio securities during the most recent 12-month period ended June 30, will
be available upon request and without charge on the Funds' website at
www.ftportfolios.com, by calling (800) 621-1675 or by accessing the SEC's
website at http://www.sec.gov.
Quarterly Portfolio Schedule. The Trust is required to disclose, after
its first and third fiscal quarters, the complete schedule of the Funds'
portfolio holdings with the SEC on Form N-Q. Form N-Q for a Fund is available on
the SEC's website at http://www.sec.gov. A Fund's Form N-Q may also be reviewed
and copied at the SEC's Public Reference Room in Washington, DC and information
on the operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330. A Fund's Form N-Q is available without charge, upon request, by
calling (800) 621-1675 or (800) 983-0903 or by writing to First Trust Portfolios
L.P., 1001 Warrenville Road, Lisle, Illinois 60532.
Policy Regarding Disclosure of Portfolio Holdings. The Trust has
adopted a policy regarding the disclosure of information about a Fund's
portfolio holdings. The Board of Trustees of the Trust must approve all material
amendments to this policy. The Funds' portfolio holdings are publicly
disseminated each day a Fund is open for business through financial reporting
and news services, including publicly accessible Internet web sites. In
addition, a basket composition file, which includes the security names and share
quantities to deliver in exchange for Fund Shares, together with estimates and
actual cash components, is publicly disseminated daily prior to the opening of
the AMEX via the National Securities Clearing Corporation (NSCC). The basket
represents one Creation Unit of a Fund. The Trust, First Trust and BONY will not
disseminate non-public information concerning the Trust.
Code of Ethics. In order to mitigate the possibility that the Funds
will be adversely affected by personal trading, the Trust, First Trust and the
Distributor have adopted Codes of Ethics under Rule 17j-1 of the 1940 Act. These
Codes contain policies restricting securities trading in personal accounts of
the officers, Trustees and others who normally come into possession of
information on portfolio transactions. These Codes are on public file with, and
are available from, the SEC.
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS
Creation. The Trust issues and sells Shares of the Funds only in
Creation Unit Aggregations on a continuous basis through the Distributor,
without a sales load, at their NAVs next determined after receipt, on any
Business Day (as defined below), of an order in proper form.
A "Business Day" is any day on which the NYSE is open for business. As
of the date of this SAI, the NYSE observes the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Washington's Birthday, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Deposit of Securities and Deposit or Delivery of Cash. The
consideration for purchase of Creation Unit Aggregations of the Funds generally
consists of the in-kind deposit of a designated portfolio of equity
-34-
securities--the "Deposit Securities"--per each Creation Unit Aggregation
constituting a substantial replication of the stocks included in the Underlying
Index ("Fund Securities") and an amount of cash--the "Cash Component"--computed
as described below. Together, the Deposit Securities and the Cash Component
constitute the "Fund Deposit," which represents the minimum initial and
subsequent investment amount for a Creation Unit Aggregation of a Fund.
The Cash Component is sometimes also referred to as the Balancing
Amount. The Cash Component serves the function of compensating for any
differences between the NAV per Creation Unit Aggregation and the Deposit Amount
(as defined below). The Cash Component is an amount equal to the difference
between the NAV of the Fund Shares (per Creation Unit Aggregation) and the
"Deposit Amount"--an amount equal to the market value of the Deposit Securities.
If the Cash Component is a positive number (i.e., the NAV per Creation Unit
Aggregation exceeds the Deposit Amount), the creator will deliver the Cash
Component. If the Cash Component is a negative number (i.e., the NAV per
Creation Unit Aggregation is less than the Deposit Amount), the creator will
receive the Cash Component.
The Custodian, through the National Securities Clearing Corporation
("NSCC") (discussed below), makes available on each Business Day, prior to the
opening of business on the AMEX (currently 9:30 a.m., Eastern time), the list of
the names and the required number of shares of each Deposit Security to be
included in the current Fund Deposit (based on information at the end of the
previous Business Day) for a Fund.
Such Fund Deposit is applicable, subject to any adjustments as
described below, in order to effect creations of Creation Unit Aggregations of a
Fund until such time as the next-announced composition of the Deposit Securities
is made available.
The identity and number of shares of the Deposit Securities required
for a Fund Deposit for a Fund changes as rebalancing adjustments and corporate
action events are reflected within a Fund from time to time by First Trust with
a view to the investment objective of a Fund. The composition of the Deposit
Securities may also change in response to adjustments to the weighting or
composition of the Component Stocks of the Underlying Index. In addition, the
Trust reserves the right to permit or require the substitution of an amount of
cash--i.e., a "cash in lieu" amount--to be added to the Cash Component to
replace any Deposit Security that may not be available in sufficient quantity
for delivery or that may not be eligible for transfer through the systems of DTC
or the Clearing Process (discussed below), or which might not be eligible for
trading by an Authorized Participant (as defined below) or the investor for
which it is acting or other relevant reason. Brokerage commissions incurred in
connection with the acquisition of Deposit Securities not eligible for transfer
through the systems of DTC and hence not eligible for transfer through the
Clearing Process (discussed below) will at the expense of a Fund and will affect
the value of all Shares; but First Trust, subject to the approval of the Board
of Trustees, may adjust the transaction fee within the parameters described
above to protect ongoing shareholders. The adjustments described above will
reflect changes known to First Trust on the date of announcement to be in effect
by the time of delivery of the Fund Deposit, in the composition of the
Underlying Index or resulting from certain corporate actions.
-35-
In addition to the list of names and numbers of securities constituting
the current Deposit Securities of a Fund Deposit, the Custodian, through the
NSCC, also makes available on each Business Day, the estimated Cash Component,
effective through and including the previous Business Day, per outstanding
Creation Unit Aggregation of a Fund.
Procedures for Creation of Creation Unit Aggregations. In order to be
eligible to place orders with the Distributor and to create a Creation Unit
Aggregation of a Fund, an entity must be (i) a "Participating Party," i.e., a
broker-dealer or other participant in the clearing process through the
Continuous Net Settlement System of the NSCC (the "Clearing Process"), a
clearing agency that is registered with the SEC; or (ii) a DTC Participant (see
the Book Entry Only System section), and, in each case, must have executed an
agreement with the Distributor, with respect to creations and redemptions of
Creation Unit Aggregations ("Participant Agreement") (discussed below). A
Participating Party and DTC Participant are collectively referred to as an
"Authorized Participant." Investors should contact the Distributor for the names
of Authorized Participants that have signed a Participant Agreement. All Fund
Shares, however created, will be entered on the records of DTC in the name of
Cede & Co. for the account of a DTC Participant.
All orders to create Creation Unit Aggregations, whether through the
Clearing Process (through a Participating Party) or outside the Clearing Process
(through a DTC Participant), must be received by the Distributor no later than
the closing time of the regular trading session on the AMEX ("Closing Time")
(ordinarily 4:00 p.m., Eastern time) in each case on the date such order is
placed in order for creation of Creation Unit Aggregations to be effected based
on the NAV of Shares of the Funds as next determined on such date after receipt
of the order in proper form. In the case of custom orders, the order must be
received by the Distributor no later than 3:00 p.m. Eastern time on the trade
date. A custom order may be placed by an Authorized Participant in the event
that the Trust permits or requires the substitution of an amount of cash to be
added to the Cash Component to replace any Deposit Security which may not be
available in sufficient quantity for delivery or which may not be eligible for
trading by such Authorized Participant or the investor for which it is acting or
other relevant reason. The date on which an order to create Creation Unit
Aggregations (or an order to redeem Creation Unit Aggregations, as discussed
below) is placed is referred to as the "Transmittal Date." Orders must be
transmitted by an Authorized Participant by telephone or other transmission
method acceptable to the Distributor pursuant to procedures set forth in the
Participant Agreement, as described below (see the Placement of Creation Orders
Using Clearing Process and the Placement of Creation Orders Outside Clearing
Process sections). Severe economic or market disruptions or changes, or
telephone or other communication failure may impede the ability to reach the
Distributor or an Authorized Participant.
All orders from investors who are not Authorized Participants to create
Creation Unit Aggregations shall be placed with an Authorized Participant, as
applicable, in the form required by such Authorized Participant. In addition,
the Authorized Participant may request the investor to make certain
representations or enter into agreements with respect to the order, e.g., to
provide for payments of cash, when required. Investors should be aware that
their particular broker may not have executed a Participant Agreement and that,
therefore, orders to create Creation Unit Aggregations of a Fund have to be
placed by the investor's broker through an Authorized Participant that has
-36-
executed a Participant Agreement. In such cases there may be additional charges
to such investor. At any given time, there may be only a limited number of
broker-dealers that have executed a Participant Agreement. Those placing orders
for Creation Unit Aggregations through the Clearing Process should afford
sufficient time in order to permit proper submission of the order to the
Distributor prior to the Closing Time on the Transmittal Date. Orders for
Creation Unit Aggregations that are effected outside the Clearing Process are
likely to require transmittal by the DTC Participant earlier on the Transmittal
Date than orders effected using the Clearing Process. Those persons placing
orders outside the Clearing Process should ascertain the deadlines applicable to
DTC and the Federal Reserve Bank wire system by contacting the operations
department of the broker or depository institution effectuating such transfer of
Deposit Securities and Cash Component.
Placement of Creation Orders Using Clearing Process. The Clearing
Process is the process of creating or redeeming Creation Unit Aggregations
through the Continuous Net Settlement System of the NSCC. Fund Deposits made
through the Clearing Process must be delivered through a Participating Party
that has executed a Participant Agreement. The Participant Agreement authorizes
the Distributor to transmit through the Custodian to NSCC, on behalf of the
Participating Party, such trade instructions as are necessary to effect the
Participating Party's creation order. Pursuant to such trade instructions to
NSCC, the Participating Party agrees to deliver the requisite Deposit Securities
and the Cash Component to the Trust, together with such additional information
as may be required by the Distributor. An order to create Creation Unit
Aggregations through the Clearing Process is deemed received by the Distributor
on the Transmittal Date if (i) such order is received by the Distributor not
later than the Closing Time on such Transmittal Date and (ii) all other
procedures set forth in the Participant Agreement are properly followed.
Placement of Creation Orders Outside Clearing Process. Fund Deposits
made outside the Clearing Process must be delivered through a DTC Participant
that has executed a Participant Agreement pre-approved by First Trust and the
Distributor. A DTC Participant who wishes to place an order creating Creation
Unit Aggregations to be effected outside the Clearing Process does not need to
be a Participating Party, but such orders must state that the DTC Participant is
not using the Clearing Process and that the creation of Creation Unit
Aggregations will instead be effected through a transfer of securities and cash
directly through DTC. The Fund Deposit transfer must be ordered by the DTC
Participant on the Transmittal Date in a timely fashion so as to ensure the
delivery of the requisite number of Deposit Securities through DTC to the
account of a Fund by no later than 11:00 a.m., Eastern time, of the next
Business Day immediately following the Transmittal Date.
All questions as to the number of Deposit Securities to be delivered,
and the validity, form and eligibility (including time of receipt) for the
deposit of any tendered securities, will be determined by the Trust, whose
determination shall be final and binding. The amount of cash equal to the Cash
Component must be transferred directly to the Custodian through the Federal
Reserve Bank wire transfer system in a timely manner so as to be received by the
Custodian no later than 2:00 p.m., Eastern time, on the next Business Day
immediately following such Transmittal Date. An order to create Creation Unit
Aggregations outside the Clearing Process is deemed received by the Distributor
on the Transmittal Date if (i) such order is received by the Distributor not
-37-
later than the Closing Time on such Transmittal Date; and (ii) all other
procedures set forth in the Participant Agreement are properly followed.
However, if the Custodian does not receive both the required Deposit Securities
and the Cash Component by 11:00 a.m. and 2:00 p.m., respectively on the next
Business Day immediately following the Transmittal Date, such order will be
canceled. Upon written notice to the Distributor, such canceled order may be
resubmitted the following Business Day using a Fund Deposit as newly constituted
in order to reflect the then current Deposit Securities and Cash Component. The
delivery of Creation Unit Aggregations so created will occur no later than the
third (3rd) Business Day following the day on which the purchase order is deemed
received by the Distributor.
Additional transaction fees may be imposed with respect to transactions
effected outside the Clearing Process (through a DTC participant) and in the
limited circumstances in which any cash can be used in lieu of Deposit
Securities to create Creation Units. (See "Creation Transaction Fee" section
below).
Creation Unit Aggregations may be created in advance of receipt by the
Trust of all or a portion of the applicable Deposit Securities as described
below. In these circumstances, the initial deposit will have a value greater
than the NAV of the Fund Shares on the date the order is placed in proper form
since, in addition to available Deposit Securities, cash must be deposited in an
amount equal to the sum of (i) the Cash Component, plus (ii) 115% of the market
value of the undelivered Deposit Securities (the "Additional Cash Deposit"). The
order shall be deemed to be received on the Business Day on which the order is
placed provided that the order is placed in proper form prior to 4:00 p.m.,
Eastern time, on such date, and federal funds in the appropriate amount are
deposited with the Custodian by 11:00 a.m., Eastern time, the following Business
Day. If the order is not placed in proper form by 4:00 p.m. or federal funds in
the appropriate amount are not received by 11:00 a.m. the next Business Day,
then the order may be deemed to be canceled and the Authorized Participant shall
be liable to a Fund for losses, if any, resulting therefrom. An additional
amount of cash shall be required to be deposited with the Trust, pending
delivery of the missing Deposit Securities to the extent necessary to maintain
the Additional Cash Deposit with the Trust in an amount at least equal to 115%
of the daily marked-to-market value of the missing Deposit Securities. To the
extent that missing Deposit Securities are not received by 1:00 p.m., Eastern
time, on the third Business Day following the day on which the purchase order is
deemed received by the Distributor or in the event a marked-to-market payment is
not made within one Business Day following notification by the Distributor that
such a payment is required, the Trust may use the cash on deposit to purchase
the missing Deposit Securities. Authorized Participants will be liable to the
Trust and the Funds for the costs incurred by the Trust in connection with any
such purchases. These costs will be deemed to include the amount by which the
actual purchase price of the Deposit Securities exceeds the market value of such
Deposit Securities on the day the purchase order was deemed received by the
Distributor plus the brokerage and related transaction costs associated with
such purchases. The Trust will return any unused portion of the Additional Cash
Deposit once all of the missing Deposit Securities have been properly received
by the Custodian or purchased by the Trust and deposited into the Trust. In
addition, a transaction fee, as listed below, will be charged in all cases. The
delivery of Creation Unit Aggregations so created will occur no later than the
-38-
third Business Day following the day on which the purchase order is deemed
received by the Distributor.
Acceptance of Orders for Creation Unit Aggregations. The Trust reserves
the absolute right to reject a creation order transmitted to it by the
Distributor in respect of a Fund if: (i) the order is not in proper form; (ii)
the investor(s), upon obtaining the Fund Shares ordered, would own 80% or more
of the currently outstanding shares of a Fund; (iii) the Deposit Securities
delivered are not as disseminated for that date by the Custodian, as described
above; (iv) acceptance of the Deposit Securities would have certain adverse tax
consequences to a Fund; (v) acceptance of the Fund Deposit would, in the opinion
of counsel, be unlawful; (vi) acceptance of the Fund Deposit would otherwise, in
the discretion of the Trust or First Trust, have an adverse effect on the Trust
or the rights of beneficial owners; or (vii) in the event that circumstances
outside the control of the Trust, the Custodian, the Distributor and First Trust
make it for all practical purposes impossible to process creation orders.
Examples of such circumstances include acts of God; public service or utility
problems such as fires, floods, extreme weather conditions and power outages
resulting in telephone, telecopy and computer failures; market conditions or
activities causing trading halts; systems failures involving computer or other
information systems affecting the Trust, First Trust, the Distributor, DTC,
NSCC, the Custodian or sub-custodian or any other participant in the creation
process, and similar extraordinary events. The Distributor shall notify a
prospective creator of a Creation Unit and/or the Authorized Participant acting
on behalf of such prospective creator of its rejection of the order of such
person. The Trust, the Custodian, any sub-custodian and the Distributor are
under no duty, however, to give notification of any defects or irregularities in
the delivery of Fund Deposits nor shall any of them incur any liability for the
failure to give any such notification.
All questions as to the number of shares of each security in the
Deposit Securities and the validity, form, eligibility, and acceptance for
deposit of any securities to be delivered shall be determined by the Trust, and
the Trust's determination shall be final and binding.
Creation Transaction Fee. Investors will be required to pay a fixed
creation transaction fee, described below, payable to BONY regardless of the
number of creations made each day. An additional charge of up to four times the
fixed transaction fee (expressed as a percentage of the value of the Deposit
Securities) may be imposed for (i) creations effected outside the Clearing
Process; and (ii) cash creations (to offset the Trust's brokerage and other
transaction costs associated with using cash to purchase the requisite Deposit
Securities). Investors are responsible for the costs of transferring the
securities constituting the Deposit Securities to the account of the Trust.
The Standard Creation/Redemption Transaction Fee for a Fund will be
$500. The Maximum Creation/Redemption Transaction Fee for a Fund will be $2,000.
Redemption of Fund Shares In Creation Units Aggregations. Fund Shares
may be redeemed only in Creation Unit Aggregations at their NAV next determined
after receipt of a redemption request in proper form by a Fund through the
Transfer Agent and only on a Business Day. A will not redeem Shares in amounts
less than Creation Unit Aggregations. Beneficial owners must accumulate enough
-39-
Shares in the secondary market to constitute a Creation Unit Aggregation in
order to have such Shares redeemed by the Trust. There can be no assurance,
however, that there will be sufficient liquidity in the public trading market at
any time to permit assembly of a Creation Unit Aggregation. Investors should
expect to incur brokerage and other costs in connection with assembling a
sufficient number of Fund Shares to constitute a redeemable Creation Unit
Aggregation.
With respect to a Fund, the Custodian, through the NSCC, makes
available prior to the opening of business on the AMEX (currently 9:30 a.m.,
Eastern time) on each Business Day, the identity of the Fund Securities that
will be applicable (subject to possible amendment or correction) to redemption
requests received in proper form (as described below) on that day. Fund
Securities received on redemption may not be identical to Deposit Securities
that are applicable to creations of Creation Unit Aggregations.
Unless cash redemptions are available or specified for a Fund, the
redemption proceeds for a Creation Unit Aggregation generally consist of Fund
Securities--as announced on the Business Day of the request for redemption
received in proper form--plus or minus cash in an amount equal to the difference
between the NAV of the Fund Shares being redeemed, as next determined after a
receipt of a request in proper form, and the value of the Fund Securities (the
"Cash Redemption Amount"), less a redemption transaction fee as listed below. In
the event that the Fund Securities have a value greater than the NAV of the Fund
Shares, a compensating cash payment equal to the difference is required to be
made by or through an Authorized Participant by the redeeming shareholder.
The right of redemption may be suspended or the date of payment
postponed (i) for any period during which the NYSE is closed (other than
customary weekend and holiday closings); (ii) for any period during which
trading on the NYSE is suspended or restricted; (iii) for any period during
which an emergency exists as a result of which disposal of the Shares of a Fund
or determination of a Fund's NAV is not reasonably practicable; or (iv) in such
other circumstances as is permitted by the SEC.
Redemption Transaction Fee. A redemption transaction fee is imposed to
offset transfer and other transaction costs that may he incurred by a Fund. An
additional variable charge for cash redemptions (when cash redemptions are
available or specified) for a Fund may be imposed. Investors will also bear the
costs of transferring the Fund Securities from the Trust to their account or on
their order. Investors who use the services of a broker or other such
intermediary in addition to an Authorized Participant to effect a redemption of
a Creation Unit Aggregation may be charged an additional fee for such services.
The redemption transaction fees for a Fund are the same as the creation fees set
forth above.
Placement of Redemption Orders Using Clearing Process. Orders to redeem
Creation Unit Aggregations through the Clearing Process must be delivered
through a Participating Party that has executed the Participant Agreement. An
order to redeem Creation Unit Aggregations using the Clearing Process is deemed
received by the Trust on the Transmittal Date if (i) such order is received by
the Transfer Agent not later than 4:00 p.m., Eastern time, on such Transmittal
Date, and (ii) all other procedures set forth in the Participant Agreement are
-40-
properly followed; such order will be effected based on the NAV of a Fund as
next determined. An order to redeem Creation Unit Aggregations using the
Clearing Process made in proper form but received by the Trust after 4:00 p.m.,
Eastern time, will be deemed received on the next Business Day immediately
following the Transmittal Date and will be effected at the NAV next determined
on such next Business Day. The requisite Fund Securities and the Cash Redemption
Amount will be transferred by the third NSCC Business Day following the date on
which such request for redemption is deemed received.
Placement of Redemption Orders Outside Clearing Process. Orders to
redeem Creation Unit Aggregations outside the Clearing Process must be delivered
through a DTC Participant that has executed the Participant Agreement. A DTC
Participant who wishes to place an order for redemption of Creation Unit
Aggregations to be effected outside the Clearing Process does not need to be a
Participating Party, but such orders must state that the DTC Participant is not
using the Clearing Process and that redemption of Creation Unit Aggregations
will instead be effected through transfer of Fund Shares directly through DTC.
An order to redeem Creation Unit Aggregations outside the Clearing Process is
deemed received by the Trust on the Transmittal Date if (i) such order is
received by the Transfer Agent not later than 4:00 p.m., Eastern time on such
Transmittal Date; (ii) such order is accompanied or followed by the requisite
number of Shares of a Fund, which delivery must be made through DTC to the
Custodian no later than 11:00 a.m., Eastern time, (for the Fund Shares) on the
next Business Day immediately following such Transmittal Date (the "DTC
Cut-Off-Time") and 2:00 p.m., Eastern Time for any Cash Component, if any owed
to a Fund; and (iii) all other procedures set forth in the Participant Agreement
are properly followed. After the Trust has deemed an order for redemption
outside the Clearing Process received, the Trust will initiate procedures to
transfer the requisite Fund Securities which are expected to be delivered within
three Business Days and the Cash Redemption Amount, if any owed to the redeeming
Beneficial Owner to the Authorized Participant on behalf of the redeeming
Beneficial Owner by the third Business Day following the Transmittal Date on
which such redemption order is deemed received by the Trust.
The calculation of the value of the Fund Securities and the Cash
Redemption Amount to be delivered/received upon redemption will be made by the
Custodian according to the procedures set forth under Determination of NAV
computed on the Business Day on which a redemption order is deemed received by
the Trust. Therefore, if a redemption order in proper form is submitted to the
Transfer Agent by a DTC Participant not later than Closing Time on the
Transmittal Date, and the requisite number of Shares of a Fund are delivered to
the Custodian prior to the DTC Cut-Off-Time, then the value of the Fund
Securities and the Cash Redemption Amount to be delivered/received will be
determined by the Custodian on such Transmittal Date. If, however, either (i)
the requisite number of Shares of a Fund are not delivered by the DTC
Cut-Off-Time, as described above, or (ii) the redemption order is not submitted
in proper form, then the redemption order will not be deemed received as of the
Transmittal Date. In such case, the value of the Fund Securities and the Cash
Redemption Amount to be delivered/received will be computed on the Business Day
following the Transmittal Date provided that the Fund Shares of a Fund are
delivered through DTC to the Custodian by 11:00 a.m. the following Business Day
pursuant to a properly submitted redemption order.
-41-
If it is not possible to effect deliveries of the Fund Securities, the
Trust may in its discretion exercise its option to redeem such Fund Shares in
cash, and the redeeming Beneficial Owner will be required to receive its
redemption proceeds in cash. In addition, an investor may request a redemption
in cash that a Fund may, in its sole discretion, permit. In either case, the
investor will receive a cash payment equal to the NAV of its Fund Shares based
on the NAV of Shares of a Fund next determined after the redemption request is
received in proper form (minus a redemption transaction fee and additional
charge for requested cash redemptions specified above, to offset a Fund's
brokerage and other transaction costs associated with the disposition of Fund
Securities). A Fund may also, in its sole discretion, upon request of a
shareholder, provide such redeemer a portfolio of securities that differs from
the exact composition of the Fund Securities, or cash lieu of some securities
added to the Cash Component, but in no event will the total value of the
securities delivered and the cash transmitted differ from the NAV. Redemptions
of Fund Shares for Fund Securities will be subject to compliance with applicable
federal and state securities laws and a Fund (whether or not it otherwise
permits cash redemptions) reserves the right to redeem Creation Unit
Aggregations for cash to the extent that the Trust could not lawfully deliver
specific Fund Securities upon redemptions or could not do so without first
registering the Fund Securities under such laws. An Authorized Participant or an
investor for which it is acting subject to a legal restriction with respect to a
particular stock included in the Fund Securities applicable to the redemption of
a Creation Unit Aggregation may be paid an equivalent amount of cash. The
Authorized Participant may request the redeeming Beneficial Owner of the Fund
Shares to complete an order form or to enter into agreements with respect to
such matters as compensating cash payment, beneficial ownership of shares or
delivery instructions.
The chart below describes in further detail the placement of redemption
orders outside the clearing process.
TRANSMITTAL NEXT BUSINESS SECOND BUSINESS THIRD BUSINESS
DATE (T) DAY (T+1) DAY (T+2) DAY (T+3)
CREATION THROUGH NSCC
STANDARD ORDERS 4:00 p.m. No action. No action. Creation Unit
Aggregations will be
Order must be delivered.
received by the
Distributor.
CUSTOM ORDERS 3:00 p.m. No action. No action. Creation Unit
Aggregations will be
Order must be delivered.
received by the
Distributor.
Orders received
after 3:00 p.m.
will be treated as
standard orders.
-42-
TRANSMITTAL NEXT BUSINESS SECOND BUSINESS THIRD BUSINESS
DATE (T) DAY (T+1) DAY (T+2) DAY (T+3)
CREATION OUTSIDE NSCC
STANDARD ORDERS 4:00 p.m. (ET) 11:00 a.m. (ET) No action. Creation Unit
Aggregations will be
Order in proper Deposit Securities must delivered.
form must be be received by the
received by the Fund's account through
Distributor. DTC.
2:00 p.m. (ET)
Cash Component must be
received by the
Custodian.
STANDARD ORDERS CREATED 4:00 p.m. (ET) 11:00 a.m. (ET) No action. 1:00 p.m.
IN ADVANCE OF RECEIPT
BY THE TRUST OF ALL OR Order in proper Available Deposit Missing Deposit
A PORTION OF THE form must be Securities. Securities are due to
DEPOSIT SECURITIES received by the the Trust or the Trust
Distributor. Cash in an amount equal may use cash on deposit
to the sum of (i) the to purchase missing
Cash Component, plus Deposit Securities.
(ii) 115% of the market
value of the Creation Unit
undelivered Deposit Aggregations will be
Securities. delivered.
CUSTOM ORDERS 3:00 p.m. 11:00 a.m. (ET) No action. Creation Unit
Aggregations will be
Order in proper Deposit Securities must delivered.
form must be be received by the
received by the Fund's account through
Distributor. DTC.
Order received 2:00 p.m. (ET)
after 3:00 p.m.
will be treated as Cash Component must be
standard orders. received by the Orders
Custodian.
REDEMPTION THROUGH NSCC
STANDARD ORDERS 4:00 p.m. (ET) No action. No action. Fund Securities and Cash
Redemption Amount will
Order must be be transferred.
received by the
Transfer Agent.
Orders received
after 4:00 p.m.
(ET) will be deemed
received on the
next business day
(T+1)
CUSTOM ORDERS 3:00 p.m. (ET) No action. No action. Fund Securities and Cash
Redemption Amount will
Order must be be transferred.
received by the
Transfer Agent
Order received
after 3:00 p.m.
will be treated as
standard orders.
-43-
TRANSMITTAL NEXT BUSINESS SECOND BUSINESS THIRD BUSINESS
DATE (T) DAY (T+1) DAY (T+2) DAY (T+3)
REDEMPTION OUTSIDE NSCC
STANDARD ORDERS 4:00 p.m. (ET) 11:00 a.m. (ET) No action. Fund Securities and Cash
Redemption Amount is
Order must be Fund Shares must be delivered to the
received by the delivered through DTC redeeming beneficial
Transfer Agent. to the Custodian. owner.
Order received 2:00 p.m.
after 4:00 p.m.
(ET) will be deemed Cash Component, if any,
received on the is due.
next business day
(T+1).
*If the order is not in
proper form or the Fund
Shares are not delivered,
then the order will not be
deemed received as of T.
CUSTOM ORDERS 3:00 p.m. (ET) 11:00 a.m. (ET) No action. Fund Securities and Cash
Redemption Amount is
Order must be Fund Shares must be delivered to the
received by the delivered through DTC redeeming beneficial
Transfer Agent. to the Custodian. owner.
Order received 2:00 p.m.
after 3:00 p.m.
will be treated as Cash Component, if any,
standard orders. is due.
*If the order is not in
proper form or the Fund
Shares are not delivered,
then the order will not be
deemed received as of T.
FEDERAL TAX MATTERS
This section summarizes some of the main U.S. federal income tax
consequences of owning Shares of the Funds. This section is current as of the
date of the Prospectus. Tax laws and interpretations change frequently, and
these summaries do not describe all of the tax consequences to all taxpayers.
For example, these summaries generally do not describe your situation if you are
a corporation, a non-U.S. person, a broker-dealer, or other investor with
special circumstances. In addition, this section does not describe your state or
foreign tax consequences.
This federal income tax summary is based in part on the advice of
counsel to the Funds. The Internal Revenue Service could disagree with any
conclusions set forth in this section. In addition, our counsel was not asked to
review, and has not reached a conclusion with respect to the federal income tax
treatment of the assets to be deposited in a Fund. This may not be sufficient
for prospective investors to use for the purpose of avoiding penalties under
federal tax law.
-44-
As with any investment, prospective investors should seek advice based
on their individual circumstances from their own tax advisor.
The Funds intend to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code (the "Code").
To qualify for the favorable U.S. federal income tax treatment
generally accorded to regulated investment companies, a Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of a Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer generally
limited for the purposes of this calculation to an amount not greater than 5% of
the value of a Fund's total assets and not greater than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities (other than U.S. Government
securities or the securities of other regulated investment companies) of any one
issuer, or two or more issuers which a Fund controls which are engaged in the
same, similar or related trades or businesses; and (c) distribute at least 90%
of its investment company taxable income (which includes, among other items,
dividends, interest and net short-term capital gains in excess of net long-term
capital losses) and at least 90% of its net tax-exempt interest income each
taxable year.
As a regulated investment company, the Funds generally will not be
subject to U.S. federal income tax on its investment company taxable income (as
that term is defined in the Code, but without regard to the deduction for
dividends paid) and net capital gain (the excess of net long-term capital gain
over net short-term capital loss), if any, that it distributes to shareholders.
The Funds intend to distribute to its shareholders, at least annually,
substantially all of its investment company taxable income and net capital gain.
If the Funds retain any net capital gain or investment company taxable income,
it will generally be subject to federal income tax at regular corporate rates on
the amount retained. In addition, amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax unless, generally, a Fund distributes during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for the one-year period ending October 31
of the calendar year, and (3) any ordinary income and capital gains for previous
years that were not distributed during those years. In order to prevent
application of the excise tax, a Fund intends to make its distributions in
accordance with the calendar year distribution requirement. A distribution will
be treated as paid on December 31 of the current calendar year if it is declared
by a Fund in October, November or December with a record date in such a month
and paid by a Fund during January of the following calendar year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
-45-
If a Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, a Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income.
DISTRIBUTIONS
Dividends paid out of a Fund's investment company taxable income are
generally taxable to a shareholder as ordinary income to the extent of a Fund's
earnings and profits, whether paid in cash or reinvested in additional shares.
However, certain ordinary income distributions received from a Fund may be taxed
at capital gains tax rates. In particular, ordinary income dividends received by
an individual shareholder from a regulated investment company such as a Fund are
generally taxed at the same rates that apply to net capital gain, provided that
certain holding period requirements are satisfied and provided the dividends are
attributable to qualifying dividends received by a Fund itself. Dividends
received by a Fund from REITs and foreign corporations are qualifying dividends
eligible for this lower tax rate only in certain circumstances.
These special rules relating to the taxation of ordinary income
dividends from regulated investment companies generally apply to taxable years
beginning before January 1, 2011. A Fund will provide notice to its shareholders
of the amount of any distributions which may be taken into account as a dividend
which is eligible for the capital gains tax rates. A Fund can not make any
guarantees as to the amount of any distribution which will be regarded as a
qualifying dividend.
A corporation that owns Shares generally will not be entitled to the
dividends received deduction with respect to many dividends received from a Fund
because the dividends received deduction is generally not available for
distributions from regulated investment companies. However, certain ordinary
income dividends on Shares that are attributable to qualifying dividends
received by a Fund from certain domestic corporations may be designated by a
Fund as being eligible for the dividends received deduction.
Distributions of net capital gain (the excess of net long-term capital
gain over net short-term capital loss), if any, properly designated as capital
gain dividends are taxable to a shareholder as long-term capital gains,
regardless of how long the shareholder has held Fund Shares. Shareholders
receiving distributions in the form of additional Shares, rather than cash,
generally will have a cost basis in each such Share equal to the value of a
Share of a Fund on the reinvestment date. A distribution of an amount in excess
of a Fund's current and accumulated earnings and profits will be treated by a
shareholder as a return of capital which is applied against and reduces the
shareholder's basis in his or her Shares. To the extent that the amount of any
such distribution exceeds the shareholder's basis in his or her Shares, the
excess will be treated by the shareholder as gain from a sale or exchange of the
Shares.
Shareholders will be notified annually as to the U.S. federal income
tax status of distributions, and shareholders receiving distributions in the
form of additional Shares will receive a report as to the value of those Shares.
-46-
SALE OR EXCHANGE OF FUND SHARES
Upon the sale or other disposition of Shares of a Fund, which a
shareholder holds as a capital asset, such a shareholder may realize a capital
gain or loss which will be long-term or short-term, depending upon the
shareholder's holding period for the Shares. Generally, a shareholder's gain or
loss will be a long-term gain or loss if the Shares have been held for more than
one year.
Any loss realized on a sale or exchange will be disallowed to the
extent that Shares disposed of are replaced (including through reinvestment of
dividends) within a period of 61 days beginning 30 days before and ending 30
days after disposition of Shares or to the extent that the shareholder, during
such period, acquires or enters into an option or contract to acquire,
substantially identical stock or securities. In such a case, the basis of the
Shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund Shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of long-term capital gain received by the
shareholder with respect to such Shares.
TAXES ON PURCHASE AND REDEMPTION OF CREATION UNITS
If a shareholder exchanges equity securities for Creation Units the
shareholder will generally recognize a gain or a loss. The gain or loss will be
equal to the difference between the market value of the Creation Units at the
time and the shareholder's aggregate basis in the securities surrendered and the
Cash Component paid. If a shareholder exchanges Creation Units for equity
securities, then the shareholder will generally recognize a gain or loss equal
to the difference between the shareholder's basis in the Creation Units and the
aggregate market value of the securities received and the Cash Redemption
Amount. The Internal Revenue Service, however, may assert that a loss realized
upon an exchange of securities for Creation Units cannot be deducted currently
under the rules governing "wash sales," or on the basis that there has been no
significant change in economic position.
NATURE OF FUND'S INVESTMENTS
Certain of a Fund's investment practices are subject to special and
complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (iv)
cause a Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions.
-47-
FUTURES CONTRACTS AND OPTIONS
A Fund's transactions in Futures Contracts and options will be subject
to special provisions of the Code that, among other things, may affect the
character of gains and losses realized by a Fund (i.e., may affect whether gains
or losses are ordinary or capital, or short-term or long-term), may accelerate
recognition of income to a Fund and may defer Fund losses. These rules could,
therefore, affect the character, amount and timing of distributions to
shareholders. These provisions also (a) will require a Fund to mark-to-market
certain types of the positions in its portfolio (i.e., treat them as if they
were closed out), and (b) may cause a Fund to recognize income without receiving
cash with which to make distributions in amounts necessary to satisfy the 90%
distribution requirement for qualifying to be taxed as a regulated investment
company and the 98% distribution requirement for avoiding excise taxes.
BACKUP WITHHOLDING
A Fund may be required to withhold U.S. federal income tax from all
taxable distributions and sale proceeds payable to shareholders who fail to
provide a Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. The withholding percentage
is 28% until 2011, when the percentage will revert to 31% unless amended by
Congress. Corporate shareholders and certain other shareholders specified in the
Code generally are exempt from such backup withholding. This withholding is not
an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal income tax liability.
NON-U.S. SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ("non-U.S. shareholder") depends on whether the income of
a Fund is "effectively connected" with a U.S. trade or business carried on by
the shareholder.
Income Not Effectively Connected. If the income from a Fund is not
"effectively connected" with a U.S. trade or business carried on by the non-U.S.
shareholder, distributions of investment company taxable income will generally
be subject to a U.S. tax of 30% (or lower treaty rate), which tax is generally
withheld from such distributions.
Distributions of capital gain dividends and any amounts retained by a
Fund which are designated as undistributed capital gains will not be subject to
U.S. tax at the rate of 30% (or lower treaty rate) unless the non-U.S.
shareholder is a nonresident alien individual and is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements. However, this 30% tax on capital gains of nonresident alien
individuals who are physically present in the United States for more than the
182 day period only applies in exceptional cases because any individual present
in the United States for more than 182 days during the taxable year is generally
treated as a resident for U.S. income tax purposes; in that case, he or she
would be subject to U.S. income tax on his or her worldwide income at the,
-48-
graduated rates applicable to U.S. citizens, rather than the 30% U.S. tax. In
the case of a non-U.S. shareholder who is a nonresident alien individual, a Fund
may be required to withhold U.S. income tax from distributions of net capital
gain unless the non-U.S. shareholder certifies his or her non-U.S. status under
penalties of perjury or otherwise establishes an exemption. If a non-U.S.
shareholder is a nonresident alien individual, any gain such shareholder
realizes upon the sale or exchange of such shareholder's shares of a Fund in the
United States will ordinarily be exempt from U.S. tax unless the gain is U.S.
source income and such shareholder is physically present in the United States
for more than 182 days during the taxable year and meets certain other
requirements.
Under the provisions of the American Jobs Creation Act of 2004 (the
"2004 Tax Act"), dividends paid by a Fund to shareholders who are nonresident
aliens or foreign entities and that are derived from short-term capital gains
and qualifying net interest income (including income from original issue
discount and market discount), and that are properly designated by a Fund as
"interest-related dividends" or "short-term capital gain dividends," will
generally not be subject to United States withholding tax, provided that the
income would not be subject to federal income tax if earned directly by the
foreign shareholder. In addition, pursuant to the 2004 Tax Act, capital gains
distributions attributable to gains from U.S. real property interests (including
certain U.S. real property holding corporations) will generally be subject to
United States withholding tax and will give rise to an obligation on the part of
the foreign shareholder to file a United States tax return. The provisions
contained in the legislation relating to distributions to shareholders who are
nonresident aliens or foreign entities generally would apply to distributions
with respect to taxable years of a Fund beginning after December 31, 2004 and
before January 1, 2008.
Income Effectively Connected. If the income from a Fund is "effectively
connected" with a U.S. trade or business carried on by a non-U.S. shareholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by a Fund which are designated as undistributed
capital gains and any gains realized upon the sale or exchange of shares of a
Fund will be subject to U.S. income tax at the graduated rates applicable to
U.S. citizens, residents and domestic corporations. Non-U.S. corporate
shareholders may also be subject to the branch profits tax imposed by the Code.
The tax consequences to a non-U.S. shareholder entitled to claim the benefits of
an applicable tax treaty may differ from those described herein. Non-U.S.
shareholders are advised to consult their own tax advisors with respect to the
particular tax consequences to them of an investment in a Fund.
OTHER TAXATION
Fund shareholders may be subject to state, local and foreign taxes on
their Fund distributions. Shareholders are advised to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in a Fund.
-49-
DETERMINATION OF NAV
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled "Net Asset Value."
The per share NAV of a Fund is determined by dividing the total value
of the securities and other assets, less liabilities, by the total number of
Shares outstanding. A Fund's NAV may not be calculated on days during which a
Fund receives no orders to purchase shares and no shares are tendered for
redemption. In determining NAV, portfolio securities for a Fund for which
accurate market quotations are readily available will be valued by a Fund
accounting agent as follows:
(1) Common stocks and other equity securities listed on any
national or foreign exchange or on NASDAQ(R) will be valued at the last
sale price for all exchanges other than NASDAQ(R) and the official
closing price for NASDAQ(R) on the exchange or system in which they are
principally traded on the valuation date. If there are no transactions
on the valuation day, securities traded principally on an exchange or
on NASDAQ(R) will be valued at the mean between the most recent bid and
ask prices.
(2) Securities traded in the over-the-counter market are
valued at their closing bid prices.
(3) Exchange traded options and Futures Contracts will be
valued at the closing price in the market where such contracts are
principally traded. Over-the-counter options and Futures Contracts will
be valued at their closing bid prices.
(4) Forward foreign currency exchange contracts which are
traded in the United States on regulated exchanges will be valued by
calculating the mean between the last bid and asked quotations supplied
to a pricing service by certain independent dealers in such contracts.
In addition, the following types of securities will be valued as
follows:
(1) Fixed income securities with a remaining maturity of 60
days or more will be valued by the fund accounting agent using a
pricing service. When price quotes are not available, fair market value
is based on prices of comparable securities.
(2) Fixed income securities maturing within 60 days are
valued by the fund accounting agent on an amortized cost basis.
(3) Repurchase agreements will be valued as follows.
Overnight repurchase agreements will be valued at cost. Term purchase
agreements (i.e., those whose maturity exceeds seven days) will be
valued by First Trust at the average of the bid quotations obtained
daily from at least two recognized dealers.
-50-
(4) Structured Products, including currency-linked notes,
credit-linked notes and other similar instruments, will be valued by
the fund accounting agent using a pricing service or quotes provided by
the selling dealer or financial institution. When price quotes are not
available, fair market value is based on prices of comparable
securities. Absent a material difference between the exit price for a
particular structured product and the market rates for similar
transactions, the structured product will be valued at its exit price.
(5) Interest rate swaps and credit default swaps will be
valued by the fund accounting agent using a pricing service or quotes
provided by the selling dealer or financial institution. When price
quotes are not available, fair market value is based on prices of
comparable securities. Absent a material difference between the exit
price for a particular swap and the market rates for similar
transactions, the swap will be valued at its exit price.
The value of any portfolio security held by a Fund for which market
quotations are not readily available will be determined by First Trust in a
manner that most fairly reflects fair market value of the security on the
valuation date, based on a consideration of all available information.
Certain securities may not be able to be priced by pre-established
pricing methods. Such securities may be valued by the Board of Trustees or its
delegate at fair value. These securities generally include but are not limited
to, restricted securities (securities which may not be publicly sold without
registration under the Securities Act of 1933) for which a pricing service is
unable to provide a market price; securities whose trading has been formally
suspended; a security whose market price is not available from a pre-established
pricing source; a security with respect to which an event has occurred that is
likely to materially affect the value of the security after the market has
closed but before the calculation of Fund NAV (as may be the case in foreign
markets on which the security is primarily traded) or make it difficult or
impossible to obtain a reliable market quotation; and a security whose price, as
provided by the pricing service, does not reflect the security's "fair value."
As a general principle, the current "fair value" of an issue of securities would
appear to be the amount which the owner might reasonably expect to receive for
them upon their current sale. A variety of factors may be considered in
determining the fair value of such securities.
A Fund may suspend the right of redemption for a Fund only under the
following unusual circumstances: (a) when the NYSE is closed (other than
weekends and holidays) or trading is restricted; (b) when trading in the markets
normally utilized is restricted, or when an emergency exists as determined by
the SEC so that disposal of a Fund's investments or determination of its net
assets is not reasonably practicable; or (c) during any period when the SEC may
permit.
DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled "Dividends, Distributions and
Taxes."
-51-
General Policies. Dividends from net investment income, if any, are
declared and paid semi-annually by First Trust Value Line(R) Equity
Allocation Index Fund and quarterly by First Trust Value Line(R) Dividend
Index Fund. Distributions of net realized securities gains, if any,
generally are declared and paid once a year, but the Trust may make
distributions on a more frequent basis. The Trust reserves the right to
declare special distributions if, in its reasonable discretion, such
action is necessary or advisable to preserve the status of a Fund as a
RIC or to avoid imposition of income or excise taxes on undistributed
income.
Dividends and other distributions on Fund Shares are distributed, as
described below, on a pro rata basis to Beneficial Owners of such Shares.
Dividend payments are made through DTC Participants and Indirect Participants to
Beneficial Owners then of record with proceeds received from a Fund.
Dividend Reinvestment Service. No reinvestment service is provided by
the Trust. Broker-dealers may make available the DTC book-entry Dividend
Reinvestment Service for use by Beneficial Owners of a Fund for reinvestment of
their dividend distributions. Beneficial Owners should contact their brokers in
order to determine the availability and costs of the service and the details of
participation therein. Brokers may require Beneficial Owners to adhere to
specific procedures and timetables. If this service is available and used,
dividend distributions of both income and realized gains will be automatically
reinvested in additional whole Shares of a Fund purchased in the secondary
market.
MISCELLANEOUS INFORMATION
Counsel. Chapman and Cutler LLP, 111 West Monroe Street, Chicago,
Illinois 60603, is counsel to the Trust.
Independent Registered Public Accounting Firm. Deloitte & Touche LLP
serves as the Funds' independent registered public accounting firm. They audit
the Funds' financial statements and perform other related audit services.
-52-
Appendix II - First Trust Value Line(R) Dividend Fund Financial
Statements dated May 31, 2006 as included in the Fund's Annual Report.
Only the financial statements included therein shall be incorporated by
reference.
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
ANNUAL REPORT
FOR THE YEAR ENDED MAY 31, 2006
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) DIVIDEND FUND (FVD)
MAY 31, 2006
Shareholder Letter.......................................................... 1
Portfolio Commentary........................................................ 2
Portfolio Components........................................................ 4
Portfolio of Investments.................................................... 5
Statement of Assets and Liabilities......................................... 10
Statement of Operations..................................................... 11
Statements of Changes in Net Assets......................................... 12
Financial Highlights........................................................ 13
Notes to Financial Statements............................................... 14
Report of Independent Registered Public Accounting Firm..................... 17
Additional Information...................................................... 18
Dividend Reinvestment Plan
Proxy Voting Policies and Procedures
Portfolio Holdings
Tax Information
By-Law Amendments
Advisory Agreement
Board of Trustees and Officers.............................................. 21
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933. Forward-looking statements
include statements regarding the goals, beliefs, plans or current expectations
of First Trust Advisors L.P. (the "Advisor") and its 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 First Trust Value Line(R) Dividend Fund's (the
"Fund") actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
Annual Report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and its
representatives only as of the date hereof. We undertake no obligation to
publicly revise or update these forward-looking statements to reflect events and
circumstances that arise after the date hereof.
HOW TO READ THIS REPORT
This report contains information that can help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the letter from the Fund's President, James A. Bowen, together with
the portfolio commentary by Robert F. Carey, who is the Chief Investment Officer
of the Advisor, you will obtain an understanding of how the market environment
affected the Fund's performance. The statistical information that follows can
help you understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by Mr. Bowen, Mr.
Carey and personnel of the Advisor are just that: informed opinions. They should
not be considered to be promises or advice. The opinions, like the statistics,
cover the period through the date on the cover of this report. Of course, the
risks of investing in the Fund are spelled out in the prospectus.
- --------------------------------------------------------------------------------
SHAREHOLDER LETTER
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) DIVIDEND FUND (FVD)
ANNUAL REPORT
MAY 31, 2006
Dear Shareholders:
We are pleased to inform you that the First Trust Value Line(R) Dividend Fund
(the "Fund") (AMEX Symbol: FVD) continued to provide increased income and price
appreciation for the one-year period ended May 31, 2006. The Fund seeks to
provide total return through a combination of current income and capital
appreciation by investing in common stocks that pay above-average dividends and
have the potential for capital appreciation. For more information on the Fund's
performance, please read the portfolio commentary found on the following pages.
Dividend-paying stocks have had a significant impact on stock performance and we
believe they will continue to reward investors over the long term. According to
Ibbotson Associates, dividends have provided approximately 43% of the 10.4%
average annual total return on the S&P 500 Index from January 1926 through
December 2005. Stocks alone provided a 5.9% average annual return. With
dividends, the return increases to 10.4%.
On June 26, 2006, the Fund announced the adoption of a policy to make regular
monthly distributions of $0.08786 per share. The Fund declared the first
distribution under the new policy, which will be payable on July 17, 2006 to
shareholders of record on July 6, 2006. The Fund's previous policy was to make
regular quarterly distributions.
Also on June 26, 2006, the Fund announced that it has adopted an open-market
share repurchase program. Under the program, the Fund may purchase up to an
aggregate of 4,860,000 shares in open-market transactions at the discretion of
First Trust Advisors L.P., the Fund's advisor. The repurchase limit represents
approximately 15% of the Fund's outstanding shares.
First Trust Advisors L.P. serves as investment advisor or portfolio supervisor
to investment portfolios with approximately $25 billion in assets which it
managed or supervised as of May 31, 2006. We appreciate the opportunity to
assist you in achieving your financial goals and thank you for your confidence.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of the First Trust Value Line(R) Dividend Fund
July 14, 2006
Page 1
[PHOTO OF ROBERT F. CAREY]
ROBERT F. CAREY, CFA SENIOR VICE PRESIDENT AND CHIEF INVESTMENT OFFICER
FIRST TRUST ADVISORS L.P.
Mr. Carey is responsible for the overall management of research and analysis of
the First Trust product line. Mr. Carey has over 20 years of experience as an
Equity and Fixed-Income Analyst and is a recipient of the Chartered Financial
Analyst (CFA) designation. He is a graduate of the University of Illinois at
Champaign-Urbana with a B.S. in Physics. He is also a member of the Investment
Analysts Society of Chicago and the CFA Institute. Mr. Carey has appeared as a
guest on such programs as Bloomberg TV and CNBC and has been quoted by several
publications, including THE WALL STREET JOURNAL, THE WALL STREET REPORTER,
BLOOMBERG NEWS SERVICE, and REGISTERED REP.
- --------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
- --------------------------------------------------------------------------------
OVERVIEW
The First Trust Value Line(R) Dividend Fund ("FVD" or the "Fund") posted a
market price total return of 11.9% and a net asset value ("NAV") total return of
10.3% for the one-year period ended May 31, 2006. Over the same one-year period,
the S&P 500 Index gained 8.6%. The Fund distributed $0.4175 per share in
ordinary income, $0.32 in short-term capital gains, and $1.38 in long-term
capital gains for the one-year period ended May 31, 2006. The Fund's
distribution rate, based on market price, was 3.0% as of May 31, 2006. FVD
carried a beta of 0.80 as of May 31, 2006, according to Bloomberg. FVD traded at
a 13.8% discount to its NAV on May 31, 2006. Its daily trading volume throughout
the period averaged 87,114 shares.
Following is a review of the portfolio strategy, composition, investment
environment and performance results of FVD for the one-year period ended May 31,
2006.
INVESTMENT STRATEGY
The investment objective of the Fund is to provide total return through a
combination of current income and capital appreciation. The Fund will invest
substantially all, but in no event less than 80%, of its net assets in the
stocks that are selected through application of a disciplined investment
strategy applied to the universe of stocks which Value Line(R) gives a
Safety(TM) Ranking of #1 and #2 in the Value Line(R) Safety(TM) Ranking System.
The Fund seeks to achieve its investment objective by investing in common stocks
that pay above-average dividends and have the potential for capital
appreciation. On the last Friday of each month, the Fund's investment advisor,
First Trust Advisors L.P., ("First Trust") reapplies the Fund's investment
strategy and makes portfolio adjustments to match any changes made to the common
stocks selected through this application of the investment strategy and
reweights the portfolio as of such date. The Fund does not employ leverage.
DISTRIBUTIONS
The Fund distributed $0.4175 per share in ordinary income, $0.32 in short-term
capital gains, and $1.38 in long-term capital gains for the one-year period
ended May 31, 2006. The Fund's distribution rate, based on market price, was
3.0% as of May 31, 2006.
On June 26, 2006, the Fund announced the adoption of a policy to make regular
monthly distributions of $0.08786 per share. The Fund declared the first
distribution under the new policy, which will be payable on July 17, 2006 to
shareholders of record on July 6, 2006. The Fund's previous policy was to make
regular quarterly distributions.
COMPOSITION OF THE FUND
The Fund held 178 issues on May 31, 2006. Over the past 12 months, 63 stocks
were sold and 64 were bought. As of May 31, 2006, the average market
capitalization of the stocks in the portfolio was $29.0 billion, up from $26.9
billion a year ago. The largest market capitalization holding in the portfolio
was $368.5 billion, down from $386.7 billion a year ago. The smallest was $1.0
billion, up from $993.0 million a year ago.
SECTOR DIVERSIFICATION
The following breakdown illustrates the major economic sector weightings,
according to S&P's Global Industry Classification Standard, for FVD as of May
31, 2005 and MAY 31, 2006: Basic Materials (4.0%; 3.4%); Consumer Discretionary
(5.8%; 6.7%); Consumer Staples (12.0%; 12.7%); Energy (5.2%; 4.5%); Financial
Services (38.3%; 38.8%); Health Care (4.6%; 5.0%); Industrials (6.3%; 3.9%);
Information Technology (0.0%; 0.5%); Telecommunications (2.9%; 2.8%); Utilities
(19.8%; 20.9%); and Cash & Equivalents (1.1%; 0.8%).
Page 2
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PORTFOLIO COMMENTARY - (CONTINUED)
- --------------------------------------------------------------------------------
PERFORMANCE OF THE FUND
The Fund posted positive returns for the fiscal year ended May 31, 2006, based
both on market price and NAV total returns relative to the S&P 500 Index. The
Fund's total return was 11.9% based on market price and 10.3% based on NAV for
the one-year period ended May 31, 2006. Over the same one-year period, the S&P
500 Index gained 8.6%. One factor that contributed positively to the Fund's
performance was an overweight position in financial stocks. Financials was the
third best performing sector in the benchmark, with a return of 14.6% for the
one-year period ended May 31, 2006. Conversely, the Fund had an underweight
position in energy stocks relative to the benchmark. The energy sector was the
period's best performing sector in the benchmark, returning 29.0%. The
underweighted position was one factor which contributed negatively to the Fund's
performance versus the benchmark over the one-year reporting period.
MARKET AND ECONOMIC OVERVIEW
Overall, stock markets performed in line with or above long-term averages with
particular strength in small and mid-cap stocks. The companies in the S&P 500
(large-cap), S&P 400 (mid-cap) and S&P 600 (small-cap) indexes increased,
including dividends, with returns of 8.6%, 15.6% and 17.6%, respectively, for
the 12-month period ended May 31, 2006. After lagging behind large-cap stocks in
the 1990s, small and mid-cap stocks have substantially outperformed their
large-cap counterparts so far this decade.
In our opinion, equity market conditions remained favorable throughout most of
the period, with particular strength from late October 2005 through early May
2006, as economic conditions improved from the lower expectations brought about
by severe weather conditions in the Gulf Region. However, starting in early May
2006, stock markets began to experience meaningful weakness, particularly the
shares of those companies that had experienced the greatest increase in price
leading up to that point. May 2006 saw the S&P Small- and Mid-Cap stock indexes
decline by approximately 4.5%, considerably higher than the 2.5% decline for the
S&P 500 Large-Cap index.
The Federal Open Market Committee raised interest rates steadily during the
period from 3% to 5% due to increased inflation expectations. The inflation
rate, as measured by the Consumer Price Index, increased from 2.8% to 3.5% on an
annual basis. Most of the increase in interest rates was likely due to the
strong recovery in capacity utilization and sharply higher commodity prices as
evidenced by the price of gold. According to Bloomberg, gold reached a 26-year
high of $732 an ounce on May 12, 2006.
Typically, higher interest rates put pressure on equity valuations and so the
positive performance of equities for the one-year period ended May 31, 2006 is
notable and can most likely be explained by strong earnings performance.
Earnings for the S&P 500 Index in the first quarter 2006 were 19.4% higher than
the same period a year earlier with 67.6% of companies beating consensus
earnings estimates. Consensus earnings estimates in April and May continued to
increase according to the Institutional Broker's Estimate System. The S&P 500
Index has posted double-digit earnings growth for the past 16 consecutive
quarters.
IN CLOSING
Historically, the market has favored quality companies that pay dividends. The
recent extension of the 2003 qualified dividend tax rate cut through 2010 from
2008 for dividends and long-term gains was positive for equities. Since the
start of 2003, there have been 972 dividend increases and 45 companies that have
started to pay dividends in the S&P 500; whereas there were just 26 decreases
and 11 suspensions over this same period, according to Standard & Poor's. For
the 12-month period ended May 2006, dividend-paying stocks gained 13.9%, vs.
14.1% for the non-payers. The number of dividend increases (S&P 500)
year-to-date since the beginning of 2006 totaled 162, down slightly from the 163
registered over the same period in 2005, but still well above the 130 increases
registered in 2004. A total of 386 companies in the S&P 500 Index currently pay
a dividend. The dividend yield on the S&P 500 Index was 1.93% at the end of May.
According to Standard & Poor's, dividends are now growing faster than earnings.
We believe dividend-paying stocks will continue to reward investors over the
long term.
Page 3
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
PORTFOLIO COMPONENTS+
MAY 31, 2006
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Commercial Banks 17.9%
Real Estate Investment Trusts (REITS) 11.1%
Multi-Utilities 9.7%
Food Products 7.8%
Electric Utilities 5.7%
Insurance 5.6%
Gas Utilities 5.1%
Oil, Gas & Consumable Fuels 4.5%
Pharmaceuticals 3.9%
Media 2.8%
Thrifts & Mortgage Finance 2.8%
Chemicals 2.3%
Diversified Telecommunication Services 2.2%
Household Products 1.7%
Commercial Services & Supplies 1.7%
Beverages 1.7%
Household Durables 1.1%
Containers & Packaging 1.1%
Health Care Equipment & Supplies 1.1%
Electrical Equipment 1.1%
Industrial Conglomerates 1.1%
Capital Markets 1.1%
Food & Staples Retailing 1.1%
Textiles, Apparel & Luxury Goods 0.6%
Personal Products 0.6%
Hotels, Restaurants & Leisure 0.6%
Leisure Equipment & Products 0.6%
Independent Power Producers & Energy Traders 0.6%
Computers & Peripherals 0.6%
Auto Components 0.6%
Wireless Telecommunication Services 0.6%
Diversified Financial Services 0.5%
Distributors 0.5%
+ Percentages are based on total investments. Please note that the
percentages shown on the Portfolio of Investments are based on net assets.
Page 4 See Notes to Financial Statements.
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
PORTFOLIO OF INVESTMENTS
MAY 31, 2006
MARKET
SHARES VALUE
- ----------- --------------
COMMON STOCKS - 99.0%
AUTO COMPONENTS - 0.5%
38,043 Magna International, Inc. ...................... $ 2,951,756
--------------
BEVERAGES - 1.7%
64,364 Anheuser-Busch Companies, Inc. ................. 2,937,573
67,473 Coca-Cola (The) Company......................... 2,970,836
49,455 PepsiCo, Inc.................................... 2,990,049
--------------
8,898,458
--------------
CAPITAL MARKETS - 1.1%
98,976 Allied Capital Corp. ........................... 2,977,198
92,255 Federated Investors, Inc., Class B.............. 2,963,231
--------------
5,940,429
--------------
CHEMICALS - 2.2%
46,135 Air Products & Chemicals, Inc. ................. 2,991,855
70,848 E. I. du Pont de Nemours and Company............ 3,013,165
83,963 International Flavors & Fragrances, Inc. ....... 2,988,243
46,092 PPG Industries, Inc. ........................... 2,965,559
--------------
11,958,822
--------------
COMMERCIAL BANKS - 17.7%
107,482 AmSouth Bancorporation.......................... 2,880,518
90,304 Associated Banc-Corp............................ 2,985,450
53,539 Bank of Montreal................................ 3,033,520
76,525 Bank of Nova Scotia............................. 3,080,131
70,798 BB&T Corp. ..................................... 2,943,073
40,790 Canadian Imperial Bank of Commerce.............. 3,000,512
41,019 City National Corp. ............................ 2,983,312
53,867 Comerica, Inc................................... 2,949,218
59,049 Commerce Bancshares, Inc. ...................... 3,053,424
53,857 Compass Bancshares, Inc. ....................... 2,997,142
51,849 Cullen/Frost Bankers, Inc. ..................... 2,939,838
77,820 Fifth Third Bancorp............................. 2,957,160
73,732 First Horizon National Corp. ................... 2,946,331
82,617 First Midwest Bancorp, Inc. .................... 2,904,814
125,856 Huntington Bancshares, Inc. .................... 2,960,133
25,640 M&T Bank Corp. ................................. 2,951,164
65,121 Marshall & Ilsley Corp. ........................ 2,952,586
81,870 Mercantile Bankshares Corp. .................... 2,943,227
53,935 National Bank of Canada......................... 3,004,006
80,244 National City Corp.............................. 2,959,399
101,016 North Fork Bancorporation, Inc.................. 2,976,942
150,583 Old National Bancorp............................ 2,888,182
42,959 PNC Financial Services Group, Inc............... 2,960,305
153,759 Popular, Inc.................................... 2,978,312
86,265 Regions Financial Corp. ........................ 2,920,070
70,580 Royal Bank of Canada............................ 2,902,250
38,875 SunTrust Banks, Inc............................. 2,943,226
112,498 Synovus Financial Corp.......................... 2,959,822
54,466 Toronto-Dominion Bank........................... 2,953,691
56,526 Wachovia Corp. ................................ 3,024,141
44,441 Wells Fargo & Company........................... 2,949,549
69,481 Wilmington Trust Corp. ......................... 2,967,534
--------------
94,848,982
--------------
See Notes to Financial Statements. Page 5
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2006
MARKET
SHARES VALUE
- ----------- --------------
COMMON STOCKS - CONTINUED
COMMERCIAL SERVICES & SUPPLIES - 1.7%
50,237 Avery Dennison Corp. ........................... $ 2,983,575
72,550 Pitney Bowes, Inc............................... 2,958,589
92,800 R.R. Donnelley & Sons Company................... 2,986,304
--------------
8,928,468
--------------
COMPUTERS & PERIPHERALS - 0.6%
69,692 Diebold, Inc. .................................. 2,962,607
--------------
CONTAINERS & PACKAGING - 1.1%
98,943 Bemis Company................................... 3,007,867
96,112 Sonoco Products Company......................... 3,044,828
--------------
6,052,695
--------------
DISTRIBUTORS - 0.5%
68,259 Genuine Parts Company........................... 2,939,233
--------------
DIVERSIFIED FINANCIAL SERVICES - 0.5%
60,729 Bank of America Corp............................ 2,939,284
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 2.2%
115,453 AT&T Inc........................................ 3,008,705
88,749 BellSouth Corp.................................. 2,997,054
128,507 Telecom Corp. of New Zealand Ltd.,
Sponsored ADR................................ 2,944,095
95,589 Verizon Communications, Inc. ................... 2,983,333
--------------
11,933,187
--------------
ELECTRIC UTILITIES - 5.6%
64,006 ALLETE, Inc..................................... 2,910,993
43,282 Entergy Corp. .................................. 3,034,501
54,140 Exelon Corp..................................... 3,064,865
76,506 FPL Group, Inc.................................. 3,047,234
108,694 Great Plains Energy, Inc........................ 3,029,302
113,137 Hawaiian Electric Industries, Inc............... 3,039,991
76,467 Pinnacle West Capital Corp...................... 3,012,035
72,043 Progress Energy, Inc............................ 3,028,688
93,937 Southern (The) Company.......................... 3,003,166
142,405 Westar Energy, Inc.............................. 3,034,651
--------------
30,205,426
--------------
ELECTRICAL EQUIPMENT - 1.1%
36,734 Emerson Electric Company........................ 3,031,290
59,026 Hubbell, Inc., Class B.......................... 2,971,959
--------------
6,003,249
--------------
FOOD & STAPLES RETAILING - 1.1%
96,546 Sysco Corp...................................... 2,952,377
68,825 Weis Markets, Inc............................... 2,755,753
--------------
5,708,130
--------------
FOOD PRODUCTS - 7.8%
77,820 Cadbury Schweppes PLC, Sponsored ADR............ 2,999,183
85,524 Campbell Soup Company........................... 3,009,590
131,561 ConAgra Foods, Inc.............................. 2,973,279
57,538 General Mills, Inc.............................. 2,985,647
69,757 H.J. Heinz Company.............................. 2,954,209
73,118 J.M. Smucker (The) Company...................... 3,031,472
Page 6 See Notes to Financial Statements.
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2006
MARKET
SHARES VALUE
- ----------- --------------
COMMON STOCKS - CONTINUED
FOOD PRODUCTS - CONTINUED
63,328 Kellogg Company................................. $ 2,982,749
90,936 Kraft Foods, Inc................................ 3,009,982
74,690 Lancaster Colony Corp. ......................... 2,910,669
85,721 McCormick & Company, Inc. ...................... 2,953,088
173,986 Sara Lee Corp. ................................. 2,952,542
130,813 Unilever NV..................................... 2,960,298
131,446 Unilever PLC, Sponsored ADR..................... 2,960,168
64,254 Wm. Wrigley Jr. Company........................ 2,937,693
--------------
41,620,569
--------------
GAS UTILITIES - 5.1%
84,057 AGL Resources, Inc.............................. 3,073,964
111,992 Atmos Energy Corp............................... 3,005,865
90,087 Equitable Resources, Inc. ...................... 3,031,428
84,989 National Fuel Gas Company....................... 3,042,606
67,322 New Jersey Resources Corp....................... 3,024,104
80,939 Peoples Energy Corp. ........................... 3,036,831
123,823 Piedmont Natural Gas Company, Inc............... 3,010,137
130,130 UGI Corp. ...................................... 3,026,824
104,954 WGL Holdings, Inc. ............................. 3,022,675
--------------
27,274,434
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 1.1%
93,467 Arrow International Inc. ....................... 3,013,376
59,272 Hillenbrand Industries, Inc. ................... 2,995,607
--------------
6,008,983
--------------
HOTELS, RESTAURANTS & LEISURE - 0.6%
90,250 McDonald's Corp................................. 2,993,592
--------------
HOUSEHOLD DURABLES - 1.1%
118,567 Leggett & Platt, Inc. .......................... 3,010,416
73,316 Snap-On, Inc. .................................. 3,070,474
--------------
6,080,890
--------------
HOUSEHOLD PRODUCTS - 1.7%
49,677 Colgate-Palmolive Company....................... 2,997,510
49,760 Kimberly-Clark Corp............................. 3,018,939
54,189 Procter & Gamble (The) Company.................. 2,939,753
--------------
8,956,202
--------------
INDEPENDENT POWER PRODUCERS &
ENERGY TRADERS - 0.6%
57,361 Constellation Energy Group, Inc................. 2,965,564
--------------
INDUSTRIAL CONGLOMERATES - 1.1%
35,875 3M Company...................................... 3,001,303
86,766 General Electric Company........................ 2,972,603
--------------
5,973,906
--------------
INSURANCE - 5.5%
53,916 Allstate (The) Corp. ........................... 2,965,919
110,707 Arthur J. Gallagher & Company................... 2,942,592
58,655 Chubb (The) Corp. .............................. 2,963,837
66,513 Cincinnati Financial Corp. ..................... 3,048,956
52,876 Lincoln National Corp........................... 2,970,574
51,993 MBIA Inc........................................ 2,970,360
See Notes to Financial Statements. Page 7
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2006
MARKET
SHARES VALUE
- ----------- --------------
COMMON STOCKS - CONTINUED
INSURANCE - CONTINUED
52,486 Mercury General Corp............................ $ 2,936,592
138,640 Old Republic International Corp. ............... 2,962,737
67,211 Protective Life Corp............................ 2,978,792
65,306 Unitrin, Inc.................................... 2,926,362
--------------
29,666,721
--------------
LEISURE EQUIPMENT & PRODUCTS - 0.6%
66,646 Polaris Industries, Inc......................... 2,967,746
--------------
MEDIA - 2.8%
55,282 Gannett Co., Inc................................ 2,985,781
47,963 Knight-Ridder, Inc.............................. 2,974,186
101,669 Lee Enterprises, Inc............................ 2,906,717
120,285 New York Times (The) Company.................... 2,906,086
106,905 Tribune Company................................. 3,190,045
--------------
14,962,815
--------------
MULTI-UTILITIES - 9.6%
60,606 Ameren Corp. ................................... 2,999,391
68,620 Consolidated Edison, Inc........................ 3,026,142
41,406 Dominion Resources, Inc......................... 3,005,247
107,482 Duke Energy Corp................................ 3,033,142
130,186 Energy East Corp................................ 3,103,634
73,969 KeySpan Corp. .................................. 2,960,979
85,573 MDU Resources Group, Inc. ...................... 3,036,130
108,457 NSTAR........................................... 2,999,921
96,828 OGE Energy Corp. ............................... 3,014,256
75,121 PG & E Corp. ................................... 2,980,801
120,140 PNM Resources Inc............................... 3,035,938
78,784 SCANA Corp...................................... 3,003,246
65,984 Sempra Energy................................... 2,967,300
115,542 Vectren Corp. .................................. 3,065,329
75,807 Wisconsin Energy Corp........................... 3,022,425
61,504 WPS Resources Corp.............................. 3,002,625
160,703 Xcel Energy, Inc. ............................. 3,016,395
--------------
51,272,901
--------------
OIL, GAS & CONSUMABLE FUELS - 4.5%
42,159 BP PLC, Sponsored ADR........................... 2,980,641
50,228 Chevron Corp.................................... 3,003,132
47,574 ConocoPhillips.................................. 3,010,958
48,753 Exxon Mobil Corp................................ 2,969,545
39,403 Marathon Oil Corp............................... 2,957,195
45,378 Royal Dutch Shell PLC, Class A, ADR............. 3,009,015
45,845 Total SA, Sponsored ADR......................... 2,989,552
102,296 TransCanada Corp. .............................. 3,139,464
--------------
24,059,502
--------------
PERSONAL PRODUCTS - 0.6%
94,651 Avon Products, Inc.............................. 3,000,437
--------------
PHARMACEUTICALS - 3.8%
69,953 Abbott Laboratories............................. 2,986,993
120,771 Bristol-Myers Squibb Company.................... 2,964,928
53,974 GlaxoSmithKline PLC, ADR........................ 2,984,762
49,171 Johnson & Johnson............................... 2,961,078
Page 8 See Notes to Financial Statements.
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2006
MARKET
SHARES VALUE
- ----------- --------------
COMMON STOCKS - CONTINUED
PHARMACEUTICALS - CONTINUED
57,098 Lilly (Eli) & Company........................... $ 2,948,541
124,805 Pfizer, Inc..................................... 2,952,886
62,195 Wyeth........................................... 2,844,799
--------------
20,643,987
--------------
REAL ESTATE INVESTMENT TRUSTS (REITS) - 11.0%
61,988 Archstone-Smith Trust........................... 2,997,120
28,316 AvalonBay Communities, Inc. .................... 3,009,991
57,284 BRE Properties, Inc., Class A................... 2,986,788
86,993 Duke Realty Corp. .............................. 2,952,542
87,425 Equity Office Properties Trust.................. 2,941,851
68,197 Equity Residential.............................. 3,007,488
43,566 Federal Realty Investment Trust................. 2,979,043
113,870 Health Care Property Investors, Inc............. 2,977,701
81,915 Kimco Realty Corp. ............................. 2,936,653
69,643 Liberty Property Trust.......................... 2,965,399
69,160 Mack-Cali Realty Corp........................... 2,965,581
126,121 New Plan Excel Realty Trust..................... 2,977,717
75,673 Pennsylvania Real Estate Investment Trust....... 2,822,603
84,821 Plum Creek Timber Company, Inc.................. 3,032,351
59,853 Prologis........................................ 2,959,731
40,491 Public Storage, Inc............................. 2,902,395
37,495 Simon Property Group, Inc. ..................... 2,985,727
112,118 United Dominion Realty Trust, Inc............... 3,028,307
80,525 Washington Real Estate Investment Trust......... 2,814,349
76,899 Weingarten Realty Investors..................... 2,911,396
--------------
59,154,733
--------------
TEXTILES, APPAREL & LUXURY GOODS - 0.6%
47,711 VF Corp. ....................................... 3,002,453
--------------
THRIFTS & MORTGAGE FINANCE - 2.8%
97,778 Astoria Financial Corp.......................... 2,958,762
92,512 Capitol Federal Financial....................... 3,013,116
48,555 Freddie Mac..................................... 2,915,242
130,073 Washington Federal, Inc......................... 2,983,875
65,737 Washington Mutual, Inc.......................... 3,017,986
--------------
14,888,981
--------------
WIRELESS TELECOMMUNICATION SERVICES - 0.5%
47,582 ALLTEL Corp. ................................... 2,942,947
--------------
TOTAL COMMON STOCKS............................. 530,708,089
--------------
(Cost $484,557,350)
TOTAL INVESTMENTS - 99.0%....................... 530,708,089
(Cost $484,557,350)*
NET OTHER ASSETS & LIABILITIES - 1.0%........... 5,550,289
--------------
NET ASSETS - 100.0%............................. $ 536,258,378
==============
- --------------------------------------------------------------------------------
* Aggregate cost for federal income tax purposes is $486,383,763.
ADR American Depository Receipt
See Notes to Financial Statements. Page 9
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2006
ASSETS:
Investments, at value
(Cost $484,557,350) .................................................................... $530,708,089
Cash ...................................................................................... 4,021,528
Prepaid expenses .......................................................................... 15,118
Receivables:
Investment securities sold ........................................................... 17,419,654
Dividends ............................................................................ 1.702.702
------------
Total Assets ......................................................................... 553,867,091
------------
LIABILITIES:
Payables:
Investment securities purchased ...................................................... 16,885,391
Investment advisory fees ............................................................. 297,771
License fees ......................................................................... 219,632
Printing fees ........................................................................ 79,760
Audit and legal fees ................................................................. 55,982
Administrative fees .................................................................. 40,046
Accrued expenses .......................................................................... 30,131
------------
Total Liabilities .................................................................... 17,608,713
------------
NET ASSETS ................................................................................ $536,258,378
============
NET ASSETS CONSIST OF:
Undistributed net investment income ....................................................... $ 1,454,887
Accumulated net realized gain on investments sold ......................................... 25,175,457
Net unrealized appreciation of investments ................................................ 46,150,739
Par value ................................................................................. 324,000
Paid-in capital ........................................................................... 463,153,295
------------
Total Net Assets ..................................................................... $536,258,378
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) ...................... $ 16.55
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) 32,400,000
============
Page 10 See Notes to Financial Statements.
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 2006
INVESTMENT INCOME:
Dividends ................................................................................. $ 19,049,591
------------
Total investment income .............................................................. 19,049,591
------------
EXPENSES:
Investment advisory fees .................................................................. 3,598,042
License fees .............................................................................. 553,886
Administration fees ....................................................................... 482,836
Audit and legal fees ...................................................................... 134,827
Custodian fees ............................................................................ 93,299
Trustees' fees and expenses ............................................................... 40,463
Other ..................................................................................... 243,376
------------
Total expenses ....................................................................... 5,146,729
------------
NET INVESTMENT INCOME ..................................................................... 13,902,862
------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain on investments during the year .......................................... 48,450,270
Net change in unrealized depreciation of investments during the year ...................... (16,192,745)
------------
Net realized and unrealized gain on investments ........................................... 32,257,525
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ...................................... $ 46,160,387
============
See Notes to Financial Statements. Page 11
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
5/31/2006 5/31/2005
------------- -------------
OPERATIONS:
Net investment income .............................................................. $ 13,902,862 $ 13,350,696
Net realized gain on investments during the year ................................... 48,450,270 44,364,038
Net change in unrealized appreciation/(depreciation) of investments during the year (16,192,745) 20,049,513
------------- -------------
Net increase in net assets resulting from operations ............................... 46,160,387 77,764,247
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .............................................................. (13,527,000) (11,907,000)
Net realized gains ................................................................. (55,080,000) (29,808,000)
------------- -------------
Total distributions to shareholders ................................................ (68,607,000) (41,715,000)
CAPITAL TRANSACTIONS:
Offering costs ..................................................................... -- (75,000)
------------- -------------
Total capital transactions ......................................................... -- (75,000)
------------- -------------
Net increase/(decrease) in net assets .............................................. (22,446,613) 35,974,247
NET ASSETS:
Beginning of year .................................................................. 558,704,991 522,730,744
------------- -------------
End of year ........................................................................ $ 536,258,378 $ 558,704,991
============= =============
Undistributed net investment income at end of year ................................. $ 1,454,887 $ 2,434,224
============= =============
Page 12 See Notes to Financial Statements.
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR PERIOD
ENDED ENDED ENDED
5/31/2006 5/31/2005 5/31/2004*
----------- ----------- -----------
Net asset value, beginning of period .................. $ 17.24 $ 16.13 $ 14.33
----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................................. 0.43 0.41 0.27
Net realized and unrealized gain on investments ....... 1.00 1.99 1.86
----------- ----------- -----------
Total from investment operations ...................... 1.43 2.40 2.13
----------- ----------- -----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ................................. (0.42) (0.37) (0.20)
Net realized gains .................................... (1.70) (0.92) (0.11)
----------- ----------- -----------
Total from distributions .............................. (2.12) (1.29) (0.31)
----------- ----------- -----------
Common Shares offering costs charged to paid-in capital -- (0.00)# (0.02)
----------- ----------- -----------
Net asset value, end of period ........................ $ 16.55 $ 17.24 $ 16.13
=========== =========== ===========
Market value, end of period ........................... $ 14.26 $ 14.64 $ 13.76
=========== =========== ===========
TOTAL RETURN BASED ON NET ASSET VALUE (A)+ ............ 10.26% 16.05% 15.09%
=========== =========== ===========
TOTAL RETURN BASED ON MARKET VALUE (B)+ ............... 11.87% 15.52% (6.20)%
=========== =========== ===========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .................. $ 536,258 $ 558,705 $ 522,731
Ratio of total expenses to average net assets ......... 0.93% 0.93% 0.93%**
Ratio of net investment income to average net assets .. 2.51% 2.45% 2.29%**
Portfolio turnover rate ............................... 58% 57% 46%
- -------------------------------------------------------
* The Fund commenced operations on August 19, 2003.
** Annualized.
# Amount represents less than $0.01 per share.
(a) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in net
asset value per share and does not reflect sales load.
(b) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share market price per share, all based on Common Share market price per
share.
+ Total return is not annualized for periods less than one year.
See Notes to Financial Statements. Page 13
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
MAY 31, 2006
1. FUND DESCRIPTION
First Trust Value Line(R) Dividend Fund (the "Fund") is a diversified closed-end
management investment company organized as a Massachusetts business trust on
June 11, 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 FVD on the American Stock Exchange.
The Fund's investment objective is to provide total return through a combination
of current income and capital appreciation. The Fund seeks to accomplish its
objective by investing in common stocks that pay above-average dividends and
have the potential for capital appreciation. Such common stocks will be selected
through the application of a disciplined investment strategy implemented by the
Fund's investment advisor, First Trust Advisors L.P. ("First Trust"). There can
be no assurance that the Fund's investment objective will be achieved.
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 Fund determines the net asset value ("NAV") of its shares daily, as of the
close of regular session trading on the New York Stock Exchange ("NYSE"),
normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. The
NAV is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of shares
outstanding.
The Fund's investments are valued at market value, or in the absence of market
value with respect to any portfolio securities, at fair value according to
procedures adopted by the Fund's Board of Trustees. Portfolio securities listed
on any exchange other than the NASDAQ National Market ("NASDAQ") are valued at
the last sale price on the business day as of which such value is being
determined. If there has been no sale on such day, the securities are valued at
the mean of the most recent bid and asked prices on such day. Securities traded
on the NASDAQ are valued at the NASDAQ Official Closing Price as determined by
NASDAQ. Portfolio securities traded on more than one securities exchange are
valued at the last sale price on the business day as of which such value is
being determined at the close of the exchange representing the principal market
for such securities. Portfolio securities traded in the over-the-counter market,
but excluding securities trading on the NASDAQ, are valued at the closing bid
prices. Short-term investments that mature in less than 60 days are valued at
amortized cost.
Foreign securities traded outside the United States are generally valued as of
the time their trading is complete, which is usually different from the close of
the NYSE. Occasionally, events affecting the value of such securities may occur
between such times and the close of the NYSE that will not always be reflected
in such securities' value. If events materially affecting the value of such
securities occur during such period, these securities will be valued at their
fair value according to procedures adopted by the Fund's Board of Trustees. All
securities and other assets of the Fund denominated in foreign currencies will
be converted to U.S. dollars using exchange rates in effect at the time of
valuation.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date; interest income on such securities
is not accrued until settlement date. The Fund instructs the Custodian to
segregate assets of the Fund with a current value at least equal to the amount
of its when-issued purchase commitments.
Page 14
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
MAY 31, 2006
C. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
On June 26, 2006, the Fund announced the adoption of a policy to make regular
monthly distributions of $0.08786 per share. The Fund declared the first
distribution under the new policy, which will be payable on July 17, 2006 to
shareholders of record on July 6, 2006.
Prior to June 26, 2006, dividends from net investment income of the Fund were
declared and paid quarterly or as the Board of Trustees determined from time to
time. Distributions of any net capital gains earned by the Fund are distributed
at least annually. Distributions will automatically be reinvested into
additional Common Shares pursuant to the Fund's Dividend Reinvestment Plan
unless cash distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund. Permanent differences incurred during the year ended May 31,
2006, resulting in book and tax accounting differences, have been reclassified
at year end to reflect a decrease to undistributed net investment income by
$1,355,199 and an increase in accumulated net realized gain on investments sold
by $1,355,199. Net assets were not affected by this reclassification.
The tax character of distributions paid during the fiscal years ended May 31,
2006 and May 31, 2005 is as follows:
2006 2005
------------- -------------
Distributions paid from:
Ordinary Income........................... $ 23,895,000 $ 38,151,000
Long-Term Capital Gains................... 44,712,000 3,564,000
As of May 31, 2006, the components of distributable earnings on a tax basis are
as follows:
Undistributed Ordinary Income............. $ 7,861,425
Undistributed Long-Term Capital Gains..... $ 20,595,332
Net Unrealized Appreciation............... $ 44,324,326
D. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, and by distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal or state income taxes.
E. EXPENSES:
The Fund pays all expenses directly related to its operations. First Trust has
entered into a non-exclusive license agreement with Value Line(R) Publishing,
Inc. which allows for the use by First Trust of the Value Line(R) Safety(TM)
Ranking System and certain trademarks and trade names of Value Line(R)
Publishing, Inc. The Fund is a sub-licensee to this license agreement. In
exchange, Value Line(R) Publishing, Inc. receives an annual fee, payable on a
quarterly basis, equal to .10% of the Fund's gross daily assets. This license
fee is paid by the Fund to First Trust, which in turn, pays Value Line(R)
Publishing, Inc. The terms of the license agreement provide that it will be
automatically renewed for successive one-year terms unless either party elects
not to renew the agreement.
F. ORGANIZATION AND OFFERING COSTS:
Organization costs consist of costs incurred to establish the Fund and enable it
to legally do business. These costs include filing fees, listing fees, legal
services pertaining to the organization of the business and audit fees relating
to the initial registration and auditing the initial statement of assets and
liabilities, among other fees. Offering costs consist of legal fees pertaining
to the Fund's shares offered for sale, registration fees, underwriting fees, and
printing of the initial prospectus, among other fees. First Trust has paid all
organization expenses and offering costs of the Fund (other than sales load)
that exceed $0.03 per Common Share.
Page 15
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
MAY 31, 2006
During the year ended May 31, 2005, it was determined that actual offering costs
from the initial public offering of the Fund's Common Shares in August 2003 were
more than the estimated offering costs by $75,000; therefore, paid-in capital in
excess of par value of Common Shares was decreased by this amount.
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment adviser to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for implementing the Fund's overall
investment strategy, including the allocation and periodic reallocation of the
portion of the Fund's assets to be invested in common stocks, 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 0.65% of the Fund's average daily net
assets.
PFPC Inc. ("PFPC"), an indirect, majority-owned subsidiary of The PNC Financial
Services Group Inc., serves as the Fund's Administrator and Transfer Agent in
accordance with certain fee arrangements. PFPC Trust Company, also an indirect,
majority-owned subsidiary of The PNC Financial Services Group Inc., serves as
the Fund's Custodian in accordance with certain fee arrangements.
The Fund pays each Trustee who is not an officer or employee of First Trust or
any of their affiliates ("Disinterested Trustees") an annual retainer of
$10,000, which includes compensation for all board and committee meetings. Until
December 31, 2005, additional fees of $1,000 and $500 were paid to Disinterested
Trustees for special board meetings and non-regular committee meetings,
respectively. These additional fees were shared by the funds in the First Trust
fund complex that participated in the particular meeting and are not per fund
fees. Trustees are also reimbursed for travel and out-of-pocket expenses in
connection with all meetings. Effective January 1, 2006, the Disinterested
Trustees are no longer paid additional fees for special board meetings and
non-regular committee meetings.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments, for the year ended May 31, 2006, were $317,331,724 and
$371,021,643, respectively.
As of May 31, 2006, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $56,407,189
and the aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $12,082,863.
5. SUBSEQUENT EVENTS
On May 22, 2006, the Fund declared a dividend of $0.1075 per share, which
represents a dividend from net investment income to Common Shareholders of
record June 5, 2006, payable June 15, 2006.
On June 26, 2006, the Fund announced the adoption of a policy to make regular
monthly distributions of $0.08786 per share. The Fund declared the first
distribution under the new policy, which will be payable on July 17, 2006 to
shareholders of record on July 6, 2006. The Fund's previous policy was to make
regular quarterly distributions.
Also on June 26, 2006, the Fund announced that it has adopted an open-market
share repurchase program. Under the program the Fund may purchase up to an
aggregate of 4,860,000 shares in open-market transactions at the discretion of
the Advisor. The repurchase limit represents approximately 15% of the Fund's
outstanding shares.
Page 16
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST VALUE LINE(R) DIVIDEND
FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Value Line(R) Dividend Fund (the "Fund"), including the portfolio of
investments, as of May 31, 2006, the related statement of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended and the financial highlights for the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of May 31, 2006, by correspondence with the Fund's
custodian and broker. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of May 31, 2006, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
July 14, 2006
Page 17
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
MAY 31, 2006 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by PFPC
Inc. (the "Plan Agent"), in additional Common Shares under the Plan. If you
elect to receive cash distributions, you will receive all distributions in cash
paid by check mailed directly to you by PFPC Inc., as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the American
Stock Exchange or elsewhere, for the participants' accounts. It is
possible that the market price for the Common Shares may increase
before the Plan Agent has completed its purchases. Therefore, the
average purchase price per share paid by the Plan Agent may exceed
the market price at the time of valuation, resulting in the purchase
of fewer shares than if the dividend or distribution had been paid
in Common Shares issued by the Fund. The Plan Agent will use all
dividends and distributions received in cash to purchase Common
Shares in the open market within 30 days of the valuation date
except where temporary curtailment or suspension of purchases is
necessary to comply with federal securities laws. Interest will not
be paid on any uninvested cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 331-1710, in
accordance with such reasonable requirements as the Plan Agent and Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized, although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing PFPC Inc., 301 Bellevue
Parkway, Wilmington, Delaware 19809.
- --------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
Page 18
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
MAY 31, 2006 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling 1-800-SEC-0330.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended May 31, 2006, 51.96% qualify for the corporate
dividends received deduction available to corporate shareholders.
The Fund hereby designates as qualified dividend income distributions 65.14% of
the ordinary income distributions (including short-term capital gain), for the
year ended May 31, 2006.
For the year ended May 31, 2006, the amount of long-term capital gain designated
by the Fund was $44,712,000, which is taxable at a maximum federal rate of 15%.
This designated amount may include distributions that are to be paid during the
fiscal year ended May 31, 2007.
BY-LAW AMENDMENTS
On December 12, 2005 and again on June 12, 2006, the Board of Trustees of the
Fund approved certain changes to the By-Laws of the Fund which may have the
effect of delaying or preventing a change in control of the Fund. To receive a
copy of the revised By-Laws, investors may call the Fund at (800) 988-5891.
ADVISORY AGREEMENT
BOARD CONSIDERATIONS REGARDING CONTINUATION OF ADVISORY CONTRACT
The Trustees unanimously approved the continuation of the Investment Advisory
Agreement (the "Agreement") between First Trust Advisors L.P. ("FIRST TRUST")
and First Trust Value Line(R) Dividend Fund (the "FUND") at a meeting held on
March 13, 2006. The Board of Trustees determined that the Agreement is in the
best interests of the Fund and that the compensation arrangement set forth in
the Agreement is fair and reasonable in light of the nature, extent and quality
of the services provided by First Trust and such other matters as the Trustees
considered to be relevant in the exercise of their reasonable business judgment.
To reach this determination, the Trustees considered their duties under the
Investment Company Act of 1940, as amended (the "1940 ACT") as well as under the
general principles of state law in reviewing and approving advisory contracts;
the requirements of the 1940 Act in such matters; the fiduciary duty of
investment advisers with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Trustees in
voting on such agreements. The Independent Trustees received advice from
independent legal counsel. The Trustees also applied their business judgment to
determine whether the arrangement between the Fund and First Trust was a
reasonable business arrangement from the Fund's perspective as well as from the
perspective of its shareholders. In reviewing such arrangement, the Board of
Trustees considered factors such as the nature, quality and extent of services
provided by First Trust under the Agreement and the fairness of the fee charged,
whether the fee level reflects any economies of scale, and any profitability
realized by First Trust under the Agreement.
The Trustees considered the nature, quality and extent of services provided by
First Trust, including the experience and skills of the personnel primarily
responsible for providing services to the Fund. The Board noted the compliance
program that had been developed by First Trust. In light of these considerations
and their overall familiarity with First Trust, the Trustees concluded that the
nature, quality and extent of services provided by First Trust to the Fund have
been and are expected to remain satisfactory.
The Trustees reviewed data prepared by Lipper Inc. ("LIPPER"), an independent
source, showing the advisory fee and expense ratio of the Fund compared to those
of a peer group of similar non-leveraged closed-end funds. The Trustees also
considered the Fund's advisory fee and expense ratio as compared to a second
peer group of similar funds, including six leveraged funds, as selected by First
Trust using data
Page 19
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
MAY 31, 2006 (UNAUDITED)
compiled by Lipper. The Trustees noted that the Fund's advisory fee and expense
ratio were below the median of both the Lipper peer group and the First
Trust-selected peer group. The Trustees also considered the advisory fees paid
to First Trust by other funds with investment objectives and policies similar to
the Fund's, noting that those fees generally were similar, except for those
funds for which First Trust served as sub-adviser, for which the annual fee was
lower. The Trustees noted that First Trust told them that the nature of the
services provided to those clients may not be comparable to those provided to
the Fund. The Trustees also considered the Fund's performance for the one year,
two year and since-inception periods ended December 31, 2005 as compared to that
of other closed-end funds in the peer group and performance universe selected by
Lipper and the peer group and performance universe selected by First Trust. In
addition, the Trustees considered the market price and net asset value
performance of the Fund since inception, and compared the Fund's discount as of
December 31, 2005 to the average and median discount of a peer group selected by
an independent source, noting that the Fund's discount was indicative of the
asset class. The Trustees noted the good performance of the Fund over all
periods as compared to both performance universes and concluded that the Fund's
performance was reasonable. On the basis of the information provided, the
Trustees concluded that the Fund's advisory fee was reasonable and appropriate
in light of the nature, quality and extent of services provided by First Trust.
The Trustees noted that First Trust has continued to invest in personnel and
infrastructure but had not identified any economies of scale realized by the
Fund and had indicated that, because the Fund is a closed-end fund that is not
issuing more shares other than pursuant to its dividend reinvestment plan, First
Trust believed that any discussion of economies of scale was not meaningful. The
Trustees concluded that the advisory fee reflects an appropriate level of
sharing of any economies of scale. The Trustees also considered the costs of the
services provided and profits realized by First Trust from its relationship with
the Fund for the twelve months ended December 31, 2005, as set forth in the
materials provided to the Board. The Trustees noted the inherent limitations in
the profitability analysis, and concluded that First Trust's profitability
appeared to be not unreasonable in light of the services provided to the Fund.
In addition, the Trustees considered and discussed any ancillary benefits
derived by First Trust from its relationship with the Fund and noted that First
Trust receives no brokerage or soft dollars from the Fund and therefore the
typical fall out benefits are not present. The Trustees concluded that any other
fall out benefits received by First Trust or its affiliates would appear to be
attenuated.
Based on all of the factors considered, the Trustees concluded that it was in
the best interests of the Fund to approve the continuation of the Agreement,
including the fees to be charged for services thereunder. No single factor was
determinative in the Board's analysis.
Page 20
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (UNAUDITED)
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
MAY 31, 2006
Information pertaining to the Trustees and officers* of the Fund is set forth
below.
NUMBER OF OTHER
PORTFOLIOS TRUSTEESHIPS/
NAME, D.O.B., ADDRESS AND TERM OF OFFICE AND PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
POSITION(S) WITH THE FUND LENGTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
- -----------------------------------------------------------------------------------------------------------------------------
DISINTERESTED TRUSTEES
- -----------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o One year term Physician; President, 29 portfolios None
D.O.B. 04/51 o 3 years served Wheaton Orthopedics;
c/o First Trust Advisors L.P. Co-owner and Co-
1001 Warrenville Road Director, Sports Med
Suite 300 Center for Fitness;
Lisle, IL 60532 Limited Partner,
Gundersen Real Estate
Partnership
Thomas R. Kadlec, Trustee o One year term Vice President and Chief 29 portfolios None
D.O.B. 11/57 o 3 years served Financial Officer (1990
c/o First Trust Advisors L.P. to present); ADM
1001 Warrenville Road Investor Services, Inc.
Suite 300 (Futures Commission
Lisle, IL 60532 Merchant); Registered
Representative (2000 to
present), Segerdahl &
Company, Inc., an
NASD member (Broker-
Dealer); President,
ADM Derivatives, Inc.
(May 2005 to present)
Robert F. Keith+ o One year term President, Hibs 17 portfolios None
D.O.B. 11/56 o 1 month served Enterprises Financial and
c/o First Trust Advisors L.P. Management Consulting
1001 Warrenville Road, (2003 to Present);
Suite 300 Aramark Service Master
Lisle, IL 60532 Management (2001 to
2003); President and
Chief Operating Officer,
Service Master
Management Services
(1998 to 2003)
Niel B. Nielson, Trustee o One year term President, Covenant 29 portfolios Director of Good News
D.O.B. 03/54 o 3 years served College (June 2002 to Publishers-Crossway
c/o First Trust Advisors L.P. present); Pastor, College Books; Covenant
1001 Warrenville Road Church in Wheaton Transport, Inc.
Suite 300 (1997 to June 2002)
Lisle, IL 60532
Page 21
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (UNAUDITED) - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
MAY 31, 2006
NUMBER OF OTHER
PORTFOLIOS TRUSTEESHIPS/
NAME, D.O.B., ADDRESS AND TERM OF OFFICE AND PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
POSITION(S) WITH THE FUND LENGTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
- -----------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
- -----------------------------------------------------------------------------------------------------------------------------
James A. Bowen, Trustee o One year Trustee President, First Trust 29 portfolios Trustee of
President, Chairman of the term and indefinite Advisors L.P. and First Wheaton
Board and CEO officer term Trust Portfolios L.P.; College
D.O.B. 09/55 o 3 years served Chairman of the Board,
1001 Warrenville Road BondWave LLC
Suite 300 (software development
Lisle, IL 60532 company/Broker-Dealer)
and Stonebridge
Advisors LLC
- -----------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- -----------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley, Treasurer, o Indefinite term Chief Financial Officer, N/A N/A
Controller, Chief Financial o 3 years served Managing Director,
Officer, Chief Accounting First Trust Advisors L.P.
Officer and First Trust
D.O.B. 11/57 Portfolios L.P.; Chief
1001 Warrenville Road Financial Officer,
Suite 300 BondWave LLC and
Lisle, IL 60532 Stonebridge Advisors
LLC
Susan M. Brix o Indefinite term Representative, First N/A N/A
Assistant Vice President o 3 years served Trust Portfolios L.P.;
D.O.B. 01/60 Assistant Portfolio
1001 Warrenville Road Manager, First Trust
Suite 300 Advisors L.P.
Lisle, IL 60532
Robert F. Carey, o Indefinite term Senior Vice President, N/A N/A
Vice President o 3 years served First Trust Advisors L.P.
D.O.B. 07/63 and First Trust
1001 Warrenville Road Portfolios L.P.
Suite 300
Lisle, IL 60532
James M. Dykas o Indefinite term Vice President, First N/A N/A
Assistant Treasurer o 6 months served Trust Advisors L.P. and
D.O.B. 01/66 First Trust Portfolios L.P.
1001 Warrenville Road (January 2005 to
Suite 300 present); Executive
Lisle, IL 60532 Director, Van Kampen
Asset Management and
Morgan Stanley
Investment Management
(1999-2005)
Page 22
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (UNAUDITED) - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) DIVIDEND FUND
MAY 31, 2006
NUMBER OF OTHER
PORTFOLIOS TRUSTEESHIPS/
NAME, D.O.B., ADDRESS AND TERM OF OFFICE AND PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
POSITION(S) WITH THE FUND LENGTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
- -----------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES - (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------
W. Scott Jardine, Secretary o Indefinite term General Counsel, N/A N/A
and Chief Compliance o 3 years served First Trust Advisors L.P.
Officer and First Trust
D.O.B. 05/60 Portfolios L.P.;
1001 Warrenville Road Secretary, BondWave
Suite 300 LLC and Stonebridge
Lisle, IL 60532 Advisors LLC
Daniel J. Lindquist o Indefinite term Senior Vice President, N/A N/A
Vice President o 6 months served First Trust Advisors L.P.
D.O.B. 02/70 andFirst Trust Portfolios
1001 Warrenville Road L.P. (April 2004 to
Suite 300 present); Chief Operating
Lisle, IL 60532 Officer, Mina Capital
Management, LLC
(January 2004-April
2004); Chief Operating
Officer, Samaritan Asset
Management Services,
Inc. (April 2000-January
2004)
Kristi A. Maher o Indefinite term Assistant General N/A N/A
Assistant Secretary o 2 years served Counsel,
D.O.B. 12/66 First Trust Advisors L.P.
1001 Warrenville Road and First Trust Portfolios
Suite 300 L.P. (March 2004 to
Lisle, IL 60532 present); Associate,
Chapman and Cutler
LLP (1995-2004)
Roger F. Testin o Indefinite term Senior Vice President, N/A N/A
Vice President o 3 years served First Trust Advisors L.P.
D.O.B. 06/66 and First Trust Portfolios
1001 Warrenville Road L.P. (August 2001 to
Suite 300 present); Analyst, Dolan
Lisle, IL 60532 Capital Management
(1998-2001)
_________________
* The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
+ Effective June 12, 2006, the Board of Trustees of the Fund unanimously
appointed Robert F. Keith to the Board of Trustees and as a member of the
Fund's Audit Committee, Valuation Committee and Nominating and Governance
Committee.
Page 23
This Page Left Blank Intentionally.
PART C: OTHER INFORMATION
Item 15: Indemnification
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
(a) Subject to the exceptions and limitations contained in
paragraph (b) below:
(i) every person who is or has been a Trustee or officer of
the Trust (hereinafter referred to as a "Covered Person")
shall be indemnified by the Trust against all liability and
against all expenses reasonably incurred or paid by him or her
in connection with any claim, action, suit or proceeding in
which that individual becomes involved as a party or otherwise
by virtue of being or having been a Trustee or officer and
against amounts paid or incurred by that individual in the
settlement thereof;
(ii) the words "claim," "action," "suit" or "proceeding"
shall apply to all claims, actions, suits or proceedings
(civil, criminal, administrative or other, including appeals),
actual or threatened; and the words "liability" and "expenses"
shall include, without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement or compromise, fines,
penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered
Person:
(i) against any liability to the Trust or the Shareholders by
reason of a final adjudication by the court or other body
before which the proceeding was brought that the Covered
Person engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of that individual's office;
(ii) with respect to any matter as to which the Covered
Person shall have been finally adjudicated not to have acted
in good faith in the reasonable belief that that individual's
action was in the best interest of the Trust; or
(iii) in the event of a settlement involving a payment by a
Trustee or officer or other disposition not involving a final
adjudication as provided in paragraph (b)(i) or (b)(ii) above
resulting in a payment by a Covered Person, unless there has
been either a determination that such Covered Person did not
engage in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of
that individual's office by the court or other body approving
the settlement or other disposition or by a reasonable
determination, based upon a review of readily available facts
(as opposed to a full trial- type inquiry) that that
individual did not engage in such conduct:
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(A) by vote of a majority of the Disinterested
Trustees (as defined below) acting on the matter
(provided that a majority of the Disinterested Trustees
then in office act on the matter); or
(B) by written opinion of (i) the then-current
legal counsel to the Trustees who are not Interested
Persons of the Trust or (ii) other legal counsel chosen
by a majority of the Disinterested Trustees (or if
there are no Disinterested Trustees with respect to the
matter in question, by a majority of the Trustees who
are not Interested Persons of the Trust) and determined
by them in their reasonable judgment to be independent.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall
not affect any other rights to which any Covered Person may now or
hereafter be entitled, shall continue as to a person who has ceased to
be a Covered Person and shall inure to the benefit of the heirs,
executors and administrators of such person. Nothing contained herein
shall limit the Trust from entering into other insurance arrangements or
affect any rights to indemnification to which Trust personnel, including
Covered Persons, may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any
claim, action, suit, or proceeding of the character described in
paragraph (a) of this Section 5.3 shall be advanced by the Trust prior
to final disposition thereof upon receipt of an undertaking by or on
behalf of the Covered Person to repay such amount if it is ultimately
determined that the Covered Person is not entitled to indemnification
under this Section 5.3, provided that either:
(i) such undertaking is secured by a surety bond or some
other appropriate security or the Trust shall be insured
against losses arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees
then in office act on the matter) or legal counsel meeting the
requirement in Section 5.3(b)(iii)(B) above in a written
opinion, shall determine, based upon a review of readily
available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the Covered Person
ultimately will be found entitled to indemnification.
As used in this Section 5.3, a "Disinterested Trustee" is one
(i) who is not an "Interested Person" of the Trust (including
anyone who has been exempted from being an "Interested Person"
by any rule, regulation or order of the Commission), and (ii)
against whom none of such actions, suits or other proceedings
or another action, suit or other proceeding on the same or
similar grounds is then or had been pending.
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(e) With respect to any such determination or opinion referred to in
clause (b)(iii) above or clause (d)(ii) above, a rebuttable presumption
shall be afforded that the Covered Person has not engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office in
accordance with pronouncements of the Commission.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person
of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
Item 16: Exhibits
The following exhibits are filed herewith as part of this Registration
Statement or incorporated herein by reference.
(1) Declaration of Trust of Registrant. (1)
(2) By-Laws of the Registrant. (2)
(3) Not applicable.
(4) Agreement and Plan of Reorganization (included in the
Prospectus/Proxy Statement as Exhibit A thereto). (5)
(5) (i) Establishment and Designation of Series dated June 10,
2005. (1)
(ii) Amended and Restated Establishment and Designation of Series
dated July 26, 2006. (7)
(6) (i) Investment Management Agreement dated September 24, 2005,
as amended. (3)
(ii) Excess Expense Agreement, as amended. (3)
(iii) Amendment to Schedule A of the Investment Management
Agreement. (7)
(iv) Amendment to Appendix I of the Excess Expense Agreement. (7)
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(7) (i) Distribution Agreement dated September 24, 2005, as
amended. (3)
(ii) Amendment to Exhibit A of the Distribution Agreement. (7)
(8) Not Applicable.
(9) (i) Custody Agreement between the Registrant and The Bank of
New York. (2)
(ii) Amendment to Schedule II of the Custody Agreement. (7)
(10) (i) 12b-1 Service Plan. (2)
(ii) Amendment to Exhibit A of the 12b-1 Service Plan. (7)
(11) (i) Opinion and Consent of Chapman and Cutler LLP dated October 13,
2006. (8)
(ii) Opinion and Consent of Bingham McCutchen LLP dated October 13,
2006. (8)
(12) Opinion and Consent of Chapman and Cutler LLP dated October 13,
2006. (8)
(13) Letter Agreement dated August 31, 2006. (6)
(14) Consent of Independent Registered Public Accounting Firm. (8)
(15) Power of attorney pursuant to which the name of any person has
been signed to the registration statement. (4)
(16) Proxy Card. (8)
- --------------
(1) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on June 13, 2005.
(2) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on September 26, 2005.
(3) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on March 15, 2006.
(4) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on August 10, 2006.
(5) Incorporated by reference to the Registrant's Registration Statement
on Form N-14 (File No. 333-137063) filed on September 1, 2006.
(6) Incorporated by reference to the Registrant's Registration Statement
on Form N-14 (File No. 333-137063) filed on September 5, 2006.
(7) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on October 13, 2006.
(8) Filed herewith.
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Item 17: Undertakings
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus
which is a part of this Registration Statement by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c) of
the Securities Act [17 CFR 230.15c], the reoffering prospectus will
contain the information called for by the applicable registration form
for reofferings by persons who may be deemed underwriters, in addition
to the information called for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment
to the Registration Statement and will not be used until the amendment
is effective, and that, in determining any liability under the 1933 Act,
each post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide
offering of them.
C-5
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the City of Lisle, and
State of Illinois, on the 13th day of October, 2006.
FIRST TRUST EXCHANGE-TRADED FUND
By: /s/ James A. Bowen
--------------------------------
James A. Bowen, President
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the
date indicated.
SIGNATURE DATE
/s/ Mark R. Bradley Treasurer, Controller and October 13, 2006
- ------------------------ Chief Financial and
Mark R. Bradley Accounting Officer
President, Chief Executive October 13, 2006
- ------------------------ Officer, Chairman and Trustee
James A. Bowen
*/s/ Richard E. Erickson )
- ------------------------ Trustee )
Richard E. Erickson )
)
*/s/ Thomas R. Kadlec )
- ------------------------ Trustee )
Thomas R. Kadlec )
)
*/s/ Robert Keith ) By: /s/ James A. Bowen
- ------------------------ Trustee ) ------------------
Robert Keith ) James A. Bowen
) Attorney-In-Fact
*/s/ Niel B. Nielson ) October 13, 2006
- ------------------------ Trustee )
Niel B. Nielson )
* Original powers of attorney authorizing James A. Bowen, W. Scott
Jardine and Eric F. Fess to execute Registrant's Registration Statement,
and Amendments thereto, for each of the trustees of the Registrant on
C-6
whose behalf this Registration Statement is filed, were previously
executed and filed as an Exhibit to the Registrant's Registration
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Statement on Form N-1A (File No. 333-125751) on August 10, 2006 and are
incorporated by reference herein.
INDEX TO EXHIBITS
(11) (i) Opinion and Consent of Chapman and Cutler LLP
(ii) Opinion and Consent of Bingham McCutchen LLP
(12) Opinion and Consent of Chapman and Cutler LLP
(14) Consent of Independent Registered Public Accounting Firm
(16) Proxy Card