As filed with the Securities and Exchange Commission on December 1, 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Registration No. 333-46064
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. ____ [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Registration No. 811-10017
Amendment No. 1 [X]
FIRST DEFINED SECTOR FUND
(Exact Name of Registrant as Specified in Charter)
1001 Warrenville Road, Suite 300, Lisle, Illinois 60532
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (630) 241-4141
W. Scott Jardine, Esq. with a copy to:
Nike Securities L.P. Eric F. Fess
1001 Warrenville Road, Suite 300 Chapman and Cutler
Lisle, Illinois 60532 111 West Monroe Street
(Name and Address of Agent for Service) Chicago, Illinois 60603
Approximate date of proposed public offering: December 13, 2000
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) [ ] on (date)
pursuant to paragraph (b) [ ] 60 days after filing pursuant to
paragraph (a)(1) [ ] on (date) pursuant to paragraph (a)(1) [ ] 75 days
after filing pursuant to paragraph (a)(2) [ ] on (date) pursuant to
paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
CONTENTS OF THE REGISTRATION STATEMENT
This Registration Statement comprises the following papers and contents:
The Facing Sheet
Part A--Prospectus
Part B--Statement of Additional Information
Part C--Other Information
Signatures
Index to Exhibits
Exhibits
FIRST DEFINED SECTOR FUND
First Trust Financial Services Portfolio
First Trust Life Sciences Portfolio
First Trust Technology Portfolio
December ___, 2000
PROSPECTUS
This prospectus is intended for use in connection with variable annuity policies
offered by insurance companies. This prospectus provides important information
to help you evaluate whether one of the funds listed above may be right for you.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
TABLE OF CONTENTS
PAGE
FIRST TRUST FINANCIAL SERVICES PORTFOLIO.........................1
Fund Overview.............................................1
FIRST TRUST LIFE SCIENCES PORTFOLIO..............................1
Fund Overview.............................................1
FIRST TRUST TECHNOLOGY PORTFOLIO.................................1
Fund Overview.............................................1
FUND ORGANIZATION................................................1
FUND MANAGEMENT..................................................1
MANAGEMENT FEES AND EXPENSES.....................................1
FUND INVESTMENTS.................................................2
HOW SECURITIES ARE SELECTED......................................2
RISK FACTORS.....................................................3
INVESTMENT IN FUND SHARES........................................4
REDEMPTION OF SHARES.............................................5
DISTRIBUTIONS AND TAXES..........................................5
12b-1 PLAN.......................................................5
NET ASSET VALUE..................................................6
FUND SERVICE PROVIDERS...........................................6
SHAREHOLDER INQUIRIES............................................6
First Trust Financial Services Portfolio
Fund Overview
Investment Objective
The fund seeks to provide above-average capital appreciation.
How the Fund Pursues Its Objective
The fund seeks to achieve its objective by investing primarily in common stocks
issued by companies involved in the financial services industry, including,
among others, money center banks, major regional banks, financial and investment
service providers and insurance companies. The companies selected for the fund
are researched and evaluated using database screening techniques, fundamental
analysis and the judgment of the investment adviser's research analysts. The
investment adviser seeks companies that it believes have above-average growth
prospects.
The fund may also invest in futures, options, warrants, forward contracts and
repurchase agreements.
What are the Risks of Investing in the Fund?
The principal risk of investing in the fund is market risk. Market risk is the
risk that a particular stock in the fund, the fund itself or stocks in general
may fall in value. The fund's potential investment in foreign stocks presents
additional risk including currency risk. Foreign companies may be affected by
adverse political, diplomatic and economic developments, changes in foreign
currency exchange rates, taxes, less publicly available information and other
factors. As with any mutual fund investment, loss of money is a risk of
investing. An investment in the fund is not a deposit of a bank and is not
insured or guaranteed by the FDIC or any other government agency.
Because the fund is non-diversified, the fund is exposed to additional market
risk. A non-diversified fund may invest a relatively high percentage of its
assets in a limited number of issuers. Non-diversified funds are more
susceptible to any single political, regulatory or economic occurrence and to
the financial condition of individual issuers in which it invests. The fund is
also exposed to additional market risk due to its policy of concentrating in
securities of companies in the financial services industry. The fund's relative
lack of diversity may subject investors to greater market risk than other mutual
funds.
Fund Performance
The fund is newly created and does not have any performance history.
First Trust Life Sciences Portfolio
Fund Overview
Investment Objective
The fund seeks to provide above-average capital appreciation.
How the Fund Pursues Its Objective
The fund seeks to achieve its objective by investing primarily in common stocks
issued by companies involved in the healthcare industry. The fund may hold
securities of issuers in many healthcare sectors including, among others,
medical supplies, drugs, biotech, managed care and services management. The
companies selected for the fund are researched and evaluated using database
screening techniques, fundamental analysis, and the judgment of the investment
adviser's research analysts. The investment adviser seeks companies that it
believes have above-average growth prospects.
The fund may also invest in futures, options, warrants, forward contracts and
repurchase agreements.
What are the Risks of Investing in the Fund?
The principal risk of investing in the fund is market risk. Market risk is the
risk that a particular stock in the fund, the fund itself or stocks in general
may fall in value. The fund's potential investment in foreign stocks presents
additional risk including currency risk. Foreign companies may be affected by
adverse political, diplomatic and economic developments, changes in foreign
currency exchange rates, taxes, less publicly available information and other
factors. As with any mutual fund investment, loss of money is a risk of
investing. An investment in the fund is not a deposit of a bank and is not
insured or guaranteed by the FDIC or any other government agency.
Because the fund is non-diversified, the fund is exposed to additional market
risk. A non-diversified fund may invest a relatively high percentage of its
assets in a limited number of issuers. Non-diversified funds are more
susceptible to any single political, regulatory or economic occurrence and to
the financial condition of individual issuers in which it invests. The fund is
also exposed to additional market risk due to its policy of concentrating in
securities of companies in the healthcare industry. The fund's relative lack of
diversity may subject investors to greater market risk than other mutual funds.
Fund Performance
The fund is newly created and does not have any performance history.
First Trust Technology Portfolio
Fund Overview
Investment Objective
The fund seeks to provide above-average capital appreciation.
How the Fund Pursues Its Objective
The fund seeks to achieve its objective by investing primarily in common stocks
issued by companies involved in the technology industry including, among others,
companies that offer computers, computer networking, software, semiconductor
equipment and semiconductors. The companies selected for the fund are researched
and evaluated using database screening techniques, fundamental analysis, and the
judgment of the investment adviser's research analysts. The investment adviser
seeks companies that it considers to have above-average growth prospects.
The fund may also invest in futures, options, warrants, forward contracts and
repurchase agreements.
What are the Risks of Investing in the Fund?
The principal risk of investing in the fund is market risk. Market risk is the
risk that a particular stock in the fund, the fund itself or stocks in general
may fall in value. The fund's potential investment in foreign stocks presents
additional risk including currency risk. Foreign companies may be affected by
adverse political, diplomatic and economic developments, changes in foreign
currency exchange rates, taxes, less publicly available information and other
factors. As with any mutual fund investment, loss of money is a risk of
investing. An investment in the fund is not a deposit of a bank and is not
insured or guaranteed by the FDIC or any other government agency.
Because the fund is non-diversified, the fund is exposed to additional market
risk. A non-diversified fund may invest a relatively high percentage of its
assets in a limited number of issuers. Non-diversified funds are more
susceptible to any single political, regulatory or economic occurrence and to
the financial condition of individual issuers in which it invests. The fund is
also exposed to additional market risk due to its policy of concentrating in
securities of companies in the technology industry. The fund's relative lack of
diversity may subject investors to greater market risk than other mutual funds.
Fund Performance
The fund is newly created and does not have any performance history.
Fund Organization
Each fund is a series of the First Defined Sector Fund ("First Defined"), a
non-diversified open-end management investment company registered under the
Investment Company Act of 1940. Each fund constitutes a separate mutual fund
with its own investment objective and policies. First Defined is organized as a
Massachusetts business trust. Its Board of Trustees is responsible for its
overall management and direction. The Board elects First Defined's officers and
approves all significant agreements including those with the investment adviser,
custodian and fund administrative and accounting agent. Board members are
elected by owners of First Defined's shares of beneficial interest (the
"shares").
Each share of a fund represents an interest in the securities held in the fund's
portfolio. The funds are not offered directly to the public. Shares of the funds
are sold only to insurance company separate accounts (the "Separate Accounts")
to fund the benefits of variable annuity policies (the "Policies") issued by
certain insurance companies. The Separate Accounts' variable annuity owners who
have Policy values allocated to any of the funds have indirect rights in First
Defined's shares.
Fund Management
The overall management of the business and affairs of the funds is the
responsibility of the Board of Trustees of the funds.
First Trust Advisors L.P. ("First Trust"), 1001 Warrenville Road, Lisle,
Illinois, 60532, is the investment adviser to the funds. In this capacity, First
Trust is responsible for the selection and ongoing monitoring of the securities
in the funds' portfolios and certain other services necessary with the
management of the portfolios.
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, Nike Securities Corporation. Grace
Partners of DuPage L.P. is a limited partnership with one general partner, Nike
Securities Corporation, and a number of limited partners. Nike Securities
Corporation is an Illinois corporation controlled by the Robert Donald Van
Kampen family. First Trust discharges its responsibilities subject to the
policies of the Board of Trustees of the funds.
First Trust serves as subadvisor or advisor for over 50 mutual funds and is also
the portfolio supervisor of unit investment trusts sponsored by Nike Securities
L.P. ("Nike Securities"), some of which are substantially similar to the funds.
Nike Securities, 1001 Warrenville Road, Lisle, Illinois 60532, specializes in
the underwriting, trading and distribution of unit investment trusts and other
securities. Nike Securities is the sponsor and principal underwriter of the
funds' shares and has sponsored or underwritten approximately $25 billion of
investment company shares.
There is no one individual primarily responsible for portfolio management
decisions for the funds. Investments are made under the direction of a
committee. For additional information concerning First Trust, including a
description of the services provided, see the Statement of Additional
Information.
Management Fees and Expenses
For providing management services, First Trust is paid an annual fund management
fee by each fund of 0.60% of average daily net assets.
Each fund pays for its own operating expenses such as custodial, transfer agent,
administrative, accounting and legal fees; brokerage commissions; distribution
and service fees; licensing fees (if applicable); extraordinary expenses; and
its portion of the Registrant's operating expenses. First Trust has agreed to
waive fees and reimburse expenses through September 30, 2001 to prevent a fund's
Total Annual Fund Operating Expenses (excluding brokerage expenses and
extraordinary expenses) from exceeding 1.47% of the average daily net asset
value of such fund.
Fund Investments
Equity Securities
Each fund invests primarily in equity securities. Eligible equity securities
include common stocks; warrants to purchase common stocks; and securities
convertible into common stocks, such as convertible bonds and debentures. In
addition, each fund may invest in equity securities of foreign issuers,
including depositary receipts that represent foreign common stocks deposited
with a custodian.
Short-Term Investments
Each 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
Statement of Additional Information.
Futures and Options
Each fund may invest in 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.
Delayed Delivery Securities
Each 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.
How Securities Are Selected
The funds invest primarily in the common stocks of companies that represent each
fund's specific sector or industry. The companies selected for the funds are
researched and evaluated by First Trust by using database screening techniques,
fundamental analysis, and the judgment of their research analysts. First Trust
seeks companies that it believes have above-average growth prospectus within the
respective industry or sector.
Investment Limitations
The funds have adopted certain investment limitations (based on total assets)
that cannot be changed without shareholder approval and are designed to limit
your investment risk. Such limitations are described in the Statement of
Additional Information.
Hedging and Other Defensive and Temporary Investment Strategies
All of the funds may invest up to 100% of their assets in cash equivalents and
short-term investments as a temporary defensive measure in response to adverse
market conditions, or to keep cash on hand fully invested. During these periods,
a fund may not be able to achieve its investment objective.
First Trust may also use various investment strategies designated to hedge
against changes in the value of securities a fund owns or expects to purchase or
to hedge against interest rate changes and to hedge against currency
fluctuations during the settlement of portfolio transactions. These hedging
strategies include using financial futures contracts, options, options on
financial futures, foreign currency forward contracts or stock index options.
The ability of a fund to benefit from options and futures is largely dependent
on First Trust's ability to use such strategies successfully. A fund could lose
money on futures transactions or an option can expire worthless.
Each fund's investment objective may not be changed without shareholder
approval. The above investment policies may be changed by the Board of Trustees
without shareholder approval unless otherwise noted in this prospectus or the
Statement of Additional Information.
Portfolio Turnover
A 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. The funds anticipate that their annual portfolio
turnover rates will generally be between 20% and 100%. A turnover rate of 100%
would occur, for example, if a fund sold and replaced securities valued at 100%
of its net assets within one year. Active trading would result in the payment by
the fund of increased brokerage costs and expenses.
Risk Factors
Risk is inherent in all investing. Investing in the funds involves risk,
including the risk that you may lose all or part of your investment. There can
be no assurance that a fund will meet its stated objective. Before you invest,
you should consider the following risks.
Market risk: Market risk is the risk that a particular stock, an industry, a
mutual fund or stocks in general may fall in value.
Small-cap company risk: The funds may invest in small capitalization companies.
Such companies may be more vulnerable to adverse general market or economic
developments, may be less liquid, and may experience greater price volatility
than larger capitalization 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
capitalization companies.
Inflation risk: 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 funds' assets can decline as can
the value of the funds' distributions. Common stock prices may be particularly
sensitive to rising interest rates, as the cost of capital rises and borrowing
costs increase.
Foreign investment risk: The funds may invest in foreign securities. Securities
issued by foreign companies or governments present risks beyond those of
securities of U.S. issuers. Risks of investing in foreign securities include
higher brokerage costs; different accounting standards; expropriation,
nationalization or other adverse political or economic developments; currency
devaluation, blockages or transfer restrictions; changes in foreign currency
exchange rates; taxes; restrictions on foreign investments and exchange of
securities; inadequate financial information; lack of liquidity of certain
foreign markets; and less government supervision and regulation of exchanges,
brokers, and issuers in foreign countries. Prices of foreign securities also may
be more volatile than U.S. stocks.
Concentration risk: Each fund is classified as "non-diversified." As a result,
each fund is only limited as to the percentage of its assets which may be
invested in the securities of any one issuer by its own investment restrictions
and by the diversification requirements imposed by the Internal Revenue Code of
1986, as amended. Since each fund may invest a relatively high percentage of its
assets in a limited number of issuers, each fund may be more susceptible to any
single economic, political or regulatory occurrence and to the financial
conditions of the issuers in which it invests. The funds are considered to be
concentrated in the securities of their respective industries or sectors. A
concentration makes the funds more susceptible to any single occurrence
affecting the industry or sector and may subject the funds to greater market
risk than more diversified funds. Particular risk factors for each sector are
provided below.
Financial Services Sector: Companies involved in the financial services
industry are generally subject to the adverse effects of economic
recession, volatile interest rates, portfolio concentrations in
geographic markets, commercial and residential real estate loans and
competition. In addition, such companies are subject to extensive
regulation and tax law changes. Insurance companies are also subject to
the imposition of premium rate caps, pressure to compete globally,
weather catastrophes and other disasters that require payouts and
mortality rates.
Life Sciences Sector: Companies in the life sciences sector are
involved in medical supplies, drugs, biotech, managed care and services
management. They are subject to governmental regulation of their
products and services, increasing competition, termination of patent
protections for drug products, litigation, the high costs of research
and development and the risk that technological advances will render
their products or services obsolete. Healthcare facility operators may
also be affected by the demand for services, rate limitations and
restriction of government financial assistance.
Technology, Communications and Internet Sectors: Companies involved in
the technology industry, including the communications and Internet
sectors, must contend with rapidly changing technology, worldwide
competition, including aggressive pricing and reduced profit margins,
rapid obsolescence of products and services, loss of patent
protections, cyclical market patterns, evolving industry standards and
frequent new product introductions. Technology companies may be smaller
and less experienced companies, with limited product lines, markets or
financial resources and fewer experienced management or marketing
personnel. Also, the stocks of many technology companies have
exceptionally high price-to-earning ratios with little or no earnings
histories. Many technology companies have experienced extreme price and
volume fluctuations that often have been unrelated to their operating
performance.
Investment in Fund Shares
Shares of the funds are sold only to the Separate Accounts to fund the benefits
of the Policies issued by certain insurance companies. The separate accounts
purchase shares of the funds in accordance with variable account allocation
instructions received from owners of the Policies. First Trust then uses the
proceeds to buy securities for the funds. A separate account as a shareholder,
has an ownership in the funds' investments.
The funds do not issue share certificates. Individual investors may not purchase
or redeem shares of the funds directly; shares may be purchased or redeemed only
through the Policies. There are no minimum investment requirements. All
investments in a fund are credited to the shareholder's account in the form of
full and fractional shares of the designated fund (rounded to the nearest 1/1000
of a share). For a discussion of how Policy owners may purchase fund shares,
please refer to the prospectus for the applicable Separate Account. Owners of
the Policies may direct purchase or redemption instructions to their respective
insurance companies.
The price received for purchase requests will depend on when the order is
received. Orders received before the close of trading on a business day will
receive that day's closing price, otherwise the next business day's price will
be received. A business day is any day the New York Stock Exchange is open for
business and normally ends at 4:00 p.m. New York time. See "Net Asset Value" for
a discussion of how shares are priced.
Redemption of Shares
Each fund offers to buy back (redeem) shares of the fund from the applicable
Separate Account at any time at net asset value. The Separate Account will
redeem shares to make benefit or surrender payments under the terms of the
Policies or to effect transfers among investment options. Redemptions are
processed on any day on which the funds are open for business and are effected
at the net asset value next determined after the redemption order, in proper
form, is received. Orders received before the close of trading on a business day
will receive that day's closing price, otherwise the next business day's price
will be received. For a discussion of how Policy owners may redeem shares,
please refer to the prospectus for the applicable Separate Account.
A fund may suspend the right of redemption only under the following unusual
circumstances:
o when the New York Stock Exchange is closed (other than weekends and holidays)
or trading is restricted;
o when trading in the markets utilized is restricted, or when an
emergency exists so that disposal of the Fund's investments or
determination of its net assets is not reasonably practicable; or
o during any period when the SEC may permit.
Distributions and Taxes
Automatic Reinvestment
All dividends received by a fund will be reinvested into additional fund shares
once a year. All realized long- or short-term capital gains of each Portfolio
are declared once a year and reinvested in the fund.
Taxes and Tax Reporting
The Registrant intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code. For a discussion of the tax status of
the variable annuity Policy, please refer to the prospectus for the applicable
Separate Account.
Internal Revenue Service Diversification Requirements
The funds intend to comply with the diversification requirements currently
imposed by the Internal Revenue Service on regulated investment companies as a
condition of maintaining the tax deferred status of the funds. First Trust
reserves the right to depart from the investment strategy of a fund in order to
meet these diversification requirements. See the Statement of Additional
Information for more specific information.
12b-1 Plan
Nike Securities serves as the selling agent and distributor of the funds'
shares. In this capacity, Nike Securities manages the offering of the funds'
shares and is responsible for all sales and promotional activities. In order to
compensate Nike Securities for its costs in connection with these activities,
each fund has adopted a service plan under Rule 12b-1 under the Investment
Company Act of 1940. Each fund may spend up to 0.25% per year of its average
daily net assets as a service fee. Nike Securities uses the service fee to
compensate the respective insurance companies for providing account services to
Policy owners. These services include establishing and maintaining Policy
owners' accounts, supplying information to Policy owners, delivering fund
materials to Policy owners, answering inquiries, and providing other personal
services to Policy owners. Because these fees are paid out of the funds' assets
on an on-going basis, over time these fees will increase the cost of your
investment any may cost you more than paying other types of sales charges. In
addition, the Plan allows First Trust to use a portion of its advisory fee to
compensate Nike Securities for other expenses, including printing and
distributing prospectuses to persons other than interest holders or Policy
owners, and the expenses of compensating its sales force and preparing, printing
and distributing advertising, sales literature and reports to shareholders and
Policy owners used in connection with the sale of shares.
Net Asset Value
The price of fund shares is based on a fund's net asset value per share which 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. Net asset value is
calculated for each 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 by the total number of shares outstanding. The result,
rounded to the nearest cent, is the net asset value per share. All valuations
are subject to review by the funds' Board of Trustees or its delegate.
In determining net asset value, expenses are accrued and applied daily and
securities and other assets are generally valued as set forth below. Common
stocks and other equity securities listed on any national or foreign exchange or
on the Nasdaq will be valued at the closing sale price on the exchange or system
in which they are principally traded on the valuation date. If there are no
transactions on the valuation day, securities traded principally on a national
or foreign 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. Foreign securities, currencies and other assets denominated in
foreign currencies are translated into U.S. dollars at the exchange rate of such
currencies against the U.S. dollar as provided by a pricing service. All assets
denominated in foreign currencies will be converted into U.S. dollars at the
exchange rates in effect at the time of valuation. The value of any portfolio
security held by a fund for which market quotations are not readily available
will be determined in a manner that most fairly reflects fair market value of
the security on the valuation date.
For funds that hold securities that trade primarily on foreign exchanges, the
net asset value of a fund's shares may change on days when share holders will
not be able to purchase or redeem the fund's shares.
Fund Service Providers
The custodian of the assets of the funds is PFPC Trust Company, 8800 Tinicum
Boulevard, 3rd Floor, Suite 200, Philadelphia, PA 19153. PFPC also provides
certain accounting services to the funds. The funds' transfer, shareholder
services, fund accounting and dividend paying agent, ICA Fund Services Corp.,
4455 E. Camelback Road, Suite 261E, Phoenix, AZ 85018, performs bookkeeping,
data processing, accounting and administrative services for the operation of the
funds and the maintenance of shareholder accounts. Investment Company
Administration, [Insert Address], serves as the administrator of the funds.
Shareholder Inquiries
All inquiries regarding the funds should be directed to the applicable fund at
1001 Warrenville Road, Suite 300, Lisle, Illinois 60532, 1-(800) 621-1675.
First Defined Sector Fund
First Trust Financial Services Portfolio
First Trust Life Sciences Portfolio
First Trust Technology Portfolio
Several additional sources of information are available to you. The Statement of
Additional Information (SAI), incorporated by reference into this prospectus,
contains detailed information on the funds' policies and operation. The SAI and
the prospectus are intended for use in connection with variable annuity policies
offered by various insurance companies. Call the fund at 1-(800) 621-1675 to
request a free copy of the SAI or for other fund information.
You may also obtain this and other fund information, including the code of
ethics adopted by First Trust, Nike Securities and the funds, in the
Commission's Public Reference Room. Information about the operation of the
Public Reference Room may be obtained by calling the Commission at
1-202-942-8090. Fund information is also available on the EDGAR Database on the
Commission's website at http://www.sec.gov, or may be obtained at proscribed
rates by sending an e-mail request to [email protected] or by writing to the
Commission's Public Reference Section at 450 Fifth Street NW, Washington, D.C.
20549-0102.
First Defined Sector Fund
1001 Warrenville Road, Suite 300
Lisle, Illinois 60532
(800) 621-1675
www.nikesec.com
File No. 811-10017
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
FT DEFINED PORTFOLIOS LLC
FT DEFINED PORTFOLIOS II LLC
FIRST DEFINED SECTOR FUND
_____________ __, 2000
This Statement of Additional Information is not a prospectus. It contains
information in addition to and more detailed than set forth in the Prospectus
for the applicable funds and should be read in conjunction with the prospectuses
for the funds, dated __________ __, 2000. A Prospectus may be obtained by
calling (800) 621-1675, or writing 1001 Warrenville Road, Suite 300, Lisle,
Illinois 60532.
TABLE OF CONTENTS
PAGE
General Information and History...............................................1
Investment Policies...........................................................2
Description of Strategy Funds................................................16
Description of the Nasdaq 100 Index..........................................17
Nasdaq 100 Index........................................................... 17
Investment Risks.............................................................18
Additional Sector Fund Industry Risks........................................21
Additional Foreign Issuer Risks..............................................26
Fund Management..............................................................29
Performance Data of Investment Strategies....................................33
Investment Advisory and Other Services.......................................35
Purchases, Redemptions and Pricing of Interests..............................38
12b-1 Plan...................................................................40
Additional Information.......................................................41
Tax Status...................................................................42
General Information and History
FT Defined Portfolios LLC (the "FT Fund") FT Defined Portfolios II LLC (the "FT
II Fund"), and First Defined Sector Fund (the "First Defined Fund") are
non-diversified, open-end management series investment companies. The FT Fund
and FT II Fund were organized as a Delaware limited liability company on April
27, 2000 and December 1, 2000, respectively. Currently, the FT Fund and FT II
Fund each have two series authorized and outstanding. Each series of the FT Fund
and FT II Fund represents membership interests (the "interests") in a separate
portfolio of securities and other assets, with its own objectives and policies.
The series of the FT Fund consists of the NASDAQ Target 15 Portfolio and First
Trust 10 Uncommon Values Portfolio (the "FT Funds"). The Series of the FT II
Fund consist of the NASDAQ Target 15 Portfolio II and First Trust 10 Uncommon
Values Portfolios II (the "FT II Funds"). The First Defined Fund was organized
as a Massachusetts business trust on April 27, 2000. Currently, the First
Defined Fund has three series authorized and outstanding. Each series of the
First Defined Fund represents shares of beneficial interest (the "shares"), in a
separate portfolio of securities and other assets, with its own objectives and
policies. (The "shares" and the "interests" are collectively referred to as the
"interests".) The series of the First Defined Fund consists of the First Trust
Financial Services Portfolio, First Trust Life Sciences Portfolio and First
Trust Technology Portfolio (the "Sector Funds" and the "First Defined Funds").
The NASDAQ Target 15 Portfolio, NASDAQ Target 15 Portfolio II, First Trust 10
Uncommon Values Portfolio, and First Trust 10 Uncommon Values Portfolio II are
referred to herein as the "Strategy Funds". The Strategy Funds and the Sector
Funds are collectively referred to herein as the "Funds" and individually
referred to as a "Fund." Interests of the Funds are sold only to insurance
company separate accounts (the "Separate Accounts") to fund the benefits of
variable annuity policies (the "Policies"). Such Policies are issued by
Allmerica Financial Life Insurance and Annuity Company ("Allmerica") for the FT
Fund, Allmerica Financial Life Insurance Company ("Allmerica NY") for the FT II
Fund and possibly by various insurance companies for the First Defined Fund.
Investment Policies
The Prospectus describes the investment objectives and strategies of each of the
Funds. Each Fund is also subject to the following fundamental policies which may
not be changed without approval of the holders of a majority of the outstanding
voting interests of the Fund:
(1)......A Fund may not issue senior securities, except as permitted under the
Investment Company Act of 1940.
(2)......A Fund may not borrow money, except that a Fund may (i) borrow money
from banks for temporary or emergency purposes (but not for leverage or the
purchase of investments) and (ii) engage in other transactions permissible under
the Investment Company Act of 1940 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)......A 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 in connection with the purchase and sale of portfolio securities.
(4)...... A Fund will not purchase or sell real estate or interests therein,
unless acquired as a result of ownership of securities or other instruments (but
this shall not prohibit a Fund from purchasing or selling securities or other
instruments backed by real estate or of issuers engaged in real estate
activities).
(5)......A Fund may not make loans to other persons, except through (i) the
purchase of debt securities permissible under 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 a 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)......A Fund may not purchase or sell physical commodities unless acquired as
a result of ownership of securities or other instruments (but this shall not
prevent a Fund from purchasing or selling options, futures contracts, forward
contracts or other derivative instruments, or from investing in securities or
other instruments backed by physical commodities).
(7)......A Fund may not pledge, mortgage or hypothecate any of its assets except
as may be necessary in connection with permissible borrowings or investments and
then such pledging, mortgaging, or hypothecating may not exceed 33-1/3% of the
Fund's total assets at the time of the borrowing or investment.
(8)......A Strategy Fund may invest more than 25% of its assets in the
securities of issuers in any single industry if the applicable investment
strategy for the Fund selects securities in a manner that results in such a
concentration. A Sector Fund may invest more than 25% of its assets in the
securities of issuers in the industry represented by the Fund. Notwithstanding
the foregoing, there shall be no limitation on the purchase of obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
(See "Risk Factors" in the Prospectus and "Additional Fund Industry Risks"
herein for a discussion of the risks associated with the concentration of a
Fund's holdings in a given industry.) 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 and the investment objective of a Fund may
not be changed without the affirmative vote of the majority of the outstanding
voting interests of a Registrant (or of a particular Fund, if appropriate). The
Investment Company Act of 1940 ("1940 Act") defines a majority vote as the vote
of the lesser of (i) 67% of the voting interests represented at a meeting at
which more than 50% of the outstanding interests are represented or (ii) more
than 50% of the outstanding voting interests. With respect to the submission of
a change in an investment policy to the holders of outstanding voting interests
of a particular Fund, such matter shall be deemed to have been effectively acted
upon with respect to such Fund if a majority of the outstanding voting interests
of such 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 interests of any other Fund affected by such matter, and (2) such matter
has not been approved by the vote of a majority of the outstanding voting
Registrant interests.
In addition to the foregoing fundamental policies, the Funds are also subject to
strategies and policies discussed herein which, unless otherwise noted, are
non-fundamental restrictions and policies which may be changed by the Board of
Trustees.
Warrants
Each Fund may invest in warrants. Warrants acquired by a Fund entitle it to buy
common stock from the issuer at a specified price and time. They do not
represent ownership of the securities but only the right to buy them. Warrants
are subject to the same market risks as stocks, but may be more volatile in
price. A Fund's investment in warrants will not entitle it to receive dividends
or exercise voting rights and will become worthless if the warrants cannot be
profitably exercised before their expiration date.
Securities Lending
Each Fund may also lend portfolio securities to broker-dealers and financial
institutions to realize additional income. A Fund will not lend its portfolio
securities or other assets, if as a result, more than 33 1/3% of the Fund's
total assets, including collateral received, would be lent to broker-dealers or
other parties. Such loans will be secured continuously by collateral at least
equal to the value of the securities lent by "marking-to-market" daily. The Fund
will continue to receive the equivalent of the interest or dividends paid by the
issuer of the securities lent and will retain the right to call, upon notice,
the lent securities. The Fund may also receive interest on the investment of the
collateral or a fee from the borrower as compensation for the loan. Securities
loaned by a Fund remain subject to fluctuations in market value. A Fund may pay
reasonable finders, custodian and administrative fees in connection with a loan.
As with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to firms deemed by First Trust to
be of good standing.
During the period that a Fund seeks to enforce its rights against the borrower,
the collateral and the securities loaned remain subject to fluctuations in
market value. A Fund may also incur expenses in enforcing its rights. If a Fund
has sold a loaned security, it may not be able to settle the sale of the
security and may incur potential liability to the buyer of the security on loan
for its costs to cover the purchase.
Delayed-Delivery Transactions
A Fund may from time to time purchase securities on a "when-issued" or other
delayed-delivery basis. The price of securities purchased in such transactions
is fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within 45 days of the purchase. During the period between the
purchase and settlement, no payment is made by a Fund to the issuer and no
interest is accrued on debt securities or dividend income is earned on equity
securities. Delayed-delivery commitments involve a risk of loss if the value of
the security to be purchased declines prior to the settlement date, which risk
is in addition to the risk of decline in value of a Fund's other assets. While
securities purchased in delayed-delivery transactions may be sold prior to the
settlement date, the Funds intend to purchase such securities with the purpose
of actually acquiring them. At the time a Fund makes the commitment to purchase
a security in a delayed-delivery transaction, it will record the transaction and
reflect the value of the security in determining its net asset value. The Funds
do not believe that net asset value will be adversely affected by purchases of
securities in delayed-delivery transactions.
Each Fund will 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 segregated securities will mature or, if
necessary, be sold on or before the settlement date. When the time comes to pay
for delayed-delivery securities, a Fund will meet its obligations from
then-available cash flow, sale of the securities 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
Each 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 Securities
Act of 1933, as amended (the "Securities Act"), but that are deemed to be
illiquid; and repurchase agreements with maturities in excess of seven days.
However, a Fund will not acquire illiquid securities if, as a result, such
securities would comprise more than 15% of the value of 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 such factors 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 Securities Act. Where registration is required, a Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time a Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, a Fund
might obtain a less favorable price than that which prevailed when it decided to
sell. Illiquid securities will be priced at fair value as determined in good
faith by the Board of Trustees or its delegate. If, through the appreciation of
illiquid securities or the depreciation of liquid securities, a Fund should be
in a position where more than 15% of the value of its net assets are invested in
illiquid securities, including restricted securities which are not readily
marketable, the affected Fund will take such steps as is deemed advisable, if
any, to protect liquidity.
Money Market Funds
Each Fund may invest in shares of money market funds to the extent permitted by
the Investment Company Act of 1940.
Temporary Investments
Each 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 IBCA, Inc. ("Fitch"), or A- or higher by Duff & Phelps,
Inc. ("D&P") 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)
the Federal National Mortgage Association, 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 a Fund's 15% restriction on investments in illiquid
securities. Pursuant to the certificate of deposit, the issuer agrees to pay the
amount deposited plus interest to the bearer of the certificate on the date
specified thereon. Under current FDIC regulations, the maximum insurance payable
as to any one certificate of deposit is $100,000; therefore; certificates of
deposit purchased by a Fund may not be fully insured.
(3)......Bankers' acceptances which are short-term credit instruments used to
finance commercial transactions. Generally, an acceptance is a time draft drawn
on a bank by an exporter or an importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is then "accepted" by a bank that, in
effect, unconditionally guarantees to pay the face value of the instrument on
its maturity date. The acceptance may then be held by the accepting bank as an
asset or it may be sold in the secondary market at the going rate of interest
for a specific maturity.
(4)......Repurchase agreements which involve purchases of debt securities. In
such an action, at the time 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 a Fund during its holding period since the
resale price is always greater than the purchase price and reflects an
agreed-upon market rate. The period of these repurchase agreements will usually
be short, from overnight to one week. Such actions afford an opportunity for a
Fund to invest temporarily available cash. A Fund may enter into repurchase
agreements only with respect to obligations of the U.S. government, its agencies
or instrumentalities; certificates of deposit; or bankers acceptances in which
the Funds may invest. In addition, the Funds may only enter into repurchase
agreements where the market value of the purchased securities/collateral equals
at least 100% of principal including accrued interest and is marked-to-market
daily. The risk to a Fund is limited to the ability of the seller to pay the
agreed-upon sum on the repurchase date; in the event of default, the repurchase
agreement provides that the affected Fund is entitled to sell the underlying
collateral. If the value of the collateral declines after the agreement is
entered into, however, and if the seller defaults under a repurchase agreement
when the value of the underlying collateral is less than the repurchase price, a
Fund could incur a loss of both principal and interest. The Funds, however,
intend 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 Fund's Board of Trustees. First Trust will
review and monitor the creditworthiness of such institutions. First Trust
monitors the value of the collateral at the time the action is entered into and
at all times during the term of the repurchase agreement. First Trust does so in
an effort to determine that the value of the collateral always equals or exceeds
the agreed-upon repurchase price to be paid to a Fund. If the seller were to be
subject to a federal bankruptcy proceeding, the ability of a Fund to liquidate
the collateral could be delayed or impaired because of certain provisions of the
bankruptcy laws.
(5)......Bank time deposits, which are monies kept on deposit with banks or
savings and loan associations for a stated period of time at a fixed rate of
interest. There may be penalties for the early withdrawal of such time deposits,
in which case the yields of these investments will be reduced.
(6)......Commercial paper, which are short-term unsecured promissory notes,
including variable rate master demand notes issued by corporations to finance
their current operations. Master demand notes are direct lending arrangements
between a Fund and a corporation. There is no secondary market for the notes.
However, they are redeemable by 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 a Fund's
liquidity might be impaired if the corporation were unable to pay principal and
interest on demand. A Fund may only invest in commercial paper rated A-1 or
better by S&P, Prime-1 or higher by Moody's, Duff 2 or higher by D&P or Fitch 2
or higher by Fitch.
Hedging Strategies
General Description of Hedging Strategies
A Fund may engage in hedging activities. First Trust may cause a Fund to utilize
a variety of financial instruments, including options, forward contracts,
futures contracts (sometimes referred to as "futures"), and options on future
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 a
Fund owns or intends to acquire. Such instruments may also be used to "lock-in"
realized but unrecognized gains in the value of portfolio securities. Hedging
instruments on stock indices, in contrast, generally are used to hedge against
price movements in broad equity market sectors in which a Fund has invested or
expects to invest. Hedging strategies, if successful, can reduce the risk of
loss by wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
reduce the opportunity for gain by offsetting the positive effect of favorable
price movements in the hedged investments. The use of hedging instruments is
subject to applicable regulations of the Securities and Exchange Commission (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, a Fund's ability to use hedging instruments
may be limited by tax considerations.
General Limitations on Futures and Options Transactions
The Registrant has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets. Pursuant to
Section 4.5 of the regulations under the Commodity Exchange Act (the "CEA"), the
notice of eligibility for a Fund includes the representation that the Fund will
use futures contracts and related options solely for bona fide hedging purposes
within the meaning of CFTC regulations. A Fund will not enter into futures and
options transactions if the sum of the initial margin deposits and premiums paid
for unexpired options exceeds 5% of a Fund's total assets. In addition, a Fund
will not enter into futures contracts and options transactions if more than 30%
of its net assets would be committed to such instruments.
The foregoing limitations are not fundamental policies of a Fund and may be
changed without shareholder approval as regulatory agencies permit. Various
exchanges and regulatory authorities have undertaken reviews of options and
futures trading in light of market volatility. Among the possible actions that
have been presented are proposals to adopt new or more stringent daily price
fluctuation limits for futures and options transactions and proposals to
increase the margin requirements for various types of futures transactions.
Asset Coverage for Futures and Options Positions
Each 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 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 held in a segregated account cannot be sold
while the futures or options position is outstanding, unless replaced with other
permissible assets, and will be marked-to-market daily.
Stock Index Options
A Fund may purchase stock index options, sell stock index options in order to
close out existing positions, and/or write covered options on stock indexes for
hedging purposes. Stock index options are put options and call options on
various stock indexes. In most respects, they are identical to listed options on
common stocks. The primary difference between stock options and index options
occurs when index options are exercised. In the case of stock options, the
underlying security, common stock, is delivered. However, upon the exercise of
an index option, settlement does not occur by delivery of the securities
comprising the index. The option holder who exercises the index option receives
an amount of cash if the closing level of the stock index upon which the option
is based is greater than, in the case of a call, or less than, in the case of a
put, the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the stock index and the exercise price
of the option expressed in dollars times a specified multiple.
A stock index fluctuates with changes in the market values of the stock 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 Composite Indices or
a more narrower market index, such as the Standard & Poor's 100. Indexes may
also be based on an industry or market segment. Options on stock indexes are
currently traded on the following exchanges: the Chicago Board of Options
Exchange, the New York Stock Exchange, the American Stock Exchange, the Pacific
Stock Exchange, and the Philadelphia Stock Exchange.
A Fund's use of stock index options is subject to certain risks. Successful use
by a Fund of options on stock indexes will be subject to the ability of First
Trust to correctly predict movements in the directions of the stock market. This
requires different skills and techniques than predicting changes in the prices
of individual securities. In addition, a Fund's ability to effectively hedge all
or a portion of the securities in its portfolio, in anticipation of or during a
market decline through transactions in put options on stock indexes, depends on
the degree to which price movements in the underlying index correlate with the
price movements of the securities held by a Fund. Inasmuch as a Fund's
securities will not duplicate the components of an index, the correlation will
not be perfect. Consequently, each 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 indexes. It is also possible that there may be a
negative correlation between the index and a Fund's securities which would
result in a loss on both such securities and the options on stock indexes
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 a Fund
in purchasing an option will be lost as a result of unanticipated movements in
prices of the securities comprising the stock index on which the option is
based.
Certain Considerations Regarding Options
There is no assurance that a liquid secondary market on an options exchange will
exist for any particular option, or at any particular time, and for some options
no secondary market on an exchange or elsewhere may exist. If a Fund is unable
to close out a call option on securities that it has written before the option
is exercised, the Fund may be required to purchase the optioned securities in
order to satisfy its obligation under the option to deliver such securities. If
a Fund is unable to effect a closing sale transaction with respect to options on
securities that it has purchased, it would have to exercise the option in order
to realize any profit and would incur transaction costs upon the purchase and
sale of the underlying securities.
The writing and purchasing of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. Imperfect correlation between the
options and securities markets may detract from the effectiveness of attempted
hedging. Options transactions may result in significantly higher transaction
costs and portfolio turnover for the Fund.
Futures Contracts
Each Fund may enter into futures contracts (hereinafter referred to as "Futures"
or "Futures Contracts"), including index Futures as a hedge against movements in
the equity markets, in order to hedge against changes on securities held or
intended to be acquired by a Fund or for other purposes permissible under the
CEA. Each 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 Board of Trade of the City of
Chicago and the Chicago Mercantile Exchange. Futures exchanges and trading are
regulated under the CEA by the CFTC.
An interest rate futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., a debt security) or currency for a specified price at a
designated date, time and place. An index Futures Contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index Futures
Contract was originally written. Transaction costs are incurred when a Futures
Contract is bought or sold and margin deposits must be maintained. A Futures
Contract may be satisfied by delivery or purchase, as the case may be, of the
instrument or by payment of the change in the cash value of the index. More
commonly, Futures Contracts are closed out prior to delivery by entering into an
offsetting transaction in a matching Futures Contract. Although the value of an
index might be a function of the value of certain specified securities, no
physical delivery of those securities is made. If the offsetting purchase price
is less than the original sale price, a gain will be realized. Conversely, if
the offsetting sale price is more than the original purchase price, a gain will
be realized; if it is less, a loss will be realized. The transaction costs must
also be included in these calculations. There can be no assurance, however, that
a Fund will be able to enter into an offsetting transaction with respect to a
particular Futures Contract at a particular time. If a Fund is not able to enter
into an offsetting transaction, 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 each 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.
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 Future
Contract so that the margin deposit exceeds the required margin, the broker will
pay the excess to the respective Fund. In computing daily net asset value, each
Fund will mark to market the current value of its open Futures Contracts. Each
Fund expects to earn interest income on their margin deposits.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the Futures Contract is deposited as margin, a subsequent 10%
decrease in the value of the Futures Contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the Future Contracts were closed out.
Thus, a purchase or sale of a Futures Contract may result in losses in excess of
the amount initially invested in the Futures Contract. However, a Fund would
presumably have sustained comparable losses if, instead of the Futures Contract,
it had invested in the underlying financial instrument and sold it after the
decline.
Most United States Futures exchanges limit the amount of fluctuation permitted
in Futures Contract prices during a single trading day. The day limit
establishes the maximum amount that the price of a Futures Contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
Futures Contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures Contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of Futures positions
and subjecting some Futures traders to substantial losses.
There can be no assurance that a liquid market will exist at a time when a 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 indexes,
including, but not limited to, the Standard & Poor's 500 Index, the Standard &
Poor's 100 Index, the Nasdaq 100 Index, the Value Line Composite Index and the
New York Stock Exchange Composite Index.
Options on Futures
Each 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 of the
premium paid, to assume a long position (call) or short position (put) in a
Futures Contract at a specified exercise price prior to the expiration of the
option. Upon exercise of a call option, the holder acquires a long position in
the Futures Contract and the writer is assigned the opposite short position. In
the case of a put option, the opposite is true. Prior to exercise or expiration,
a futures option may be closed out by an offsetting purchase or sale of a
futures option of the same series.
A Fund may use options on Futures Contracts in connection with hedging
strategies. Generally, these strategies would be applied under the same market
and market sector conditions in which the Fund use put and call options on
securities or indexes. The purchase of put options on Futures Contracts is
analogous to the purchase of puts on securities or indexes so as to hedge a
Funds' 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 a securities which are
deliverable upon exercise of the Futures Contract. If the futures price at
expiration of a written call option is below the exercise price, a Fund will
retain the full amount of the option premium which provides a partial hedge
against any decline that may have occurred in the Fund's holdings of securities.
If the futures 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 acquires.
As with investments in Futures Contracts, each 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. Each Fund will 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 placed in the segregated account whenever the total
value of the segregated account falls below the amount due on the underlying
obligation.
The risks associated with the use of options on Futures Contracts include the
risk that a Fund may close out its position as a writer of an option only if a
liquid secondary market exists for such options, which cannot be assured. A
Fund's successful use of options on Futures Contracts depends on First Trust's
ability to correctly predict the movement in prices of Futures Contracts and the
underlying instruments, which may prove to be incorrect. In addition, there may
be imperfect correlation between the instruments being hedged and the Futures
Contract subject to the option. For additional information, see "Futures
Contracts." Certain characteristics of the futures market might increase the
risk that movements in the prices of futures contracts or options on futures
contracts might not correlate perfectly with movements in 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
in markets, 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.
Risks and Special Considerations Concerning Derivatives
In addition to the foregoing, the use of derivative instruments involves certain
general risks and considerations as described below.
(1)......Market Risk. Market risk is the risk that the value of the underlying
assets may go up or down. Adverse movements in the value of an underlying asset
can expose a Fund to losses. Market risk is the primary risk associated with
derivative transactions. Derivative instruments may include elements of leverage
and, accordingly, fluctuations in the value of the derivative instrument in
relation to the underlying asset may be magnified. The successful use of
derivative instruments depends upon a variety of factors, particularly the
portfolio manager's ability to predict movements of the securities, currencies,
and commodities markets, which may require different skills than predicting
changes in the prices of individual securities. There can be no assurance that
any particular strategy adopted will succeed. A decision to engage in a
derivative transaction will reflect the portfolio manager's judgment that the
derivative transaction will provide value to a Fund and its shareholders and is
consistent with a Fund's objectives, investment limitations, and operating
policies. In making such a judgment, the portfolio manager will analyze the
benefits and risks of the derivative transactions and weigh them in the context
of a Fund's overall investments and investment objective.
(2)......Credit Risk. Credit risk is the risk that a loss 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 OTC derivatives, since generally a
clearing agency, which is the issuer or counterparty to each exchange-traded
instrument, provides a guarantee of performance. For privately-negotiated
instruments, there is no similar clearing agency guarantee. In all transactions,
a Fund will bear the risk that the counterparty will default, and this could
result in a loss of the expected benefit of the derivative transactions and
possibly other losses to the Fund. The Fund will enter into transactions in
derivative instruments only within counterparties that First Trust reasonably
believes are capable of performing under the contract.
(3)......Correlation Risk. Correlation risk is the risk that there might be an
imperfect correlation, or even no correlation, between price movements of a
derivative instrument and price movements of investments being hedged. When a
derivative transaction is used to completely hedge another position, changes in
the market value of the combined position (the derivative instrument plus the
position being hedged) result from an imperfect correlation between the price
movements of the two instruments. With a perfect hedge, the value of the
combined position remains unchanged with any change in the price of the
underlying asset. With an imperfect hedge, the value of the derivative
instrument and its hedge are not perfectly correlated. For example, if the value
of a derivative instrument used in a short hedge (such as writing a call option,
buying a put option or selling a futures contract) increased by less than the
decline in value of the hedged investments, the hedge would not be perfectly
correlated. This might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the markets
in which these instruments are traded. The effectiveness of hedges using
instruments on indices will depend, in part, on the degree of correlation
between price movements in the index and the price movements in the investments
being hedged.
(4)......Liquidity Risk. Liquidity risk is the risk that a derivative instrument
cannot be sold, closed out, or replaced quickly at or very close to its
fundamental value. Generally, exchange contracts are very liquid because the
exchange clearinghouse is the counterparty of every contract. OTC transactions
are less liquid than exchange-traded derivatives since they often can only be
closed out with the other party to the transaction. A Fund might be required by
applicable regulatory requirements to maintain assets as "cover," maintain
segregated accounts, and/or make margin payments when it takes positions in
derivative instruments involving obligations to third parties (i.e., instruments
other than purchase options). If a Fund is unable to close out its positions in
such instruments, it might be required to continue to maintain such assets or
accounts or make such payments until the position expires, matures, or is closed
out. These requirements might impair a Fund's ability to sell a security or make
an investment at a time when it would otherwise be favorable to do so, or
require that the Fund sell a portfolio security at a disadvantageous time. A
Fund's ability to sell or close out a position in an instrument prior to
expiration or maturity depends upon the existence of a liquid secondary market
or, in the absence of such a market, the ability and willingness of the
counterparty to enter into a transaction closing out the position. Due to
liquidity risk, there is no assurance that any derivatives position can be sold
or closed out at a time and price that is favorable to a Fund.
(5)......Legal Risk. Legal risk is the risk of loss caused by the
unenforceability of a party's obligations under the derivative. While a party
seeking price certainty agrees to surrender the potential upside in exchange for
downside protection, the party taking the risk is looking for a positive payoff.
Despite this voluntary assumption of risk, a counterparty that has lost money in
a derivative transaction may try to avoid payment by exploiting various legal
uncertainties about certain derivative products.
(6)......Systemic or "Interconnection" Risk. Systemic or interconnection risk is
the risk that a disruption in the financial markets will cause difficulties for
all market participants. In other words, a disruption in one market will spill
over into other markets, perhaps creating a chain reaction. Much of the OTC
derivatives market takes place among the OTC dealers themselves, thus creating a
large interconnected web of financial obligations. This interconnectedness
raises the possibility that a default by one large dealer could create losses
for other dealers and destabilize the entire market for OTC derivative
instruments.
Foreign Currency Transactions. The Funds may engage in foreign currency forward
contracts, options, and futures transactions. Such Funds may enter into foreign
currency transactions for hedging and other permissible risk management purposes
only. Foreign currency futures and options contracts are traded in the U.S. on
regulated exchanges such as the Chicago Mercantile Exchange, the Mid-America
Commodities Exchange, and the Philadelphia Stock Exchange. If the Funds invest
in a currency futures or options contract, they must make a margin deposit to
secure performance of such contract. With respect to investments in currency
futures contracts, the Funds may also be required to make a variation margin
deposit because the value of futures contracts fluctuates from purchase to
maturity. In addition, the Funds may segregate assets to cover its futures
contracts obligations.
Risks and Special Considerations Concerning Foreign Currencies
(1)......Currency Risks. The exchange rates between the U.S. dollar and foreign
currencies depend upon such factors as supply and demand in the currency
exchange markets, international balances of payments, governmental intervention,
speculation, and other economic and political conditions. Although each Fund
values its assets daily in U.S. dollars, a Fund may not convert its holdings of
foreign currencies to U.S. dollars daily. A Fund may incur conversion costs when
it converts its holdings to another currency. Foreign exchange dealers may
realize a profit on the difference between the price at which a Fund buys and
sells currencies. Funds may engage in foreign currency exchange transactions in
connection with its portfolio investments. A Fund will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market or through forward
contracts to purchase or sell foreign contracts.
(2)......Forward Foreign Currency Exchange Contracts. The Funds may enter into
forward foreign currency exchange contracts. Forward foreign currency exchange
contracts may limit potential gains that could result from a positive change in
such currency relationships. First Trust believes that it is important to have
the flexibility to enter into forward foreign currency exchange contracts
whenever it determines that it is in a Fund's best interest to do so. The Funds
will not speculate in foreign currency exchange.
The Funds will not enter into forward currency exchange contracts or maintain a
net exposure in such contracts that it would be obligated to deliver an amount
of foreign currency in excess of the value of their portfolio securities or
other assets denominated in that currency or, in the case of a "cross-hedge,"
denominated in a currency or currencies that First Trust believes will tend to
be closely correlated with that currency with regard to price movements.
Generally, the Funds will not enter into a forward foreign currency exchange
contract with a term longer than one year.
(3)......Foreign Currency Options. A foreign currency option provides the option
buyer with the right to buy or sell a stated amount of foreign currency at the
exercise price on a specified date or during the option period. The owner of a
call option has the right, but not the obligation, to buy the currency.
Conversely, the owner of a put options has the right, but not the obligation, to
sell the currency. When the option is exercised, the seller (i.e., writer) of
the option is obligated to fulfill the terms of the sold option. However, either
the seller or the buyer may, in the secondary market, close its position during
the option period at any time prior to expiration.
A call option on foreign currency generally rises in value if the underlying
currency appreciates in value, and a put option on a foreign currency generally
rises in value if the underlying currency depreciates in value. Although
purchasing a foreign currency option can protect the Fund against an adverse
movement in the value of a foreign currency, the option will not limit the
movement in the value of such currency. For example, if a Fund held securities
denominated in a foreign currency that was appreciating and had purchased a
foreign currency put to hedge against a decline in the value of the currency,
the Fund would not have to exercise its put option. Likewise, if a Fund entered
into a contract to purchase a security denominated in foreign currency and, in
conjunction with that purchase, purchased a foreign currency call option to
hedge against a rise in value of the currency, and if the value of the currency
instead depreciated between the date of purchase and the settlement date, the
Fund would not have to exercise its call. Instead, the Fund could acquire in the
spot market the amount of foreign currency needed for settlement.
(4)......Special Risks Associated with Foreign Currency Options. Buyers and
sellers of foreign currency options are subject to the same risks that apply to
options generally. In addition, there are certain risks associated with foreign
currency options. The markets in foreign currency options are relatively new,
and the Fund's ability to establish and close out positions on such options is
subject to the maintenance of a liquid secondary market. Although a Fund will
not purchase or write such options unless and until, in the opinion of the First
Trust, the market for them has developed sufficiently to ensure that the risks
in connection with such options are not greater than the risks in connection
with the underlying currency, there can be no assurance that a liquid secondary
market will exist for a particular option at any specific time.
In addition, options on foreign currencies are affected by all of those factors
that influence foreign exchange rates and investments generally. The value of a
foreign currency option depends upon the value of the underlying currency
relative to the U.S. dollar. As a result, the price of the option position may
vary with changes in the value of either or both currencies and may have no
relationship to the investment merits of a foreign security. Because foreign
currency transactions occurring in the interbank market involve substantially
larger amounts than those that may be involved in the use of foreign currency
options, investors may be disadvantaged by having to deal in an odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirements that quotations available through dealers or
other market sources be firm or revised on a timely basis. Available quotation
information is generally representative of very large transactions in the
interbank market and thus may not reflect relatively smaller transactions (i.e.,
less than $1 million) where rates may be less favorable. The interbank market in
foreign currencies is a global, around-the-clock market. To the extent that the
U.S. options markets are closed while the markets for the underlying currencies
remain open, significant price and rate movements may take place in the
underlying markets that cannot be reflected in the options markets until they
reopen.
(5)......Foreign Currency Futures Transactions. By using foreign currency
futures contracts and options on such contracts, a Fund may be able to achieve
many of the same objectives as it would through the use of forward foreign
currency exchange contracts. The Funds may be able to achieve these objectives
possibly more effectively and at a lower cost by using futures transactions
instead of forward foreign currency exchange contracts.
(6)......Special Risks Associated with Foreign Currency Futures Contracts and
Related Options. Buyers and sellers of foreign currency futures contracts are
subject to the same risks that apply to the use of futures generally. In
addition, there are risks associated with foreign currency futures contracts and
their use as a hedging device similar to those associated with options on
currencies, as described above.
Options on foreign currency futures contracts may involve certain additional
risks. Trading options on foreign currency futures contracts is relatively new.
The ability to establish and close out positions on such options is subject to
the maintenance of a liquid secondary market. To reduce this risk, a Fund will
not purchase or write options on foreign currency futures contracts unless and
until, in the opinion of First Trust, the market for such options has developed
sufficiently that the risks in connection with such options are not greater than
the risks in connection with transactions in the underlying foreign currency
futures contracts. Compared to the purchase or sale of foreign currency futures
contracts, the purchase of call or put options on futures contracts involves
less potential risk to a Fund because the maximum amount at risk is the premium
paid for the option (plus transaction costs). However, there may be
circumstances when the purchase of a call or put option on a futures contract
would result in a loss, such as when there is no movement in the price of the
underlying currency or futures contract.
Foreign Investments
Indirect Foreign Investment--Depositary Receipts. The Funds may invest in
foreign securities by purchasing depositary receipts, including American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), or Global
Depositary Receipts ("GDRs"), or other securities representing indirect
ownership interests in the securities of foreign issuers. Generally, ADRs, in
registered form, are denominated in U.S. dollars and are designed for use in the
U.S. securities markets, while EDRs and GDRs, in bearer form, may be denominated
in other currencies and are designed for use in European and other markets. For
purposes of such Fund's investment policies, ADRs, EDRs, and GDRs are deemed to
have the same classification as the underlying securities they represent, except
that ADRs, EDRs, and GDRs shall be treated as indirect foreign investments.
Thus, an ADR, EDR, or GDR representing ownership of common stock will be treated
as common stock. ADRs, EDRs, and GDRs do no eliminate all of the risks
associated with directly investing in the securities of foreign issuers.
Other types of depositary receipts include American Depositary Shares ("ADSs"),
Global Depositary Certificates ("GDCs"), and International Depositary Receipts
("IDRs"). ADSs are shares issued under a deposit agreement representing the
underlying ordinary shares that trade in the issuer's home market. An ADR,
described above, is a certificate that represents a number of ADSs. GDCs and
IDRs are typically issued by a foreign bank or trust company, although they may
sometimes also be issued by a U.S. bank or trust company. GDCs and IDRs are
depositary receipts that evidence ownership of underlying securities issued by
either a foreign or a U.S. corporation.
Direct Foreign Investments. The Funds may invest directly in the securities of
foreign issuers. In consideration of whether to invest in the securities of a
foreign company, First Trust considers such factors as the characteristics of
the particular company, differences between economic trends, and the performance
of securities markets within the U.S. and those within other countries. First
Trust also considers factors relating to the general economic, governmental, and
social conditions of the country or countries where the company is located.
Securities transactions conducted outside the U.S. may not be regulated as
rigorously as in the U.S., may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by (i)
other complex foreign political, legal and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading decisions, (iii)
delays in a Fund's ability to act upon economic events occurring in foreign
markets during non-business hours in the U.S., (iv) the imposition of different
exercise and settlement terms and procedures and the margin requirements than in
the U.S., and (v) lower trading volume and liquidity.
Insurance Law Restrictions
In connection with the Registrant's agreement to sell shares to the Separate
Accounts, First Trust may enter into agreements with certain insurance
companies, required by certain state insurance departments, under which First
Trust may agree to use its best efforts to assure and to permit those insurance
companies to monitor each Fund for compliance with the investment restrictions
and limitations prescribed by state insurance laws and regulations applicable to
the investment of separate account assets in shares of mutual funds. If a Fund
failed to comply with such restrictions or limitations, the insurance company
would take appropriate action which might include ceasing to make investments in
the Fund or withdrawing from the state imposing the limitation. Such
restrictions and limitations are not expected to have a significant impact on
the Registrant's operations.
Description of Strategy Funds
As described in the Funds' Prospectus of each Strategy Fund is primarily
invested in accordance with an investment strategy. Each year, as discussed in
the Prospectus, the portfolio of each Strategy Fund is adjusted in accordance
with its investment strategy. See "Fund Overview" in the Prospectus for the
relevant Fund for a more detailed description of its investment strategy.
Dow Jones, Standard & Poor's, The Nasdaq Stock Market, Inc. and Value Line are
not affiliated with First Trust and have not participated in the creation of the
Funds or the selection of the equity securities included therein. There is, of
course, no guarantee that the objective of any Fund will be achieved.
Any changes in the components of any of the respective indices or in the
composition of the stocks listed on the New York Stock Exchange, American Stock
Exchange or Nasdaq Stock Market made after the respective Stock Selection Date
will not cause a change in the identity of the common stocks included in the
applicable Fund, including any additional equity securities deposited thereafter
until the next Stock Selection Date when the portfolio of the each Fund will be
adjusted in accordance with its investment strategy.
Investors should note that each Fund's investment criteria is applied and will
in the future be applied to the equity securities selected for inclusion in the
Fund as of the applicable Stock Selection Date. Additional equity securities
which were originally selected through this process may be purchased throughout
the year, as investors may continue to invest in the Fund, even though the
yields on these equity securities may have changed subsequent to the previous
Stock Selection Date. These equity securities may no longer be included in the
index, or may not meet a Fund's selection criteria at that time, and therefore,
such equity securities would no longer be chosen for inclusion in the Fund if
the selection process were to be performed again at that time. Accordingly, the
equity securities selected and the percentage relationship among the number of
shares will not change for purchases or sales by a Fund until the next annual
Stock Selection Date.
Licensing Arrangements with Lehman Brothers, Inc.
As noted in the Prospectus, the objective of the First Trust 10 Uncommon Value
Portfolio and First Trust 10 Uncommon Values Porfolio II is to provide the
potential for above-average capital appreciation by investing the Fund's
portfolio in the ten common stocks selected by the Investment Policy Committee
of Lehman Brothers Inc. with the assistance of the Research Department of Lehman
Brothers Inc. which, in the opinion of Lehman Brothers Inc., have the greatest
potential for capital appreciation during the next year. The selection was based
upon a determination by Lehman Brothers Inc. that the selected stocks are deemed
to have an above-average appreciation potential against the S&P 500 Index over
the 12 months following the selection of the portfolio. The stocks included in
this Fund are adjusted annually in accordance with the new selections of Lehman
Brothers for subsequent years. Lehman Brothers Inc. is one of the leading global
investment banks serving institutional, corporate, government and high net worth
individual clients and customers. Lehman Brothers' business includes capital
raising for clients through securities underwriting and direct placements;'
corporate finance and strategic advisory services; merchant banking; securities
sales and trading; research; and the trading of foreign exchange, derivative
products and certain commodities. The Fund are not sponsored, advised, or
created by Lehman Brothers Inc. Lehman Brothers Inc.'s only relationship to
First Trust is the licensing of certain trademarks and tradenames of Lehman
Brothers Inc. and of the "10 Uncommon Values" and the sale to First Trust of
research which is determined, composed and calculated by Lehman Brothers Inc.
without regard to First Trust or the Fund. In addition, Lehman Brothers Inc. may
also receive fees for brokerage services provided to a Fund as well as unit
investment trusts sponsored by Nike Securities L.P. Lehman Brothers Inc., in its
general securities business acts, as agent or principal in connection with the
purchase and sale of equity securities, including the equity securities held in
a Fund and may act as a market maker in certain of the equity securities.
Description of the Nasdaq 100 Index
The Nasdaq Target 15 Portfolio and the Nasdaq Target 15 Portfolio II invest in
stocks included in the Nasdaq 100 Index. The following is a description of this
index.
Nasdaq -- 100 Index
The Nasdaq - 100 Index represents the largest and most active non-financial
domestic and international issues listed on the Nasdaq Stock Market(R). The
index is calculated based on a modified capitalization weighted methodology. The
Nasdaq Stock Market lists approximately 5,400 companies and trades more shares
per day than any other major U.S. market.
The Funds are not sponsored, endorsed, sold or promoted by The Nasdaq Stock
Market, Inc. (including its affiliates) (Nasdaq, with its affiliates are
referred to as the "Corporations"). The Corporations have not passed on the
legality or suitability of, or the accuracy or adequacy of descriptions and
disclosures relating to, the Funds. The Corporations make no representation or
warranty, express or implied to the owners of the Funds or any member of the
public regarding the advisability of investing in securities generally or in the
Fund particularly, or the ability of the Nasdaq 100 Index(R) to track general
stock market performance. The Corporations' only relationship to First Trust
(the "Licensee") is in the licensing of the Nasdaq 100(R), Nasdaq 100 Index(R)
and Nasdaq(R) trademarks or service marks, and certain trade names of the
corporations and the use of the Nasdaq 100 Index(R) which is determined,
composed and calculated by Nasdaq without regard to Licensee or the Funds.
Nasdaq has no obligation to take the needs of the Licensee or the owners of the
Funds into consideration in determining, composing or calculating the Nasdaq 100
Index(R). The Corporations are not responsible for and have not participated in
the determination of the timing of, prices at, or quantities of the Fund to be
issued or in the determination or calculation of the equation by which the Fund
is to be converted into cash. The corporations have not liability in connection
with the administration, marketing or trading of the Funds.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION
OF THE NASDAQ 100 INDEX(R) OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE
NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE,
OWNERS OF THE PRODUCT(S) OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
NASDAQ 100 INDEX(R) OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO
EXPRESS OR IMPLIED WARRANTIES AND EXPRESSLY DISCLAIM ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
NASDAQ 100 INDEX(R) OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST
PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES,
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Investment Risks
Generally
An investment in a 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 a Fund may decline. A Fund may not be an appropriate
investment for those who are unable or unwilling to assume the risks involved
generally with an equity investment. The past market and earnings performance of
any of the equity securities included in a Fund is not predictive of their
future performance. Common stocks are especially susceptible to general stock
market movements and to volatile increases and decreases of value as market
confidence in and perceptions of the issuers change. These perceptions are based
on unpredictable factors including expectations regarding government, economic,
monetary and fiscal policies, inflation and interest rates, economic expansion
or contraction, and global or regional political economic or banking crises.
First Trust cannot predict the direction or scope of any of these factors.
Shareholders of common stocks have rights to receive payments from the issuers
of those common stocks that are generally subordinate to those of creditors of,
or holders of debt obligations or preferred stocks of, such issuers.
Shareholders of common stocks of the type held by a Fund have a right to receive
dividends only when and if, and in the amounts, declared by the 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 or provided for. Common stocks do not represent an obligation of the issuer
and, therefore, do not offer any assurance of income or provide the same degree
of protection of capital as do debt securities. The issuance of additional debt
securities or preferred stock will create prior claims for payment of principal,
interest and dividends which could adversely affect the ability and inclination
of the issuer to declare or pay dividends on its common stock or the rights of
holders of common stock with respect to assets of the issuer upon liquidation or
bankruptcy. The value of common stocks is subject to market fluctuations for as
long as the common stocks remain outstanding, and thus the value of the equity
securities in a Fund will fluctuate over the life of the Fund and may be more or
less than the price at which they were purchased by such Fund. The equity
securities held in a Fund may appreciate or depreciate in value (or pay
dividends) depending on the full range of economic and market influences
affecting these securities, including the impact of 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.
First Trust shall not be liable in any way for any default, failure or defect in
any equity security held in a Fund's portfolio.
Legislation
At any time after the date of the Prospectus, legislation may be enacted that
could negatively affect the equity securities in a Fund or the issuers of the
equity securities. Changing approaches to regulation, particularly with respect
to the environment or with respect to the petroleum industry, may have a
negative impact on certain companies represented in a Fund. There can be no
assurance that future legislation, regulation or deregulation will not have a
material adverse effect on a Fund or will not impair the ability of the issuers
of the equity securities held in a Fund to achieve their business goals.
Liquidity
Whether or not the equity securities in a Fund are listed on a securities
exchange, the principal trading market for the equity securities may be in the
over-the-counter market. As a result, the existence of a liquid trading market
for the equity securities may depend on whether dealers will make a market in
the equity securities. There can be no assurance that a market will be made for
any of the equity securities, that any market for the equity securities will be
maintained or that there will be sufficient liquidity of the equity securities
in any markets made. The price at which the equity securities held in a Fund may
be sold to meet transfers, partial withdrawals or surrenders and the value of a
Fund will be adversely affected if trading markets for the equity securities are
limited or absent.
Lack of Diversification
Each Fund is classified as "non-diversified" and therefore a Fund is only
limited as to the percentage of its assets which may be invested in securities
of any one issuer by its own investment restrictions and by diversification
requirements imposed by the Internal Revenue Code of 1986, as amended. A Fund
may therefore invest a relatively high percentage of its assets in a limited
number of issuers. This can expose each Fund to potentially greater market
fluctuations than might be experienced by a diversified fund. Each Fund may be
more susceptible to any single economic, political or regulatory occurrence and
to the financial conditions of the issuer in which it invests. For example, an
investment in the Nasdaq Target 15 Portfolio may subject an investor to
additional risk due to the relative lack of diversity in its portfolio since the
portfolio contains only 15 stocks. Therefore, the Nasdaq Target 15 Portfolio may
be subject to greater market risk than other funds which may contain a more
diversified portfolio of securities. A Fund is not designed to be a complete
investment program for an investor. Variable annuity Policy owners, in light of
their own financial situations and goals, should consider other additional
funding options in order to diversify the allocations of their Policy assets.
Small Capitalization Companies
Certain or all of the equity securities in the Funds may be small cap company
stocks. While, historically, small cap company stocks have outperformed the
stocks of large companies, the former have customarily involved more investment
risk as well. Small cap companies may have limited product lines, markets or
financial resources; may lack management depth or experience; and may be more
vulnerable to adverse general market or economic developments than large
companies. Some of these companies may distribute, sell or produce products
which have recently been brought to market and may be dependent on key
personnel.
The prices of small company securities are often more volatile than prices
associated with large 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 companies normally have fewer shares
outstanding and these shares trade less frequently than large companies, it may
be more difficult for a Fund which contain these equity securities to buy and
sell significant amounts of such shares without an unfavorable impact on
prevailing market prices. The securities of small companies are often traded
over-the-counter and may not be traded in the volumes typical of a national
securities exchange.
Litigation
Certain of the issuers of equity securities in certain Funds may be involved in
the manufacture, distribution and sale of tobacco products. Pending litigation
proceedings against such issuers in the United States and abroad cover a wide
range of matters including product liability and consumer protection. Damages
claimed in such litigation alleging personal injury (both individual and class
actions), and in health cost recovery cases brought by governments, labor unions
and similar entities seeking reimbursement for health care expenditures,
aggregate many billions of dollars.
In November 1998, certain companies in the U.S. tobacco industry, including
Philip Morris, entered into a negotiated settlement with several states which
would result in the resolution of significant litigation and regulatory issues
affecting the tobacco industry generally. The proposed settlement, while
extremely costly to the tobacco industry, would significantly reduce
uncertainties facing the industry and increase stability in business and capital
markets. Future litigation and/or legislation could adversely affect the value,
operating revenues and financial position of tobacco companies.
Microsoft Corporation is engaged in litigation with Sun Microsystems, Inc., the
U.S. Department of Justice and several state Attorneys General. The complaints
against Microsoft include copyright infringement, unfair competition and
anti-trust violations. The claims seek injunctive relief and monetary damages.
In the action brought against Microsoft by the U.S. Department of Justice, the
United States District Court for the District of Columbia issued findings of
fact that included a finding that Microsoft possesses and exercised monopoly
power. The court also recently entered an order finding that Microsoft exercised
this power in violation of the Sherman Antitrust Act and various state antitrust
laws. Subject to appeal, the court has determined that Microsoft must split into
two companies and change some of its business practices. One company would
retain the Microsoft Windows operating systems; the other company would offer
Microsoft's other software and Web products--such as Outlook, Internet Explorer,
BackOffice and Microsoft Network. Microsoft has stated that it will appeal this
ruling. It is possible that any remedy could have a material adverse impact on
Microsoft, however, it is impossible to predict the impact that any penalty may
have on Microsoft's business in the future.
Additional Strategy Fund Risks
Equity securities in a Strategy Fund from time to time may be sold under certain
circumstances described in the Prospectus or herein. Each Strategy Fund,
however, is not actively managed and equity securities in a Fund will not be
sold to take advantage of market fluctuations or changes in anticipated rates of
appreciation or depreciation or if the equity securities no longer meet the
criteria by which they were selected for a Fund. However, equity securities will
be sold on or about each annual Stock Selection Date in accordance with its
stock selection strategy.
Additional Fund Industry Risks
The following is a discussion of additional risks affecting particular industry
sectors represented in the Funds.
Financial Sector. An investment in the financial services sector should be made
with an understanding of the problems and risks inherent in the bank and
financial services sector in general.
Banks, thrifts and their holding companies are especially subject to the adverse
effects of economic recession, volatile interest rates, portfolio concentrations
in geographic markets and in commercial and residential real estate loans, and
competition from new entrants in their fields of business. Banks and thrifts are
highly dependent on net interest margin. Recently, bank profits have come under
pressure as net interest margins have contracted, but volume gains have been
strong in both commercial and consumer products. There is no certainty that such
conditions will continue. Bank and thrift institutions had received significant
consumer mortgage fee income as a result of activity in mortgage and refinance
markets. As initial home purchasing and refinancing activity subsided, this
income diminished. Economic conditions in the real estate markets, which have
been weak in the past, can have a substantial effect upon banks and thrifts
because they generally have a portion of their assets invested in loans secured
by real estate. Banks, thrifts and their holding companies are subject to
extensive federal regulation and, when such institutions are state-chartered, to
state regulation as well. Such regulations impose strict capital requirements
and limitations on the nature and extent of business activities that banks and
thrifts may pursue. Furthermore, bank regulators have a wide range of discretion
in connection with their supervisory and enforcement authority and may
substantially restrict the permissible activities of a particular institution if
deemed to pose significant risks to the soundness of such institution or the
safety of the federal deposit insurance fund. Regulatory actions, such as
increases in the minimum capital requirements applicable to banks and thrifts
and increases in deposit insurance premiums required to be paid by banks and
thrifts to the Federal Deposit Insurance Corporation ("FDIC"), can negatively
impact earnings and the ability of a company to pay dividends. Neither federal
insurance of deposits nor governmental regulations, however, insures the
solvency or profitability of banks or their holding companies, or insures
against any risk of investment in the securities issued by such institutions.
The statutory requirements applicable to and regulatory supervision of banks,
thrifts and their holding companies have increased significantly and have
undergone substantial change in recent years. To a great extent, these changes
are embodied in the Financial Institutions Reform, Recovery and Enforcement Act
enacted in August 1989, the Federal Deposit Insurance Corporation Improvement
Act of 1991, the Resolution Trust Corporation Refinancing, Restructuring, and
Improvement Act of 1991 and the regulations promulgated under these laws. Many
of the regulations promulgated pursuant to these laws have only recently been
finalized and their impact on the business, financial condition and prospects of
the equity securities in the First Trust Financial Services Portfolio cannot be
predicted with certainty. The recently enacted Gramm-Leach-Bliley Act repealed
most of the barriers set up by the 1933 Glass-Steagall Act which separated the
banking, insurance and securities industries. Now banks, insurance companies and
securities firms can merge to form one-stop financial conglomerates marketing a
wide range of financial service products to investors. This legislation will
likely result in increased merger activity and heightened competition among
existing and new participants in the field. Efforts to expand the ability of
federal thrifts to branch on an interstate basis have been initially successful
through promulgation of regulations, and legislation to liberalize interstate
banking has recently been signed into law. Under the legislation, banks will be
able to purchase or establish subsidiary banks in any state, one year after the
legislation's enactment. Since mid-1997, banks have been allowed to turn
existing banks into branches. Consolidation is likely to continue. The
Securities and Exchange Commission and the Financial Accounting Standards Board
require the expanded use of market value accounting by banks and have imposed
rules requiring market accounting for investment securities held in trading
accounts or available for sale. Adoption of additional such rules may result in
increased volatility in the reported health of the industry, and mandated
regulatory intervention to correct such problems. Additional legislative and
regulatory changes may be forthcoming. For example, the bank regulatory
authorities have proposed substantial changes to the Community Reinvestment Act
and fair lending laws, rules and regulations, and there can be no certainty as
to the effect, if any, that such changes would have on the equity securities in
the First Trust Financial Services Portfolio. In addition, from time to time the
deposit insurance system is reviewed by Congress and federal regulators, and
proposed reforms of that system could, among other things, further restrict the
ways in which deposited moneys can be used by banks or reduce the dollar amount
or number of deposits insured for any depositor. Such reforms could reduce
profitability such as investment opportunities available to bank institutions
become more limited and as consumers look for savings vehicles other than bank
deposits. Banks and thrifts face significant competition from other financial
institutions such as mutual funds, credit unions, mortgage banking companies and
insurance companies, and increased competition may result from legislative
broadening of regional and national interstate banking powers as has been
recently enacted. Among other benefits, the legislation allows banks and bank
holding companies to acquire across previously prohibited state lines and to
consolidate their various bank subsidiaries into one unit. First Trust makes no
prediction as to what, if any, manner of bank and thrift regulatory actions
might ultimately be adopted or what ultimate effect such actions might have on
the First Trust Financial Services Portfolio.
The Federal Bank Holding Company Act of 1956 generally prohibits a bank holding
company from (1) acquiring, directly or indirectly, more than 25% of the
outstanding shares of any class of voting securities of a bank or bank holding
company, (2) acquiring control of a bank or another bank holding company, (3)
acquiring all or substantially all the assets of a bank, or (4) merging or
consolidating with another bank holding company, without first obtaining Federal
Reserve Board ("FRB") approval. In considering an application with respect to
any such transaction, the FRB is required to consider a variety of factors,
including the potential anti-competitive effects of the transaction, the
financial condition and future prospects of the combining and resulting
institutions, the managerial resources of the resulting institution, the
convenience and needs of the communities the combined organization would serve,
the record of performance of each combining organization under the Community
Reinvestment Act and the Equal Credit Opportunity Act, and the prospective
availability to the FRB of information appropriate to determine ongoing
regulatory compliance with applicable banking laws. In addition, the federal
Change In Bank Control Act and various state laws impose limitations on the
ability of one or more individuals or other entities to acquire control of banks
or bank holding companies.
The FRB has issued a policy statement on the payment of cash dividends by bank
holding companies. In the policy statement, the FRB expressed its view that a
bank holding company experiencing earnings weaknesses should not pay cash
dividends which exceed its net income or which could only be funded in ways that
would weaken its financial health, such as by borrowing. The FRB also may impose
limitations on the payment of dividends as a condition to its approval of
certain applications, including applications for approval of mergers and
acquisitions. First Trust makes no prediction as to the effect, if any, such
laws will have on the equity securities in this sector or whether such
approvals, if necessary, will be obtained.
Companies involved in the insurance industry are engaged in underwriting,
reinsuring, selling, distributing or placing of property and casualty, life or
health insurance. Other growth areas within the insurance industry include
brokerage, reciprocals, claims processors and multiline insurance companies.
Insurance company profits are affected by interest rate levels, general economic
conditions, and price and marketing competition. Property and casualty insurance
profits may also be affected by weather catastrophes and other disasters. Life
and health insurance profits may be affected by mortality and morbidity rates.
Individual companies may be exposed to material risks including reserve
inadequacy and the inability to collect from reinsurance carriers. Insurance
companies are subject to extensive governmental regulation, including the
imposition of maximum rate levels, which may not be adequate for some lines of
business. Proposed or potential tax law changes may also adversely affect
insurance companies' policy sales, tax obligations, and profitability. In
addition to the foregoing, profit margins of these companies continue to shrink
due to the commoditization of traditional businesses, new competitors, capital
expenditures on new technology and the pressures to compete globally.
In addition to the normal risks of business, companies involved in the insurance
industry are subject to significant risk factors, including those applicable to
regulated insurance companies, such as: (i) the inherent uncertainty in the
process of establishing property-liability loss reserves, particularly reserves
for the cost of environmental, asbestos and mass tort claims, and the fact that
ultimate losses could materially exceed established loss reserves which could
have a material adverse effect on results of operations and financial condition;
(ii) the fact that insurance companies have experienced, and can be expected in
the future to experience, catastrophe losses which could have a material adverse
impact on their financial condition, results of operations and cash flow; (iii)
the inherent uncertainty in the process of establishing property-liability loss
reserves due to changes in loss payment patterns caused by new claims settlement
practices; (iv) the need for insurance companies and their subsidiaries to
maintain appropriate levels of statutory capital and surplus, particularly in
light of continuing scrutiny by rating organizations and state insurance
regulatory authorities, and in order to maintain acceptable financial strength
or claims-paying ability rating; (v) the extensive regulation and supervision to
which insurance companies' subsidiaries are subject, various regulatory
initiatives that may affect insurance companies, and regulatory and other legal
actions; (vi) the adverse impact that increases in interest rates could have on
the value of an insurance company's investment portfolio and on the
attractiveness of certain of its products; (vii) the need to adjust the
effective duration of the assets and liabilities of life insurance operations in
order to meet the anticipated cash flow requirements of its policyholder
obligations, and (vii) the uncertainty involved in estimating the availability
of reinsurance and the collectibility of reinsurance recoverables.
The state insurance regulatory framework has, during recent years, come under
increased federal scrutiny, and certain state legislatures have considered or
enacted laws that alter and, in many cases, increase state authority to regulate
insurance companies and insurance holding company systems. Further, the National
Association of Insurance Commissioners ("NAIC") and state insurance regulators
are re-examining existing laws and regulations, specifically focusing on
insurance companies, interpretations of existing laws and the development of new
laws. In addition, Congress and certain federal agencies have investigated the
condition of the insurance industry in the United States to determine whether to
promulgate additional federal regulations. First Trust is unable to predict
whether any state or federal legislation will be enacted to change the nature or
scope of regulation of the insurance industry, or what effect, if any, such
legislation would have on the industry.
All insurance companies are subject to state laws and regulations that require
diversification of their investment portfolios and limit the amount of
investments in certain investment categories. Failure to comply with these laws
and regulations could cause non-conforming investments to be treated as
non-admitted assets for purposes of measuring statutory surplus and, in some
instances, would require divestiture.
Environmental pollution clean-up is the subject of both federal and state
regulation. By some estimates, there are thousands of potential waste sites
subject to clean up. The insurance industry is involved in extensive litigation
regarding coverage issues. The Comprehensive Environmental Response Compensation
and Liability Act of 1980 ("Superfund") and comparable state statutes
("mini-Superfund") govern the clean-up and restoration by "Potentially
Responsible Parties" ("PRP's"). Superfund and the mini- Superfunds
("Environmental Clean-up Laws" or "ECLs") establish a mechanism to pay for
clean-up of waste sites if PRPs fail to do so, and to assign liability to PRPs.
The extent of liability to be allocated to a PRP is dependent on a variety of
factors. Further, the number of waste sites subject to clean-up is unknown. Very
few sites have been subject to clean-up to date. The extent of clean-up
necessary and the assignment of liability has not been established. The
insurance industry is disputing many such claims. Key coverage issues include
whether Superfund response costs are considered damages under the policies, when
and how coverage is triggered, applicability of pollution exclusions, the
potential for joint and several liability and definition of an occurrence.
Similar coverage issues exist for clean up and waste sites not covered under
Superfund. To date, courts have been inconsistent in their rulings on these
issues. An insurer's exposure to liability with regard to its insureds which
have been, or may be, named as PRPs is uncertain. Superfund reform proposals
have been introduced in Congress, but none have been enacted. There can be no
assurance that any Superfund reform legislation will be enacted or that any such
legislation will provide for a fair, effective and cost-efficient system for
settlement of Superfund related claims.
While current federal income tax law permits the tax-deferred accumulation of
earnings on the premiums paid by an annuity owner and holders of certain
savings-oriented life insurance products, no assurance can be given that future
tax law will continue to allow such tax deferrals. If such deferrals were not
allowed, consumer demand for the affected products would be substantially
reduced. In addition, proposals to lower the federal income tax rates through a
form of flat tax or otherwise could have, if enacted, a negative impact on the
demand for such products.
Companies engaged in investment banking/brokerage and investment management
include brokerage firms, broker/dealers, investment banks, finance companies and
mutual fund companies. Earnings and share prices of companies in this industry
are quite volatile, and often exceed the volatility levels of the market as a
whole. Recently, ongoing consolidation in the industry and the strong stock
market has benefited stocks which investors believe will benefit from greater
investor and issuer activity. Major determinants of future earnings of these
companies are the direction of the stock market, investor confidence, equity
transaction volume, the level and direction of long-term and short-term interest
rates, and the outlook for emerging markets. Negative trends in any of these
earnings determinants could have a serious adverse effect on the financial
stability, as well as on the stock prices, of these companies. Furthermore,
there can be no assurance that the issuers of the equity securities included in
the Financial Services Portfolio will be able to respond in a timely manner to
compete in the rapidly developing marketplace. In addition to the foregoing,
profit margins of these companies continue to shrink due to the commoditization
of traditional businesses, new competitors, capital expenditures on new
technology and the pressures to compete globally.
Life Sciences and Pharmaceutical Sectors. An investment in the life sciences and
pharmaceutical sectors should be made with an understanding of the
characteristics of the healthcare industry and the risks which such investment
may entail.
Healthcare companies include companies involved in advanced medical devices and
instruments, drugs and biotech, healthcare/managed care, hospital
management/health services and medical supplies. These companies have potential
risks unique to their sector of the healthcare field. These companies are
subject to governmental regulation of their products and services, a factor
which could have a significant and possibly unfavorable effect on the price and
availability of such products and services, a factor which could have a
significant and possibly unfavorable effect on the price and availability of
such products or services. Furthermore, such companies face the risk of
increasing competition from new products or services, generic drug sales, the
termination of patent protection for drug or medical supply products and the
risk that technological advances will render their products or services
obsolete. The research and development costs of bringing a drug to market are
substantial, and include lengthy governmental review processes with no guarantee
that the product will ever come to market. Many of these companies may have
losses and may not offer certain products for several years. Such companies may
also have persistent losses during a new product's transition from development
to production, and revenue patterns may be erratic. In addition, healthcare
facility operators may be affected by events and conditions including among
other things, demand for services, the ability of the facility to provide the
services required, physicians' confidence in the facility, management
capabilities, competition with other hospitals, efforts by insurers and
governmental agencies to limit rates, legislation establishing state
rate-setting agencies, expenses, government regulation, the cost and possible
unavailability of malpractice insurance and the termination or restriction of
governmental financial assistance, including that associated with Medicare,
Medicaid and other similar third party payor programs.
As the population of the United State ages, the companies involved in the
healthcare field will continue to search for and develop new drugs, medical
products and medical services through advanced technologies and diagnostics. On
a worldwide basis, such companies are involved in the development and
distributions of drugs, vaccines, medical products and medical services. These
activities may make the healthcare and medical services sector very attractive
for investors seeking the potential for growth in their investment portfolio.
However, there are no assurances that a Fund's objectives will be met.
Legislative proposals concerning healthcare are proposed in Congress from time
to time. These proposals span a wide range of topics, including cost and price
controls (which might include a freeze on the prices of prescription drugs),
national health insurance, incentives for competition in the provision of
healthcare services, tax incentives and penalties related to healthcare
insurance premiums and promotion of pre-paid healthcare plans.
Technology, Communications and Internet Sectors. An investment in the technology
industry, including the communications and Internet sectors, should be made with
an understanding of the characteristics of the technology industry and the risks
which such an investment may entail.
Technology companies generally include companies involved in the development,
design, manufacture and sale of computers, computer-related equipment, computer
networks, communications systems, telecommunications products, electronic
products and other related products, systems and services. The market for these
products, especially those specifically related to the Internet, is
characterized by rapidly changing technology, rapid product obsolescence,
cyclical market patterns, evolving industry standards and frequent new product
introductions. The success of the issuers of the equity securities included in
this sector depends in substantial part on the timely and successful
introduction of new products. An unexpected change in one or more of the
technologies affecting an issuer's products or in the market for products based
on a particular technology could have a material adverse affect on an issuer's
operating results. Furthermore, there can be no assurance that the issuers of
the equity securities included in this sector will be able to respond in a
timely manner to compete in the rapidly developing marketplace.
Based on trading history of common stock, factors such as announcements of new
products or development of new technologies and general conditions of the
industry have caused and are likely to cause the market price of high-
technology common stocks to fluctuate substantially. In addition, technology
company stocks have experienced extreme price and volume fluctuations that often
have been unrelated to the operating performance of such companies. This market
volatility may adversely affect the market price of the securities.
Some key components of certain products of technology issuers are currently
available only from single sources. There can be no assurance that in the future
suppliers will be able to meet the demand for components in a timely and cost
effective manner. Accordingly, an issuer's operating results and customer
relationships could be adversely affected by either an increase in price for, or
an interruption or reduction in supply of, any key components. Additionally,
many technology issuers are characterized by a highly concentrated customer base
consisting of a limited number of large customers who may require product
vendors to comply with rigorous industry standards. Any failure to comply with
such standards may result in a significant loss or reduction of sales. Because
many products and technologies of technology companies are incorporated into
other related products, such companies are often highly dependent on the
performance of the personal computer, electronics and telecommunications
industries. There can be no assurance that these customers will place additional
orders, or that an issuer of securities will obtain orders of similar magnitude
such as past orders from other customers. Similarly, the success of certain
technology companies is tied to a relatively small concentration of products or
technologies. Accordingly, a decline in demand of such products, technologies or
from such customers could have a material adverse impact on issuers of
securities.
Many technology companies rely on a combination of patents, copyrights,
trademarks and trade secret laws to establish and protect their proprietary
rights in their products and technologies. There can be no assurance that the
steps taken by the issuers of the equity securities to protect their proprietary
rights will be adequate to prevent misappropriation of their technology or that
competitors will not independently develop technologies that are substantially
equivalent or superior to such issuers' technology. In addition, due to the
increasing public use of the Internet, it is possible that other laws and
regulations may be adopted to address issues such as privacy, pricing,
characteristics, and quality of Internet products and services. For example,
recent proposals would prohibit the distribution of obscene, lascivious or
indecent communications on the Internet. The adoption of any such laws could
have a material adverse impact on the securities.
Additional Foreign Issuer Risks
Since certain of the portfolio securities included in the Funds may consist of
common stocks of foreign issuers, an investment in such Funds involves certain
investment risks that are different in some respects from an investment in a
fund which invests entirely in common stocks of domestic issuers. These
investment risks include the possible imposition of future political or
governmental restrictions which might adversely affect the payment or receipt of
dividends on the relevant portfolio securities, the possibility that the
financial condition of the issuers of the portfolio securities may become
impaired or that the general condition of the relevant stock market may
deteriorate, the limited liquidity and relatively small market capitalization of
the relevant securities market, the imposition of expropriation or confiscatory
taxation, economic uncertainties, the lack of the quantity and quality of
publicly available information concerning the foreign issuers as such issuers
are generally not subject to the same reporting and accounting requirements as
domestic issuers, and the effect of foreign currency devaluations and
fluctuations on the value of the common stocks and dividends of foreign issuers
in terms of U.S. dollars. In addition, fixed brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the United States and there is generally less government supervision and
regulation of exchanges, brokers and issuers in foreign countries than there is
in the United States.
On the basis of the best information available to First Trust at the present
time, none of the portfolio securities in such Funds are currently subject to
exchange control restrictions under existing law which would materially
interfere with payment to such Funds of dividends due on, or proceeds from the
sale of, the foreign portfolio securities. The adoption of such restrictions or
other legal restrictions could adversely impact the marketability of the foreign
portfolio securities and may impair the ability of such Funds to satisfy its
obligation to redeem shares or could cause delays or increase the costs
associated with the purchase and sale of the foreign portfolio securities and
correspondingly affect the price of its shares.
The purchase and sale of the foreign portfolio securities will generally be made
in foreign securities markets. Although First Trust does not believe that the
Funds will encounter obstacles in acquiring or disposing of the foreign
portfolio securities, investors should be aware that in certain situations it
may not be possible to purchase or sell a foreign portfolio security in a timely
manner for any number of reasons, including lack of liquidity in the relevant
market, the unavailability of a seller or purchaser of the foreign portfolio
securities, and restrictions on such purchases or sales by reason of federal
securities laws or otherwise. An investment in such Funds will also be subject
to the risks of currency fluctuations associated with investments in foreign
equity securities trading in non-U.S. currencies.
Certain of the equity securities in the Funds may be in ADR or GDR form. ADRs,
which evidence American Depositary Receipts and GDRs, which evidence Global
Depositary Receipts, represent common stock deposited with a custodian in a
depositary. American Depositary Shares and Global Depositary Shares
(collectively, the "Depositary Receipts") are issued by a bank or trust company
to evidence ownership of underlying securities issued by a foreign corporation.
These instruments may not necessarily be denominated in the same currency as the
securities into which they may be converted. For purposes of the discussion
herein, the terms ADR and GDR generally include American Depositary Shares and
Global Depositary Shares, respectively.
Depositary Receipts may be sponsored or unsponsored. In an unsponsored facility,
the depositary initiates and arranges the facility at the request of market
makers and acts as agent for the Depositary Receipts holder, while the company
itself is not involved in the transaction. In a sponsored facility, the issuing
company initiates the facility and agrees to pay certain administrative and
shareholder-related expenses. Sponsored facilities use a single depositary and
entail a contractual relationship between the issuer, the shareholder and the
depositary; unsponsored facilities involve several depositaries with no
contractual relationship to the company. The depositary bank that issues
Depositary Receipts generally charges a fee, based on the price of the
Depositary Receipts, upon issuance and cancellation of the Depositary Receipts.
This fee would be in addition to the brokerage commissions paid upon the
acquisition or surrender of the security. In addition, the depositary bank
incurs expenses in connection with the conversion of dividends or other cash
distributions paid in local currency into U.S. dollars and such expenses are
deducted from the amount of the dividend or distribution paid to holders,
resulting in a lower payout per underlying share represented by the Depositary
Receipts than would be the case if the underlying share were held directly.
Certain tax considerations, including tax rate differentials and withholding
requirements, arising from the application of the tax laws of one nation to
nationals of another and from certain practices in the Depositary Receipts
market may also exist with respect to certain Depositary Receipts. In varying
degrees, any or all of these factors may affect the value of the Depositary
Receipts compared with the value of the underlying shares in the local market.
In addition, the rights of holders of Depositary Receipts may be different than
those of holders of the underlying shares, and the market for Depositary
Receipts may be less liquid than that for the underlying shares. Depositary
Receipts are registered securities pursuant to the Securities Act of 1933 and
may be subject to the reporting requirements of the Securities Exchange Act of
1934.
For the equity securities that are Depositary Receipts, currency fluctuations
will affect the U.S. dollar equivalent of the local currency price of the
underlying domestic shares and, as a result, are likely to affect the value of
the Depositary Receipts and consequently the value of the equity securities. The
foreign issuers of securities that are Depositary Receipts may pay dividends in
foreign currencies which must be converted into dollars. Most foreign currencies
have fluctuated widely in value against the United States dollar for many
reasons, including supply and demand of the respective currency, the soundness
of the world economy and the strength of the respective economy as compared to
the economies of the United States and other countries. Therefore, for any
securities of issuers (whether or not they are in Depositary Receipt form) whose
earnings are stated in foreign currencies, or which pay dividends in foreign
currencies or which are traded in foreign currencies, there is a risk that their
United States dollar value will vary with fluctuations in the United States
dollar foreign exchange rates for the relevant currencies.
Exchange Rate. The Funds may be comprised substantially of equity securities
that are principally traded in foreign currencies and as such, involve
investment risks that are substantially different from an investment in a fund
which invests in securities that are principally traded in United States
dollars. The United States dollar value of each Fund's portfolios and of the
distributions from the portfolios will vary with fluctuations in the United
States dollar foreign exchange rates for the relevant currencies. Most foreign
currencies have fluctuated widely in value against the United States dollar for
many reasons, including supply and demand of the respective currency, the rate
of inflation in the respective economies compared to the United States, the
impact of interest rate differentials between different currencies on the
movement of foreign currency rates, the balance of imports and exports of goods
and services, the soundness of the world economy and the strength of the
respective economy as compared to the economies of the United States and other
countries.
Exchange rate fluctuations are partly dependent on a number of economic factors
including economic conditions within countries, the impact of actual and
proposed government policies on the value of currencies, interest rate
differentials between the currencies and the balance of imports and exports of
goods and services and transfers of income and capital from one country to
another. These economic factors are influenced primarily by a particular
country's monetary and fiscal policies (although the perceived political
situation in a particular country may have an influence as well--particularly
with respect to transfers of capital). Investor psychology may also be an
important determinant of currency fluctuations in the short run. Moreover,
institutional investors trying to anticipate the future relative strength or
weakness of a particular currency may sometimes exercise considerable
speculative influence on currency exchange rates by purchasing or selling large
amounts of the same currency or currencies. However, over the long term, the
currency of a country with a low rate of inflation and a favorable balance of
trade should increase in value relative to the currency of a country with a high
rate of inflation and deficits in the balance of trade.
First Trust will estimate current exchange rates for the relevant currencies
based on activity in the various currency exchange markets. However, since these
markets are volatile and are constantly changing, depending on the activity at
any particular time of the large international commercial banks, various central
banks, large multi-national corporations, speculators and other buyers and
sellers of foreign currencies, and since actual foreign currency transactions
may not be instantly reported, the exchange rates estimated by First Trust may
not be indicative of the amount in United States dollars a Fund would receive
had the Fund sold any particular currency in the market. The foreign exchange
transactions of a Fund will be conducted by the Fund with foreign exchange
dealers acting as principals on a spot (i.e., cash) buying basis. Although
foreign exchange dealers trade on a net basis, they do realize a profit based
upon the difference between the price at which they are willing to buy a
particular currency (bid price) and the price at which they are willing to sell
the currency (offer price).
Fund Management
The officers of the FT Fund, FT II Fund and the First Defined Fund
(collectively, the "Registrants") manage their day to day operations and are
responsible to their Board of Trustees. The management of a Fund, including
general supervision of the duties performed for a Fund under the Investment
Advisory and Management Agreement, is the responsibility of its Board of
Trustees. The Trustees set broad policies for each Fund and choose the
Registrants' officers. The following is a list of the Trustees and officers of
the Registrants and a statement of their present positions and principal
occupations during the past five years, with the Trustee who is an "interested
person" (as such term is defined in the Investment Company Act of 1940) of the
Registrants indicated by an asterisk. The mailing address of the officers and
Trustees, unless otherwise noted, is 1001 Warrenville Road, Suite 300, Lisle,
Illinois 60532.
<TABLE>
<CAPTION>
Principal Occupations
Name, Age and Address Position and Offices with Registrant During Past 5 Years
--------------------- ------------------------------------ -------------------
<S> <C> <C>
(1) Robert J. Bartel (67) Trustee Board Member (1996 to Present), First
730 Windmill Circle American Federal Savings Bank of
Bristol, VA 24201 Virginia; Tri-City Advisory Board (1999
to Present), First American Bank;
Senior Financial Advisor (1997 to Present),
United Management Company, LLC; Trustee
(1997 to Present), United Investment Trust;
Chairman of the Board (1989 to 1996),
Charter Federal Savings Bank.
*James A. Bowen (44) President, Chairman of the Board, President, Nike Securities; Managing
Chief Executive Officer and Trustee Director, First Trust Advisors.
(1) Mark R. Bradley (42) Treasurer, Controller, Chief Chief Financial Officer, Senior Vice
Financial Officer and Chief President, Nike Securities and First
Accounting Officer Trust Advisors.
Susan M. Brix (40) Assistant Vice President Representative, Nike Securities;
Assistant Portfolio Manager, First Trust
Advisors.
Robert F. Carey (36) Vice President Senior Vice President, Nike Securities
and First Trust Advisors.
Richard E. Erickson (48) Trustee Physician, Sportsmed/Wheaton Orthopedics.
327 Gundersen Drive
Carol Stream, IL 60188
David B. Field (50) Vice President Senior Vice President, Nike Securities;
Senior Vice President, Chief Investment
Officer, First Trust Advisors; Of Counsel
(1998 to Present), Johnson Westra,
Attorneys; Adjunct Professor of Finance
(1999 to Present), Kellstadt Graduate
School of Business, DePaul University.
Patrick M. Fitzgerald (46) Trustee President, Available Business Group Inc.
4141 S. Peoria Street (Printing products and distribution).
Chicago, IL 60609
W. Scott Jardine (39) Secretary Senior Vice President and General Counsel
(1995 to Present), Nike Securities and
First Trust Advisors; Partner (1985 to
1995), Chapman and Cutler (Law firm).
Niel B. Nielson (45) Trustee Pastor (1997 to Present), College Church
330 East Union in Wheaton; Partner (1996 to 1997),
Wheaton, IL 60187 Ritchie Capital Markets (Options Trading);
Vice President (1995 to 1996), The
Service-Master Company; Senior Vice
President (1984 to 1995), Chicago
Research and Trading--NationsBank.
<FN>
(1) Mr. Bartel is Mr. Bradley's father-in-law.
</FN>
</TABLE>
The following table sets forth estimated total compensation for the First Trust
Fund complex for the fiscal year ended December 31, 2000 and compensation
estimated to be paid by the Registrants to each of the Trustee who are not
designated "interested persons" during the Registrants' fiscal year ending
December 31, 2001. The Registrants have no retirement or pension plans. The
officers and the Trustee who are "interested persons" as designated above serve
without any compensation from the Registrants.
<TABLE>
<CAPTION>
Aggregate
Estimated Estimated
Estimated Estimated Compensation Compensation
Compensation From Compensation From First From Fund
Name of Trustee FT Fund(1) From Ft II Fund(1) Defined Fund(1) Complex(2)
------------------------------------------ ------------------- ------------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Robert J. Bartel......................... $ $ $ $
Richard E. Erickson...................... $ $ $ $
Patrick M. Fitzgerald.................... $ $ $ $
Niel B. Nielson.......................... $ $ $ $
----------- ----------- ----------- -----------
Total............................ $ $ $ $
=========== =========== =========== ===========
<FN>
(1)Based on the estimated compensation to be paid to the independent Trustees
for the fiscal year ending December 31, 2001 for services to the
applicable Registrant.
(2)Based on the estimated compensation to be paid to independent
Trustees for the fiscal year ended December 31, 2000 for service to the eleven
open-end funds advised by First Trust.
</FN>
</TABLE>
As of __________, 2000, the Trustees and officers of the Funds, owned, in the
aggregate, less than 1% of the interests of any individual Fund.
PERFORMANCE
A Fund may quote its total return and yield in reports to shareholders, sales
literature, and advertisements. These performance measures are described below.
Performance advertised for a Fund may or may not reflect the effect of any
charges that are imposed under a variable annuity Policy that is funded by the
Registrant. Such charges, described in the variable annuity prospectus, will
have the effect of reducing a Fund's performance.
Standardized average annual total return and non-standardized total return
measure both the net investment income generated by, and the effect of any
realized and unrealized appreciation or depreciation of, the underlying
investments of a Fund. Yield is a measure of the net investment income per
interest earned over a specific one month or 30-day period expressed as a
percentage of the net asset value.
A Fund's standardized average annual total return quotation is computed in
accordance with a standardized method prescribed by rules of the Securities and
Exchange Commission. The standardized average annual total return for a Fund for
a specific period is found by first taking a hypothetical $1,000 investment
("initial investment") in the Fund's interests on the first day of the period,
adjusting to deduct the applicable charges, if any, and computing the
"redeemable value" of that investment at the end of the period. The redeemable
value is then divided by the initial investment, and this quotient is taken to
the Nth root (N representing the number of years in the period) and 1 is
subtracted from the result, which is then expressed as a percentage. The
calculation assumes that all income and capital gains dividends paid by a Fund
have been reinvested at net asset value on the reinvestment dates during the
period.
The standardized average annual total return quotations will be current to the
last day of the calendar quarter preceding the date on which an advertisement is
submitted for publication. The standardized average annual total return will be
based on rolling calendar quarters and will cover at least periods of one, five
and ten years, or a period covering the time the Fund has been in existence, if
it has not been in existence for one of the prescribed periods.
Non-standardized total return may also be advertised. The non-standardized total
return is not subject to a prescribed formula. Non-standardized total return may
be for periods other than those required to be presented or may otherwise differ
from standardized average annual total return. Non-standardized total return for
a specific period is calculated by first taking an investment ("initial
investment") in the Fund's interests on the first day of the period and
computing the "end value" of that investment at the end of the period. The total
return percentage is then determined by subtracting the initial investment from
the ending value and dividing the remainder by the initial investment and
expressing the result as a percentage. The calculation assumes that all income
and capital gains dividends paid by a Fund have been reinvested at net asset
value on the reinvestment dates during the period. Non-standardized total return
may also be shown as the increased dollar value of the hypothetical investment
over the period.
Quotations of standardized average annual total return and non-standardized
total return are based upon historical earnings and is not intended to indicate
future performance.
The yield for a Fund is computed in accordance with a standardized method
prescribed by the rules of the SEC. Under that method, yield is computed by
dividing the net investment income per interest earned during the specified one
month or 30-day period by the offering price per interest on the last day of the
period, according to the following formula:
Yield = 2[ (a - b + 1) 6 - 1]
-----
cd
Where:
a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of interests outstanding during the period
that were entitled to receive dividends; and d = the offering price
(net asset value) per interest on the last day of the period.
In computing the yield, a Fund follows certain standardized accounting practices
specified by SEC rules. These practices are not necessarily consistent with
those that a Fund uses to prepare annual and interim financial statements in
accordance with generally accepted accounting principles.
A Fund's performance quotations are based upon historical results and are not
necessarily representative of future performance. A Fund's interests are sold at
net asset value. Returns and net asset value will fluctuate. Factors affecting a
Fund's performance include general market conditions, operating expenses and
investment management. Interests of a Fund are redeemable at the then current
net asset value, which may be more or less than original cost.
The performance of the Funds may be compared to the performance of other mutual
funds, mutual fund indices or annuity indices with similar objectives and
policies as reported by various sources, including Lipper Analytical Services,
Inc. ("Lipper") and CDA Investment Technologies, Inc. ("CDA"). Lipper and CDA
performance calculations are based upon changes in net asset value with all
dividends reinvested and do not include the effect of any sales charges. A
Fund's performance may also be compared to that of the Consumer Price Index or
various unmanaged stock and bond indices including, but not limited to, Salomon
Brothers Broad Investment Grade Index, Lehman Brothers High Yield Index, Lehman
Brothers Aggregate Bond Index, Lehman Brothers Intermediate Government/Corporate
Bond Index, Salomon Brothers Treasury Index, S&P MidCap 400 Index, Morgan
Stanley Capital International World Index, Morgan Stanley Capital International
Europe and Australia, Far East Equity Index, Russell 2000 Index, Russell MidCap
Index, Dow Jones Industrial Average, Hang Seng Index, Ibbotson Small Cap Index,
Financial Times and S&P 500 Index. There are differences and similarities
between the investments which a Fund may purchase and the investments by the
market indicators.
From time to time, a Fund also may quote information from publications
including, but not limited to, the following: Morningstar, Inc., The Wall Street
Journal, Money Magazine, Forbes, Barron's, The New York Times, USA Today,
Institutional Investor and Registered Representative. Also, investors may want
to compare the historical returns of various investments, performance indices of
those investments or economic indicators, including but not limited to stocks,
bonds, certificates of deposit and other bank products, money market funds and
U.S. Treasury obligations. Certain of these alternative investments may offer
fixed rates of return and guaranteed principal, and may be insured. Economic
indicators may include, without limitation, indicators of market rate trends and
cost of funds, such as Federal Home Loan Bank Board 11th District Cost of Funds
Index (COFI). A Fund may also advertise its portfolio or its significant
holdings at any given time. A Fund may also periodically advertise tax-deferred
compounding charts and other hypothetical illustrations.
Performance Data of Investment Strategies
As of the date of this Statement of Additional Information, the Funds had not
yet commenced investment operations. However, certain aspects of the investment
strategies can be demonstrated using historical data.
The following table shows hypothetical performance and information for the
strategies employed by the Funds noted below, but not any actual Fund, and the
actual performance of the S&P 500 Index. The information for each investment
strategy assumed that the strategy was fully invested as of the beginning of
each year and that each Stock Selection Date was the last day of the preceding
year. In addition, the performance information does take into consideration the
estimated net expenses of the Funds (after expense reimbursements) but does not
take into consideration any sales charges, commissions, insurance fees or
charges imposed on the sale of the variable annuity policies or any taxes. Any
of such charges will lower the returns shown. All of the figures set forth below
have been adjusted to take into account the effect of currency exchange rate
fluctuations of the U.S. dollar, where applicable (i.e., returns are stated in
U.S. dollar terms). The returns shown in the following tables and graphs are not
guarantees of future performance and should not be used as a predictor of
returns to be expected in connection with a Fund's portfolio. Both stock prices
(which may appreciate or depreciate) and dividends (which may be increased,
reduced or eliminated) will affect the returns. Each investment strategy has
underperformed its respective index or indices in certain years. Accordingly,
there can be no assurance that a Fund's portfolio will outperform its respective
index (or combination thereof, where applicable).
The following table compares the hypothetical performance of the investment
strategy of the Nasdaq Target 15 Portfolio and Nasdaq Target 15 Portfolio II;
and the performance of the S&P 500 Index, Nasdaq 100 Index and the DJIA, each of
those years (and as of the most recent quarter).
An investor in a Fund would not necessarily realize as high a total return on an
investment in the stocks upon which the hypothetical returns are based for the
following reasons: the total return figures shown reflect estimated and not
actual expenses and do not reflect taxes; the Funds are established at different
times of the year; and the Funds may not be fully invested at all times or
equally weighted in all stocks comprising a strategy. Further, the returns also
do not reflect the deduction of any insurance fees or charges which are imposed
by the insurance companies that sponsor the Separate Accounts in connection with
the sale of variable annuity policies. Investors should refer to the prospectus
for the applicable Separate Account for a description of those fees and charges
which have a detrimental effect on the performance of the Funds. If the
above-mentioned charges were reflected in the hypothetical returns, the returns
would be lower than those presented here.
The returns shown below for the Nasdaq Target 15 Strategy do not represent the
results of actual trading using client assets but were achieved by means of the
retroactive application of a strategy that was designed with the benefit of
hindsight. These returns should not be considered indicative of the skill of
First Trust. The returns may not reflect the impact that any material market or
economic factors might have had if the strategies had been used during the
periods shown to actually manage client assets. During most of the period shown
in the table below, First Trust did not manage or supervise accounts which
employed strategies similar to the hypothetical strategies shown below. The
returns shown below for the strategies are not a guarantee of future performance
and should not be used to predict the expected returns of a Fund. Each strategy
has the potential for loss.
These figures are for calendar years; the Funds may use different 12-month
periods.
COMPARISON OF TOTAL RETURN(2)
Hypothetical Strategy Index Total Returns
Total Returns (1)
Nasdaq
NASDAQ Target S&P 500 100
Year 15 Strategy Index DJIA Index
-------- -------------- -------- ------ ---------
1986 21.78% 18.31% 27.00% 6.89%
1987 12.98% 5.33% 5.66% 10.49%
1988 -1.64% 16.64% 16.03% 13.54%
1989 36.10% 31.35% 32.09% 26.17%
1990 -6.42% -3.30% -0.73% -10.41%
1991 107.72% 30.40% 24.19% 64.99%
1992 -1.20% 7.62% 7.39% 8.86%
1993 27.36% 9.95% 16.87% 11.67%
1994 9.40% 1.34% 5.03% 1.74%
1995 52.49% 37.22% 36.67% 43.01%
1996 58.69% 22.82% 28.71% 42.74%
1997 33.92% 33.21% 24.82% 20.76%
1998 121.49% 28.57% 18.03% 85.43%
1999 99.03% 20.94% 27.06% 102.08%
9/29/00 40.44% -1.39% -6.28% -3.68%
(1) The strategy stocks for the Nasdaq Target 15 Strategy for a given year
consist of the stocks selected by applying the strategy as of the beginning of
the period.
(2) Total Return represents the sum of the change in market value of each group
of stocks between the first and last trading day of a period plus the total
dividends paid on each group of stocks during the period divided by the opening
market value of each group of stocks as of the first trading day of a period.
Total Return does not take into consideration any taxes. Total Return assumes
that all dividends are reinvested semi-annually and all returns are stated in
terms of the United States dollar.
There can be no assurance that any Fund will outperform any index shown.
Investors should not rely on the preceding financial information as an
indication of the past or future performance of a Fund. This information may be
used in advertisements.
Investment Advisory and Other Services
Investment Adviser
First Trust Advisors L.P., 1001 Warrenville Road, Suite 300, Lisle, Illinois
60532, is the investment adviser to the Funds. As investment adviser, First
Trust provides the Funds with professional investment supervision and management
and permits any of its officers or employees to serve without compensation as
Trustees or officers of the Registrant if elected to such positions. First Trust
provides each Fund with discretionary investment services and certain other
services necessary with the management of the portfolios. Specifically, First
Trust is responsible for supervising and directing the investments of each Fund
in accordance with each Fund's investment objective, program, and restrictions
as provided in the Prospectus and this Statement of Additional Information.
First Trust is responsible for effecting all security transactions on behalf of
each Fund. First Trust is also responsible for compliance with the provisions of
the Internal Revenue Code of 1986, as amended ("Code"), applicable to each Fund
(relating to the diversification requirements applicable to investments in
underlying variable annuity contracts and/or regulated investment companies).
First Trust Advisors L.P. ("First Trust") is an Illinois limited partnership
formed in 1991 and an investment adviser registered with the SEC under the
Investment Advisers Act of 1940. First Trust is a limited partnership with one
limited partner, Grace Partners of DuPage L.P. ("Grace Partners"), and one
general partner, Nike Securities Corporation. Grace Partners is a limited
partnership with one general partner, Nike Securities Corporation, and a number
of limited partners. Grace Partners' and Nike Securities Corporation's primary
business is investment advisory and broker/dealer services through their
interests. Nike Securities Corporation is an Illinois corporation controlled by
Robert Donald Van Kampen. First Trust is controlled by Grace Partners and Nike
Securities Corporation.
First Trust is also advisor or subadviser to over 50 mutual funds and is the
portfolio supervisor of certain unit investment trusts sponsored by Nike
Securities L.P. ("Nike Securities") which are substantially similar to the Funds
in that they have the same investment objectives and strategies as the various
Funds but have a finite life. Nike Securities specializes in the underwriting,
trading and distribution of unit investment trusts and other securities. Nike
Securities, an Illinois limited partnership formed in 1991, acts as sponsor for
successive series of The First Trust Combined Series, The First Trust Special
Situations Trust, the First Trust Insured Corporate Trust, The First Trust of
Insured Municipal Bonds and The First Trust GNMA. First Trust introduced the
first insured unit investment trust in 1974 and to date more than $24 billion in
First Trust unit investment trusts have been deposited.
First Trust acts as investment adviser to the Funds pursuant to an Investment
Advisory and Management Agreement. The Investment Advisory and Management
Agreement continues in effect for each Fund from year to year after its initial
two-year term so long as its continuation is approved at least annually by the
Trustees including a majority of the Trustees who are not parties to such
agreement or interested persons of any such party except in their capacity as
Trustees of the Registrant, or the interest holders of each Fund. It may be
terminated at any time upon 60 days notice by either party, or by a majority
vote of the outstanding interests of a Fund with respect to that Fund, and will
terminate automatically upon assignment. Additional Funds may be subject to a
different agreement. The Investment Advisory and Management Agreement provides
that First Trust, its partners, directors, officers, employees, and certain
other persons performing specific functions for a Fund will only be liable to a
Fund for losses resulting from willful misfeasance, bad faith, gross negligence,
or reckless disregard of their obligations and duties under the agreement. As
compensation for its services, each Fund pays First Trust a fee as described in
the Prospectus. Provisions regarding expense limitations are described in the
Prospectus.
Nike Securities, 1001 Warrenville Road, Lisle, Illinois 60532, serves as the
principal underwriter of the interests of the Fund pursuant to a "best efforts"
arrangement as provided by a distribution agreement with the Fund (the
"Distribution Agreement"). The officers of the Registrant described as being
associated with Nike Securities are affiliated persons of both the Registrant
and Nike Securities. Pursuant to the Distribution Agreement, the Fund appointed
Nike Securities to be its agent for the distribution of the Funds' shares on a
continuous offering basis. Nike Securities sells shares to the Separate
Accounts. Pursuant to the Distribution Agreement, Nike Securities, at its own
expense, finances certain activities incident to the sale and distribution of
the interests of the Funds, including printing and distribution of prospectuses
and statements of additional information to other than existing shareholders and
the printing and distributing of sales literature and advertising. Nike
Securities also receives compensation pursuant to a Rule 12b-1 plan adopted by
the Fund and described herein under "12b-1 Plan."
Custodian and Transfer Agent
The custodian has custody of all securities and cash of the Registrant
maintained in the United States and attends to the collection of principal and
income and payment for and collection of proceeds of securities bought and sold
by the Funds. PFPC Trust Company, 8800 Tinicum Boulevard, 3rd Floor, Suite 200,
Philadelphia, PA 19153, acts as custodian for each Fund. ICA Fund Services
Corp., 4455 E. Camelback Road, Suite 261E, Phoenix, AZ, 85018, is the transfer,
shareholder services, accounting and dividend-paying agent for each Fund and
also provides certain clerical, bookkeeping, accounting and administrative
services necessary for the operation of the Registrant and maintenance of
shareholder accounts.
Administrator
Each Fund pays an administration fee to Investment Company Administration
("ICA"), [Insert Address] to compensate ICA for providing administrative
services. The services provided by ICA shall include, among others, the
following: (i) prepare and coordinate reports and other materials to be supplied
to the Board of Trustees of the Trust; (ii) prepare and/or supervise the
preparation and filing of all securities filings, periodic financial reports,
prospectuses, statements of additional information, marketing materials, tax
returns, shareholder reports and other regulatory reports of filings required of
the Trust and the Funds; (iii) prepare all required filings necessary for the
sale of shares of the Funds in all states where the officers of the Trust deem
it appropriate; (iv) coordinate the preparation, printing and mailing of all
materials (e.g., Annual Reports) required to be sent to shareholders; (v)
coordinate the preparation and payment of Trust and Fund related expenses; (vi)
conduct relations with, and monitor and oversee the activities of the Trust's
and the Funds' servicing agents (i.e., transfer agent, custodian, fund
accounting agent, attorneys, underwriters, brokers and dealers, corporate
fiduciaries and banks) and such other persons in any such other capacity deemed
to be necessary or desirable; (vii) review and adjust as necessary the Funds'
daily expense accruals; (viii) maintain and keep such books and records of the
Trust as required by law or for the proper operation of the Trust and the Funds
other than those maintained and kept by the Trust's Adviser and other servicing
agents; (ix) provide the Trust with (i) the services of persons competent to
perform the administrative and clerical functions described herein, and (ii)
personnel to serve as officers of the Trust; (x) provide the Funds with office
space as well as administrative offices and such data processing facilities as
are necessary for the performance of its duties under this Agreement; (xi)
monitor each Fund's compliance with investment policies and restrictions as set
forth in the Fund's currently effective Prospectus and Statement of Additional
Information under the Securities Act of 1933 and (xii) perform such additional
services as may be agreed upon by the Trust and the Administrator.
ICA receive a monthly fee based on the scheduled provided below
(however, the minimum Annual per fund fee is $25,000):
Administration Services Fees:
Basis Points Average Daily Net Assets
____________ ________________________
.10% First $200 million
.05% Next $300 million
.03% Thereafter
Independent Accountants
The Funds' independent accountants, Ernst & Young LLP, 233 S. Wacker Dr.,
Chicago, Illinois 60606-6301, audit and report on the Funds' annual financial
statements, and perform other professional accounting, auditing and advisory
services when engaged to do so by the Funds.
Fund Transactions and Brokerage
First Trust is responsible for decisions to buy and sell securities for each
Fund and for the placement of a Fund's securities business, the negotiation of
the commissions to be paid on brokered transactions, the prices for principal
trades in securities, and the allocation of portfolio brokerage and principal
business. It is the policy of First Trust to seek the best execution at the best
security price available with respect to each transaction, and with respect to
brokered transactions in light of the overall quality of brokerage and research
services provided to First Trust and its advisees. 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 a Fund's futures and
options transactions, if any. The purchase price of portfolio securities
purchased from an underwriter or dealer may include underwriting commissions and
dealer spreads. A Fund may pay mark-ups on principal transactions. In selecting
broker/dealers and in negotiating commissions, First Trust considers, among
other things, the firm's reliability, the quality of its execution services on a
continuing basis and its financial condition. Fund portfolio transactions may be
effected with broker/dealers who have assisted investors in the purchase of
policies. The selection of a broker-dealer may take into account the sale of
products sponsored or advised by First Trust and/or its affiliates.
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 considers 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 Registrant. First Trust believes
that the research information received in this manner provides the Funds with
benefits by supplementing the research otherwise available to the Funds. The
Investment Advisory and Management Agreement provides that such higher
commissions will not be paid by the Funds unless the adviser determines in good
faith that the amount is reasonable in relation to the services provided. The
investment advisory fees paid by the Funds to First Trust under the Investment
Advisory and Management Agreement are not reduced as a result of receipt by
First Trust of research services.
First Trust places portfolio transactions for other advisory accounts advised by
it, and research services furnished by firms through which the Funds effects
their securities transactions may be used by First Trust in servicing all of its
accounts; not all of such services may be used by First Trust in connection with
a Fund. First Trust believes it is not possible to measure separately the
benefits from research services to each of the accounts (including the Funds)
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 Funds will not be
disproportionate to the benefits received by the Funds on a continuing basis.
First Trust seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Funds 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 Funds. In
making such allocations between the Funds 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.
Code of Ethics
To mitigate the possibility that a Fund will be adversely affected by personal
trading of employees, the Registrants, First Trust and Nike Securities have
adopted Codes of Ethics under Rule 17j-1 of the Investment Company Act of 1940.
These Codes contain policies restricting securities trading in personal accounts
of the portfolio Trustees and others who normally come into possession of
information on portfolio transactions.
Purchases, Redemptions and Pricing of Interests
The Separate Accounts will purchase interests of the Funds at their net asset
value. Interests are purchased using premiums received on Policies issued by the
insurance companies. The Separate Accounts are funded by interests of the
Registrants.
All investments in the Registrants are credited to the interest holder's account
in the form of full and fractional interests of the designated Fund (rounded to
the nearest 1/1000 of an interest). The Registrants do not issue interest
certificates.
As stated in the applicable Prospectus, the net asset value ("NAV") of a Fund's
interests is determined once each day on which the New York Stock Exchange (the
"NYSE") is open ("Business Day") at the close of the regular trading session of
the Exchange (normally 4:00 p.m., Eastern Time, Monday through Friday). The NAV
of a Fund's interests is not determined on the days the NYSE is closed, which
days generally are New Year's Day, Martin Luther King Jr. holiday, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
The per interest NAV of a Fund is determined by dividing the total value of the
securities and other assets, less liabilities, by the total number of interests
outstanding. A Fund's net assets value 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 each 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 or on the Nasdaq will be valued at the closing sale price on
the exchange or system in which they are principally traded on the valuation
date. If there are no transactions on the valuation day, securities traded
principally on a national or foreign exchange or on Nasdaq 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.
(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.
The value of any portfolio security held by a Fund for which market quotations
are not readily available will be determined by the Adviser 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.
Foreign securities, currencies and other assets denominated in foreign
currencies are translated into U.S. dollars at the exchange rate of such
currencies against the U.S. dollar as provided by a pricing service. All assets
denominated in foreign currencies will be converted into U.S. dollars at the
exchange rates in effect at the time of valuation.
All foreign equity securities are valued at their closing sale price on the
exchange on which the security is primarily traded. Where a foreign securities
market remains open at the time that a Fund values its portfolio securities, or
closing prices of securities from that market may not be retrieved because of
local time differences or other difficulties in obtaining such prices at that
time, the most recent prices in such market at a point in time most practicable
to timely valuation of the Fund may be used.
Foreign securities not traded on a particular day or on an exchange are valued
at one of the following prices: (a) at the most recent bid price or (b) a
valuation within the range considered best to represent value in the
circumstances. Otherwise, the fund accounting agent will contact a pricing
service and/or broker/dealers to provide a price for the securities at "fair
value."
Foreign debt securities are valued by the fund accounting agent on the basis of
prices provided by a pricing service, or at the mean between the bid and asked
price, as long as such prices, in the opinion of the fund accounting agent
continue to reflect the value of the security. If no quotations are available,
the fund accounting agent will contact a pricing service and/or broker/dealers
to provide a price for the securities at "fair value."
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each Business Day. In addition, European and Far Eastern securities trading
generally or in a particular country or countries may not take place on all
Business Days. Furthermore, trading takes place in Japanese markets on certain
Saturdays and in various foreign markets on days which are not Business Days and
on which a Fund's net asset value is not calculated. A Fund calculates net asset
value per interest, and therefore effects sales, redemptions and repurchases of
its interests, as of the close of the NYSE once on each day on which the NYSE is
open. Such calculation does not take place contemporaneously with the
determination of the prices of the majority of the foreign portfolio securities
used in such calculation.
The Registrants may suspend the right of redemption for any Fund only under the
following unusual circumstances: (a) when the New York Stock Exchange 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 Securities and Exchange Commission so that disposal of the
Company's investments or determination of its net assets is not reasonably
practicable; or (c) during any period when the Securities and Exchange
Commission may permit.
12b-1 Plan
The Registrants have adopted plans (the "Plans") pursuant to Rule 12b-1 under
the Investment Company Act of 1940, which provides that interests of the Funds
will be subject to an annual service fee.
Nike Securities serves as selling agent and distributor of the interests of the
Funds. In this capacity, Nike Securities manages the offering of the Funds'
interests and is responsible for all sales and promotional activities. In order
to compensate Nike Securities for its costs in connection with these activities,
each Fund has adopted a service plan under Rule 12b-1 under the Investment
Company Act of 1940. Nike Securities uses the service fee to compensate the
insurance companies for providing account services to Policy owners. These
services include establishing and maintaining Policy owners' accounts, supplying
information to Policy owners, delivering fund materials to Policy owners,
answering inquiries, and providing other personal services to Policy owners.
Each Fund may spend up to .25 of 1% per year of the average daily net assets of
its interests as a service fee under the Plan. In addition, the Plan permits
First Trust to use a portion of its advisory fee to compensate Nike Securities
for expenses incurred in connection with the sale and distribution of a Fund's
interests including, without limitation, compensation of its sales force,
expenses of printing and distributing prospectuses to persons other than
interest holders or policy owners, expenses of preparing, printing and
distributing advertising and sales literature and reports to interests holders
and Policy owners used in connection with the sale of a Fund's interests,
certain other expenses associated with the distribution of interests of the
Funds, and any distribution-related expenses that may be authorized from time to
time by the Board of Trustees of the applicable Fund.
Under each Registrant's Plan, the Registrant will report quarterly to the Board
of Trustees for its review all amounts expended under the Plan. A Plan may be
terminated at any time with respect to any Fund, without the payment of any
penalty, by a vote of a majority of the Trustees who are not "interested
persons" and who have no direct or indirect financial interest in a Plan or by
vote of a majority of the outstanding voting securities of such Fund. A Plan may
be renewed from year to year if approved by a vote of the Board of Trustees and
a vote of the non-interested Trustees who have no direct or indirect financial
interest in a Plan cast in person at a meeting called for the purpose of voting
on the Plan. A Plan may be continued only if the Trustees who vote to approve
such continuance conclude, in the exercise of reasonable business judgment and
in light of their fiduciary duties under the applicable law, that there is a
reasonable likelihood that the Plan will benefit a Fund and its shareholders. A
Plan may not be amended to increase materially the cost which a Fund may bear
under the Plan without the approval of the interest holders of the affected
Fund, and any other material amendments of a Plan must be approved by the
non-interested Trustees by a vote cast in person at a meeting called for the
purpose of considering such amendments. During the continuance of a Plan, the
selection and nomination of the non-interested Trustees of the Registrant will
be committed to the discretion of the non-interested Trustees then in office.
Additional Information
Voting Rights and General Fund Information
Interest holders are entitled to one vote for each interest held. Interest
holders may vote on the election of Trustees and on other matters submitted to
meetings of interest holders. In regard to certain matters including
termination, merger, or a change of investment restrictions, the right to vote
is limited to the holders of interests of the particular Fund affected by the
proposal. When a majority is required, it means the lesser of 67% or more of the
interests present at a meeting when the holders of more than 50% of the
outstanding interests are present or represented by proxy, or more than 50% of
the outstanding interests.
To the extent required by applicable law, the insurance companies will solicit
voting instructions from owners of variable annuity Policies. All interests in
each Fund will be voted by the insurance companies in accordance with voting
instructions received from such variable annuity Policy owners. The insurance
companies will vote all of the interests which it is entitled to vote in the
same proportion as the voting instructions given by variable annuity Policy
owners, on the issues presented.
Each issued and outstanding interest in a Fund is entitled to participate
equally in dividends and distributions, if any, declared by its corresponding
Fund, and in the net assets of the Fund remaining upon liquidation or
dissolution after outstanding liabilities are satisfied. The interests of each
Fund, when issued, are fully paid and non-assessable. They have no preemptive,
conversion, cumulative dividend or similar rights. They are not freely
transferable. The FT Funds and the FT II Funds can only be owned by the
Allmerica and Allmerica NY Separate Accounts, respectively. The First Defined
Funds may only be owned by the Allmerica and Allmerica NY Separate Accounts and
other separate accounts. Interests in a Fund do not have cumulative rights. This
means that owners of more than half of the FT Fund's, FT II Fund's or the First
Defined Fund's interests voting for election of Trustees of such Fund can elect
all the Trustees of such Fund if they so choose. Then, the remaining interest
owners would not be able to elect any Trustees.
The Board of Trustees of the Funds has the right to establish additional series
in the future, to change those series and to determine the preferences, voting
powers, rights and privileges thereof.
The Funds are not required and do not intend to hold annual meetings of
shareholders. Shareholders owning more than 10% of the outstanding shares of a
Fund have the right to call a special meeting to remove Trustees or for any
other purpose.
With regard to the First Defined Fund, under Massachusetts law applicable to
Massachusetts business trusts, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust of the First Defined Fund contains an express
disclaimer of shareholder liability for acts or obligations of the First Defined
Fund and requires that notice of this disclaimer be given in each agreement,
obligation or instrument entered into or executed by the First Defined Fund or
the Trustees. The First Defined Fund Declaration of Trust further provides for
indemnification out of the assets and property of the First Defined Fund for all
losses and expenses of any shareholder held personally liable for the
obligations of the First Defined Fund. 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 First Defined Fund or the
applicable Fund itself was unable to meet its obligations. The First Defined
Fund believes the likelihood of the occurrence of these circumstances is remote.
Shareholder Inquiries
All inquiries regarding a Registrant should be directed to the applicable Fund
at 1-(800) 621-1675 or by writing the applicable Fund at 1001 Warrenville Road,
Suite 300, Lisle, Illinois 60532.
Tax Status
Federal Income Tax Matters
The following discussion of federal income tax matters is based upon the advice
of Chapman and Cutler, counsel to the Funds.
First Defined Fund
Each First Defined Fund intends to qualify under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code") for tax treatment as a regulated
investment company. In order to qualify as a regulated investment company, each
Sector Fund (i) must elect to be treated as a regulated investment company and
(ii) for each taxable year thereafter must satisfy certain requirements relating
to the source of its income, diversification of its assets, and distributions of
its income to shareholders.
First, each First Defined Fund must derive at least 90% of its annual gross
income (including tax-exempt interest) from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities, foreign currencies or other income (including but not limited to
gains from options, futures, or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies (the "90% gross
income test"). Second, each First Defined Fund must diversify its holdings so
that, at the close of each quarter of its taxable year, (i) at least 50% of the
value of its total assets is comprised of cash, cash items, United States
Government securities, securities of other regulated investment companies and
other securities limited in respect of any one issuer to an amount not greater
in value that 5% of the value of the Fund's total assets and to not more that
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of the Fund's total assets is invested in the securities of any
one issuer (other than United States Government securities and securities of
other regulated investment companies) or two or more issuers controlled by the
Fund and engaged in the same, similar or related trades or businesses.
As a regulated investment company, each First Defined Fund will not be subject
to federal income tax in any taxable year for which it distributes at least 90%
of the sum of (i) its "investment company taxable income" (without regard to its
net capital gain, i.e., the excess of its net long-term capital gain over its
short-term capital loss) and (ii) its net tax-exempt interest (the excess of its
gross tax-exempt interest income over certain disallowed deductions). In
addition, to the extent a First Defined Fund timely distributes to shareholders
at least 98% of its taxable income (including any net capital gain), it will not
be subject to the 4% excise tax on certain undistributed income of "regulated
investment companies." Each First Defined Fund intends to make timely
distributions in compliance with these requirements and consequently it is
anticipated that they generally will not be required to pay the excise tax. A
First Defined Fund may retain for investment its net capital gain. However, if a
First Defined Fund retains any net capital gain or any investment company
taxable income, it will be subject to federal income tax at regular corporate
rates on the amount retained. If a First Defined Fund retains any net capital
gain, the Fund may designate the retained amount as undistributed capital gains
in a notice to its shareholders who, if subject to federal income tax on
long-term capital gains, (i) will be required to include in income for federal
income tax purposes, as long-term capital gain, their shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund against their federal income tax liabilities
if any, and to claim refunds to the extent the credit exceeds such liabilities.
For federal income tax purposes, the tax basis of shares owned by a shareholder
of a First Defined Fund will be increased by an amount equal to the difference
between the amount of such includible gains and the tax deemed paid by such
shareholder in respect of such shares. Each First Defined Fund intends to
distribute at least annually to its shareholders all or substantially all of its
investment company taxable income, net tax-exempt interest and net capital gain.
Treasury regulations permit a regulated investment company, in determining its
investment company taxable income and net capital gain, to elect (unless it has
made a taxable year election for excise tax purposes as discussed below) to
treat all or part of any net capital loss, any net long-term capital loss or any
net foreign currency loss incurred after October 31 as if they had been incurred
in the succeeding year.
If a First Defined Fund engages in hedging transactions involving financial
futures and options, these transactions will be subject to special tax rules,
the effect of which may be to accelerate income to the Fund, defer the First
Defined Fund's losses, cause adjustments in the holding periods of the Fund's
securities, convert long term capital gains into short-term capital losses and
convert short-term capital losses into long-term capital losses. These rules
could therefore affect the amount, timing and character of distributions to
shareholders.
Prior to purchasing shares in a First Defined Fund, the impact of dividends or
distributions which are expected to be or have been declared, but not paid,
should be carefully considered. Any dividend or distribution declared shortly
after a purchase of such shares prior to the record date will have the effect of
reducing the per share net asset value by the per share amount of the dividend
or distribution and will be subject to federal income tax to the extent it is a
distribution of ordinary income or capital gain.
In any taxable year of a First Defined Fund, distributions from the First
Defined Fund, other than distributions which are designated as capital gains
dividends, will to the extent of the earnings and profits on the First Defined
Fund, constitute dividends for Federal income tax purposes which are taxable as
ordinary income to shareholders. To the extent that distributions to a
shareholder in any year exceed a First Defined Fund's current and accumulated
earnings and profits, they will be treated as a return of capital and will
reduce the shareholder's basis in his or her shares and, to the extent that they
exceed his or her basis, will be treated as gain from the sale of such shares as
discussed below. Distributions of a First Defined Fund's net capital gain which
are properly designated as capital gain dividends by the First Defined Fund will
be taxable to the shareholders as long-term capital gain, regardless of the
length of time the shares have been held by a shareholder. Distributions will be
taxed in the manner described (i.e., as ordinary income, long-term capital gain,
return of capital or exempt-interest dividends) even if reinvested in additional
shares of a First Defined Fund.
Although dividends generally will be treated as distributed when paid, dividends
declared in October, November or December, payable to shareholders of record on
a specified date in one of those months and paid during the following January,
will be treated as having been distributed by a First Defined Fund (and received
by the shareholders) on December 31 of the year such dividends are declared.
The redemption or exchange of the shares of a First Defined Fund normally will
result in capital gain or loss to the shareholders. Generally, a shareholder's
gain or loss will be long-term gain or loss if the shares have been held for
more than one year. Present law taxes both long- and short-term capital gains of
corporations at the rates applicable to ordinary income. The Internal Revenue
Service Restructuring and Reform Act for 1998 (the "1998 Tax Act") provides that
for taxpayers other than corporations, net capital gain (which is defined as net
long-term capital gain over net short-term capital loss for the taxable year)
realized from property (with certain exclusions) is generally subject to a
maximum marginal stated tax rate of 20% (10% in the case of certain taxpayers in
the lowest tax bracket). 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. The date on which a share is acquired (i.e., the
"trade date") is excluded for purposes for determining the holding period of the
share. Capital gains realized from assets held for one year or less are taxed at
the same rates as ordinary income. Note that if a sale of shares held for less
than six months results in loss, the loss will be treated as a long-term capital
loss to the extent of any capital gain distribution made with respect to such
shares during the period those shares are held by the shareholder.
In addition, please note that capital gains may be recharacterized as ordinary
income in the case of certain financial transactions that are considered
"conversion transactions" effective for transactions entered into after April
30, 1993. Shareholders and prospective investors should consult with their tax
advisers regarding the potential effect of this provision on their investment in
shares of a First Defined Fund.
Under the Code, certain miscellaneous itemized deductions, such as investment
expenses, tax return preparation fees and employee business expenses, will be
deductible by individuals only to the extent they exceed 2% of adjusted gross
income. Miscellaneous itemized deductions subject to this limitation under
present law do not include expenses incurred by a First Defined Fund as long as
the shares of the First Defined Fund are held by or for 500 or more persons at
all times during the taxable year or another exception is met. In the event the
shares of a First Defined Fund are held by fewer than 500 persons, additional
taxable income may be realized by the individual (and other non-corporate)
shareholders in excess of the distributions received from the First Defined
Fund.
All or a portion of a sales load paid in purchasing shares of a First Defined
Fund cannot be taken into account for purposes of determining gain or loss on
the redemption or exchange of such shares within 90 days after their purchase to
the extent shares of the First Defined Fund or another fund are subsequently
acquired without payment of a sales load or with the payment of a reduced sales
load pursuant to the reinvestment or exchange privilege. Any disregarded portion
of such load will result in an increase in the shareholder's tax basis in the
shares subsequently acquired. Moreover, losses recognized by a shareholder on
the redemption or exchange of shares of a First Defined Fund held for six months
or less are disallowed to the extent of any distribution of exempt-interest
dividends received with respect to such shares and, if not disallowed, such
losses are treated as long-term capital losses to the extent of any
distributions of long-term capital gains made with respect to such shares. In
addition, no loss will be allowed on the redemption or exchange of shares of a
First Defined Fund if the shareholder purchases other shares of the First
Defined Fund (whether through reinvestment of distributions or otherwise) or the
shareholder acquires or enters into a contract or option to acquire securities
that are substantially identical to shares of the First Defined Fund within a
period of 61 days beginning 30 days before and ending 30 days after such
redemption or exchange. If disallowed, the loss will be reflected in an
adjustment to the basis of the shares acquired.
If in any year a First Defined Fund should fail to qualify under Subchaper M for
tax treatment as a regulated investment company, the First Defined Fund would
incur a regular corporate federal income tax upon its income for that year, and
distributions to its shareholders would be taxable to shareholders as ordinary
dividend income for federal income tax purposes to the extent of the First
Defined Fund's available earnings and profits.
Each First Defined Fund is required in certain circumstances to withhold 31% of
taxable dividends and certain other payments paid to non-corporate holders of
shares who have not furnished to the First Defined Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain certifications, or who are otherwise subject to backup withholding.
A shareholder who is a foreign investor (i.e., an investor other than a United
States citizen or resident or a United States corporation, partnership, estate
or trust) should be aware that, generally, subject to applicable tax treaties,
distributions from a First Defined Fund which constitute dividends for Federal
income tax purposes (other than dividends which a First Defined Fund designates
as capital gain dividends) will be subject to United States income taxes,
including withholding taxes. However, distributions received by a foreign
investor from a First Defined Fund that are designated by a First Defined Fund
as capital gain dividends should not be subject to United States Federal income
taxes, including withholding taxes, if all of the following conditions are met:
(i) the capital gain dividend is not effectively connected with the conduct by
the foreign investor of a trade or business within the United States, (ii) the
foreign investor (if and individual) is not present in the United States for 183
days or more during his or her taxable year, and (iii) the foreign investor
provides all certification which may be required of his status (foreign
investors may contact the Fund to obtain a Form W-8 which must be filed with
such First Defined Fund and refiled every three calendar years thereafter).
Foreign investors should consult their tax advisors with respect to United
States tax consequences of ownership of Shares. Units in a First Defined Fund
and First Defined Fund distribution may also be subject to state and local
taxation and Shareholders should consult their tax advisors in this regard.
A corporate shareholder may be entitled to a 70% dividends received deduction
with respect to any portion of such shareholder's ordinary income dividends
which are attributable to dividends received by a First Defined Fund on certain
Equity Securities (other than corporate shareholders, such as "S" corporations,
which are not eligible for the deduction because of their special
characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding corporation tax). Each First
Defined Fund will designate the portion of any taxable dividend which is
eligible for this deduction. However, a corporate shareholder should be aware
that Sections 246 and 246A of the Code impose additional limitations on the
eligibility of dividends for the 70% dividends received deduction. These
limitations include a requirement that stock (and therefore Shares of a First
Defined Fund) must generally be held at least 46 days (as determined under, and
during the period specified in, Section 246(c) of the Code). Regulations have
been issued which address special rules that must be considered in determining
whether the 46 day holding requirement is met. Moreover, the allowable
percentage of the deduction will generally be reduced from 70% if a corporate
shareholder owns Shares of a First Defined Fund the financing of which is
directly attributable to indebtedness incurred by such corporation. To the
extent dividends received by a First Defined Fund are attributable to foreign
corporations, a corporate shareholder will not be entitled to the dividends
received deduction with respect to its share of such foreign dividends since the
dividends received deduction is generally available only with respect to
dividends paid by domestic corporations. It should be noted that payments to a
First Defined Fund of dividends on equity Securities that are attributable to
foreign corporations may be subject to foreign withholding taxes. Corporate
shareholders should consult with their tax advisers with respect to the
limitations on, and possible modifications to, the dividends received deduction.
A First Defined Fund may elect to pass through to the shareholders the foreign
income and similar taxes paid by the Fund in order to enable such shareholders
to take a credit (or deduction) for foreign income taxes paid by a First Defined
Fund. If such an election is made, shareholders of a First Defined Fund, because
they are deemed to own a pro rata portion of the foreign securities held by the
First Defined Fund, much include in their gross income, for federal income tax
purposes, both their portion of dividends received by such First Defined Fund
and also their portion of the amount which the First Defined Fund deems to be
the shareholders' portion of foreign income taxes paid with respect to, or
withheld from, dividends, interest or other income of the First Defined Fund
from its foreign investments. Shareholders may then subtract from their federal
income tax the amount of such taxes withheld, or else treat such foreign taxes
as deductions from gross income; however, as in the case of investors receiving
income directly from foreign sources, the above described tax credit or
deduction is subject to certain limitations. The 1997 Act imposes a required
holding period for such credits. Shareholders should consult their tax advisers
regarding this election and its consequences to them.
Foreign currency gains and losses realized by a Fund in connection with certain
transactions that involve foreign currency-denominated debt securities, certain
foreign currency options, foreign currency forward contracts, foreign
currencies, or payable or receivables denominated in a foreign currency are
subject to Section 988 of the Code, which generally causes such gains and losses
to be treated as ordinary income and losses and may affect the amount, timing
and character of distributions to shareholders. For example, if a Fund sold a
foreign stock or bond and part of the gain or loss on the sale was attributable
to an increase or decrease in the value of a foreign currency, then the currency
gain or loss may be treated as ordinary income or loss. If such transactions
result in higher net ordinary income, the dividends paid by the Fund will be
increased; if such transactions result in lower net ordinary income, a portion
of dividends paid could be classified as a return of capital.
Each First Defined Fund may qualify for and make an election permitted under the
"pass through" provisions of Section 853 of the Internal Revenue Code, which
allows a regulated investment company to elect to have its foreign tax credit
taken by its shareholders instead of on its own tax return. To be eligible for
this credit, more than 50% of the value of a Fund's total assets at the close of
its taxable year must consist of stock or other securities in foreign
corporations, and the Fund must meet certain other requirements.
If a First Defined Fund makes this election, it may not take any foreign tax
credit and may not take a deduction for foreign taxes paid. However, each Fund
is allowed to include the amount of foreign taxes paid in a taxable year in its
dividends paid deduction. Each shareholder would then include in his gross
income, and treat as paid by him, his proportionate share of the foreign taxes
paid by the Fund.
If the U.S. government were to impose any restrictions, through taxation or
other means, on foreign investments by U.S. investors such as those to be made
through a Fund, the Board of Trustees of each Fund will promptly review the
policies of the Fund to determine whether significant changes in its investments
are appropriate.
General
The foregoing is a general and abbreviated summary of the provisions of the Code
and Treasury Regulations presently in effect as they directly govern the federal
income taxation of a Sector Fund and its shareholders and relates only to the
federal income tax status of a First Defined Fund and to the tax treatment of
distributions by a First Defined Fund to United States shareholders. For
complete provisions, reference should be made to the pertinent Code sections and
Treasury Regulations. The Code and Treasury Regulations are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. Shareholders are advised to consult their own
tax advisers for more detailed information concerning the federal taxation of a
First Defined Fund and the income tax consequences to its shareholders, as well
as with respect to foreign, state and local tax consequences of ownership of
First Defined Fund shares.
FT Fund and FT II Fund
The FT Fund and FT II Fund are not "regulated investment companies" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The
FT Fund and FT II Fund nonetheless do not pay federal income tax on its
interest, dividend income or capital gains. As a limited liability company whose
interests are sold only to a Separate Account, the FT Fund and FT II Fund are
disregarded as entities for purposes of federal income taxation. Allmerica and
Allmerica NY, through the Separate Accounts, are treated as owning the assets of
the FT Fund and FT II Fund, respectively, which are the collective assets of the
FT Funds and FT II Fund, respectively, directly and their tax obligations
thereon are computed pursuant to Subchapter L of the Code (which governs the
taxation of insurance companies). Under current tax law, interest, dividend
income and capital gains of the Funds are not taxable to the Funds, and are not
currently taxable to Allmerica or Allmerica NY or to Policy owners, when left to
accumulate within a variable annuity Policy. Tax disclosure relating to the
variable annuity Policies that offer the FT Fund or the FT II Fund as an
investment alternative is contained in the prospectuses for those Policies.
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of segregated asset accounts that hold assets purchased under
contracts such as the variable annuity Policies (that is, the assets of the
Funds). Failure to satisfy those standards would result in imposition of Federal
income tax on a variable annuity Policy owner with respect to the increase in
the value of the variable annuity Policy. Section 817(h)(2) provides that a
segregated asset account that funds contracts such as the variable annuity
Policies is treated as meeting the diversification standards if, as of the close
of each calendar quarter, the assets in the account meet the diversification
requirements for a regulated investment company and no more than 55% of those
assets consist of cash, cash items, U.S. Government securities and securities of
other regulated investment companies.
The Treasury Regulations amplify the diversification standards set forth in
Section 817(h) and provide an alternative to the provision described above.
Under the regulations, an investment portfolio will be deemed adequately
diversified if (i) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (ii) no more than 70% of such
value is represented by any two investments; (iii) no more than 80% of such
value is represented by any three investments; and (iv) no more than 90% of such
value is represented by any four investments. For purposes of these Regulations,
all securities of the same issuer are treated as a single investment, but each
United States government agency or instrumentality shall be treated as a
separate issuer.
Each FT Fund and FT II Fund will be managed with the intention of complying with
these diversification requirements. It is possible that, in order to comply with
these requirements, less desirable investment decisions may be made which could
affect the investment performance of a FT Fund or FT II Fund.
<PAGE>
FIRST DEFINED SECTOR FUND
PART C
OTHER INFORMATION
Note: Items 23-30 have been answered with respect to all investment portfolios
(Funds) of the Registrant.
Item 23. Exhibits
Exhibit
Number Description
(a) Form of Declaration of Trust of the Registrant.(1)
(b) Form of By-Laws of the Registrant.(2)
(c) Form of Establishment and Designation of Series of Shares of
Beneficial Interest.(2)
(d) Form of Investment Advisory and Management Agreement between
Registrant and First Trust Advisors L.P.(2)
(e) Form of Distribution Agreement between Registrant and Nike
Securities L.P.(2)
(f) Not Applicable
(g)(1) Form of Custodian Agreement between the Registrant and PFPC Trust
Company.(2)
(g)(2) Form of Foreign Custody Manager Agreement between the Registrant and
First Trust Advisors L.P.(2)
(h) Form of Administration Agreement between Registrant and Investment
Company Administration.(2)
(i)(1) Form of Opinion and Consent of Chapman and Cutler.(2)
(i)(2) Form of Opinion and Consent of Potter Anderson & Corroon. (2)
(j) Not Applicable.
(k) Not Applicable.
(l) Not Applicable.
(m) 12b-1 Service Plan.(2)
(n) Not Applicable.
(p) Code of Ethics of the Registrant, First Trust Advisors L.P. and Nike
Securities L.P.
(z) Original Powers of Attorney for Messrs. Bartel, Bowen, Erickson,
Fitzgerald, and Nielson, authorizing, among others, James A.
Bowen and W. Scott Jardine to execute the Registration Statement.(2)
(1) Incorporated by reference to the initial registration filed on
Form N-1A for the Registrant.
(2) To be supplied by amendment.
Item 24. Persons controlled by or under Common Control with Registrant
Not Applicable
Item 25. Indemnification
Section 4 of the Registrant's Declaration of Trust provides as follows:
Section 4. Indemnification. Subject to the exceptions and
limitations contained in this Section 4, every person who is, or has been, a
Trustee, officer, employee or agent of the Trust, including persons who
serve at the request of the Trust as directors, trustees, officers,
employees or agents of another organization in which the Trust has an
interest as a shareholder, creditor or otherwise (hereinafter referred to
as a "Covered Person"), shall be indemnified by the Trust to the fullest
extent permitted by law against liability and against all expenses reasonably
incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue
of his being or having been such a Trustee, director, officer, employee or
agent and against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by
reason of a final adjudication by the court or other body before which
the proceeding was brought that he engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in
the conduct of his office;
(b) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the reasonable
belief that his action was in the best interests of the Trust; or
(c) in the event of a settlement or other disposition not
involving a final adjudication (as provided in paragraph (a) or (b))
and 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 his office by the court or
other body approving the settlement or other disposition, or a
reasonable determination, based on a review of readily available facts
(as opposed to a full trial-type inquiry), that he did not engage in
such conduct:
(i) by a vote of 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
(ii) by written opinion of independent legal counsel.
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 such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.
Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding subject to a claim for indemnification under this
Section 4 shall be advanced by the Trust prior to final disposition thereof upon
receipt of an undertaking by or on behalf of the recipient to repay such amount
if it is ultimately determined that he is not entitled to indemnification under
this Section 4, provided that either:
(a) 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
(b) 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 independent legal counsel in a written
opinion shall determine, based upon a review of the readily available
facts (as opposed to a full trial-type inquiry), that there is reason
to believe that the recipient ultimately will be found entitled to
indemnification.
As used in this `Section 4, a "Disinterested Trustee" is one (x) who is
not an Interested Person of the Trust (including anyone, as such Disinterested
Trustee, who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), and (y) 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 has been pending.
As used in this Section 4, the words "claim," "action," "suit" or
"proceeding" shall apply to all claims, actions, suits, 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, fines, penalties
and other liabilities.
The trustees and officers of the Registrant are covered by Investment Trust
Errors and Omission policies in the aggregate amount of $500,000 (with a maximum
deductible of $50,000) against liability and expenses of claims of wrongful acts
arising out of their position with the Registrant, except for matters which
involved willful acts, bad faith, gross negligence and willful disregard of duty
(i.e., where the insured did not act in good faith for a purpose he or she
reasonably believed to be in the best interest of Registrant or where he or she
shall have had reasonable cause to believe this conduct was unlawful).
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to the officers, trustees or controlling persons of the
Registrant pursuant to the Limited Liability Company Agreement of the Registrant
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 Act and is, therefore, unenforceable. In the even that a
claim for indemnification is against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by an officer or trustee or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such officer, trustee 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 of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of the Investment Adviser
First Trust Advisors L.P. ("First Trust") serves as investment adviser to the
funds and also serves as subadvisor to 23 mutual funds and is the portfolio
supervisor of certain unit investment trusts. Its principal address is 1001
Warrenville Road, Suite 300, Lisle, Illinois 60532.
The principal business of certain of First Trust's principal executive officers
involves various activities in connection with the family of unit investment
trusts sponsored by Nike Securities L.P. ("Nike Securities"). Nike Securities
principal address is 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532.
<TABLE>
<CAPTION>
Other Business, Profession, Vocation or Employment
Name and Position with First Trust During Past Two Years
<S> <C>
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
Ronald Dean McAlister, President Managing Director, Nike Securities.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
James A. Bowen, Managing Director President, Nike Securities.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
Charles Henry Bradley, Jr., Senior Vice President Senior Vice President, Nike Securities; Chief
Investment Officer, CornerStone Investment Advisors.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
Mark R. Bradley, Chief Financial Officer and Senior Vice Chief Financial Officer and Senior Vice President, Nike
President Securities.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
Robert W. Bredemeier, Senior Vice President Senior Vice President, Nike Securities.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
Susan Marie Brix, Ass't Portfolio Manager Representative, Nike Securities.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
Robert Franklin Carey, Senior Vice President Senior Vice President, Nike Securities.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
Jon Carl Erickson, Vice President Vice President, Nike Securities.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
Frank Leonard Fichera, Managing Director Managing Director, Nike Securities.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
David Brooks Field, Senior Vice President and Chief Senior Vice President, Nike Securities; Of Counsel,
Investment Officer Johnson, Westra, Attorneys; Adjunct Professor of
Finance, Kellstadt Graduate School of Business, DePaul
University.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
Robert Scott Hall and Managing Director Managing Director, Nike Securities.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
William Scott Jardine, Senior Vice President, General Senior Vice President, General Counsel, Nike Securities.
Counsel
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
Edward Hayes Keiley III, Vice President Compliance Vice President Compliance, Nike Securities; Associate
Examiner, NASDR; Executive Vice President, Community
Brokerage, Inc.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
Daniel Joel Lindquist, Vice President and Portfolio Vice President, Nike Securities; Vice President, Shay
Manager Assets Management; Registered Representative, Nike
Securities.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
David Gerard McGarel, Evaluations Supervisor Evaluations Supervisor, Nike Securities; Manager,
Bansley & Kiener, L.L.P.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
Nike Securities Corporation, General Partner General Partner, Grace Partners of DuPage L.P.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
Richard Allen Olson, Managing Director Managing Director, Nike Securities.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
John Griffin Phillips, Vice President Vice President, Nike Securities.
----------------------------------------------------------- ---------------------------------------------------------
----------------------------------------------------------- ---------------------------------------------------------
Robert Steven Swiatek, Vice President Vice President of Nike Securities; Analyst, Griffin,
Kubic, Stephens & Thompson.
----------------------------------------------------------- ---------------------------------------------------------
</TABLE>
Item 27. Principal Underwriters
(a) Nike Securities L.P. serves as principal underwriter of the shares of the
Fund. Nike Securities serves as principal underwriter and depositor of the
following investment companies registered as unit investment trusts: the First
Trust Combined Series, FT Series (formerly known as the First Trust Special
Situations Trust), the First Trust Insured Corporate Trust, the First Trust of
Insured Municipal Bonds, and the First Trust GNMA.
(b)
<TABLE>
<CAPTION>
Positions and Offices
Name and Principal Business Address with Underwriter Positions and Offices with Fund
<S> <C> <C>
--------------------------------------------- ----------------------------------- -----------------------------------
--------------------------------------------- ----------------------------------- -----------------------------------
Nike Securities Corporation General Partner None
1001 Warrenville Road
Lisle, IL 60532
--------------------------------------------- ----------------------------------- -----------------------------------
--------------------------------------------- ----------------------------------- -----------------------------------
Grace Partners of DuPage L.P. Limited Partner None
--------------------------------------------- ----------------------------------- -----------------------------------
--------------------------------------------- ----------------------------------- -----------------------------------
James A. Bowen President President, Chairman of the Board,
1001 Warrenville Road Chief Financial Officer, Trustee
Lisle, IL 60532
--------------------------------------------- ----------------------------------- -----------------------------------
--------------------------------------------- ----------------------------------- -----------------------------------
Ronald D. McAlister Managing Director None
1001 Warrenville Road
Lisle, IL 60532
--------------------------------------------- ----------------------------------- -----------------------------------
--------------------------------------------- ----------------------------------- -----------------------------------
Scott R. Hall Managing Director None
1001 Warrenville Road
Lisle, IL 60532
--------------------------------------------- ----------------------------------- -----------------------------------
--------------------------------------------- ----------------------------------- -----------------------------------
Frank L. Fichera Managing Director None
1001 Warrenville Road
Lisle, IL 60532
--------------------------------------------- ----------------------------------- -----------------------------------
--------------------------------------------- ----------------------------------- -----------------------------------
Richard A. Olson Managing Director None
1001 Warrenville Road
Lisle, IL 60532
--------------------------------------------- ----------------------------------- -----------------------------------
--------------------------------------------- ----------------------------------- -----------------------------------
Mark R. Bradley Chief Financial Officer Treasurer, Chief Financial
1001 Warrenville Road Officer and Chief Accounting
Lisle, IL 60532 Officer
--------------------------------------------- ----------------------------------- -----------------------------------
--------------------------------------------- ----------------------------------- -----------------------------------
Carlos E. Nardo Senior Vice President None
1001 Warrenville Road
Lisle, IL 60532
--------------------------------------------- ----------------------------------- -----------------------------------
--------------------------------------------- ----------------------------------- -----------------------------------
Robert W. Bredemeier Senior Vice President None
1001 Warrenville Road
Lisle, IL 60532
--------------------------------------------- ----------------------------------- -----------------------------------
--------------------------------------------- ----------------------------------- -----------------------------------
David B. Field Senior Vice President Vice President
1001 Warrenville Road
Lisle, IL 60532
--------------------------------------------- ----------------------------------- -----------------------------------
--------------------------------------------- ----------------------------------- -----------------------------------
Andrew S. Roggensack Senior Vice President None
1001 Warrenville Road
Lisle, IL 60532
--------------------------------------------- ----------------------------------- -----------------------------------
--------------------------------------------- ----------------------------------- -----------------------------------
William S. Jardine General Counsel Secretary
1001 Warrenville Road
Lisle, IL 60532
--------------------------------------------- ----------------------------------- -----------------------------------
</TABLE>
(c) Not Applicable.
Item 28. Location of Accounts and Records
First Trust Advisors L.P., 1001 Warrenville Road, Suite 300, Lisle, Illinois
60532, maintains the Registrant's organizational documents, minutes of meetings,
contracts of the Registrant and all advisory material of the investment adviser.
PFPC Trust Company, 8800 Tinicum Boulevard, 3rd Floor, Suite 2000 Philadelphia,
PA 19153, maintains all general and subsidiary ledgers, journals, trial
balances, records of all portfolio purchase and sales, and all other required
records not maintained by First Trust Advisors L.P.
ICA Fund Services Corp., 4455 E. Camelback Road, Suite 261E, Phoenix, AZ 85018,
maintains all the required records in its capacity as transfer, accounting,
dividend payment and interest holder service agent for the Registrant.
Item 29. Management Services
Not Applicable
Item 30. Undertakings
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, the Registrant has duly caused this Registration Statement to be signed on
its behalf by the undersigned, duly authorized, in the City of Lisle and the
State of Illinois on the 1st day of December, 2000.
FIRST DEFINED SECTOR FUND
By: /s/ James A. Bowen
-----------------------------------------
James A. Bowen
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following person in the capacity and on
the date indicated.
Signature Title Date
/s/ Mark R. Bradley Treasurer and Chief Financial December 1, 2000
Mark R. Bradley and Accounting Officer
/s/ James A. Bowen President and Trustee December 1, 2000
James A. Bowen
EXHIBIT INDEX