As filed electronically with the Securities and Exchange Commission
on or about March 21, 2007
Registration Nos. 333-140482
811-21774
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 2 [ ] POST-EFFECTIVE AMENDMENT NO. ___
FIRST TRUST EXCHANGE-TRADED FUND
(Exact Name of Registrant as Specified in Charter)
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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)
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With copies to:
Eric F. Fess
Chapman and Cutler LLP
111 West Monroe Street
Chicago, Illinois 60603
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TITLE OF SECURITIES BEING REGISTERED:
Shares of beneficial interest ($0.01 par value per share) of the First Trust
Value Line(R) 100 Exchange-Traded 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) 100 FUND
A MESSAGE FROM THE FUND'S CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MARCH 21, 2007
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) 100 Fund
("FVL"). Enclosed is a combined proxy statement and prospectuS seeking your
approval of a proposal at a Special Meeting of Shareholders of FVL (the
"Meeting").
Like many closed-end funds, shares of FVL have historically traded at
market prices that are below their net asset value. Since FVL's inception, FVL'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 FVL has been seeking to develop a viable approach to address the
discount while maintaining FVL's disciplined investment strategy. After
considerable efforts by the Board of Trustees and management of FVL and other
closed-end funds in the First Trust family of funds, we are pleased to present
to shareholders for approval at the Meeting, a proposal that the Board and
management believe has the potential to significantly reduce or eliminate the
discount while maintaining FVL's disciplined investment strategy. The proposal
involves the reorganization (the "Reorganization") of FVL with and into First
Trust Value Line(R) 100 Exchange-Traded Fund ("FVL 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. Due to the ETF structure, shares of
ETFs have historically traded at or very close to their net asset values. FVL
ETF is managed by First Trust Advisors L.P., the same investment adviser that
manages FVL, and will seek to replicate (before expenses) the performance of the
Value Line(R) 100 Index, which is sponsored and maintained by Value Line(R)
Publishing, Inc. (the "Index"). The Index's stock selection methodology is
similar to FVL's investment strategy. As explained in greater detail in the
combined proxy statement and prospectus, the principal difference between the
two is that the securities included in FVL are adjusted on a weekly basis and
the Index is reconstituted monthly. Because of the similarities between FVL's
objective, rule-based investment process and the Index's stock selection
methodology, FVL is uniquely situated to make this opportunity available to its
shareholders.
Through the Reorganization, your shares of FVL (other than fractional
shares) would be exchanged, on a tax-free basis for federal income tax purposes,
for shares of FVL ETF with an equal aggregate net asset value, and you will
become a shareholder of FVL ETF. If you are a record holder, which includes
registered holders and brokers that hold shares of FVL on behalf of their
customers, and you own a fractional share of FVL, in lieu of receiving a
fractional share of FVL ETF, you will receive an amount in cash equal to the net
asset value of such fractional share. Please note that you may incur certain tax
liability if you receive cash in lieu of the fractional share.
In determining to recommend approval of this proposal, the Trustees of FVL
considered the following factors, among others:
o the Reorganization should significantly reduce or eliminate the
discount to net asset value at which shares of FVL have
historically traded;
o FVL ETF will have a lower management fee and lower total fund
operating expense ratio than FVL 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 FVL has unanimously approved the Agreement and
Plan of Reorganization (the "Plan") and recommends that FVL 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 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 FVL ETF, the specific proposal being considered at the Meeting
and why the proposal is being made, including the differences
between your shares of FVL and the shares of FVL 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 touch-tone telephone or via 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 or vote by touch-tone telephone or via the
Internet. A postage-paid envelope is enclosed for mailing, and touch-tone
telephone and Internet 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 FVL that you own. Please take a few moments to read the
enclosed materials and then cast your vote.
Our proxy solicitor, The Altman Group, may contact you to encourage you to
exercise your right to vote.
We appreciate your participation in this important Meeting. Thank you.
Sincerely yours,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees,
Chief Executive Officer and President
First Trust Value Line(R) 100 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) 926-7043 WEEKDAYS FROM
9:00 A.M. TO 10:00 P.M. EASTERN TIME.
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BECAUSE SHARES OF FVL ETF WILL NOT BE CERTIFICATED, SHAREHOLDERS WHO HOLD FVL
SHARES DIRECTLY AND NOT IN "STREET NAME" THROUGH A BROKER-DEALER 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) 100 FUND
WITH AND INTO
FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED 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) 100 Fund, a closed-end
investment company ("FVL"), would be transferred in a tax-free reorganization
(the "Reorganization") to First Trust Value Line(R) 100 Exchange-Traded Fund
("FVL 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 FVL would become
shareholders of FVL ETF. Like FVL, FVL ETF is managed by First Trust Advisors
L.P. ("First Trust" or the "Adviser").
After carefully reviewing the proposal, FVL's Board of Trustees has determined
that the proposed Plan is in the best interests of FVL. THE BOARD RECOMMENDS
THAT YOU VOTE FOR THE PLAN AND THE REORGANIZATION CONTEMPLATED THEREBY.
Q. WHY HAS THIS REORGANIZATION BEEN PROPOSED FOR FVL?
A. Shares of closed-end funds often trade at a discount from their net asset
value. Shares of FVL have historically traded at a discount from their net asset
value (including a discount of 7.37% on the date FVL's Board of Trustees
approved the Reorganization). The Board of Trustees and management of FVL have
worked to develop a viable approach to address the discount. The Board of
Trustees and management believe that the Reorganization has the potential to
significantly reduce or eliminate the discount while maintaining FVL's
disciplined investment strategy. Through the Reorganization, FVL's shareholders
would receive FVL ETF shares with an aggregate net asset value equal to the
aggregate net asset value of their FVL shares as of the Closing Date referred to
in the Plan. FVL ETF, which will have no operations prior to the Reorganization,
lists and trades its common shares on the American Stock Exchange ("AMEX").
Although the trading prices of FVL ETF shares on the AMEX may differ from the
daily net asset value of FVL 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 FVL ETF are anticipated to trade at or close to
the net asset value of FVL shares immediately prior to the Reorganization. The
Reorganization should effectively eliminate the discount at which FVL shares
have historically traded.
In addition, FVL ETF will pay a lower management fee than FVL, and First Trust
has agreed to waive all or a portion of its fees and/or reimburse or pay FVL
ETF's operating expenses to the extent necessary to maintain FVL 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, FVL ETF will have a lower total operating expense ratio than FVL
for at least two years following the Reorganization.
Q. WILL MY SHARES CONTINUE TO BE LISTED ON THE AMEX?
A. FVL shares are currently listed and trading on the AMEX. FVL ETF lists and
trades 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 FVL, generally do not redeem Open-end funds (known generally as mutual funds), in
their outstanding shares or engage in the continuous sale of general, issue shares that can be redeemed or sold back to
new shares. Shares of closed-end investment companies the fund at the fund's net asset value per share (less any
typically are traded on a securities exchange. Thus, persons applicable redemption fee or contingent deferred sales
wishing to buy or sell closed-end fund shares generally must charge, neither of which will be charged by FVL ETF). Unlike
do so through a broker-dealer and pay or receive the market conventional mutual funds, ETFs, like FVL ETF, trade their
price per share (plus or minus any applicable commissions). shares on a securities exchange, and persons wishing to buy
The market price may be more (a premium) or less (a discount) or sell shares generally must do so through a broker-dealer
than the net asset value per share of the closed-end fund. and pay and receive the market price per share (plus or minus
Closed-end funds have greater flexibility than ETFs to make any applicable brokerage commissions). Unlike a closed-end
certain types of investments, and to use certain investment fund, ETFs issue and redeem shares on a continuous basis, at
strategies, such as financial leverage and investments in net asset value, in large blocks consisting of a specified
illiquid securities. number of shares, referred to as a "Creation Unit." Creation
Units of FVL ETF will be issued and redeemed principally
in-kind for securities included in the Value Line(R) 100 Index
(the "Index"). Except when aggregated in Creation Units
("Creation Unit Aggregations"), FVL ETF shares are not
redeemable securities of FVL 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 fund, whereas the
in-kind Creation Unit redemption mechanism of FVL ETF generally
will not lead to a tax event for FVL ETF or its ongoing
shareholders. As a practical matter, only broker-dealers, or
large institutional investors with creation and redemption
agreements called "Authorized Participants," can purchase or
redeem these Creation Units. As a result, shares of FVL ETF
will be traded on the AMEX to provide liquidity for purchasers
of FVL ETF shares in amounts less than the size of a Creation
Unit Aggregation. The market price of FVL 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.
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Q. ARE THE INVESTMENT OBJECTIVES AND STRATEGIES OF FVL ETF AND FVL SIMILAR?
A. The investment objectives and strategies of FVL ETF and FVL are similar, but
have some important distinctions. FVL ETF will seek investment results that
correspond generally (before fees and expenses) to an equity index called the
Value Line(R) 100 Index. FVL 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 FVL ETF, which will normally invest at least 90% of
its total assets in common stocks that comprise the Index. The principal
difference between FVL and FVL ETF is that the securities held by FVL are
adjusted on a weekly basis whereas the Index is reconstituted monthly.
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 FVL'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 FVL
whether or not the proposed Reorganization occurs.
FVL 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 FVL's
holdings and the extent of liquidation of securities between the date of the
Meeting and the closing of the Reorganization.
If you are a record holder, which includes registered holders and brokers that
hold shares on behalf of their customers, and you own a fractional share of FVL,
in lieu of receiving a fractional share of FVL ETF, you will receive an amount
in cash equal to the net asset value of such fractional share. Please note that
you may incur certain tax liability if you receive cash in lieu of the
fractional share.
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 FVL into FVL ETF, the aggregate net asset value of your FVL
ETF shares immediately following the Reorganization will be the same as the
aggregate net asset value, rather than market value, of your FVL shares
immediately prior to the Reorganization. In addition, it is likely that the
number of shares you own will not change as a result of the Reorganization
because your shares of FVL will be exchanged at the net asset value per share of
FVL ETF, which will probably be equal to the net asset value per share of FVL at
the time of the Reorganization. Accordingly, if you are a record holder, which
includes registered holders and brokers that hold shares on behalf of their
customers, and if you own a fractional share of FVL, in lieu of receiving a
fractional share of FVL ETF, you will receive an amount in cash equal to the net
asset value of such fractional share.
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 FVL'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 FVL represented
at a meeting at which more than 50% of the outstanding shares of FVL are
represented or (ii) more than 50% of the outstanding shares of FVL.
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Q. WHEN WOULD THE PROPOSED REORGANIZATION BE EFFECTIVE?
A. If approved, the Reorganization is expected to occur no later than June 22,
2007 or as soon as reasonably practicable after shareholder approval is
obtained. Shortly after completion of the Reorganization, shareholders of FVL
will receive notice indicating that the Reorganization was approved.
Q. WILL FVL 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 FVL.
Q. HOW CAN I VOTE?
A. You can vote in any one of four ways:
o By touch-tone 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;
o Via the Internet by following the instructions set forth on your
proxy card; or
o In person, by attending the Meeting.
We encourage you to vote by touch-tone telephone or via the Internet by
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.
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 FVL ETF through
these means.
Q. IF I HOLD FVL SHARES DIRECTLY AND NOT IN "STREET NAME" THROUGH A
BROKER-DEALER, HOW WILL I RECEIVE REORGANIZATION SHARES?
A. Because shares of FVL ETF will not be certificated, you will need to
establish a brokerage account that will hold 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 (800)
926-7043.
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FIRST TRUST VALUE LINE(R) 100 FUND
1001 WARRENVILLE ROAD, SUITE 300
LISLE, ILLINOIS 60532
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 17, 2007
March 21, 2007
To the Shareholders of First Trust Value Line(R) 100 Fund:
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of First Trust Value Line(R) 100 Fund ("FVL"), 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 May 17, 2007, 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 FVL to First Trust Value Line(R) 100 Exchange-Traded Fund
("FVL ETF"), in exchange for shares of FVL ETF, the assumption by FVL
ETF of all of the liabilities of FVL and the distribution of such FVL
ETF shares, on a tax-free basis for federal income tax purposes, pro
rata to the shareholders of record of FVL in complete liquidation,
dissolution and termination of FVL.
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 FVL at the close of business on February 16,
2007 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,
/s/ W. Scott Jardine
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) 926-7043 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) 100 FUND
This document contains a Prospectus/Proxy Statement and is accompanied by 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 touch-tone telephone or via the Internet),
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 the cover 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 touch-tone
telephone or via the Internet. Your prompt return of the enclosed proxy card (or
your voting by touch-tone telephone or via 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, FVL's proxy
solicitor, at the special toll-free number we have set up for you
(1-800-926-7043).
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PROSPECTUS/PROXY STATEMENT
MARCH 21, 2007
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) 100 Fund, a Massachusetts business trust that
is a closed-end investment company ("FVL"). 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) 100 Exchange-Traded Fund
("FVL 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 FVL would
be transferred in a tax-free reorganization (the "Reorganization") to FVL ETF.
The transactions contemplated by the Plan are described in further detail
elsewhere herein. The principal business address and phone number for both FVL
and First Trust ETF is 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532
and (630) 241-4141. FVL ETF and FVL are referred to herein collectively as the
"Funds," and each is referred to herein individually as a "Fund."
FVL ETF lists and trades its shares on the American Stock Exchange
("AMEX"). Shares of FVL ETF are not redeemable individually and therefore
liquidity for individual shareholders of FVL 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 FVL ETF shares. Reports, proxy materials and other
information concerning the Funds can be inspected at the AMEX.
The Board of Trustees of FVL has unanimously approved the Plan and the
Reorganization contemplated thereby as being in the best interests of FVL 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 FVL ETF HAS BEEN FILED WITH THE SEC. THIS
INFORMATION, INCLUDING THE REORGANIZATION SAI (AS DEFINED BELOW), DATED MARCH
21, 2007, AND THE FVL ETF SAI (AS DEFINED BELOW), IS AVAILABLE UPON ORAL OR
WRITTEN REQUEST AT NO CHARGE BY CALLING (800) 988-5891 OR CONTACTING FIRST TRUST
PORTFOLIOS L.P., 1001 WARRENVILLE ROAD, SUITE 300, LISLE, ILLINOIS 60532.
FVL'S MOST RECENT ANNUAL AND SEMI-ANNUAL REPORTS ARE AVAILABLE UPON
REQUEST, WITHOUT CHARGE, BY WRITING TO FIRST TRUST ADVISORS L.P. ("FIRST TRUST"
OR THE "ADVISER") 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 FVL ETF, dated March 21, 2007, relating to shares
of FVL ETF, incorporated by reference into this Prospectus/Proxy Statement,
and attached hereto as Appendix I;
(ii) the Statement of Additional Information relating to the proposed
Reorganization, dated March 21, 2007 (the "Reorganization SAI");
(iii) the Statement of Additional Information of FVL ETF, dated March
21, 2007, a copy of which is included with the Reorganization SAI (the "FVL
ETF SAI"); and
(iv) the financial statements and related independent registered public
accounting firm's report included in FVL's Annual Report to Shareholders
for the year ended December 31, 2006.
Shareholders may receive free copies of FVL's annual reports, semi-annual
reports, or the Reorganization SAI, request other information about FVL or make
shareholder inquiries by calling FVL at (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. Reports, proxy materials and
other information concerning FVL ETF and FVL may be inspected at the offices of
the AMEX, 86 Trinity Place, New York, New York 10006. 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 (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.........................12
C. Other Comparisons Between the Funds............................17
D. Information About the Proposed Reorganization..................22
ADDITIONAL INFORMATION......................................................29
OTHER MATTERS TO COME BEFORE THE MEETING....................................31
Exhibit A. AGREEMENT AND PLAN OF REORGANIZATION..........................A-1
Exhibit B. FURTHER DISCLOSURE REGARDING FVL..............................B-1
Appendix I. PROSPECTUS FOR FVL ETF
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INTRODUCTION
This Prospectus/Proxy Statement, along with the Notice of Special Meeting
of Shareholders and the proxy card, is being mailed to shareholders of FVL on or
about March 29, 2007. 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, FVL's proxy solicitor, at (800) 926-7043.
The Altman Group ("Altman") has been engaged to assist in the solicitation
of proxies for FVL, at an estimated cost to First Trust of approximately
$42,700, plus expenses. As the Meeting date approaches, certain shareholders of
FVL 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 instructions from shareholders of FVL. 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 touch-tone telephone or
Internet 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 or before submitting their
voting instructions via the Internet.
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 FVL 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 FVL, 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
- 1 -
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 FVL, and in that case, any adjournment must be approved
by the vote of holders of a majority of the shares of FVL present and entitled
to vote with respect to the matter to be adjourned. Unless a proxy is otherwise
limited in this regard, any shares of FVL 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
FVL 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.
Proxy solicitations will be made, beginning on or about March 29, 2007,
primarily by mail, but such solicitations may also be made by telephone or
personal interviews conducted by (i) officers of FVL; (ii) The Altman Group,
FVL's proxy solicitor that will provide proxy solicitation services in
connection with the Plan; (iii) First Trust, the investment adviser of the
Funds; (iv) PFPC Inc. ("PFPC"), the administrator, accounting agent and transfer
agent of FVL 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 total amount of these
normal expenses is expected to be approximately $125,000.
The close of business on February 16, 2007 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, 17,490,000 shares of FVL were outstanding.
Shareholders of record on the Record Date are entitled to one vote for each
share of FVL the shareholder owns. On the Record Date, FVL ETF had no shares
outstanding.
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PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
It is proposed that all of the assets of FVL, a closed-end fund, be
transferred in a tax-free reorganization to FVL ETF, a newly created,
diversified series of First Trust ETF, in exchange for (a) the issuance and
delivery to FVL of shares of FVL ETF in Creation Unit Aggregations (as defined
below), with a value equal to the value of FVL's assets net of liabilities and
(b) the assumption by FVL ETF of all liabilities of FVL.
As a result of the proposed Reorganization, each shareholder of FVL will
receive a number of shares of FVL ETF equal in net asset value as of the
Valuation Time (defined below) to the total net asset value of such
shareholder's FVL shares. Following the consummation of the Reorganization, the
legal existence of FVL will be terminated.
LIKE SHARES OF FVL, SHARES OF FVL 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 FVL 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 FVL with and into FVL ETF. If approved by shareholders of
FVL, all of the assets of FVL will be transferred to FVL ETF in exchange for (a)
the issuance and delivery to FVL of shares of FVL ETF ("Reorganization Shares")
in "Creation Unit" aggregations of 30,000 shares of FVL ETF, for purposes of the
Reorganization only, with an aggregate value equal to the value of FVL's assets
net of liabilities and (b) the assumption by FVL ETF of all of the liabilities
of FVL. Following the Reorganization, a Creation Unit of FVL ETF shall consist
of aggregations of 50,000 shares. Immediately following the transfer, the
Reorganization Shares received by FVL will be distributed by FVL or its agent
pro rata, on a tax-free basis for federal income tax purposes, to each of FVL's
shareholders of record as of the valuation time, which is expected to be 4:00
p.m. Eastern Time on June 22, 2007, or such other date and time as may be agreed
upon by the parties (the "Valuation Time") in complete dissolution, liquidation
and termination of FVL. Through the Reorganization, your shares of FVL would be
exchanged, on a tax-free basis for federal income tax purposes, for shares of
FVL ETF with an equal aggregate net asset value, and you will become a
shareholder of FVL ETF. If you are a record holder, which includes registered
holders and brokers that hold shares of FVL on behalf of their customers, and
you own a fractional share of FVL, in lieu of receiving a fractional share of
FVL ETF, you will receive an amount in cash equal to the net asset value of such
fractional share. Please note that you may incur certain tax liability if you
receive cash in lieu of the fractional share.
2. WHAT WILL HAPPEN TO MY SHARES OF FVL AS A RESULT OF THE REORGANIZATION?
As a result of the Reorganization, your shares of FVL, a closed-end fund,
will be exchanged for shares of FVL ETF, an exchange-traded "index fund," with
an equal aggregate net asset value as of the Valuation Time. As a shareholder of
FVL ETF following the Reorganization, it is anticipated that you will still be
able to sell your shares of FVL ETF on the AMEX, and because ETFs generally
trade at or very close to net asset value, you should be able to sell your FVL
ETF shares at or close to net asset value. Through the Reorganization, your
shares of FVL would be exchanged, on a tax-free basis for federal income tax
- 3 -
purposes, for shares of FVL ETF with an equal aggregate net asset value, and you
will become a shareholder of FVL ETF. If you are a record holder, which includes
registered holders and brokers that hold shares of FVL on behalf of their
customers, and you own a fractional share of FVL, in lieu of receiving a
fractional share of FVL ETF, you will receive an amount in cash equal to the net
asset value of such fractional share. Please note that you may incur certain tax
liability if you receive cash in lieu of the fractional share.
3. WHAT IS THE DIFFERENCE BETWEEN A CLOSED-END FUND AND AN ETF?
CLOSED-END FUNDS ETFS
- ------------------------------------------------- ---------------------------------------------------------------------
Closed-end funds, like FVL, generally do Open-end funds (known generally as mutual funds), in
not redeem their outstanding shares or engage in general, issue shares that can be redeemed or sold back to the fund
the continuous sale of new shares. Shares of at the fund's net asset value per share (less any applicable
closed-end investment companies typically are redemption fee or contingent deferred sales charge). Unlike
traded on a securities exchange. Thus, persons conventional mutual funds, ETFs, like FVL ETF, trade their shares
wishing to buy or sell closed-end fund shares on a securities exchange, and persons wishing to buy or sell shares
generally must do so through a broker-dealer and generally must do so through a broker-dealer and pay and receive
pay or receive the market price per share (plus or the market price per share (plus or minus any applicable
minus any applicable commissions). The market commissions). Unlike a closed-end fund, like FVL, ETFs issue and
price may be more (a premium) or less (a discount) redeem shares on a continuous basis, at net asset value, in large
than the net asset value per share of the blocks consisting of a specified number of shares, referred to as a
closed-end fund. Closed-end funds, like FVL, have "Creation Unit." Creation Units of FVL ETF will be issued and
greater flexibility than ETFs to make certain redeemed principally in-kind for securities included in the Index
types of investments, and to use certain (as defined on page 5). Except when aggregated in Creation Units,
investment strategies, such as financial leverage FVL ETF shares are not redeemable securities of FVL ETF. As a
and investments in illiquid securities. practical matter, only broker-dealers, or large institutional
investors with creation and redemption agreements, called
"Authorized Participants," can purchase or redeem these Creation
Units. As a result, shares of FVL ETF will be traded on the AMEX
to provide liquidity for purchasers of FVL ETF shares in amounts
less than the size of a Creation Unit. The market price of FVL
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.
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 FVL ETF generally will not lead to a tax
event for FVL ETF or its ongoing shareholders. Unlike a closed-end
fund, if an ETF experiences material cash inflows, an ETF may be
unable to satisfy the qualified dividend income holding period
requirements for a portion of its dividends and may subject investors
to increased tax liability.
- 4 -
4. WHY HAVE THE TRUSTEES OF FVL 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 FVL approve the Plan and the Reorganization it
contemplates:
o FVL shares have historically traded at a discount from net asset
value (including a discount of 7.37% at the close of trading on
the date FVL's Board of Trustees approved the Reorganization and a
discount of 2.23% at the close of trading on the Record Date). FVL
shareholders would receive FVL ETF shares with an aggregate net
asset value equal to the aggregate net asset value of their FVL
shares as of the Valuation Time pursuant to the Reorganization.
Shares of exchange-traded funds, such as FVL ETF, typically trade
at or very close to their net asset value.
o FVL ETF will have a lower management fee than FVL and FVL ETF's
investment adviser has agreed to cap expenses so that FVL ETF will
have a lower total fund operating expense ratio than FVL for at
least two years following the Reorganization.
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 FVL recommend approval of the Plan and the Reorganization
it contemplates and have concluded that: (1) the Reorganization is in the best
interests of FVL and (2) the interests of the existing shareholders of FVL will
not be diluted as a result of the Reorganization.
5. HOW DO THE INVESTMENT GOALS, POLICIES AND RESTRICTIONS OF FVL AND FVL ETF
COMPARE?
The investment goals, policies and restrictions of FVL and FVL ETF are
similar, but have some important distinctions. FVL ETF seeks investment results
that correspond generally (before fees and expenses) to an equity index called
the Value Line(R) 100 Index (the "Index"). FVL primarily utilizes an investment
strategy that is similar to the methodology of the Index to invest its portfolio
but is not required to replicate an index, as is the case with FVL ETF, each as
discussed and summarized below. The principal difference between FVL and FVL ETF
is that the securities included in FVL are adjusted on a weekly basis and the
Index is reconstituted monthly. 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.
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INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
FVL FVL ETF
- --------------------------------------------------------------- -------------------------------------------------------------
FVL's investment objective is to provide capital appreciation. The investment objective of FVL ETF is to seek investment
The Fund seeks to outperform the Standard & Poor's 500 Composite results that correspond generally to the price and yield
Stock Price Index (the "S&P 500 Index") by adhering to a (before the Fund's fees and expenses) of the Index.
disciplined strategy of investing in a diversified portfolio of
the 100 common stocks ranked #1 in the Value Line(R) FVL ETF will normally invest at least 90% of its total assets
Timeliness(TM) Ranking System. in common stocks that comprise the Index. First Trust, as
investment adviser to the Fund, will seek to match the
The Value Line(R) Timeliness(TM) Ranking System was introduced performance of the Index (before fees and expenses).
in its present form in 1965. Each week, Value Line(R) screens a
wide array of data, using a series of proprietary calculations FVL ETF's investment objective is a fundamental policy and may
to rank each of the approximately 1,700 stocks in the Value not be changed without the approval of a "majority of the
Line(R) universe from #1 (highest) to #5 (lowest) based on their outstanding voting securities" of FVL ETF. A "majority of the
expected price performance relative to the other stocks in the outstanding voting securities" means the lesser of (i) 67% of
universe over the following 6 to 12 months. The approximately the shares represented at a meeting at which more than 50% of
1,700 stocks in the Value Line(R) universe represent companies the outstanding shares are represented or (ii) more than 50% of
in over 90 industries. At any one time, only 100 stocks are the outstanding shares.
ranked #1 in the Value Line(R) Timeliness(TM) Ranking System.
FVL ETF's complete portfolio holdings as of the end of each
The Fund invests substantially all, but in no event less than semi-annual period will be sent to you as part of the Semi-
80%, of its net assets in the stocks that are ranked #1 in the Annual Report and Annual Report of FVL ETF. FVL ETF's complete
Value Line(R) Timeliness(TM) Ranking System. portfolio holdings as of the end of the first and third fiscal
quarters will be filed on Form N-Q with the SEC. The FVL ETF
FVL's investment objective is a fundamental policy and may not SAI includes a description of the Fund's policies and
be changed without the approval of a "majority of the procedures with respect to the disclosure of its portfolio
outstanding voting securities" of FVL. A "majority of the holdings.
outstanding voting securities" of FVL means the lesser of (i)
67% of the shares represented at a meeting at which more than Please also see Part B - Investment Objectives and Risk Factors
50% of the outstanding shares are represented or (ii) more than - below for a more detailed comparison of the Funds' investment
50% of the outstanding shares. Please also see Part B - policies and restrictions.
Investment Objectives and Risk Factors - below for a more
detailed comparison of the Funds' investment policies and
restrictions.
- 6 -
6. HOW DO THE MANAGEMENT FEES AND EXPENSE RATIOS OF FVL AND FVL 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 FVL and the pro forma estimated expense ratios of FVL 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)
FVL ETF
FVL 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, FVL trades on the AMEX and does not charge a sales
load or a redemption fee. When buying or selling Fund shares, investors
will incur customary brokerage commissions and charges.
(2) As an ETF, FVL ETF trades on the AMEX and does not charge a sales load
or a redemption fee on individual Fund shares. When buying or selling
Fund shares, investors will incur customary brokerage commissions and
charges. Purchasers of Creation Units of FVL ETF and shareholders
redeeming Creation Units of FVL 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 FVL is 0.65% of average daily net assets and
the annual management fee for FVL ETF is 0.50% of average daily net assets. As
shown below, the proposed Reorganization is expected to result in a lower total
expense ratio for shareholders of FVL who become shareholders of FVL ETF as a
result of the Reorganization. First Trust has contractually agreed to waive fees
and/or pay FVL ETF's operating expenses to the extent necessary to prevent the
operating expenses of FVL 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.
- 7 -
ANNUAL FUND OPERATING EXPENSES(1)
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
NET ANNUAL
DISTRIBUTION/ TOTAL ANNUAL LESS EXPENSE FUND
MANAGEMENT SERVICE (12B-1) OTHER FUND OPERATING WAIVER/ OPERATING
FEE FEES EXPENSES EXPENSES REIMBURSEMENTS EXPENSES
FVL
Common shares 0.65% 0% 0.32% 0.97% 0.00% 0.97%
FVL ETF
Common shares 0.50% 0% (2) 0.28(4) 0.78% 0.08%(3) 0.70%(3)
FVL ETF
(Pro forma combined)
Common shares 0.50% 0%(2) 0.28%(4) 0.78% 0.08%(3) 0.70%(3)
<FN>
(1) Expressed as a percentage of average daily net assets.
(2) FVL ETF has adopted a distribution and service (12b-1) plan pursuant to
which FVL ETF may bear a 12b-1 fee not to exceed 0.25% per annum of FVL
ETF's average daily net assets. However, no such fee is currently paid by
FVL ETF and FVL ETF does not currently anticipate paying 12b-1 fees.
(3) First Trust has agreed to waive fees and/or pay expenses of FVL ETF to
the extent necessary to prevent the annual operating expenses of FVL ETF
(excluding interest expense, brokerage commissions and other trading
expenses, taxes, and extraordinary expenses) from exceeding 0.70% of
average daily net assets (the "Expense Cap") for at least two years after
the initial public issuance of shares of FVL ETF. Expenses borne by First
Trust are subject to reimbursement by FVL ETF up to three years from the
date the fee or expense was incurred, but no reimbursement payment will
be made at any time by FVL ETF if it would result in FVL ETF's exceeding
0.70% of average net assets per year.
(4) FVL 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 FVL 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 FVL 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
------ ------- ------- --------
FVL
Common shares $99 $309 $536 $1,190
FVL ETF
Common shares (1) $72 $233 $417 $951
F
VL ETF
(Pro forma combined)
Common shares(1) $72 $233 $417 $951
(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.
- 8 -
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 FVL or its shareholders as a direct result of the Reorganization
other than with respect to the cash paid for fractional shares as explained
below. Any capital gains realized prior to the Reorganization will be
distributed to FVL'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 FVL's
shareholders. Through the Reorganization, your shares of FVL would be exchanged,
on a tax-free basis for federal income tax purposes, for shares of FVL ETF with
an equal aggregate net asset value, and you will become a shareholder of FVL
ETF. If you are a record holder, which includes registered holders and brokers
that hold shares of FVL on behalf of their customers, and you own a fractional
share of FVL, in lieu of receiving a fractional share of FVL ETF, you will
receive an amount in cash equal to the net asset value of such fractional share.
Please note that you may incur certain tax liability if you receive cash in lieu
of the fractional share. For more information, please see "Information About the
Proposed Reorganization -- Federal Income Tax Consequences" below.
8. WILL MY DIVIDENDS BE AFFECTED BY THE REORGANIZATION?
FVL currently pays dividends from net investment income monthly and
distributes realized capital gains, if any, to shareholders semi-annually. FVL
ETF expects to pay net investment income dividends on a semi-annual basis and
realized capital gains, if any, annually. FVL ETF will not establish a dividend
reinvestment plan such as the one that FVL currently has in place, but dividends
may be reinvested automatically in additional FVL ETF shares 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 FVL are traded and listed on the AMEX and investors may
purchase or sell FVL shares on the AMEX. FVL shareholders who become
shareholders of FVL ETF as a result of the Reorganization may also trade their
FVL ETF shares on the AMEX. Unlike conventional mutual funds, ETFs, like FVL
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 FVL ETF will be issued and redeemed principally
in-kind for securities included in the Index. Following the Reorganization, a
Creation Unit Aggregation of FVL ETF shall consist of 50,000 shares. Except in
Creation Unit Aggregations, FVL ETF shares are not individually redeemable
securities of FVL ETF and shareholders of FVL ETF owning fewer shares than a
Creation Unit Aggregation will be unable to redeem their shares. Liquidity for
such individual shareholders of FVL ETF will be realized only through a sale of
FVL ETF shares on the AMEX. First Trust Portfolios L.P. will serve as the
principal underwriter of Creation Unit Aggregations of FVL ETF. The procedures
for purchasing and redeeming a Creation Unit Aggregation of FVL ETF may be found
in the FVL ETF Prospectus dated March 21, 2007, incorporated by reference into
this Prospectus/Proxy Statement, and attached hereto as Appendix I.
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10. HOW WILL I BE NOTIFIED OF THE OUTCOME OF THE REORGANIZATION?
If the Reorganization is approved by shareholders of FVL, you will receive
confirmation after the Reorganization is completed, indicating the number of
shares of FVL ETF you are receiving as a result of the Reorganization.
Otherwise, you will be notified in the next shareholder report of FVL.
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
FVL ETF you receive as a result of the Reorganization will equal the total value
of the shares of FVL that you hold at the Valuation Time. Accordingly, if you
are a record holder, which includes registered holders and brokers that hold
shares on behalf of their customers, and you own a fractional share of FVL, in
lieu of receiving a fractional share of FVL ETF, you will receive an amount in
cash equal to the net asset value of such fractional share.
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 FVL, i.e., the
lesser of (i) 67% of the shares represented at the 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 FVL SHARES DIRECTLY AND NOT IN "STREET NAME" THROUGH A
BROKER-DEALER, HOW WILL I RECEIVE REORGANIZATION SHARES?
Because shares of FVL ETF will not be certificated, you will need to
designate a brokerage account that will hold your Reorganization Shares. If you
do not designate a brokerage account, you may be limited in the ability to sell
your Reorganization Shares in the secondary market until such account is
designated.
THE TRUSTEES OF FVL BELIEVE THAT THE PROPOSED REORGANIZATION IS IN THE BEST
INTERESTS OF FVL. ACCORDINGLY, THE TRUSTEES RECOMMEND THAT SHAREHOLDERS VOTE FOR
APPROVAL OF THE PLAN AND THE REORGANIZATION IT CONTEMPLATES.
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B. INVESTMENT OBJECTIVES AND RISK FACTORS
What are the main investment strategies and related risks of FVL ETF and
how do they compare with those of FVL?
INVESTMENT OBJECTIVES AND POLICIES. As noted above, the investment goals of
FVL ETF are similar to those of FVL, but have some important distinctions.
Please note that despite the differences in investment objectives of FVL ETF and
FVL, the Funds' investment approaches are similar. The investment objectives of
FVL ETF and FVL are set forth below.
INVESTMENT OBJECTIVES AND POLICIES
FVL FVL ETF
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FVL's investment objective is to provide capital appreciation. The investment objective of FVL ETF is to seek investment results
The Fund seeks to outperform the Standard & Poor's 500 Composite that correspond generally to the price and yield (before the
Stock Price Index (the "S&P 500 Index") by adhering to a Fund's fees and expenses) of an equity index called the Value
disciplined strategy of investing in a diversified portfolio of Line(R) 100 Index. The Index seeks to outperform the S&P 500
the 100 common stocks ranked #1 in the Value Line(R) Index. The Index is sponsored and maintained by Value Line(R)
Timeliness(TM) Ranking System. Publishing, Inc. ("Value Line(R)"), which is not affiliated with
First Trust, FVL ETF or FVL. Value Line(R) has licensed to First
The Value Line(R) Timeliness(TM) Ranking System was introduced Trust the right to use the Index and certain Value Line(R)
in its present form in 1965. Each week, Value Line(R) screens a trademarks, trade names and Value Line(R) systems. First Trust
wide array of data, using a series of proprietary calculations in turn has sublicensed these rights to FVL ETF. There can be no
to rank each of the approximately 1,700 stocks in the Value assurance that FVL ETF's investment objective will be achieved.
Line(R) universe from #1 (highest) to #5 (lowest) based on their
expected price performance relative to the other stocks in the FVL ETF, using an "indexing" investment approach, attempts to
universe over the following 6 to 12 months. The approximately replicate, before expenses, the performance of the Index. The
1,700 stocks in the Value Line(R) universe represent companies Index is designed to objectively identify and select those stocks
in over 90 industries. At any one time, only 100 stocks are from the universe of stocks of which Value Line(R) gives a
ranked #1 in the Value Line(R) Timeliness(TM) Ranking System. Timeliness(TM) Ranking of #1. First Trust seeks a correlation of
0.95 or better (before expenses) between FVL ETF's performance
The Fund invests substantially all, but in no event less than and the performance of the Index; a figure of 1.00 would
80%, of its net assets in the stocks that are ranked #1 in the represent perfect correlation. First Trust will regularly
Value Line(R) Timeliness(TM) Ranking System. monitor its tracking accuracy and will use the investment
techniques described below in seeking to maintain an appropriate
Each week, the Fund makes portfolio adjustments to match any correlation. FVL generally has followed an investment strategy
changes that are made by Value Line(R) - those stocks that are similar to the methodology of the Index but is not required to
no longer ranked #1 by Value Line(R) will be sold from the replicate an index, as is the case with FVL ETF, which will
Fund's portfolio and the sale proceeds will be used to purchase normally invest at least 90% of its total assets in common stocks
the stocks that have been newly added to the Value Line(R) #1 that comprise the Index. Accordingly, First Trust, as FVL's
ranking category. The Fund's portfolio is rebalanced on or about investment adviser, has more discretion when building FVL's
the last Friday of each calendar quarter so that each stock will portfolio than when acting as investment adviser to FVL ETF.
be equally weighted as of such date. There can be no assurance There can be no assurance that FVL ETF's investment strategy will
that the Fund's investment strategy will be successful or that be successful.
the Fund will achieve its investment objective.
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FVL ETF will normally invest at least 90% of its total assets in
FVL may invest in cash and cash equivalents when determined by common stocks that comprise the Index. First Trust, as
First Trust that such investments are appropriate. FVL may also investment adviser of the Fund, will seek to match the
use derivatives and other transactions for the purpose of performance of the Index.
hedging its exposure to an increase in the price of a security
prior to its anticipated purchase or a decrease in the price of In seeking to achieve FVL ETF's objective, FVL ETF generally will
a security prior to its anticipated sale. FVL may also lend its invest in all of the stocks comprising the Index in proportion to
portfolio securities to banks and brokers to receive additional their weightings in the Index. However, under various
return. circumstances, it may not be possible or practicable to purchase
all of those stocks in those weightings. In those circumstances,
FVL ETF may purchase a sample of stocks in the Index. 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
or utilize various combinations of the above techniques or
futures or other derivative instruments in seeking to track the
Index. FVL ETF 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.
FVL ETF'S INDEX CONSTRUCTION. First Trust is responsible for implementing
FVL ETF's overall investment strategy, including the allocation and periodic
reallocation of FVL ETF's net assets among the common stocks in which FVL ETF
invests in order to replicate and correlate to the Index as discussed above. In
this capacity, First Trust will generally seek to invest FVL ETF's net assets in
the common stocks of companies included in the Index.
The Index, sponsored and maintained by Value Line(R), is an equal-dollar
weighted index comprised of 100 U.S. exchange-listed securities of companies
that are ranked #1 by the Timeliness(TM) Ranking System. The composition of the
Index is reconstituted on a monthly basis to match any changes in those stocks
ranked #1 by the Timeliness(TM) Ranking System. Those stocks that are no longer
ranked #1 in the Timeliness(TM) Ranking System by Value Line(R) will be removed
from the Index and replaced with any newly added stocks. The Index will be
rebalanced on or about the last Friday of each calendar quarter so that each
stock will be equally weighted as of such date.
The inception date of the Index was January 16, 2007. The Timeliness(TM)
Ranking System was introduced in its present form in 1965. Each week, Value
Line(R) screens a wide array of data, using a series of proprietary
calculations, such as long-term earnings and price trends, recent company
earnings and price performance and earnings relative to expectations, to assign
a Timeliness(TM) rank to each of the approximately 1,700 stocks in the Value
Line(R) universe, representing companies in over 90 industries, from #1
(highest) to #5 (lowest) based on their expected price performance relative to
the other stocks in the universe over the following 6 to 12 months. At any one
time, only 100 stocks are ranked #1 in the Timeliness(TM) Ranking System.
Unlike FVL, the Index, and accordingly FVL ETF, will only make such
adjustments on a monthly basis. As a result, the Index and FVL ETF will continue
to include for the remainder of a given monthly period stocks that Value Line(R)
no longer gives a Timeliness(TM) Ranking of #1. The Index divisor was initially
determined to yield a benchmark value of 1000.00 at the close of trading on
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January 16, 2007. FVL ETF will make changes to its portfolio holdings on a
monthly basis to replicate changes made by Value Line(R) in the composition of
the Index. The holdings of FVL ETF and the composition and compilation
methodology of the Index will be available on FVL ETF's website at
www.ftportfolios.com. Value Line's(R) updated rankings are released weekly on
its website at www.valueline.com.
Value Line(R) is not affiliated with FVL, FVL ETF or with First Trust. FVL
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(R) 100 INDEX (THE "INDEX"), WHICH IS COMPOSED BY
VLPI WITHOUT REGARD TO FTA, THE FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED
FUND (THE "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 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.
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DIVERSIFICATION STATUS. FVL and FVL ETF have both elected to be classified
as diversified funds. With certain exceptions, a diversified fund may not, with
respect to 75% of its 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 FVL ETF are traded throughout the day on the AMEX whereas shares of
mutual funds are typically only bought and redeemed or sold or back to the fund
at the fund's closing net asset value per share. The shares of FVL 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 net asset value. These arrangements are designed to
protect ongoing shareholders from adverse effects on FVL 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 FVL ETF shares' in-kind redemption
mechanism generally will not lead to a tax event for FVL ETF or its ongoing
shareholders. Unlike a closed-end fund, if an ETF experiences material cash
inflows, an ETF may be unable to satisfy the qualified dividend income holding
period requirements for a portion of its dividends and may subject investors to
increased tax liability.
Please see the FVL ETF Prospectus incorporated by reference and included
herein as Appendix I for additional information regarding FVL 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 FVL
are also applicable to an investment in FVL 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 FVL 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 FVL ETF, shares of FVL ETF or
stocks in general may fall in value. Shares of FVL ETF are subject to market
fluctuations caused by such factors as economic, political, 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 FVL ETF will decline,
more or less, in correlation with any decline in the value of the Index.
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NON-CORRELATION RISK
FVL ETF's return may not match the return of the Index for a number of
reasons. For example, FVL ETF incurs operating expenses not applicable to the
Index, and may incur costs in buying and selling securities, especially when
rebalancing FVL ETF's portfolio holdings to reflect changes in the composition
of the Index. In addition, FVL ETF's portfolio holdings may not exactly
replicate the securities included in the Index or the ratios between the
securities included in the Index.
FVL ETF may not be fully invested at times, either as a result of cash
flows into FVL ETF or reserves of cash held by FVL ETF to meet redemptions and
expenses. If FVL 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 FVL 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, FVL ETF's performance
may correlate to a lesser extent and may possibly vary substantially from the
performance of the Index.
REPLICATION MANAGEMENT RISK
FVL 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 FVL 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, FVL 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
FVL 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.
CONCENTRATION
FVL ETF will be concentrated in the securities of a given industry if the
Index is concentrated in such industry. A concentration makes FVL ETF more
susceptible to any single occurrence affecting the industry and may subject FVL
ETF to greater market risk than more diversified funds.
NON-U.S. SECURITIES RISK
FVL ETF may invest in the securities of issuers domiciled in jurisdictions
other than the United States and such stocks may be denominated in currencies
other than the U.S. dollar. These securities are either in the form of American
Depositary Receipts ("ADRs") or are directly listed on a U.S. securities
exchange. Investments in securities of non-U.S. issuers involve special risks
not presented by investments in securities of U.S. issuers, including: (i) there
may be less publicly available information about non-U.S. issuers or markets due
to less rigorous disclosure or accounting standards or regulatory practices;
- 15 -
(ii) many non-U.S. markets are smaller, less liquid and more volatile than the
U.S. market; (iii) potential adverse effects of fluctuations in currency
exchange rates or controls on the value of FVL ETF's investments; (iv) the
economies of non-U.S. countries may grow at slower rates than expected or may
experience a downturn or recession; (v) the impact of economic, political,
social or diplomatic events; (vi) certain non-U.S. countries may impose
restrictions on the ability of non-U.S. issuers to make payments of principal
and interest to investors located in the U.S., due to blockage of non-U.S.
currency exchanges or otherwise; and (vii) withholding and other non-U.S. taxes
may decrease FVL ETF's return.
INTELLECTUAL PROPERTY RISK. FVL ETF relies on a license from Value Line(R)
that permits FVL ETF to use Value Line's(R) Index and associated trade names and
trademarks ("Intellectual Property") in connection with the name and investment
strategies of FVL ETF. Such license may be terminated by the licensor, and as a
result, FVL ETF 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 FVL ETF. 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 FVL
ETF.
ISSUER-SPECIFIC CHANGES RISK. The value of an individual security or
particular type of security can be more volatile than the market as a whole and
can perform differently from the value of the market as a whole.
TAX RISK
FVL'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 26.
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 FVL's counsel.
The opinion of FVL'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 FVL to FVL ETF resulting in gain recognition to FVL. 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 FVL would
individually owe taxes on the gain recognized in the Reorganization, and
potentially for their proportionate portion of the taxes of FVL.
See the FVL ETF Prospectus (incorporated herein by reference and attached
hereto as Appendix I) for additional information regarding risks.
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C. OTHER COMPARISONS BETWEEN THE FUNDS
The following information provides shareholders of FVL with more
information about FVL ETF and how FVL ETF compares with FVL.
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 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 22 mutual fund portfolios,
13 exchange-traded fund portfolios and 12 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 FVL ETF.
Most of the members of the advisory team at First Trust who are responsible
for the portfolio management of FVL ETF are also responsible for the portfolio
management of FVL. Specifically, Stan Ueland is a member of the advisory team
that manages the portfolio of FVL ETF, but he is not a member of the advisory
team that manages the portfolio of FVL. There is no one individual primarily
responsible for portfolio management decisions for FVL 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 Mr. 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. Mr. Testin is 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
- 17 -
plays an important role in executing the investment strategies of each portfolio
of ETFs 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 FVL ETF, see
the FVL ETF SAI. In addition, the FVL ETF SAI provides additional information
about the compensation of members of the Investment Committee, other accounts
managed by members of the Investment Committee and the ownership of securities
of members of the Investment Committee in FVL ETF.
First Trust will receive annual investment advisory fees from FVL ETF equal
to 0.50% of FVL ETF's average daily net assets, and currently receives annual
investment advisory fees from FVL equal to 0.65% of FVL's average daily net
assets.
FVL 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 FVL
ETF's expenses to the extent necessary to prevent the operating expenses of FVL
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 after the
initial public issuance of shares of FVL ETF. Expenses borne by First Trust are
subject to reimbursement by FVL ETF up to three years from the date the fee or
expense was incurred, but no reimbursement payment will be made by FVL ETF at
any time if it would result in FVL ETF's expenses exceeding 0.70% of average
daily net assets per year.
DISTRIBUTION AND SERVICE FEES. FVL shares are not subject to any 12b-1
distribution and service fees, nor are any 12b-1 fees currently being paid by
FVL ETF.
The Board of Trustees of First Trust ETF, of which FVL 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, FVL 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
authorized participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by FVL 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 FVL 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 FVL ETF is
a series) are the same as those of FVL. The following individuals comprise the
Board of Trustees of both First Trust ETF and FVL: James A. Bowen, Richard E.
Erickson, Thomas R. Kadlec, Robert F. Keith and Niel B. Nielson. The Board of
Trustees is responsible for the management of the Funds, including supervision
of the duties performed by the Adviser. In addition, the officers of First Trust
ETF are the same as those of FVL.
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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ("AUDITOR"). Deloitte &
Touche LLP serves as Auditor for both FVL ETF and FVL.
CHARTER DOCUMENTS. FVL is organized as a Massachusetts business trust
governed by Massachusetts law. FVL ETF is a diversified series of First Trust
ETF, a Massachusetts business trust governed by Massachusetts law. FVL is
governed by a Declaration of Trust, dated as of April 18, 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 FVL and FVL 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 FVL, First Trust ETF is permitted to
have more than one series, and currently there are 12 series existing in
addition to FVL ETF. In some circumstances all of the series vote together, but
a separate vote will be taken by the shareholders of FVL ETF on matters
affecting FVL 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 FVL ETF,
only the required vote by that applicable series shall be required. For example,
a change in a fundamental investment policy for FVL ETF would be voted upon only
by shareholders of FVL ETF.
Shareholder meetings of First Trust ETF and FVL must be called when
required by the 1940 Act to elect Trustees. Shareholder meetings of FVL 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 FVL ETF also may be called by a majority of the Trustees.
Shareholder meetings of both FVL and FVL 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 FVL, and (ii) one-third, in the
case of FVL ETF, of the voting power of the outstanding shares entitled to vote
on the matters specified in such written request. Because of AMEX rules, FVL is
required to hold annual shareholder meetings at which Trustees of FVL are
elected. FVL 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 FVL 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 FVL ETF will be issued
and redeemed principally in-kind for securities included in the Index. Following
the Reorganization, a Creation Unit Aggregation of FVL ETF shall consist of
50,000 shares. Except in Creation Unit Aggregations, FVL ETF shares are not
individually redeemable securities of FVL ETF. Shares of FVL ETF will be listed
and traded on the AMEX under the ticker symbol "FVL" to provide liquidity for
individual shareholders of FVL ETF shares in amounts less than the size of a
Creation Unit Aggregation. As closed-end fund shareholders, FVL shareholders
have no similar right to redeem shares of FVL, but shares of FVL also are listed
on the AMEX and may be purchased or sold on that exchange.
The Declaration of FVL authorizes the issuance of an unlimited number of
common shares. The common shares have a par value of $0.01 per share and have
equal rights to the payment of dividends and the distribution of assets upon
liquidation. The common shares have no conversion rights (except as may
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otherwise be determined by the Trustees in their sole discretion) or rights to
cumulative voting. Shareholders of FVL ETF are entitled to dividends as declared
by its Trustees, and if First Trust ETF were liquidated, each shareholder of FVL
ETF would be entitled to receive pro rata the distributable assets of First
Trust ETF attributable to shares of FVL ETF. FVL's present policy is to
distribute at least annually all, or substantially all, of its net investment
income as dividends and its net realized capital gains annually, if any. FVL ETF
intends to distribute its net investment income semi-annually 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 FVL, First Trust ETF issues its shares in more than
one series. All consideration received by FVL ETF for the issue or sale of
shares of FVL 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 FVL ETF, and belong irrevocably to FVL ETF
for all purposes. Additional series of First Trust ETF may be established by the
Trustees from time to time. Shares of FVL 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 FVL 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 FVL 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 FVL. However, the
Declaration of First Trust ETF authorizes the issuance of series of shares, of
which FVL ETF is one, while the Declaration of FVL 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 series or classes of First
Trust ETF, rather than the requisite percentage vote of shares of FVL ETF only.
Certain provisions of FVL's Declaration could have the effect of limiting
the ability of other entities or persons to acquire control of FVL. The
affirmative vote or consent of the holders of 66-2/3% of the shares of FVL is
required to authorize certain transactions, including under certain
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circumstances a conversion into an open-end company or a merger or consolidation
of FVL 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 FVL 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 FVL in a
tender offer or similar transaction. Currently, FVL's Board members serve
concurrent annual terms of office. However, FVL's By-Laws permit Board members
to serve staggered terms. If the Reorganization is not approved, it is
anticipated that FVL's Board will be divided into three classes serving
staggered three-year terms with each class being elected to serve until the
third succeeding annual shareholder meeting subsequent to their election or
thereafter in each case until their successors are duly elected and qualified.
FVL ETF's By-Laws do not include a similar provision. This provision may affect
the ability of FVL shareholders to quickly change the composition of the Board.
Except as required by the 1940 Act, AMEX rules or as described above, the
Trustees of FVL and of First Trust ETF (of which FVL 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, these 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 FVL may be removed
from office with or without cause by (a) three-quarters of the Trustees then in
office or (b) a vote of two-thirds of the outstanding shares of FVL or First
Trust ETF, as applicable.
Quorum for a shareholder meeting of First Trust ETF (of which FVL ETF is a
series) and FVL 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 FVL and FVL ETF. It is qualified in its entirety by
reference to the charter documents themselves.
D. INFORMATION ABOUT THE PROPOSED REORGANIZATION
GENERAL. The shareholders of FVL are being asked to approve a
Reorganization of FVL with and into FVL ETF pursuant to the proposed Agreement
and Plan of Reorganization between FVL and First Trust ETF on behalf of its
series, FVL 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 FVL
to FVL ETF in exchange for the assumption by FVL ETF of all of the liabilities
of FVL and for the issuance and delivery to FVL of Reorganization Shares (as
defined in the Plan) equal in aggregate value to the net value of the assets
transferred to FVL ETF.
After the receipt of the Reorganization Shares in Creation Unit
Aggregations of 30,000 shares (for purposes of the Reorganization only), FVL 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, in complete liquidation of FVL, and the legal existence of
FVL will be terminated. Each shareholder of FVL will receive a number of full or
fractional Reorganization Shares equal in value at the Valuation Time to the
aggregate value of the shareholder's FVL shares. Because shares of FVL ETF will
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not be certificated, shareholders who hold FVL shares directly and not in
"street name" through a broker-dealer 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
their 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 FVL ETF.
Prior to the date of the Reorganization, FVL 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 FVL 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 FVL occurring prior to the
Reorganization above that which they would have received absent the
Reorganization. As of February 23, 2007, First Trust did not believe that any
securities held by FVL were inconsistent with the Index.
The Trustees of FVL have voted to approve the Plan and the proposed
Reorganization contemplated thereby and to recommend that shareholders of FVL
also approve the Plan. The Plan and the Reorganization described therein will be
consummated only if approved by the holders of the lesser of (i) 67% of FVL's
shares represented at the Meeting, if more than 50% of the outstanding shares of
FVL are represented at the Meeting or (ii) more than 50% of FVL's outstanding
shares.
In the event that the Reorganization does not receive the required
shareholder vote to approve the Plan, FVL will continue to be managed and
operated as a separate closed-end fund in accordance with its current investment
objective and policies, and the Trustees of FVL may consider such alternatives
as may be in the best interests of FVL, including the possible liquidation of
FVL.
BACKGROUND AND TRUSTEES' CONSIDERATIONS RELATING TO THE PROPOSED
REORGANIZATION. The Trustees of FVL had, at each regularly scheduled Board
meeting beginning in December 2003, discussed the discount to net asset value at
which FVL shares, and shares of closed-end funds in general, have traded. They
reviewed the investment performance of FVL, shareholder activity in FVL shares
and possible methods to reduce or eliminate the discount at which FVL shares
have traded. On January 10, 2007, the Trustees were notified of a filing with
the Securities and Exchange Commission by Doliver Capital Advisors, Inc.
("Doliver"), disclosing that Doliver had acquired beneficial ownership of 10.8%
of FVL's outstanding shares, and that this would be an agenda item for their
January 17, 2007 special Board meeting. At the meeting, representatives of First
Trust informed the Trustees that they had determined to propose the
Reorganization, noting that First Trust's recommendation was based in part on
the Board's familiarity with this possible response to the discount due to
extensive discussions that had been held on similar proposals for two other
closed-end funds managed by First Trust that also had been trading at a
discount, and which also were based on Value Line(R) indices. The First Trust
representatives indicated that they also had determined to propose the
Reorganization because of First Trust's and the Board's knowledge of prior
actions of Doliver associates with respect to another First Trust closed-end
fund that First Trust and the Board had determined were not in the best
interests of that fund.
The First Trust representatives discussed the terms and conditions of the
proposed Reorganization with the Trustees of FVL, noting that they were
essentially identical to the terms and conditions of two reorganizations that
the Board had recently approved for two other First Trust closed-end funds. They
reviewed with the Trustees the reorganization of the First Trust Value Line(R)
Dividend Fund ("FVD") into an ETF, which had occurred in December 2006. In light
- 22 -
of the persistent discount, the discussions between Fund counsel and the staff
of the SEC (the "Staff") concerning reorganizations for FVD and another First
Trust closed-end fund that also had traded at a discount, the substantial
similarity between the proposed Reorganization and the FVD reorganization, and
the recent filing by Doliver, 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 January 17, 2007 meeting, the Trustees discussed
the discount to net asset value at which FVL shares have historically traded. In
addition, the Trustees considered the prior actions by Doliver and its
associates with respect to other closed-end funds, including another closed-end
fund advised by First Trust.
Based upon the foregoing and the considerations discussed below, the
Trustees of FVL, including all of the Trustees who are not "interested persons"
of FVL (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 FVL 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 FVL's discount (for shareholders
of record who become shareholders of FVL ETF as a result of the
Reorganization). The Trustees noted that FVL's shares have
historically traded at a discount from their net asset value. The
Trustees considered that if the Reorganization is approved, FVL
shareholders would receive FVL ETF shares with an aggregate net
asset value equal to the net asset value of their FVL 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 FVL who become shareholders of FVL ETF as part of
the Reorganization should be able to sell their Reorganization
Shares at or close to the NAV of their previously held FVL shares,
thus effectively reducing or eliminating FVL's discount.
o Comparison of Fees and Expense Ratios. The Trustees considered
comparative expense information of FVL and FVL ETF, including
comparisons between the current expense ratio for FVL and the
estimated pro forma operating expense ratio of FVL ETF, and between
the estimated operating expense ratio of FVL ETF and the current
expense ratios of other ETFs comparable to the proposed FVL ETF.
The Trustees in particular noted that the management fee of FVL ETF
would be lower than FVL's management fee and that the estimated
operating expense ratio of FVL ETF is expected to be lower than the
current expense ratio of FVL.
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 FVL ETF to the extent
necessary to maintain FVL 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.
o Benefits of the ETF Structure. The Trustees considered the
favorable tax attributes of ETFs, that shareholders of FVL who
become shareholders of FVL 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 Units
Aggregations on an in-kind basis.
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o Expenses of the Reorganization. The Trustees noted that First Trust
would bear all normal costs of the Reorganization, and that FVL
would bear any extraordinary costs of the Reorganization.
o Avoidance of Proxy Contest and Related Expenses. The Trustees
considered the costs and expenses to FVL of a proxy contest that
might be brought by Doliver or its associates, given Doliver's
history of engaging in proxy contests to acquire the assets of
other closed-end funds, and in light of the proxy contest initiated
with respect to another First Trust closed-end fund by the
brother-in-law of Doliver's portfolio manager.
IN ADDITION TO THE FOREGOING, THE TRUSTEES OF FVL 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
FVL's existing shareholders in light of the basis on which shares
of FVL ETF will be issued to FVL in Creation Unit Aggregations as
contemplated in the Reorganization;
o The compatibility of FVL's and FVL ETF's investment objectives,
policies and restrictions and the composition of the current FVL
portfolio and the expected FVL ETF portfolio; and
o The tax consequences of the Reorganization on FVL and its
shareholders; the Reorganization is expected to be a tax-free
reorganization for federal income tax purposes and the receipt by
FVL shareholders of shares of FVL ETF as a result of the
Reorganization is expected to be a tax-free transaction.
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 FVL. The Trustees
also determined that the interests of FVL's existing shareholders would not be
diluted as a result of the transactions contemplated by the Reorganization. THE
TRUSTEES OF FVL, INCLUDING THE INDEPENDENT TRUSTEES, UNANIMOUSLY RECOMMEND THAT
SHAREHOLDERS OF FVL APPROVE THE REORGANIZATION.
AGREEMENT AND PLAN OF REORGANIZATION. The proposed Reorganization will be
governed by the Plan, the form of which is attached hereto as Exhibit A. The
Plan provides that FVL ETF will acquire all of the assets of FVL in exchange for
the assumption by FVL ETF of all liabilities of FVL 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 immediately after the
Valuation Time (which is expected to be 4:00 p.m. Eastern time on June 22, 2007,
or such other date and time as may be agreed upon by the parties) (the "Closing
Date"). The following discussion of the Plan is qualified in its entirety by
reference to the full text of the Plan.
FVL will transfer all of its assets to FVL ETF, and in exchange, FVL ETF
will assume all liabilities of FVL, including without limitation FVL's
indemnification obligations to its trustees and officers, and deliver to FVL a
number of Creation Units representing the Reorganization Shares having an
aggregate net asset value equal to the value of the assets of FVL attributable
to common shares of FVL, less the value of the liabilities of FVL assumed by FVL
ETF attributable to common shares of FVL. Immediately following the transfer of
assets on the Closing Date, FVL or its agent will distribute pro rata to its
- 24 -
shareholders of record as of the Valuation Time the Reorganization Shares
received by FVL. As a result of the Reorganization, each shareholder of FVL will
receive a number of Reorganization Shares equal in aggregate value as of the
Valuation Time to the value of the FVL common shares surrendered by the
shareholder. This distribution will be accomplished by the establishment of
accounts on the share records of FVL ETF in the name of such FVL 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 FVL and the Trustees of First Trust ETF, of which FVL ETF
is 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 First Trust ETF on behalf of FVL ETF and FVL, (ii) by
either party if the Reorganization shall not have occurred on or before June 30,
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 FVL approve the
Reorganization, both Funds agree to coordinate their respective portfolios from
the date of the Plan up to and including the Closing Date in order that the
investments of FVL as of the time of the Reorganization will meet as closely as
practicable the investment objective, policies and restrictions of FVL 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 FVL. Extraordinary
costs are those costs that are neither foreseen nor normally associated with a
reorganization.
First Trust (but not FVL) 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 FVL. This
fee is payable quarterly at the annual rate of 0.15% of FVL'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
FVL 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 FVL in Creation Unit Aggregations in accordance with the Plan as
described above. Reorganization Shares will thereafter be distributed to FVL's
shareholders by FVL 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 FVL ETF.
The common shares of FVL are currently listed and traded on the AMEX under
the symbol FVL. If the Reorganization is approved, FVL shares will no longer be
listed on the AMEX and FVL will be dissolved, liquidated and terminated as
provided in the Plan. FVL ETF has applied to list and trade its shares on the
AMEX, subject to notice of issuance. Reports, proxy materials and other
information concerning FVL ETF and FVL may be inspected at the offices of the
AMEX, 86 Trinity Place, New York, New York 10006.
- 25 -
For more information on the characteristics of the Reorganization Shares,
please see the FVL 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 FVL ETF of all of the assets of FVL solely
(except to the extent cash payments are made in lieu of fractional
shares) in exchange for Creation Units representing Reorganization
Shares and the assumption by FVL ETF of all of the liabilities of FVL,
followed by the distribution by FVL to its shareholders of
Reorganization Shares in complete liquidation of FVL, all pursuant to
the Plan, constitutes a reorganization within the meaning of Section
368(a) of the Code, and FVL and FVL ETF 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, FVL will not recognize gain or
loss upon the transfer of FVL's assets to FVL ETF in exchange for
Reorganization Shares, cash in lieu of fractional shares and the
assumption of FVL's liabilities by FVL ETF, and FVL will not recognize
gain or loss upon the distribution to FVL's shareholders of the
Reorganization Shares in liquidation of FVL;
(iii) under Section 354 of the Code, shareholders of FVL will not
recognize gain or loss on the receipt of Reorganization Shares solely
in exchange for FVL shares (except to the extent cash payments are made
in lieu of fractional shares);
(iv) under Section 358 of the Code, the aggregate basis of the
Reorganization Shares received by each shareholder of FVL will be the
same as the aggregate basis of FVL shares exchanged therefor (after
taking into account cash distributed in lieu of fractional shares);
(v) under Section 1223(1) of the Code, the holding period of the
Reorganization Shares received by each FVL shareholder will include the
holding periods of FVL shares exchanged therefor, provided that the FVL
shareholder held the FVL shares at the time of the Reorganization as a
capital asset;
(vi) under Section 1032 of the Code, FVL ETF will not recognize
gain or loss upon the receipt of assets of FVL in exchange for
Reorganization Shares and the assumption by FVL ETF of all of the
liabilities of FVL;
(vii) under Section 362(b) of the Code, the basis of the assets of
FVL transferred to FVL ETF in the Reorganization will be the same in
the hands of FVL ETF as the basis of such assets in the hands of FVL
immediately prior to the transfer;
(viii) under Section 1223(2) of the Code, the holding periods of the
assets of FVL transferred to FVL ETF in the Reorganization in the hands
of FVL ETF will include the periods during which such assets were held
by FVL; and
- 26 -
(ix) FVL ETF will succeed to and take into account the items of
FVL 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 FVL shareholders are not expected to recognize any gain or loss upon
the exchange of their shares in the Reorganization (other than gain attributable
to the cash payments made in lieu of fractional shares), 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 FVL, FVL 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 of FVL.
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 February 28, 2007 and of FVL ETF on a pro forma basis, giving
effect to the proposed acquisition of assets at net asset value as of that
date:(1)
PRO FORMA FVL ETF PRO
FVL FVL ETF ADJUSTMENTS FORMA COMBINED
NET ASSETS:
Common Shares $286,688,845 $0 $0 $286,688,845
Total Net Assets $286,688.845 $0 $0 $286,688,845
SHARES OUTSTANDING:
Common Shares 17,490,000 0 0 17,490,000
NET ASSET VALUE PER SHARE:
Common Shares $16.39 $0 $0 $16.39
<FN>
(1) Assumes the Reorganization had been consummated on February 28, 2007, and is
for information purposes only. No assurance can be given as to how many
shares of FVL ETF will be received by the shareholders of FVL on the date
the Reorganization takes place, and the foregoing should not be relied upon
to reflect the number of shares of FVL ETF that actually will be received on
or after such date.
</FN>
THE BOARD OF TRUSTEES OF FVL, INCLUDING THE INDEPENDENT TRUSTEES,
UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS OF FVL VOTE TO APPROVE THE
REORGANIZATION BY VOTING FOR APPROVAL OF THE PLAN.
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ADDITIONAL INFORMATION
INVESTMENT ADVISER AND ADMINISTRATOR. First Trust Advisors L.P., 1001
Warrenville Road, Suite 300, Lisle, Illinois 60532, serves as FVL's investment
adviser.
PFPC acts as FVL's transfer agent, 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. PFPC Trust Company, 301 Bellevue Parkway, Wilmington, Delaware 19809, is
the custodian of the assets of FVL.
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 FVL AND FVL 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 FVL's shares. According to
the Schedule 13G filed with the SEC on January 10, 2007, by Doliver Capital
Advisors, Inc. ("Doliver"), Doliver does not have sole voting power with respect
to the FVL shares it beneficially owns, but does share power to dispose or to
direct the disposition of the shares beneficially owned. Neither First Trust nor
FVL have any knowledge regarding the identities of the ultimate beneficiaries of
these shares.
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY OWNED PERCENTAGE OF OWNERSHIP
Doliver Capital Advisors, Inc. 1,897,300 10.8%
6363 Woodway, Suite 963
Houston, Texas 77057
As of December 31, 2006, the Trustees and executive officers as a group
beneficially owned 9,612 shares of FVL, which is less than 1% of FVL's
outstanding shares. No shares of FVL ETF are outstanding.
SHAREHOLDER PROPOSALS. FVL's By-Laws require that in order to nominate
persons to FVL'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 FVL, which notice must be delivered
to or mailed and received at FVL'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 not scheduled to be held within a period 30 days
before or more than 30 days after the first anniversary date of the annual
meeting for the preceding year, for notice by the shareholder to be timely it
must be so delivered by the later of the close of business on the later of the
- 28 -
45th day prior to such annual meeting or the 10th day following the day on which
public announcement or disclosure of the date of such annual meeting is first
made by FVL. The shareholder's notice must contain information specified in
FVL's By-Laws. The date of the release of this combined Prospectus/Proxy
Statement is expected to be on or about March 21, 2007.
As a general matter, FVL ETF does not intend to hold regular annual or
special meetings of its shareholders. To be considered for presentation at FVL'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, no later than the time specified in
Rule14a-8. However, if the Reorganization is approved, FVL will be dissolved and
will no longer hold shareholder meetings.
Timely submission of a proposal does not mean that such proposal will be
included in FVL's proxy statement.
SHAREHOLDER COMMUNICATIONS. Shareholders of FVL who want to communicate
with the Board of Trustees or any individual Trustee should write to the
attention of FVL's 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 FVL 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 FVL is December 31. The fiscal year
end for FVL ETF is December 31.
ANNUAL REPORT DELIVERY. Annual reports will be sent to shareholders of
record of FVL ETF or, if the Reorganization is not approved, to shareholders of
FVL 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 FVL 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 of FVL entitled to be present and to vote
at the Meeting will be available at the offices of FVL, 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 FVL to additional expense. The chair of the Meeting
may call for an adjournment of the Meeting to permit further 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.
- 29 -
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
properly come before the Meeting, 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 FVL.
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) 926-7043 WEEKDAYS FROM 9:00 A.M. TO
10:00 P.M. EASTERN TIME.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BECAUSE SHARES OF FVL ETF WILL NOT BE CERTIFICATED, SHAREHOLDERS WHO HOLD FVL
SHARES DIRECTLY AND NOT IN "STREET NAME" THROUGH A BROKER-DEALER 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.
- --------------------------------------------------------------------------------
- 30 -
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") is made as of
this 21st day of March, 2007, 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) 100 Exchange-Traded Fund (the "ACQUIRING FUND"), First
Trust Value Line(R) 100 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") and cash in lieu
of fractional 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 except that cash shall be delivered in lieu of fractional
shares; 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
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Acquired Fund in "Creation Unit" aggregations only ("CREATION UNITS"), meaning
specified blocks of 30,000 Acquiring Fund Shares ("CREATION UNIT AGGREGATIONS").
The Acquired Fund directly or through an agent will distribute the Acquiring
Fund Shares received by the Acquired Fund pro rata to the Acquired Fund
shareholders of record determined as of the Valuation Time (as defined in
Section 2.1) (the "ACQUIRED FUND SHAREHOLDERS"). 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"). Notwithstanding anything to the contrary herein, Acquired Fund
Shareholders who own fractional Acquired Fund Shares shall receive an amount in
cash equal to the net asset value of the fractional Acquiring Fund Shares at the
Closing in lieu of receiving fractional Acquiring Fund Shares.
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 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 Acquired Fund
Shareholders as of the Valuation Time. Notwithstanding anything to the contrary
herein, fractional Acquiring Fund Shares will not be issued to the Acquired Fund
Shareholders. If the calculation of the pro rata distribution amount of
Acquiring Fund Shares to any Acquired Fund Shareholder results in fractional
shares, such Acquired Fund Shareholder will receive an amount in cash equal to
the net asset value of the fractional Acquiring Fund Shares at the Closing. 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, as defined in
Section 3.1, 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 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.
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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 30,000 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.
ARTICLE 3. CLOSING AND CLOSING DATE
Section 3.1 The Closing of the transactions contemplated by this Agreement
shall be on June 22, 2007, or such other 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 5:00 p.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
A-4
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 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 common 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 the 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 its 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
A-5
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 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 December 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 December 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
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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 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 shareholders of the Acquired Fund, this Agreement will
constitute a valid and binding obligation of the Acquired Fund, enforceable in
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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 any national securities exchange or the
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
(o) The Registration Statement referred to in Section 5.7,
only 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 its 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;
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(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 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, 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 January 17, 2007, 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,
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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 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 any national securities exchange or 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;
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(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 Trust and 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.
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 in this Agreement
are accurate.
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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 this Agreement and 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
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, the 1934 Act
and 1940 Act, and such of the state securities laws as may be necessary 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 advisable in order
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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 as provided in Section 3.6 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 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.
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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 Fund is a separate series of the Acquiring Trust and
has been duly designated in accordance with applicable provisions of the
Acquiring Trust's Declaration of Trust;
(c) 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;
(d) 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;
(e) 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
(f) 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.
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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% of
average daily net assets 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.
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:
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(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 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 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 and the assumption of the
Acquired Fund liabilities by the Acquiring Fund 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.
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,
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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 referred to in Section 5.7 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 (except to the extent cash
payments are made in lieu of fractional shares) 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, cash in lieu of fractional shares and the assumption of the Acquired
Fund liabilities by Acquiring Fund, and Acquired Fund 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 (except to the extent
cash payments are made in lieu of fractional 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 (after taking into account the cash distributed
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in lieu of fractional shares); (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 Trust, on behalf of 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 Trust or the Acquiring Fund of any of their representations,
warranties, covenants or agreements set forth in this Agreement.
Section 9.2 The Acquired Fund agrees to indemnify and hold harmless the
Acquiring Trust and 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 Fund, the Acquiring Trust or any of the Acquiring
Trust's Board members or officers may become subject, insofar as any such loss,
claim, damage, liability or expense (or actions with respect thereto) arises out
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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 Trust, on behalf of 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 June 30, 2007, unless such
date is extended by mutual agreement of the parties, or (iii) by either party if
the other party or the Acquiring Fund 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 Trust on behalf 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-19
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 Board members, 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-20
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.
[Remainder of page left intentionally
blank. Signature page follows.]
A-21
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) 100
EXCHANGE-TRADED FUND
/s/ W. Scott Jardine /s/ James A. Bowen
- ------------------------------- ---------------------------------------
Secretary By: James A. Bowen
Its: President
Attest: FIRST TRUST VALUE LINE(R) 100 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
EXHIBIT B
FURTHER DISCLOSURE REGARDING FVL
PER SHARE PRICE DATA. For FVL, 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
2007
First Quarter (through 02/28/07) 16.82 14.78 17.19 15.89 -1.04% -8.62%
2006
First Quarter 16.77 15.79 18.83 17.52 -8.29% -11.45%
Second Quarter 17.79 14.17 19.92 14.88 -3.14% -13.13%
Third Quarter 15.45 14.10 16.78 14.81 -3.06% -8.37%
Fourth Quarter 15.95 14.55 17.13 15.78 -5.86% -9.76%
2005
First Quarter 16.67 15.38 18.62 16.88 -6.03% -12.06%
Second Quarter 15.77 14.63 17.96 16.32 -7.27% -14.34%
Third Quarter 16.59 15.42 19.17 17.85 -12.15% -14.56%
Fourth Quarter 17.82 15.35 20.04 17.13 -8.97% -14.79%
2004
First Quarter 17.92 16.01 17.58 16.05 4.73% -1.59%
Second Quarter 17.75 14.18 17.72 15.58 1.79% -10.04%
Third Quarter 15.30 13.58 16.95 14.96 -4.29% -10.48%
Fourth Quarter 17.10 14.86 18.31 16.14 -5.26% -9.75%
2003
Second Quarter (Fund Inception 06/13/03) 16.09 15.50 14.33 13.70 16.79% 8.16%
Third Quarter 15.40 14.05 15.71 13.90 9.25% -5.70%
Fourth Quarter 16.55 14.40 17.13 15.22 -0.72% -11.27%
FVL's common shares have historically traded at an amount less than their
net asset value.
As of February 28, 2007, FVL's net asset value was $16.39 per share, and
the closing price of its shares on the AMEX was $16.22 per share (reflecting a
1.04% discount). Recently FVL'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 FVL's shares have tended to trade is likely to return to more
typical levels. The discount level of FVL shares at the time of the
Reorganization cannot be predicted.
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APPENDIX I
CURRENT FUND PROSPECTUS FOR FVL ETF
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[GRAPHIC OMITTED] [LOGO OMITTED] FIRST TRUST
ADVISORS L.P.
FIRST TRUST VALUE LINE(R) 100
EXCHANGE-TRADED FUND
March 21, 2007
Front Cover
[BLANK INSIDE FRONT COVER]
FIRST TRUST VALUE LINE(R) 100
EXCHANGE-TRADED FUND
PROSPECTUS
March 21, 2007
First Trust Value Line(R) 100 Exchange-Traded Fund (the "Fund") is a series of a
registered management investment company that is offering its shares (the
"Shares") through this Prospectus.
The Shares list and trade on the American Stock Exchange ("AMEX"), subject to
notice of issuance, under the ticker symbol "FVL," 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 Value Line(R) 100 Index.
Except when aggregated in Creation Units, the Shares 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.
Page 1
Table of Contents
Introduction--First Trust Value Line(R) 100 Exchange-Traded Fund........... 3
Who Should Invest in the Fund.............................................. 3
Tax Efficient Product Structure............................................ 3
Investment Objective, Strategies and Risks................................. 3
Additional Investment Strategies........................................... 8
Additional Risks of Investing in the Fund.................................. 9
Fund Organization.......................................................... 10
Management of the Fund..................................................... 10
How to Buy and Sell Shares................................................. 11
Creations, Redemptions and Transaction Fees................................ 12
Dividends, Distributions and Taxes......................................... 14
Federal Tax Matters........................................................ 14
Distribution Plan.......................................................... 16
Net Asset Value............................................................ 17
Fund Service Providers..................................................... 18
Disclaimers................................................................ 18
Additional Index Information............................................... 19
Other Information.......................................................... 20
Page 2
Introduction--
First Trust Value Line(R) 100 Exchange-Traded 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) 100 Index (the "Index"). First Trust Advisors L.P. ("First Trust")
is the investment adviser for 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) 100 Index (Symbol: VLFVL).
Principal Investment Strategies
The Fund will normally invest at least 90% of its total assets in common stocks
that comprise the Index. The Index is designed to objectively identify and
select 100 stocks ranked #1 by Value Line, Inc.(R) ("Value Line(R)") in the
Value Line(R) Timeliness(TM) Ranking System (the "Ranking System").
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
Page 3
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 investment 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, sponsored and maintained by Value Line(R), is an equal-dollar
weighted index comprised of 100 U.S. exchange-listed securities of companies
that are ranked #1 by the Ranking System. Value Line(R) reconstitutes the Index
on a monthly basis to match any changes in those stocks ranked #1 by the Ranking
System. Value Line(R) removes from the Index those stocks that are no longer
ranked #1 in the Ranking System and replaces such stocks with any newly added
stocks. The Index will be rebalanced on or about the last Friday of each
calendar quarter so that each stock will be equally weighted as of such date.
The inception date of the Index was January 16, 2007. The Ranking System was
introduced in its present form in 1965. Each week, Value Line(R) screens a wide
array of data, using a series of proprietary calculations, such as long-term
earnings and price trends, recent company earnings and price performance and
earnings relative to expectations, to assign a Timeliness(TM) rank to each of
the approximately 1,700 stocks in the Value Line(R) universe, representing more
than 90 industries, from #1 (highest) to #5 (lowest) based on their expected
price performance relative to the other stocks in the universe over the
following 6 to 12 months. At any one time, only 100 stocks are ranked #1 in the
Ranking System.
The Index divisor was initially determined to yield a benchmark value of 1000.00
at the close of trading on January 16, 2007. The Fund will make changes to its
portfolio holdings on a monthly basis to replicate changes made by Value Line(R)
in the composition of the Index. 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's(R) updated rankings are released weekly on
its website at www.valueline.com.
See "Additional Index Information" for additional information regarding the
Index.
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, Shares of the
Fund or stocks in general may fall in value. Shares are subject to market
Page 4
fluctuations caused by such factors as economic, political, regulatory or market
developments, changes in interest rates 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 portfolio 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 companies.
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 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's(R) 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.
Page 5
Non-U.S. Securities Risk. The Fund may invest in the securities of issuers
domiciled in jurisdictions other than the United States and such stocks may be
denominated in currencies other than the U.S. dollar. These securities are
either in the form of American Depositary Receipts ("ADRs") or are directly
listed on a U.S. securities exchange. Investments in securities of non-U.S.
issuers involve special risks not presented by investments in securities of U.S.
issuers, including: (i) there may be less publicly available information about
non-U.S. issuers or markets due to less rigorous disclosure or accounting
standards or regulatory practices; (ii) many non-U.S. markets are smaller, less
liquid and more volatile than the U.S. market; (iii) potential adverse effects
of fluctuations in currency exchange rates or controls on the value of the
Fund's investments; (iv) the economies of non-U.S. countries may grow at slower
rates than expected or may experience a downturn or recession; (v) the impact of
economic, political, social or diplomatic events; (vi) certain non-U.S.
countries may impose restrictions on the ability of non-U.S. issuers to make
payments of principal and interest to investors located in the U.S. due to
blockage of non-U.S. currency exchanges or otherwise; and (vii) withholding and
other non-U.S. taxes may decrease the Fund's return.
Issuer-Specific Changes Risk. The value of an individual security or particular
type of security can be more volatile than the market as a whole and can perform
differently from the value of the market as a whole.
See "Additional Risks of Investing in the Fund" for additional information
regarding risks.
How the Fund Has Performed
The Fund has not yet commenced operations and, therefore, does not have a
performance history.
Page 6
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 0.28%
Total Annual Fund Operating Expenses 0.78%
Fee Waivers and Expense Reimbursement(6) 0.08%
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. (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.
(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 public issuance of Shares of the Fund. 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 at any time if it would result in the Fund's
expenses exceeding 0.70% of average net assets per year.
* 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 customary 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 5 Years 10 Years
$ 72 $233 $417 $951
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
Page 7
institutional investors that have entered into authorized participant agreements
with respect to purchases and redemptions of Creation Units, 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 Transaction 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 $8,151 if the
Creation Unit is redeemed after one year, $24,273 if the Creation Unit is
redeemed after three years, $42,714 if the Creation Unit is redeemed after five
years and $96,071 if the Creation Unit is redeemed after ten 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 Transaction Fee, Redemption Transaction 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 is a
non-fundamental policy that may be changed by the Board of Trustees of the Trust
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 non-U.S. issuers listed on
any national exchange, including depositary receipts that represent non-U.S.
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 8
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 9
Fund Organization
The Fund is a series of First Trust Exchange-Traded Fund (the "Trust"), an
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund is treated as a separate 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.
First Trust serves as adviser or sub-adviser for 22 mutual fund portfolios, 13
exchange-traded fund portfolios and 12 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 president of sales at BondWave LLC from May 2004
through August 2005, an account executive for Mina Capital Management LLC and
Page 10
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 Shares of 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 semi-annual report to
Shareholders for the period ending June 30, 2007.
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 Shares
of the Fund. 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 at any time if it would result in
the Fund's expenses exceeding 0.70% of average net assets per year.
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 should expect to incur customary brokerage commissions,
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
trades under the AMEX symbol "FVL," subject to notice of issuance. 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
Page 11
companies, clearing corporations and other institutions 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.
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 AP
agreement with the Fund's principal underwriter and the Fund's 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 NAV 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 NSCC (the
Page 12
"Clearing Process") or (ii) a participant of DTC ("DTC Participant") that has
entered into an AP agreement with the Fund's principal underwriter and the
Fund's 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 NAV 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 purchase 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 (i.e., 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 NAV of Shares being redeemed as next determined after
receipt by the Fund's 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 AP. Investors
should expect to incur customary brokerage commissions in connection with
assembling a sufficient number of Shares of the Fund to constitute a redeemable
Creation Unit. For more details, see "Creation and Redemption of Creation Unit
Aggregations" in the SAI.
Page 13
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 Fund's 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 NAV per Share. In the case of custom orders,
as further described in the SAI, the order must be received by the Fund's
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
semi-annually. 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 customary 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 non-U.S. 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 14
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 15
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.
Non-U.S. Tax Credit
If your Fund invests in any non-U.S. securities, the tax statement that you
receive may include an item showing non-U.S. 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.
Non-U.S. Investors
If you are a non-U.S. 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. federal income taxes, including withholding taxes,
subject to certain exceptions described below. However, distributions received
by a non-U.S. 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 non-U.S. 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 16
The Board 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 NAV per Share. All valuations
are subject to review by the Board 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 non-U.S. 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 date, 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 the Fund for which reliable market quotations are not readily
available or if a valuation is deemed inappropriate will be determined by the
Board 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 the Fund's 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 17
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.
The Board has approved an agreement with PFPC, Inc., 301 Bellevue Parkway,
Wilmington, Delaware 19809, whereby PFPC, Inc. will provide certain
administrative services to the Trust in connection with the Board's meetings and
other related matters.
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) 100 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) 100 Index, 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 100 INDEX (THE "INDEX"), WHICH IS COMPOSED BY VLPI
WITHOUT REGARD TO FTA, THE FIRST TRUST VALUE LINE 100 EXCHANGE-TRADED FUND (THE
"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
Page 18
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 IS LICENSED TO FTA. THE 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 100
stocks that Value Line(R) gives a Timeliness(TM) Ranking of #1 using the Value
Line(R) Timeliness(TM) Ranking System. Value Line's(R) updated rankings are
released weekly on its website at www.valueline.com.
The Value Line(R) Timeliness(TM) Ranking System
The Value Line(R) Timeliness(TM) Ranking System was introduced in its present
form in 1965. Each week Value Line(R) assigns a Timeliness(TM) rank to each of
the approximately 1,700 stocks in the Value Line(R) universe. As of March 9,
2007, approximately 24% of the stocks in the Value Line(R) universe were large
cap companies, approximately 31% were mid cap companies and approximately 45%
were small cap companies. The market capitalization of the approximately 1,700
stocks in the Value Line(R) universe ranged from $34,970,000 to $407,446,500,000
as of this same date. The average market capitalization of the stocks in the
Value Line(R) universe was $11,883,720,000 and the median market capitalization
was $2,932,290,000 as of this same date. Approximately 92% of the companies in
the Value Line(R) universe were domiciled in the United States as of this same
date.
According to information published by Value Line(R), the Value Line(R)
Timeliness(TM) rank measures the expected price performance relative to the
other stocks in the universe over the following six to 12 months. According to
reports published by Value Line,(R) the most important factor in determining the
Timeliness(TM) Rank is earnings growth. Other factors considered, according to
Value Line,(R) include: (i) a company's earnings growth over the past ten years
in relation to the recent price performance of the company's stock relative to
all of the approximately 1,700 stocks in the Value Line(R) universe; (ii) a
company's recent quarterly earnings performance; and (iii) a company's reporting
of results that are significantly better or worse than market expectations.
Value Line(R) combines these factors to determine the Timeliness(TM) Rank. All
data are known and actual.
Stocks ranked #1 (highest) and #2 (above average) are likely to outpace the
year-ahead market. Those ranked #4 (below average) and #5 (lowest) are not
expected to outperform most stocks over the next 12 months. Stocks ranked #3
Page 19
(average) will probably advance or decline with the market in the year ahead.
Please note that because Value Line(R) assigns a Timeliness(TM) rank weekly and
the Index reconstitutes monthly, the Index may, for the remainder of any given
monthly period, contain securities that are no longer ranked #1 for
Timeliness.(TM)
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 Investment Survey,(R) Value Line's(R) 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 Investment
Survey(R) 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; and (iii) the stock's float must be more
than 10 million shares.
The Fund will make changes to its portfolio holdings on a monthly basis to
replicate changes made by Value Line(R) in the composition of the Index.
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 will seek to engage a replacement index. However, if that
proves to be impracticable, the Board will take whatever action it deems to be
in the best interests of the Fund. The Board will also take whatever actions 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.
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
Page 20
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 a broker-dealer
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 available with respect to transactions on a
national securities exchange, a trading facility or an alternative trading
system.
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, D.C., or call the
Securities and Exchange Commission at (202) 551-5850 for information on the
Public Reference 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, D.C. 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) 100
EXCHANGE-TRADED 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) 100 EXCHANGE-TRADED FUND,
A SERIES OF THE
FIRST TRUST EXCHANGE-TRADED FUND
1001 WARRENVILLE ROAD, SUITE 300
LISLE, ILLINOIS 60532
TELEPHONE: (630) 241-4141
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Prospectus/Proxy Statement dated March 21, 2007 of
First Trust Value Line(R) 100 Exchange-Traded Fund (the "Fund") for use in
connection with the Special Meeting of Shareholders (the "Special Meeting") of
First Trust Value Line(R) 100 Fund, to be held on May 17, 2007. At the Special
Meeting, shareholders of First Trust Value Line(R) 100 Fund will be asked to
approve the reorganization of First Trust Value Line(R) 100 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 March 21, 2007 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) 100 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 March 21, 2007.
TABLE OF CONTENTS
FUND HISTORY.................................................................1
DESCRIPTION OF THE FUND AND ITS INVESTMENT OBJECTIVES AND RISKS..............1
MANAGEMENT OF THE FUND.......................................................1
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES..........................1
INVESTMENT ADVISORY AND OTHER SERVICES.......................................1
PORTFOLIO MANAGERS...........................................................2
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) 100
Exchange-Traded Fund Statement of Additional
Information dated March 21, 2007.
APPENDIX II -- First Trust Value Line(R) 100 Fund
Financial Statements dated December 31, 2006
as included in its 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) 100 Exchange-Traded Fund, a series of the First Trust Exchange-Traded
Fund (the "Trust"). 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 INVESTMENT OBJECTIVES 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 Trust'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 Trust's trustees and officers, identifying those who are interested persons
of the Trust, 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 Trust 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.
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,
Distributor, Transfer Agent and Fund Accounting Agent, Index Provider and
Exchange" 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) 100 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) 100 Fund is
2
being reorganized with and into the newly created Fund, which does not have
material assets or liabilities.
APPENDIX I -- First Trust Value Line(R) 100 Exchange-Traded Fund Statement
of Additional Information dated March 21, 2007.
STATEMENT OF ADDITIONAL INFORMATION
INVESTMENT COMPANY ACT FILE NO. 811-21774
FIRST TRUST EXCHANGE-TRADED FUND
FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND
DATED MARCH 21, 2007
This Statement of Additional Information is not a Prospectus. It should
be read in conjunction with the Prospectus dated March 21, 2007 (the
"Prospectus") for the First Trust Value Line(R) 100 Exchange-Traded Fund, 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 FUND...............................1
EXCHANGE LISTING AND TRADING................................................2
INVESTMENT OBJECTIVE AND POLICIES...........................................3
INVESTMENT STRATEGIES.......................................................4
SUBLICENSE AGREEMENT.......................................................14
INVESTMENT RISKS...........................................................14
FUND MANAGEMENT............................................................18
ACCOUNTS MANAGED BY INVESTMENT COMMITTEE...................................28
BROKERAGE ALLOCATIONS......................................................28
CUSTODIAN, DISTRIBUTOR, TRANSFER AGENT, FUND ACCOUNTING AGENT, INDEX
PROVIDER AND EXCHANGE..............................................30
ADDITIONAL INFORMATION.....................................................33
PROXY VOTING POLICIES AND PROCEDURES.......................................34
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS......................35
FEDERAL TAX MATTERS........................................................45
DETERMINATION OF NAV.......................................................51
DIVIDENDS AND DISTRIBUTIONS................................................52
MISCELLANEOUS INFORMATION..................................................53
GENERAL DESCRIPTION OF THE TRUST AND THE FUND
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 13 series, including the First Trust
Value Line(R) 100 Exchange-Traded Fund (the "Fund"), a diversified series. This
Statement of Additional Information relates only to the Fund. The shares of the
Fund 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 (the "Board of Trustees" or the
"Trustees") 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 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 (the "Declaration") provides that by
becoming a shareholder of the Fund, 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 the Fund, and ownership of Fund Shares
may be disclosed by the 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 the Fund without first requesting that the Trustees
bring such suit unless there would be irreparable injury to the 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.
- 1 -
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
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 the Fund itself was unable to meet its obligations.
The Fund is managed by First Trust Advisors L.P. (the "Adviser" or
"First Trust").
The Fund offers and issues 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"). 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. 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 Securities and Exchange Commission
(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 the Fund will continue to be met. The AMEX
may, but is not required to, remove the Shares of the Fund from listing if (i)
following the initial 12-month period beginning at the commencement of trading
of the Fund, there are fewer than 50 beneficial owners of the Shares of the 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 the Fund from listing and
trading upon termination of the Fund.
- 2 -
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.
The Fund reserves 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 the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus describes the investment objective and policies of the
Fund. The following supplements the information contained in the Prospectus
concerning the investment objective and policies of the Fund.
The Fund is 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 the Fund:
(1) The Fund may not issue senior securities, except as
permitted under the 1940 Act.
(2) The Fund may not borrow money, except that the 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 the Fund's total assets (including the
amount borrowed), less the Fund's liabilities (other than borrowings).
(3) The Fund will not underwrite the securities of other
issuers except to the extent the 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) The 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 the Fund
from purchasing or selling securities or other instruments backed by
real estate or of issuers engaged in real estate activities).
(5) The Fund may not make loans to other persons, except
through (i) the purchase of debt securities permissible under the
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 the Fund if, as a result, the
aggregate of such loans would exceed 33-1/3% of the value of the Fund's
total assets.
(6) The 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 the Fund from purchasing or
- 3 -
selling options, futures contracts, forward contracts or other
derivative instruments, or from investing in securities or other
instruments backed by physical commodities).
(7) The Fund may not 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 the 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 Fund may not be changed
without the affirmative vote of the majority of the outstanding voting
securities of the 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 the Fund, such matter shall be deemed to have been effectively acted upon
with respect to the Fund if a majority of the outstanding voting securities of
the 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 of the Trust 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 Fund is 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, the Fund will invest at least 90% of its
total assets in common stocks that comprise the Value Line(R) 100 Index (the
"Index"). Fund Shareholders are entitled to 60 days' notice prior to any change
in this non-fundamental investment policy.
TYPES OF INVESTMENTS
Warrants: The Fund may invest in warrants. Warrants acquired by the
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 volatile in price. The 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.
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Delayed-Delivery Transactions: The 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 the
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
the Fund's other assets. While securities purchased in delayed-delivery
transactions may be sold prior to the settlement date, the Fund intends to
purchase such securities with the purpose of actually acquiring them. At the
time the 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 Fund does not believe that net
asset value will be adversely affected by purchases of securities in
delayed-delivery transactions.
The 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, the 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: The 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, the Fund will not acquire
illiquid securities if, as a result, such securities would comprise more than
15% of the value of the 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 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, the
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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 the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the 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, the 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, the Fund will
take such steps as is deemed advisable, if any, to protect liquidity.
Money Market Funds: The Fund may invest in shares of money market funds
to the extent permitted by the 1940 Act.
Temporary Investments: The 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.
(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 the Fund's 15% restriction on investments in illiquid
securities. Pursuant to the certificate of deposit, the issuer agrees
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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 the
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 the 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 the
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 the Fund
to invest temporarily available cash. The 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 the Fund may invest. In addition, the
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 the 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, the Fund could incur a
loss of both principal and interest. The 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 the Fund. If the seller were
to be subject to a federal bankruptcy proceeding, the ability of the
Fund to liquidate the collateral could be delayed or impaired because
of certain provisions of the bankruptcy laws.
(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.
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(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 the Fund and a corporation.
There is no secondary market for the notes. However, they are
redeemable by the 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
the Fund's liquidity might be impaired if the corporation were unable
to pay principal and interest on demand. The 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
The Fund buys and sells portfolio securities in the normal course of
its investment activities. The proportion of the Fund's investment portfolio
that is sold and replaced with new securities during a year is known as the
Fund's portfolio turnover rate. A turnover rate of 100% would occur, for
example, if the Fund sold and replaced securities valued at 100% of its net
assets within one year. Active trading would result in the payment by the Fund
of increased brokerage costs and expenses.
HEDGING STRATEGIES
General Description of Hedging Strategies
The Fund may engage in hedging activities. First Trust may cause the
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 the 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 the 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 the 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
Trading Commission (the "CFTC") and various state regulatory authorities. In
addition, the Fund's ability to use hedging instruments may be limited by tax
considerations.
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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. The 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 the Fund's total
assets. In addition, the 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 the 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
The 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
The 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 stock 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.
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
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Options Exchange, the New York Stock Exchange ("NYSE"), the AMEX, the NYSE Arca,
and the Philadelphia Stock Exchange.
The Fund's use of stock index options is subject to certain risks.
Successful use by the 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, the 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
the Fund. Inasmuch as the Fund's securities will not duplicate the components of
an index, the correlation will not be perfect. Consequently, the 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 the
Fund's securities, which would result in a loss on both such securities and the
options on stock indices acquired by the 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 the 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
the Fund is unable to close out a call option on securities that it has written
before the option is exercised, the Fund may be required to purchase the
optioned securities in order to satisfy its obligation under the option to
deliver such securities. If the 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
attempted hedging. Options transactions may result in significantly higher
transaction costs and portfolio turnover for the Fund.
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Futures Contracts
The 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 the Fund or for other purposes
permissible under the Commodity Exchange Act (the "CEA"). The 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. The 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 Chicago Board of Trade 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
the Fund will be able to enter into an offsetting transaction with respect to a
particular Futures Contract at a particular time. If the Fund is not able to
enter into an offsetting transaction, the 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 the 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 the Fund's open
positions in Futures Contracts. A margin deposit is intended to ensure the
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
may range upward from less than 5% of the value of the Futures Contract being
traded.
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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 the Fund. In computing daily net asset value, the
Fund will mark to market the current value of its open Futures Contracts. The
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, the 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 investors 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. The Fund would continue to
be required to meet margin requirements until the position is closed, possibly
resulting in a decline in the 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.
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Options on Futures
The 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.
The 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 the 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 the
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, the Fund will retain the full
amount of the option premium which provides a partial hedge against any decline
that may have occurred in the Fund's holdings of securities. If the price when
the option is exercised is above the exercise price, however, the 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 the 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 the Fund intends to
acquire.
As with investments in Futures Contracts, the 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 the Fund. The Fund will earmark or set aside in a segregated
account at the 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 the 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. The 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
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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
The Fund has entered into a sublicense agreement (the "Sublicense
Agreement") with First Trust that grants the Fund a non-exclusive and
non-transferable sublicense to use certain intellectual property of Value
Line(R) Publishing, Inc. ("Value Line(R)") in connection with the issuance,
distribution, marketing and/or promotion of the Fund. Pursuant to the Sublicense
Agreement, the Fund has agreed to be bound by certain provisions of a product
license agreement by and between Value Line(R) 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 the Fund. Under the Sublicense Agreement, the Fund will reimburse First
Trust for its costs associated with the Product License Agreement.
INVESTMENT RISKS
Overview
An investment in the Fund 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 the Fund may decline. The 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 the 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.
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Shareholders of common stocks of the type held by the Fund have a right
to receive dividends only when and if, and in the amounts, declared by the
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 the Fund will fluctuate over the life of the Fund and may be more
or less than the price at which they were purchased by the Fund. The equity
securities held in the 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 the 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 FUND
Liquidity
Whether or not the equity securities in the 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 at which the equity securities
are held in the 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 the 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
- 15 -
general market or economic developments than large cap companies. Some of these
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 the 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
The Fund relies on a license from Value Line(R) to First Trust that
permits the Fund to use the Value Line(R) 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 use of 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.
Non-U.S. Securities Risk
The Fund may invest in the securities of issuers domiciled in
jurisdictions other than the United States and such stocks may be denominated in
currencies other than the U.S. dollar. These securities are either in the form
of American Depositary Receipts ("ADRs") or are directly listed on a U.S.
securities exchange. Investments in securities of non-U.S. issuers involve
special risks not presented by investments in securities of U.S. issuers,
including: (i) there may be less publicly available information about non-U.S.
issuers or markets due to less rigorous disclosure or accounting standards or
regulatory practices; (ii) many non-U.S. markets are smaller, less liquid and
more volatile than the U.S. market; (iii) potential adverse effects of
fluctuations in currency exchange rates or controls on the value of the Fund's
investments; (iv) the economies of non-U.S. countries may grow at slower rates
than expected or may experience a downturn or recession; (v) the impact of
economic, political, social or diplomatic events; (vi) certain non-U.S.
countries may impose restrictions on the ability of non-U.S. issuers to make
payments of principal and interest to investors located in the U.S. due to
blockage of non-U.S. currency exchanges or otherwise; and (vii) withholding and
other non-U.S. taxes may decrease the Fund's return.
- 16 -
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 the 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 the Fund and its shareholders and is consistent with
the 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 the 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
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, the 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 the Fund. The 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
- 17 -
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. The 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 the 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 the 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 the Fund sell a portfolio security at a disadvantageous
time. The 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 derivatives position can be sold or closed out at a time and
price that is favorable to the 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.
FUND MANAGEMENT
The general supervision of the duties performed for the Fund 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 Trustees who are not
officers or employees of First Trust or any of its affiliates ("Independent
- 18 -
Trustees"). The Trustees set broad policies for the Fund, 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
PORTFOLIOS
IN THE FIRST
TERM OF OFFICE TRUST FUND OTHER
AND YEAR FIRST COMPLEX TRUSTEESHIPS OR
NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
Trustee who is an
Interested Person
of the Trust
- ---------------------
James A. Bowen(1) President, o Indefinite President, First 33 Portfolios Trustee of
1001 Warrenville Road, Chairman of the term Trust Portfolios and Wheaton College
Suite 300 Board, Chief First Trust Advisors;
Lisle, IL 60532 Executive Officer Chairman of the Board
D.O.B.: 09/55 and Trustee o 2005 of Directors, Bond
Wave, LLC and
Stonebridge Advisors LLC
Trustees who are not
Interested Persons of
the Trust
- ---------------------
Richard E. Erickson Trustee o Indefinite Physician, President 33 Portfolios None
c/o First Trust Advisors term Wheaton Orthopedics;
L.P. Co-Owner, Co-Director
1001 Warrenville Road, Sports Med Center for
Suite 300 o 2005 Fitness; Limited
Lisle, IL 60532 Partner Gundersen
D.O.B.: 04/51 Real Estate
Partnership
Thomas R. Kadlec Trustee o Indefinite President, ADM 33 Portfolios None
c/o First Trust Advisors term Derivatives, Inc.
L.P. (May 2005 to
1001 Warrenville Road, o 2005 Present); Vice
Suite 300 President, Chief
Lisle, IL 60532 Financial Officer
D.O.B.: 11/57 (1990 to 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 o Indefinite President Hibs 25 Portfolios None
c/o First Trust Advisors term 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)
- 19 -
NUMBER OF
PORTFOLIOS
IN THE FIRST
TERM OF OFFICE TRUST FUND OTHER
AND YEAR FIRST COMPLEX TRUSTEESHIPS OR
NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
Niel B. Nielson Trustee o Indefinite President (2002 to 33 Portfolios Director of Good Nesw
c/o First Trust Advisors term Present), Covenant Publishers - Crossway
L.P. College; Associate Books; Covenant
1001 Warrenville Road, o 2005 Pastor (1997 to Transport Inc.
Suite 300 2002), College Church
Lisle, IL 60532 in Wheaton
D.O.B.: 03/54
Officers of the Trust
- ---------------------
Mark R. Bradley Treasurer, o Indefinite Chief Financial N/A N/A
1001 Warrenville Road, Controller, Chief term Officer, Managing
Suite 300 Financial Officer Director, First Trust
Lisle, IL 60532 and Chief Portfolios and First
D.O.B.: 11/57 Accounting Officer o 2005 Trust Advisors; Chief
Financial Officer,
Bond Wave LLC and
Stonebridge Advisors LLC
Kelley Christensen Vice President o Indefinite Assistant Vice President N/A N/A
1001 Warrenville Road, term of First Trust
Suite 300 Portfolios and First
Lisle, IL 60532 o 2006 Trust Advisors
D.O.B.: 09/70
James M. Dykas Assistant o Indefinite Vice President, First N/A N/A
1001 Warrenville Road, Treasurer term Trust Portfolios L.P.
Suite 300 (January 2005 to
Lisle, IL 60532 o 2005 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 o Indefinite General Counsel, N/A N/A
1001 Warrenville Road, Chief Compliance term First Trust
Suite 300 Officer Portfolios and First
Lisle, IL 60532 o 2005 Trust Advisors;
D.O.B.: 05/60 Secretary, Bond Wave,
LLC and Stonebridge
Advisors LLC
Daniel J. Lindquist Vice President o Indefinite Senior Vice N/A N/A
1001 Warrenville Road, term President, First
Suite 300 Trust Advisors, L.P.;
Lisle, IL 60532 o 2005 Senior Vice President,
D.O.B.: 02/70 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.
Kristi A. Maher Assistant o Indefinite Assistant General N/A N/A
1001 Warrenville Road, Secretary term Counsel (March 2004
Suite 300 to Present), First
Lisle, IL 60532 o 2005 Trust Portfolios and
D.O.B.: 12/66 First Trust Advisors
L.P.; Associate (1995
to March 2004),
Chapman and Cutler LLP
- 20 -
NUMBER OF
PORTFOLIOS
IN THE FIRST
TERM OF OFFICE TRUST FUND OTHER
AND YEAR FIRST COMPLEX TRUSTEESHIPS OR
NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
Roger Testin Vice President o Indefinite Senior Vice N/A N/A
1001 Warrenville Road, term President, First
Suite 300 Trust Advisors L.P.
Lisle, IL 60532 o 2005 (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
Stan Ueland Assistant Vice o Indefinite Vice President of First N/A N/A
1001 Warrenville Road, President term Trust and First
Suite 300 Trust Portfolios
Lisle, IL 60532 o 2005 (August 2005 to
D.O.B.: 11/70 Present), Vice
President, BondWave 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)
- --------------------
<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 Fund.
</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 three
meetings.
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 Fund. To
submit a recommendation for nomination as a candidate for a position on the
Board, Shareholders of the Fund shall mail such recommendation to W. Scott
Jardine at the Fund's 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,
- 21 -
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 the 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 Nominating and Governance
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 chairman 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 five meetings.
The Valuation Committee is responsible for the oversight of the pricing
procedures of the Fund. Messrs. Erickson, Kadlec, Nielson and Keith are members
of the Valuation Committee. During the last fiscal year, the Valuation Committee
held four meetings.
The Audit Committee is responsible for overseeing the Fund's 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 six 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 8
portfolios, and Messrs. Erickson Nielson, Kadlec, Keith and Bowen are trustees
of the First Trust Value Line(R) 100 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, 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, closed-end funds
advised by First Trust. 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
(other than Stan Ueland and Roger Testin) hold the same positions with the First
Defined Portfolio Fund, LLC, First Trust Value Line(R) 100 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, 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
- 22 -
Complex") as they hold with the Trust. Mr. Testin, Vice President of the Trust,
serves in the same position for First Trust Value Line(R) 100 Fund and First
Defined Portfolio Fund, LLC.
Effective January 1, 2007, the Independent Trustees are paid an annual
retainer of $10,000 by each investment company in the First Trust Fund Complex
up to a total of 14 investment companies (the "Trustee Compensation I") and an
annual retainer of $7,500 by each subsequent investment company added to the
First Trust Fund Complex (the "Trustee Compensation II," and together with
Trustee Compensation I, the "Aggregate Trustee Compensation"). The Aggregate
Trustee Compensation is divided equally among each of the investment companies
in the First Trust Fund Complex. No additional meeting fees are paid in
connection with board or committee meetings. Trustees are also reimbursed for
travel and out-of-pocket expenses in connection with all meetings.
Additionally, Mr. Kadlec is paid annual compensation of $10,000 to
serve as the Lead Trustee and Niel B. Nielson is paid annual compensation of
$5,000 to serve as the chairman of the Audit Committee of each of the investment
companies in the First Trust Fund Complex. Such additional compensation to
Messrs. Kadlec and Nielson is paid by the investment companies in the First
Trust Fund Complex and equally divided among those investment companies.
The following table sets forth the estimated compensation to be paid by
the Fund projected during the Fund's full fiscal year to each of the Trustees,
and the estimated total compensation to be paid to each of the Trustees by the
First Trust Fund Complex for a full year. The Trust has no retirement or pension
plans. The officers and Trustee who are "interested persons" as designated above
serve without any compensation from the Fund.
ESTIMATED AGGREGATE ESTIMATED TOTAL COMPENSATION
COMPENSATION FROM THE FROM THE FIRST TRUST FUND
NAME OF TRUSTEE FUND (1) COMPLEX(2)
James A. Bowen $0 $0
Richard E. Erickson $1,243 $140,000
Thomas R. Kadlec $1,332 $150,000
Niel B. Nielson $1,288 $140,000
Robert F. Keith $1,243 $130,000
- --------------------
<FN>
(1) The compensation estimated to be paid by the Fund to the Trustees for the
full fiscal year for services to the Fund.
(2) The total estimated compensation to be paid to Messrs. Erickson, Kadlec
and Nielson, Independent Trustees, from the Fund and the investment
companies in the First Trust Fund Complex for a full calendar year is
based on estimated compensation to be paid to 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 8 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
- 23
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. 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 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, the First Trust Strategic High Income Fund II, the First Trust
Tax-Advantaged Preferred Income Fund and the First Trust/Aberdeen Emerging
Opportunity Fund.
</FN>
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 the Fund and in other funds overseen by
the Trustees in the Fund Complex as of December 31, 2006:
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN
DOLLAR RANGE OF ALL REGISTERED INVESTMENT COMPANIES
EQUITY SECURITIES OVERSEEN BY TRUSTEE IN THE
TRUSTEE IN THE FUND FIRST TRUST FUND COMPLEX
Mr. Bowen None Over $100,000
Mr. Erickson None $50,001-$100,000
Mr. Kadlec None Over $100,000
Mr. Keith None Over $100,000
Mr. Nielson None $50,001 - $100,000
As of the date of the 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 the Fund or any person directly or indirectly
controlling, controlled by, or under common control with an investment adviser
or principal underwriter of the Fund.
As of the date of the SAI, the officers and Trustees of the Trust, in
the aggregate, owned less than 1% of the Shares of the Fund.
As of the date of the SAI, no person owned of record, or is known by
the Trust to own of record, beneficially 5% or more of the Shares of the Fund.
The Board of Trustees of the Trust, including the Independent Trustees,
unanimously approved the Investment Management Agreement (the "Agreement") for
the Fund for an initial two-year term at a meeting held on January 17, 2007. The
- 24 -
Board of Trustees determined that the Agreement is in the best interests of the
Fund 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 Fund. 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, the Fund has agreed to pay an annual management fee equal to 0.50% of
its average daily net assets.
The 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.
Until two years after the initial public issuance of Fund Shares, 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 until two years after the
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 at any time if
it would result in the Fund's expenses exceeding 0.70% of average net assets.
Under the 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 Agreement
continues until two years after the initial issuance of Fund Shares 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 the Fund by the Board, including
a majority of the Independent Trustees, or by vote of the holders of a majority
of the Fund's outstanding voting securities on 60 days' written notice to First
Trust, or by First Trust on 60 days' written notice to the Fund.
First Trust is located at 1001 Warrenville Road, Lisle, Illinois 60532.
- 25 -
Investment Committee. The Investment Committee of First Trust is
primarily responsible for the day-to-day management of the 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 Since 2004 Senior Vice President, First
Trust and 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 Since 1991 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 Since 1994 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 Since 1997 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 Since 2001 Senior Vice President of First
Trust and First Trust
Portfolios L.P. (August 2001
to present); Analyst, Dolan
Capital Management (1998 to
2001)
- 26 -
POSITION WITH LENGTH OF SERVICE PRINCIPAL OCCUPATION
NAME FIRST TRUST WITH FIRST TRUST DURING PAST FIVE YEARS
Stan Ueland Vice President Since 2005 Vice President of First Trust
and First Trust Portfolios
(August 2005 to present); Vice
President; BondWave LLC (May
2004 - August 2005); Account
Executive, Mina Capital
Management LLC and Samaritan
Asset Management LLC (January
2003 - May 2004); Sales
Consultant, Oracle Corporation
(January 1997 - 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 the 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 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 Fund's portfolios. In addition, Mr. Carey, Mr. Erickson,
Mr. Lindquist and Mr. McGarel also have an indirect ownership stake in the firm
and will therefore receive their allocable share of ownership-related
distributions.
- 27 -
The Investment Committee manages the investment vehicles with the
number of accounts and assets, as of December 31, 2006, set forth in the table
below:
ACCOUNTS MANAGED BY INVESTMENT COMMITTEE
REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES
NUMBER OF ACCOUNTS NUMBER OF ACCOUNTS
INVESTMENT COMMITTEE MEMBER ($ ASSETS) ($ ASSETS)
Robert F. Carey 37 ($2,680,560,650) 2 ($73,595,630)
Roger F. Testin 37 ($2,680,560,650) 2 ($73,595,630)
Jon C. Erickson 37 ($2,680,560,650) 2 ($73,595,630)
David G. McGarel 37 ($2,680,560,650) 2 ($73,595,630)
Daniel J. Lindquist 37 ($2,680,560,650) 2 ($73,595,630)
Stan Ueland 10 ($709,673,350) 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 Fund's
investments and the investments of the other accounts managed by the Investment
Committee. However, because the investment strategy of the 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 the
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 the Fund and other accounts managed by the Investment
Committee.
BROKERAGE ALLOCATIONS
First Trust is responsible for decisions to buy and sell securities for
the Fund and for the placement of the 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 the 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 the 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. The 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,
- 28 -
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.
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 the Fund with benefits by supplementing the research otherwise
available to the Fund. The 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 the Fund to First Trust under the 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 the 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 the Fund. First Trust believes it is not possible to measure
separately the benefits from research services to each of the accounts
(including the 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 the
Fund will not be disproportionate to the benefits received by the Fund on a
continuing basis. First Trust seeks to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities by the
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 the Fund.
In making such allocations between the 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.
- 29 -
Administrator. The Bank of New York ("BONY") serves as Administrator
for the Fund. Its principal address is 101 Barclay St., New York, NY 10286.
The Trustees approved an agreement with PFPC, Inc., 301 Bellevue
Parkway, Wilmington, DE 19809, whereby PFPC, Inc. will provide certain board
administrative services to the Trust.
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
Fund. BONY will generally assist in all aspects of the Trust's and the Fund's
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 Fund has 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 Fund pursuant to a Custody
Agreement, holds the Fund's assets. BONY also serves as transfer agent of the
Fund 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 Fund for its
out-of-pocket expenses.
Distributor. First Trust Portfolios L.P. is the Distributor of the
Fund's 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
- 30 -
for sale by the Fund 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 Fund may
reimburse the Distributor up to a maximum annual rate of 0.25% its average daily
net assets.
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
Fund's method of distribution. However, no such fee is currently charged to the
Fund, 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
Fund 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 Fund. 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 that the Fund seeks to track is compiled by
Value Line(R).
Value Line(R) is not affiliated with the Fund or with First Trust. The
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") IS VLPI'S LICENSING TO FTA OF CERTAIN VLPI TRADEMARKS AND
TRADE NAMES AND THE VALUE LINE(R) 100 INDEX (THE "INDEX"), WHICH IS COMPOSED BY
VLPI WITHOUT REGARD TO FTA, THE FIRST TRUST VALUE LINE 100 EXCHANGE-TRADED FUND
- 31 -
(THE "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 IS LICENSED TO FIRST TRUST ADVISORS L.P. THE FIRST TRUST
VALUE LINE(R) 100 EXCHANGE-TRADED 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 the Index Calculation and License
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 Fund in connection with the Fund are that the AMEX lists
the Shares of the Fund pursuant to its Listing Agreement with the Trust. The
AMEX is not responsible for and has not participated in the determination of
- 32 -
pricing or the timing of the issuance or sale of the Shares of the Fund or in
the determination or calculation of the net asset value of the Fund. The AMEX
has no obligation or liability in connection with the administration, marketing
or trading of the 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 Fund
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 Fund
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
- 33 -
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 Fund 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 Fund are voted consistently and solely in the
best economic interests of the Fund.
A senior member of First Trust is responsible for oversight of the
Fund's 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 Fund.
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 Fund. 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.
- 34 -
Information regarding how the Fund votes 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 Fund's 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 Fund's
portfolio holdings with the SEC on Form N-Q. Form N-Q for the Fund is available
on the SEC's website at http://www.sec.gov. The Fund's Form N-Q may also be
reviewed and copied at the SEC's Public Reference Room in Washington, D.C. and
information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330. The Trust'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 the Fund's
portfolio holdings. The Board of Trustees of the Trust must approve all material
amendments to this policy. The Fund's portfolio holdings are publicly
disseminated each day the 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 the 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 Fund 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 Fund 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 Fund generally
consists of the in-kind deposit of a designated portfolio of equity
- 35 -
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 the 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 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 the Fund.
Such Fund Deposit is applicable, subject to any adjustments as
described below, in order to effect creations of Creation Unit Aggregations of
the 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 the Fund changes as rebalancing adjustments and corporate
action events are reflected within the Fund from time to time by First Trust
with a view to the investment objective of the 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 the 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.
- 36 -
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 the 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 the 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 Fund 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 the Fund have to be
placed by the investor's broker through an Authorized Participant that has
- 37 -
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 the 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
- 38 -
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 the 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 Fund 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
- 39 -
delivery of Creation Unit Aggregations so created will occur no later than the
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 with respect to the 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 the 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 the 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 the Fund will be
$500. The Maximum Creation/Redemption Transaction Fee for the 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 the Fund through the
Transfer Agent and only on a Business Day. The Fund will not redeem Shares in
- 40 -
amounts less than Creation Unit Aggregations. Beneficial owners must accumulate
enough 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 the 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 the 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 the
Fund or determination of the 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 be incurred by the Fund. An
additional variable charge for cash redemptions (when cash redemptions are
available or specified) for the 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 the 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
- 41 -
properly followed; such order will be effected based on the NAV of the 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 the 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 the 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 in this SAI 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 the 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 the 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 the Fund are
delivered through DTC to the Custodian by 11:00 a.m. the following Business Day
pursuant to a properly submitted redemption order.
- 42 -
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 the 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 the 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 the Fund's
brokerage and other transaction costs associated with the disposition of Fund
Securities). The 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 the 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.
- 43 -
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.
- 44 -
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 Fund. 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 Fund. 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 the Fund. This may not be sufficient
for prospective investors to use for the purpose of avoiding penalties under
federal tax law.
- 45 -
As with any investment, prospective investors should seek advice based
on their individual circumstances from their own tax advisor.
The Fund intends 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, the 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 the 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 the 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 the 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 Fund 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 Fund intends to distribute to its shareholders, at least annually,
substantially all of its investment company taxable income and net capital gain.
If the Fund retains 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, the 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, the 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 the Fund in October, November or December with a record date in such a month
and paid by the 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.
- 46 -
If the Fund failed to qualify as a regulated investment company or
failed to satisfy the 90% distribution requirement in any taxable year, the 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 the Fund's investment company taxable income are
generally taxable to a shareholder as ordinary income to the extent of the
Fund's earnings and profits, whether paid in cash or reinvested in additional
shares. However, certain ordinary income distributions received from the 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 the 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
the Fund itself. Dividends received by the 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. The 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. The 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 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 domestic corporations may be designated by the
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 the Fund on the reinvestment date. A distribution of an amount in
excess of the 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.
- 47 -
SALE OR EXCHANGE OF FUND SHARES
Upon the sale or other disposition of Shares of the 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 or Creation Units for
securities 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 the 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 the 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.
- 48 -
FUTURES CONTRACTS AND OPTIONS
The 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 the 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 the 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 the 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 the 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
The 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 the 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
the Fund is "effectively connected" with a U.S. trade or business carried on by
the shareholder.
Income Not Effectively Connected. If the income from the 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 the
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
- 49 -
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, the
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
the 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 the 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 the 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 the Fund beginning after December 31, 2004 and
before January 1, 2008.
Income Effectively Connected. If the income from the 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 the Fund which are designated as
undistributed capital gains and any gains realized upon the sale or exchange of
shares of the 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 the 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 the Fund.
- 50 -
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 the Fund is determined by dividing the total value
of the securities and other assets, less liabilities, by the total number of
Shares outstanding. The Fund's NAV may not be calculated on days during which
the Fund receives no orders to purchase shares and no shares are tendered for
redemption. In determining NAV, portfolio securities for the Fund for which
accurate market quotations are readily available will be valued by the Fund
accounting agent as follows:
(1) Common stocks and other equity securities listed on any
national or foreign exchange will be valued at the last sale price on
the exchange or system in which they are principally traded on the
valuation date and at the official closing price for Securities listed
on NASDAQ(R). If there are no transactions on the valuation day,
securities traded principally on an exchange 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.
- 51 -
(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 the 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.
The Fund may suspend the right of redemption for the 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 the 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."
- 52 -
General Policies. Dividends from net investment income, if any, are
declared and paid semi-annually. 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 the Fund as a RIC or to avoid imposition
of income or excise taxes on undistributed income.
Dividends and other distributions of 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 the 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 the 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 the 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,
111 South Wacker Drive, Chicago, Illinois 60601, serves as the Fund's
independent registered public accounting firm. The firm audits the Fund's
financial statements and performs other related audit services.
- 53 -
APPENDIX II -- First Trust Value Line(R) 100 Fund Financial Statements
dated December 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) 100 FUND
ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2006
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) 100 FUND (FVL)
DECEMBER 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
Board of Trustees and Officers........................................... 20
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 actual results, performance or achievements of
the First Trust Value Line(R) 100 Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
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 commentary by Robert F. Carey, the Chief Investment Officer of the Advisor,
you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by Mr. Bowen and Mr.
Carey 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) 100 FUND (FVL)
ANNUAL REPORT
DECEMBER 31, 2006
Dear Shareholders:
We are pleased to present this annual report of the First Trust Value Line(R)
100 Fund (the "Fund"). For the fiscal year ended December 31, 2006, the Fund
posted gains in both market value and net asset value ("NAV"). An overview of
the portfolio returns and composition of the Fund's portfolio are presented in
this annual report for the fiscal year ended December 31, 2006.
The Fund's objective is to provide capital appreciation. It seeks to outperform
the S&P 500 Index by adhering to a disciplined strategy of investing in a
diversified portfolio of the 100 common stocks ranked #1 in the Value Line(R)
TimelinessTM Ranking System. Every week, the Value Line(R) TimelinessTM Ranking
System screens millions of data items and, using a proprietary series of
calculations, ranks approximately 1,700 stocks for probable performance relative
to each other during the next six to twelve months.
On February 6, 2007, the Fund's Board of Trustees (the "Board") announced that
it had voted to approve the reorganization of the Fund into First Trust Value
Line(R) 100 Exchange-Traded Fund ("FVLEF"), an exchange-traded fund and newly
created, diversified series of First Trust Exchange-Traded Fund. FVLEF is
managed by First Trust Advisors L.P. ("First Trust" or the "Advisor"), the same
investment advisor that manages the Fund, and will seek to replicate (before
fees and expenses) the performance of an equity index called the Value Line(R)
100 Index (the "Index"), which is sponsored and maintained by Value Line(R). The
stock selection methodology of the Index is similar to the Fund's investment
strategy. The reorganization, which is subject to approval by the shareholders
of the Fund, is expected to be a tax-free transaction in which the assets of the
Fund would be transferred to, and the liabilities of the Fund would be assumed
by, FVLEF in exchange for shares of FVLEF. The Board and the Fund's management
believe the reorganization has the potential to significantly reduce or
eliminate the discount to net asset value at which shares of the Fund have
historically traded while maintaining the Fund's disciplined investment
strategy. A meeting of the Fund's shareholders is expected to be scheduled for a
date on or before May 18, 2007. Assuming approval by the Fund's shareholders,
the reorganization is anticipated to take place no later than June 25, 2007.
First Trust serves as investment advisor or portfolio supervisor to investment
portfolios with approximately $28 billion in assets which it managed or
supervised as of December 31, 2006. We value our relationship with our investors
and appreciate the opportunity to assist you in achieving your financial goals.
Sincerely,
/S/ JAMES A. BOWEN
James A. Bowen
President of the First Trust Value Line(R) 100 Fund
February 21, 2007
Page 1
[GRAPHIC OMITTED]
ROBERT CAREY PIC
ROBERT F. CAREY, CFA
SENIOR VICE PRESIDENT, 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.
- --------------------------------------------------------------------------------
A COMMENTARY ON THE FIRST TRUST VALUE LINE(R) 100 FUND
- --------------------------------------------------------------------------------
OVERVIEW
The First Trust Value Line(R) 100 Fund ("FVL" or the "Fund") posted a market
price total return of 5.9% for the fiscal year ended December 31, 2006. Its net
asset value ("NAV") total return was 4.6%. Over the same one-year period, the
S&P 500 (large-cap) Index, S&P 400 (mid-cap) Index, and S&P 600 (small-cap)
Index gained 15.6%, 10.3% and 15.1%, respectively. The Fund distributed $0.546
per share in short-term capital gains and $1.333 per share in long-term capital
gains during the calendar year 2006. FVL had an adjusted beta of 1.17, according
to Bloomberg, at the period ended December 31, 2006. Beta is a measurement of
portfolio volatility and indicates that the Fund's portfolio is only slightly
more volatile than the overall market (S&P 500), which by definition has a beta
of 1.0. FVL traded at a 7.9% discount to its NAV on December 31, 2006.
Following is a review of the portfolio strategy and composition, investment
environment and performance results of FVL for the fiscal year ended December
31, 2006.
INVESTMENT STRATEGY
The Fund adheres to a disciplined strategy of investing in the 100 common stocks
ranked #1 in the Value Line(R) Timeliness(TM) Ranking System. The Value Line(R)
Timeliness(TM) Ranking System was introduced in 1965. Each week, Value Line(R)
applies its Timeliness(TM) Ranking System to screen a wide array of data using a
series of proprietary calculations to rank each of the approximately 1,700
stocks in the Value Line(R) universe based on their expected price performance
relative to the other stocks in the universe over the next 6 to 12 months. Only
100 stocks are given Value Line(R)'s #1 ranking for Timeliness(TM) at any given
time. Each week the Fund makes portfolio adjustments to match changes initiated
by Value Line(R) to the 100 stocks ranked #1 for Timeliness(TM). When a new
stock attains a #1 ranking, it is added to the Fund's portfolio and stocks no
longer ranked #1 are removed from the Fund's portfolio. During the 12-month
period ended December 31, 2006, 4.4 stocks on average were changed in a given
week, essentially the same as in 2005. The Fund rebalances its holdings on a
quarterly basis so that each stock is equally weighted on the rebalancing date.
DISTRIBUTIONS
On June 15, 2006, the Fund distributed capital gains of $0.826 per share, which
represented $0.546 per share in short-term capital gains and $0.28 per share in
long-term capital gains. On December 29, 2006, the Fund distributed capital
gains of $1.053 per share, which represented long-term capital gains.
COMPOSITION OF THE FUND
The Fund had a large-cap orientation to its portfolio holdings as of December
31, 2006 as 50 of its 100 holdings were classified as large-cap stocks. These
stocks comprised approximately 50% of the Fund's portfolio. The breakdown of the
100 stocks in the Fund's portfolio as of December 31, 2006, was as follows:
Large-Cap stocks (50), Mid-Cap stocks (31) and Small-Cap stocks (19). The Fund's
energy shares drastically trailed the benchmark sector which turned out to be
the biggest drag on the portfolio's overall performance. Additionally,
financials were underweighted as compared to the benchmark and so the impact the
return had in the Fund's portfolio was limited. The breakdown of the 100 stocks
in the Fund's portfolio as of December 31, 2005, was as follows: Large-Cap
stocks (34), Mid-Cap stocks (35) and Small-Cap stocks (31). The average market
capitalization of the issuers of the stocks in the Fund's portfolio in 2006 was
approximately $17.7 billion, up from $13.8 billion at the end of 2005. The
Fund's beta of 1.17 at the period ended December 31, 2006 indicates the Fund's
portfolio is only slightly more volatile than the overall market (S&P 500).
MARKET AND ECONOMIC OVERVIEW
Despite the fact that the housing sector entered into a long-anticipated
correction after several years of being boosted by unusually low interest rates,
on an inflation-adjusted basis, the U.S. economy expanded by 3.3% in 2006 -
which is roughly equal to its 50-year average growth rate. Unlike in previous
business cycles, it is believed that the contraction in housing did not coincide
with dramatic weakness in other sectors of the economy. Personal consumption
expanded by 3.7%, while business fixed investment - spending on plant,
equipment, and software - increased approximately 9%. Exports also increased
about 9% as foreign economic growth increased.
Page 2
- --------------------------------------------------------------------------------
A COMMENTARY ON THE FIRST TRUST VALUE LINE(R) 100 FUND - (CONTINUED)
- --------------------------------------------------------------------------------
Although falling energy prices late in 2006 held the Consumer Price Index
("CPI") to a 2.5% gain, the core CPI, which excludes food and energy prices,
increased 2.6%, the largest increase in five years. The "median CPI", a measure
of underlying inflation calculated by the Federal Reserve Bank of Cleveland,
increased 3.7% in 2006, also the largest gain in five years. Despite some signs
of rising inflationary pressures, bond yields remained low. The 10-year Treasury
bond yield ended 2006 at 4.71%, slightly higher than its year-end 2005 yield of
4.39%, but still well below its 6.04% average yield between the years of 1995
and 1999.
Federal Reserve Board Chairman, Alan Greenspan retired in January 2006
and was succeeded by Ben Bernanke. The Federal Reserve's short-term interest
rate target began 2006 at 4.25%, was boosted in four 25-basis point increments
during the first six months of 2006 and then remained unchanged. The federal
funds rate ended the year at 5.25%, with the futures markets pricing in a small
chance of rate cuts during 2007. However, after strengthening in 2005, the U.S.
dollar fell back to a fresh 9-year low when compared to the Federal Reserve
Board's trade-weighted broad index of world currencies.
As many U.S. stock indices climbed to multi-year highs during 2006, corporate
profits grew strongly as well. As a result, the trailing 12-month P/E ratio for
the S&P 500 fell to 17.4% in December 2006 from 17.9% in December 2005.
Page 3
FIRST TRUST VALUE LINE(R) 100 FUND
PORTFOLIO COMPONENTS+
DECEMBER 31, 2006
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS
Media 7.0%
Chemicals 6.0%
IT Services 5.0%
Semiconductors & Semiconductor Equipment 5.0%
Multiline Retail 5.0%
Electronic Equipment & Instruments 5.0%
Specialty Retail 4.0%
Biotechnology 4.0%
Software 4.0%
Machinery 4.0%
Electrical Equipment 3.0%
Health Care Equipment & Supplies 3.0%
Diversified Telecommunication Services 3.0%
Textiles, Apparel & Luxury Goods 3.0%
Pharmaceuticals 3.0%
Airlines 2.0%
Insurance 2.0%
Commercial Services & Supplies 2.0%
Capital Markets 2.0%
Metals & Mining 2.0%
Communications Equipment 2.0%
Containers & Packaging 2.0%
Internet Software & Services 2.0%
Aerospace & Defense 2.0%
Leisure Equipment & Products 2.0%
Life Sciences Tools & Services 2.0%
Household Durables 2.0%
Computers & Peripherals 1.0%
Personal Products 1.0%
Real Estate Management & Development 1.0%
Internet & Catalog Retail 1.0%
Hotels, Restaurants & Leisure 1.0%
Industrial Conglomerates 1.0%
Commercial Banks 1.0%
Automobiles 1.0%
Office Electronics 1.0%
Food & Staples Retailing 1.0%
Health Care Providers & Services 1.0%
Energy Equipment & Services 1.0%
+ 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) 100 FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 2006
MARKET
SHARES VALUE
- - ------------ ------------
COMMON STOCKS - 99.5%
AEROSPACE & DEFENSE - 2.0%
61,465 Honeywell International Inc..................... $ 2,780,677
34,900 Precision Castparts Corp........................ 2,731,972
----------------
5,512,649
----------------
AIRLINES - 2.0%
92,746 AMR Corp.*...................................... 2,803,712
67,355 Continental Airlines, Inc., Class B*............ 2,778,394
----------------
5,582,106
----------------
AUTOMOBILES - 1.0%
39,140 Harley-Davidson, Inc............................ 2,758,196
----------------
BIOTECHNOLOGY - 4.0%
39,958 Amgen, Inc.*.................................... 2,729,531
56,188 Biogen Idec, Inc.*.............................. 2,763,888
39,796 Cephalon, Inc.*................................. 2,802,036
59,054 Digene Corp.*................................... 2,829,868
----------------
11,125,323
----------------
CAPITAL MARKETS - 2.0%
34,413 Morgan Stanley.................................. 2,802,251
46,506 SEI Investments Company......................... 2,769,897
----------------
5,572,148
----------------
CHEMICALS - 6.0%
38,270 Albemarle Corp.................................. 2,747,786
56,442 E. I. du Pont de Nemours and Company............ 2,749,290
143,514 Hercules, Inc.*................................. 2,771,255
56,650 International Flavors & Fragrances, Inc......... 2,784,914
61,315 OM Group, Inc.*................................. 2,776,343
19,651 Potash Corp. of Saskatchewan, Inc............... 2,819,525
----------------
16,649,113
----------------
COMMERCIAL BANKS - 1.0%
90,048 Synovus Financial Corp.......................... 2,776,180
----------------
COMMERCIAL SERVICES & SUPPLIES - 2.0%
96,514 Kelly Services, Inc., Class A................... 2,793,115
116,511 TeleTech Holdings, Inc.*........................ 2,782,283
----------------
5,575,398
----------------
COMMUNICATIONS EQUIPMENT - 2.0%
101,678 Cisco Systems, Inc.*............................ 2,778,860
21,425 Research In Motion Ltd.*........................ 2,737,687
----------------
5,516,547
----------------
COMPUTERS & PERIPHERALS - 1.0%
33,505 Apple Computer, Inc.*........................... 2,842,564
----------------
See Notes to Financial Statements. Page 5
FIRST TRUST VALUE LINE(R) 100 FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
DECEMBER 31, 2006
MARKET
SHARES VALUE
- ------------- ------------
COMMON STOCKS - CONTINUED
CONTAINERS & PACKAGING - 2.0%
102,149 Rock-Tenn Company, Class A...................... $ 2,769,259
42,300 Sealed Air Corp................................. 2,746,116
----------------
5,515,375
----------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 3.0%
78,750 AT&T, Inc....................................... 2,815,312
45,105 BT Group PLC, SP ADR............................ 2,701,338
331,585 Qwest Communications International Inc.*........ 2,775,366
----------------
8,292,016
----------------
ELECTRICAL EQUIPMENT - 3.0%
53,902 Acuity Brands, Inc.............................. 2,805,060
35,688 Genlyte Group (The), Inc.*...................... 2,787,590
100,491 II-VI, Inc.*.................................... 2,807,719
----------------
8,400,369
----------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 4.9%
106,430 Avnet, Inc.*.................................... 2,717,158
85,177 FLIR Systems, Inc.*............................. 2,711,184
133,566 Newport Corp.*.................................. 2,798,208
188,731 PC Connection, Inc.*............................ 2,798,881
45,848 Rogers Corp.*................................... 2,711,909
----------------
13,737,340
----------------
ENERGY EQUIPMENT & SERVICES - 1.0%
33,521 Core Laboratories N.V.*......................... 2,715,201
----------------
FOOD & STAPLES RETAILING - 1.0%
79,135 Safeway, Inc.................................... 2,734,906
----------------
HEALTH CARE EQUIPMENT & SUPPLIES - 3.0%
93,596 Immucor, Inc.*.................................. 2,735,811
50,393 Stryker Corp.................................... 2,777,158
35,468 Zimmer Holdings, Inc.*.......................... 2,779,982
----------------
8,292,951
----------------
HEALTH CARE PROVIDERS & SERVICES - 1.0%
99,189 AMN Healthcare Services, Inc.*.................. 2,731,665
----------------
HOTELS, RESTAURANTS & LEISURE - 1.0%
48,709 MGM MIRAGE*..................................... 2,793,461
----------------
HOUSEHOLD DURABLES - 1.9%
109,518 Kimball International, Inc., Class B............ 2,661,287
135,205 Tempur-Pedic International, Inc.*............... 2,766,294
----------------
5,427,581
----------------
INDUSTRIAL CONGLOMERATES - 1.0%
123,287 Tredegar Corp................................... 2,787,519
----------------
Page 6 See Notes to Financial Statements.
FIRST TRUST VALUE LINE(R) 100 FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
DECEMBER 31, 2006
MARKET
SHARES VALUE
- ------------- ------------
COMMON STOCKS - CONTINUED
INSURANCE - 2.0%
38,463 American International Group, Inc............... $ 2,756,258
70,043 CNA Financial Corp.*............................ 2,824,134
----------------
5,580,392
----------------
INTERNET SOFTWARE & SERVICES - 2.0%
51,504 Akamai Technologies, Inc.*...................... 2,735,893
189,380 Interwoven, Inc.*............................... 2,778,205
----------------
5,514,098
----------------
INTERNET & CATALOG RETAIL - 1.0%
64,335 Priceline.com, Inc.*............................ 2,805,649
----------------
IT SERVICES - 4.9%
35,986 Cognizant Technology Solutions Corp., Class A*.. 2,776,680
101,304 CSG Systems International, Inc.*................ 2,707,856
139,588 Gartner, Inc.*.................................. 2,762,447
51,112 Infosys Technologies Ltd., SP ADR............... 2,788,671
69,495 Paychex, Inc.................................... 2,747,832
----------------
13,783,486
----------------
LEISURE EQUIPMENT & PRODUCTS - 2.0%
101,528 Hasbro, Inc..................................... 2,766,638
120,458 Mattel, Inc..................................... 2,729,578
----------------
5,496,216
----------------
LIFE SCIENCES TOOLS & SERVICES - 2.0%
69,407 Illumina, Inc.*................................. 2,728,389
56,280 Waters Corp.*................................... 2,756,032
----------------
5,484,421
----------------
MACHINERY - 4.0%
114,146 Kadant Inc.*.................................... 2,782,879
82,130 Lindsay Corp.................................... 2,681,545
47,038 Manitowoc Company (The), Inc.................... 2,795,468
60,454 Robbins & Myers, Inc............................ 2,776,048
----------------
11,035,940
----------------
MEDIA - 7.0%
65,638 Comcast Corp., Special Class A*................. 2,748,919
112,354 DIRECTV Group (The), Inc.*...................... 2,802,109
55,903 E.W. Scripps Company, Class A................... 2,791,796
26,740 Omnicom Group, Inc.............................. 2,795,400
86,055 Shaw Communications, Inc........................ 2,728,804
66,686 Thompson (The) Corp............................. 2,763,468
81,115 Walt Disney (The) Company....................... 2,779,811
----------------
19,410,307
----------------
METALS & MINING - 2.0%
31,030 Allegheny Technologies, Inc..................... 2,813,800
80,711 Brush Engineered Materials, Inc.*............... 2,725,610
----------------
5,539,410
----------------
See Notes to Financial Statements. Page 7
FIRST TRUST VALUE LINE(R) 100 FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
DECEMBER 31, 2006
MARKET
SHARES VALUE
- ------------- ------------
COMMON STOCKS - CONTINUED
MULTILINE RETAIL - 4.9%
120,064 Big Lots, Inc.*................................. $ 2,751,867
34,981 J.C. Penney Company, Inc........................ 2,706,130
39,958 Kohl's Corp.*................................... 2,734,326
56,861 Nordstrom, Inc.................................. 2,805,522
48,329 Target Corp..................................... 2,757,169
----------------
13,755,014
----------------
OFFICE ELECTRONICS - 1.0%
161,706 Xerox Corp.*.................................... 2,740,917
----------------
PERSONAL PRODUCTS - 1.0%
67,936 NBTY, Inc.*..................................... 2,824,100
----------------
PHARMACEUTICALS - 3.0%
54,392 Forest Laboratories, Inc.*...................... 2,752,235
116,069 Schering-Plough Corp............................ 2,743,871
44,457 Sepracor, Inc.*................................. 2,737,662
----------------
8,233,768
----------------
REAL ESTATE MANAGEMENT
& DEVELOPMENT - 1.0%
84,576 CB Richard Ellis Group, Inc., Class A*.......... 2,807,923
----------------
SEMICONDUCTORS
& SEMICONDUCTOR EQUIPMENT - 4.9%
89,391 ATMI, Inc.*..................................... 2,729,107
178,579 Integrated Device Technology, Inc.*............. 2,764,403
80,054 Novellus Systems, Inc.*......................... 2,755,459
73,558 NVIDIA Corp.*................................... 2,722,382
61,506 Varian Semiconductor Equipment .................
Associates, Inc.* .......................... 2,799,753
----------------
13,771,104
----------------
SOFTWARE - 4.0%
72,608 Amdocs Ltd.*.................................... 2,813,560
84,524 BMC Software, Inc.*............................. 2,721,673
128,640 Jack Henry & Associates, Inc.................... 2,752,896
160,763 Oracle Corp.*................................... 2,755,478
----------------
11,043,607
----------------
SPECIALTY RETAIL - 4.0%
90,492 American Eagle Outfitters, Inc.................. 2,824,255
55,983 Dick's Sporting Goods, Inc.*.................... 2,742,607
45,726 Guess? Inc.*.................................... 2,900,400
55,220 OfficeMax, Inc.................................. 2,741,673
----------------
11,208,935
----------------
Page 8 See Notes to Financial Statements.
FIRST TRUST VALUE LINE(R) 100 FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
DECEMBER 31, 2006
MARKET
SHARES VALUE
- ------------- ------------
COMMON STOCKS - CONTINUED
TEXTILES, APPAREL & LUXURY GOODS - 3.0%
64,081 Coach, Inc.*.................................... $ 2,752,920
54,901 Phillips-Van Heusen Corp........................ 2,754,383
77,948 Steven Madden, Ltd.*............................ 2,735,195
----------------
8,242,498
----------------
TOTAL COMMON STOCKS............................. 276,616,393
----------------
(Cost $248,516,129)
TOTAL INVESTMENTS - 99.5%....................... 276,616,393
(Cost $248,516,129)**
NET OTHER ASSETS & LIABILITIES - 0.5%........... 1,285,470
----------------
NET ASSETS - 100.0%............................. $ 277,901,863
================
- -------------------------------------------------------------------------------
* Non-income producing security.
** Aggregate cost for federal income tax purposes is $248,867,981.
ADR American Depository Receipt
See Notes to Financial Statements. Page 9
FIRST TRUST VALUE LINE(R) 100 FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2006
ASSETS:
Investments, at value
(Cost $248,516,129)............................................................................. $ 276,616,393
Cash .............................................................................................. 1,479,680
Prepaid expenses................................................................................... 14,836
Receivables:
Dividends..................................................................................... 177,531
Interest...................................................................................... 14,613
--------------
Total Assets.................................................................................. 278,303,053
--------------
LIABILITIES:
Payables:
Investment advisory fees...................................................................... 159,571
Licensing fees................................................................................ 74,767
Audit and legal fees.......................................................................... 71,700
Printing fees................................................................................. 59,678
Administrative fees........................................................................... 23,037
Transfer agent fees........................................................................... 2,888
Custodian fees................................................................................ 7,771
Accrued expenses and other liabilities............................................................. 1,778
--------------
Total Liabilities............................................................................. 401,190
--------------
NET ASSETS......................................................................................... $ 277,901,863
==============
NET ASSETS CONSIST OF:
Accumulated net realized loss on investments sold ................................................ $ (224,353)
Net unrealized appreciation of investments ........................................................ 28,100,264
Par value.......................................................................................... 174,900
Paid-in capital.................................................................................... 249,851,052
--------------
Net Assets......................................................................................... $ 277,901,863
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)............................... $ 15.89
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)........ 17,490,000
==============
Page 10 See Notes to Financial Statements.
FIRST TRUST VALUE LINE(R) 100 FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2006
INVESTMENT INCOME:
Dividends.......................................................................................... $ 1,616,763
Interest........................................................................................... 66,339
-------------
Total investment income....................................................................... 1,683,102
-------------
EXPENSES:
Investment advisory fees........................................................................... 1,936,973
Licensing fees..................................................................................... 308,869
Administration fees................................................................................ 278,397
Audit and legal fees............................................................................... 102,020
Printing fees...................................................................................... 81,477
Custodian fees..................................................................................... 48,650
Trustees' fees and expenses........................................................................ 41,385
Transfer agent fees................................................................................ 35,371
Other.............................................................................................. 49,473
-------------
Total expenses................................................................................ 2,882,615
-------------
NET INVESTMENT LOSS................................................................................ (1,199,513)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments............................................................ 20,416,167
-------------
Net change in unrealized appreciation (depreciation) on investments ............................... (8,499,843)
-------------
Net realized and unrealized gain (loss)............................................................ 11,916,324
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................... $ 10,716,811
=============
See Notes to Financial Statements. Page 11
FIRST TRUST VALUE LINE(R) 100 FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
12/31/2006 12/31/2005
--------------- --------------
OPERATIONS:
Net investment loss................................................................... $ (1,199,513) $ (1,352,309)
Net realized gain (loss) on investments .............................................. 20,416,167 56,759,952
Net change in unrealized appreciation (depreciation) on investments .................. (8,499,843) (21,808,712)
--------------- --------------
Net increase in net assets resulting from operations.................................. 10,716,811 33,598,931
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains.................................................................... (32,863,710) (49,181,880)
--------------- --------------
Total distributions to shareholders................................................... (32,863,710) (49,181,880)
--------------- --------------
Net decrease in net assets............................................................ (22,146,899) (15,582,949)
NET ASSETS:
Beginning of year..................................................................... 300,048,762 315,631,711
--------------- --------------
End of year........................................................................... $ 277,901,863 $ 300,048,762
=============== ==============
Undistributed net investment income at end of year.................................... $ -- $ --
=============== ==============
Page 12 See Notes to Financial Statements.
FIRST TRUST VALUE LINE(R) 100 FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
12/31/2006 12/31/2005 12/31/2004 12/31/2003*
----------- ----------- ----------- -----------
Net asset value, beginning of period............... $ 17.16 $ 18.05 $ 16.61 $ 14.33(c)
---------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss................................ (0.07) (0.08) (0.09) (0.06)
Net realized and unrealized gain on investments.... 0.68 2.00 2.19 2.37
---------- ----------- ----------- -----------
Total from investment operations................... 0.61 1.92 2.10 2.31
---------- ----------- ----------- -----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net realized gains.................................. (1.88) (2.81) (0.66) --
---------- ----------- ----------- -----------
Total from distributions............................ (1.88) (2.81) (0.66) --
---------- ----------- ----------- -----------
Common Share offering costs charged to paid-in capital -- -- 0.00# (0.03)
---------- ----------- ----------- -----------
Net asset value, end of period..................... $ 15.89 $ 17.16 $ 18.05 $ 16.61
========== =========== =========== ===========
Market value, end of period......................... $ 14.64 $ 15.62 $ 17.10 $ 16.49
========== =========== =========== ===========
TOTAL RETURN BASED ON NET ASSET VALUE (A)+.......... 4.59% 11.86% 13.05% 15.91%
========== =========== =========== ===========
TOTAL RETURN BASED ON MARKET VALUE (B)+............. 5.87% 7.48% 7.88% 9.93%
========== =========== =========== ===========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .............. $ 277,902 $ 300,049 $ 315,632 $ 290,464
Ratio of total expenses to average net assets ...... 0.97% 0.95% 0.97% 1.02%**
Ratio of net investment loss to average net assets . (0.40)% (0.43)% (0.52)% (0.75)%**
Portfolio turnover rate ............................ 234% 240% 220% 144%
<FN>
- ---------------------------------------------------
* The Fund commenced operations on June 12, 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.
(c) Net of sales load of $0.675 per Common Share on initial offering.
+ Total return is not annualized for periods less than one year.
</FN>
See Notes to Financial Statements. Page 13
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) 100 FUND
DECEMBER 31, 2006
1. FUND DESCRIPTION
First Trust Value Line(R) 100 Fund (the "Fund") is a diversified, closed-end
management investment company organized as a MassachusettS business trust on
April 18, 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 FVL on the American Stock Exchange.
The Fund's investment objective is to provide capital appreciation. The Fund
seeks to outperform the Standard & Poor's 500 Composite Stock Price Index (the
"S&P 500 Index") by adhering to a disciplined strategy of investing in a
diversified portfolio of the 100 common stocks ranked #1 in Value Line's(R)
Timeliness(TM) Ranking System. There can be no assurance that the Fund's
investment objectiVe will be achieved.
The Value Line(R) Timeliness(TM) Ranking System was introduced in its present
form in 1965. Each week, Value Line(R) Publishing, Inc. ("Value Line(R) ")
screens a wide array of data, using a series of proprietary calculations, to
rank each of the approximately 1,700 stocks in the Value Line(R) universe from
#1 (highest) to #5 (lowest) based on their expected price performance relative
to the other stocks in the universe over the following six to twelve months. At
any one time, only 100 stocks are ranked #1 in the Value Line(R) Timeliness(TM)
Ranking System.
The Fund invests substantially all, but in no event less than 80%, of its net
assets in the stocks that are ranked #1 in the Value Line(R) Timeliness(TM)
Ranking System. Each week, the Fund will make portfolio adjustments to match the
changes made to the stocks ranKed #1 for TimelinessTM by Value Line(R). The Fund
also rebalances its holdings on a quarterly basis so that each stock is equally
weighteD on the rebalancing date.
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.
Page 14
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) 100 FUND
DECEMBER 31, 2006
C. FOREIGN CURRENCY:
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investment securities and items of income and expense are
translated on the respective dates of such transactions. Net realized foreign
currency gains and losses include the effect of changes in exchange rates
between trade date and settlement date on investment security transactions,
foreign currency transactions and interest and dividends received.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income and net realized long-term and short-term
capital gains of the Fund will be paid at least annually or as the Board of
Trustees may determine from time to time. 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 realized capital gains are determined in
accordance with the 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 December 31, 2006, resulting in book and tax
accounting differences, have been reclassified at year end to reflect a decrease
to accumulated net investment loss by $1,199,513 and a decrease in accumulated
net realized gain on investments sold by $1,199,513. Net assets were not
affected by this reclassification.
The tax character of distributions paid during the fiscal years ended December
31, 2006 and December 31, 2005 was as follows:
Distributions paid from:
2006 2005
Ordinary Income.......................... $ 12,931,124 $ 31,551,960
Long-Term Capital Gains.................. 19,932,586 17,629,920
As of December 31, 2006, the components of distributable earnings on a tax basis
were as follows:
Undistributed Ordinary Income............ $ 127,500
Net Unrealized Appreciation.............. 27,748,412
E. 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.
F. EXPENSES:
The Fund pays all expenses directly related to its operations. First Trust
Advisors L.P. ("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) Timeliness(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 0.10% of the Fund's average
gross daily assets during such calendar quarter. 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.
G. NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes."
This pronouncement provides guidance on the recognition, measurement,
classification, and disclosures related to uncertain tax positions, along with
any related interest and penalties. FIN 48 is effective for fiscal years
beginning after December 15, 2006. Management is currently evaluating the
implications of FIN 48 and its impact on the financial statements which has not
yet been determined.
Page 15
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) 100 FUND
DECEMBER 31, 2006
In addition, in September 2006, Statement of Financial Accounting Standards No.
157 Fair Value Measurements ("SFAS 157") was issued by the FASB and is effective
for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the impact the
adoption of SFAS 157 could have on the Fund's financial statement disclosures.
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for 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 paid each Trustee of the Fund who is not an officer or employee of
First Trust or any of its affiliates (the "Independent Trustees") an annual
retainer of $10,000, which includes compensation for all board and committee
meetings. Trustees are also reimbursed for travel and out-of-pocket expenses in
connection with all meetings.
Effective June 12, 2006, the Board of Trustees unanimously appointed Robert F.
Keith to the Board of Trustees and as a member to the Fund's Audit Committee,
Valuation Committee and Nominating and Governance Committee.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investment
securities, excluding short-term investments, for the year ended December 31,
2006, were $697,436,500 and $731,573,291, respectively.
As of December 31, 2006, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $30,437,356
and the aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $2,688,944.
5. SUBSEQUENT EVENTS
The Board of Trustees of the Fund adopted a compensation policy pursuant to
which, effective January 1, 2007, the Independent Trustees are paid an annual
retainer of $10,000 for each investment company of the First Trust Fund Complex
up to a total of 14 investment companies (the "Trustees Compensation I") and an
annual retainer of $7,500 for each subsequent investment company added to the
First Trust Fund Complex (the "Trustees Compensation II" and together with
Trustees Compensation I, the "Aggregate Trustee Compensation"). The Aggregate
Trustee Compensation is divided equally among each of the investment companies
in the First Trust Fund Complex. No additional meeting fees are paid in
connection with board or committee meetings. Trustees are also reimbursed for
travel and out-of-pocket expenses in connection with all meetings.
Additionally, Thomas R. Kadlec is paid annual compensation of $10,000 to serve
as the Lead Trustee and Niel B. Nielson is paid annual compensation of $5,000 to
serve as the chairman of the Audit Committee of each of the investment companies
in the First Trust Fund Complex. Such additional compensation to Messrs. Kadlec
and Nielson is paid by the investment companies in the First Trust Fund Complex
and the fees are divided equally among those investment companies.
On February 6, 2007, First Trust announced that the Board of Trustees of the
Fund voted to approve the reorganization of the Fund into First Trust Value
Line(R) 100 Exchange-Traded Fund ("FVLEF"), an exchange-traded fund and newly
created, diversified series of First Trust Exchange-Traded Fund ("FTETF"). Under
the terms of the proposed reorganization, which is expected to be tax-free, the
assets of the Fund would be transferred to, and the liabilities of the Fund
would be assumed by, FVLEF in exchange for shares of FVLEF. The FVLEF shares
would then be distributed to the Fund's shareholders and the Fund would be
terminated. The reorganization is subject to certain conditions, including that
the reorganization be approved by the shareholders of the Fund. A meeting of the
Fund's shareholders is expected to be scheduled for a date on or before May 18,
2007. There can be no assurance that the necessary percentage of the
shareholders of the Fund will vote in favor of the proposed reorganization.
Assuming the reorganization is approved by the Fund's shareholders, the
reorganization is anticipated to take place no later than June 25, 2007 and
would be effected based upon the respective net asset values of the Fund and
FVLEF.
Page 16
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST VALUE LINE(R) 100 FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Value Line 100(R) Fund (the "Fund"), including the portfolio of
investments, as of December 31, 2006, the related statement of operations for
the year then ended, the statement 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 December 31, 2006, by correspondence with the Fund's
custodian. 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 December 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.
[GRAPHIC OMITTED]
DELOITE LOGO
Chicago, Illinois
February 21, 2007
Page 17
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) 100 FUND
DECEMBER 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) 100 FUND
DECEMBER 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 December 31, 2006, 12.13% qualifies for the
corporate dividend received deduction available to corporate shareholders.
The Fund hereby designates as qualified dividend income distributions 15.78% of
the ordinary income distributions (including short-term capital gain), for the
year ended December 31, 2006.
For the year ended December 31, 2006, the amount of long-term capital gain
distributions designated by the Fund was $19,932,586 which is taxable at a 15%
rate gain for federal income tax purposes.
BY-LAW AMENDMENTS
On June 12, 2006 and December 11, 2006, the Board of Trustees approved certain
changes to the By-Laws of the Fund which may have the effect of delaying or
preventing a change in control of the Fund, including the implementation of a
staggered Board of Trustees. These changes were not required to be, and were
not, approved by the Fund's shareholders. To receive a copy of the revised
By-Laws, investors may call the Fund at (800) 988-5891.
Page 19
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS - (UNAUDITED)
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) 100 FUND
DECEMBER 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
- --------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
- --------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, o One year term Physician; 34 portfolios None
Trustee D.O.B. o 3-1/2 years served President, Wheaton
04/51 c/o First Trust Orthopedics;
Advisors L.P. 1001 Co-owner and
Warrenville Road Co-Director, Sports
Suite 300 Lisle, IL Med Center for
60532 Fitness; Limited
Partner, Gundersen
Real Estate
Partnership
Thomas R. Kadlec, o One year term Vice President and 34 portfolios None
Trustee D.O.B. 11/57 o 3-1/2 years served Chief Financial
c/o First Trust Officer (1990 to
Advisors L.P. 1001 present), ADM
Warrenville Road Investor Services,
Suite 300 Lisle, IL Inc. (Futures
60532 Commission
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 22 portfolios None
Trustee D.O.B. 11/56 o 7 months served Enterprises
c/o First Trust (Financial and
Advisors L.P. 1001 Management
Warrenville Road Consulting) (2003 to
Suite 300 present); Aramark
Lisle, IL 60532 Service Master
Management (2001 to
2003); President and
Chief Operating
Officer, Service
Master Management
Services (1998 to
2003)
Niel B. Nielson, o One year term President, Covenant 34 portfolios Director of Good
Trustee D.O.B. 03/54 o 3-1/2 years served College (June 2002 News
c/o First Trust to present); Pastor, Publishers-Crossway
Advisors L.P. 1001 College Church in Books; Covenant
Warrenville Road Wheaton (1997 to Transport, Inc.
Suite 300 Lisle, IL June 2002)
60532
Page 20
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS - (UNAUDITED)-(CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) 100 FUND
DECEMBER 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, o One year Trustee term and President, First 34 portfolios Trustee of Wheaton
Trustee President, indefinite officer term Trust Advisors L.P. College
Chairman of the o 3-1/2 years served and First Trust
Board and CEOD.O.B. Portfolios L.P.;
09/55 1001 Chairman of the
Warrenville Road Board, BondWave LLC
Suite 300Lisle, IL and Stonebridge
60532 Advisors LLC
- --------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- --------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley, o Indefinite term Chief Financial N/A N/A
Treasurer, o 3-1/2 years served Officer, Managing
Controller, Chief Director, First
Financial Officer, Trust Advisors L.P.
Chief Accounting and First Trust
Officer D.O.B. Portfolios L.P.;
11/571001 Chief Financial
Warrenville Officer, BondWave
RoadSuite 300 Lisle, LLC and Stonebridge
IL 60532 Advisors LLC
Kelley Christensen o Indefinite term Assistant Vice N/A N/A
Vice President o Since December President of First
D.O.B. 09/70 10, 2006 Trust Portfolios
1001 Warrenville Road L.P. and First Trust
Suite 300 Advisors L.P.
Lisle, IL 60532
James M. Dykas o Indefinite term Vice President, N/A N/A
Assistant Treasurer o 13 months served First Trust Advisors
D.O.B. 01/66 1001 L.P. and First Trust
Warrenville Road Portfolios L.P.
Suite 300 Lisle, IL (January 2005 to
60532 present); Executive
Director, Van Kampen
Asset Management and
Morgan Stanley
Investment
Management
(1999-2005)
W. Scott Jardine, o Indefinite term General Counsel, N/A N/A
Secretary and Chief o 3-1/2 years served First Trust Advisors
Compliance Officer L.P. and First Trust
D.O.B. 05/601001 Portfolios L.P.;
Warrenville Secretary, BondWave
RoadSuite 300 Lisle, LLC and Stonebridge
IL 60532 Advisors LLC
Page 21
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS - (UNAUDITED)-(CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST VALUE LINE(R) 100 FUND
DECEMBER 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)
- --------------------------------------------------------------------------------------------------------------------------
Daniel J. Lindquist o Indefinite term Senior Vice N/A N/A
Vice President o 13 months served President, First
D.O.B. 02/70 Trust Advisors L.P.;
1001 Warrenville Road Vice President,
Suite 300 First Trust
Lisle, IL 60532 Portfolios L.P.
(April 2004 to
present); Chief
Operating 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, 7 months Counsel, First Trust
D.O.B. 12/66 1001 served Advisors L.P. and
Warrenville Road First Trust
Suite 300 Lisle, IL Portfolios L.P.
60532 (March 2004 to
present); Associate,
Chapman and Cutler
LLP (1995-2004)
Roger F. Testin o Indefinite term Senior Vice N/A N/A
Vice President o 3-1/2 years served President, First
D.O.B. 06/66 Trust Advisors L.P.
1001 Warrenville Road and First Trust
Suite 300 Lisle, Portfolios L.P.
IL 60532 (August 2001 to
present); Analyst,
Dolan Capital
Management
(1998-2001)
<FN>
- -------------------
* The term "officer" means the president, vice president, secretary, treasurer,
controller or any other officer who performs a policy making function.
</FN>
Page 22
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:
(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.
C-2
(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). (8)
(5) Amended and Restated Establishment and Designation of Series dated
January 17, 2007. (5)
(6) (i) Investment Management Agreement dated September 24, 2005, as
amended. (3)
(ii) Amended and Restated Expense Reimbursement, Fee Waiver and
Recovery Agreement. (7)
(iii) Amendment to Schedule A of the Investment Management
Agreement. (7)
(7) (i) Distribution Agreement dated September 24, 2005, as amended.(3)
C-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. (6)
(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 March 21,
2007. (8)
(ii) Opinion and Consent of Bingham McCutchen LLP dated March 21,
2007. (8)
(12) Opinion and Consent of Chapman and Cutler LLP dated March 21, 2007.
(8)
(13) Not applicable.
(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 February 6, 2007.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on February 9, 2007.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on February 14, 2007.
(7) Incorporated by reference to the Registrant's Registration Statement on
Form N-1A (File No. 333-125751) filed on March 21, 2007.
(8) Filed herewith.
C-4
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 21st day of March, 2007.
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 Chief
- -------------------- Financial and Accounting Officer March 21, 2007
Mark R. Bradley
/s/ James A. Bowen President, Chief Executive
- --------------------- Officer, Chairman and Trustee March 21, 2007
James A. Bowen
*/s/ Richard E. Erickson Trustee )
- ------------------------ )
Richard E. Erickson )
)
*/s/ Thomas R. Kadlec Trustee )
- ------------------------ ) By: /s/ James A. Bowen
Thomas R. Kadlec ) ---------------------
) James A. Bowen
*/s/ Robert F. Keith Trustee ) Attorney-In-Fact
- ------------------------ ) March 21, 2007
Robert F. Keith
)
*/s/ Niel B. Nielson 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 whose behalf this
Registration Statement is filed, were previously executed and filed as an
Exhibit to the Registrant's Registration Statement on Form N-1A (File No.
333-125751) on February 6, 2007 and are incorporated by reference herein.
INDEX TO EXHIBITS
(4) Agreement and Plan of Reorganization (included in the Prospectus/Proxy
Statement as Exhibit A thereto).
(11) (i) Opinion and Consent of Chapman and Cutler LLP dated March 21, 2007.
(11) (ii) Opinion and Consent of Bingham McCutchen LLP dated March 21, 2007.
(12) Opinion and Consent of Chapman and Cutler LLP dated March 21, 2007.
(14) Consent of Independent Registered Public Accounting Firm.
(16) Proxy Card.