File No. 333-116023
Rule 497(c)
Rule 497(h)
PROSPECTUS
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18,500,000 SHARES
FIRST TRUST/FIDUCIARY ASSET MANAGEMENT
COVERED CALL FUND
COMMON SHARES
$20.00 PER SHARE
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The Fund. First Trust/Fiduciary Asset Management Covered Call Fund (the
"Fund") is a newly organized, diversified, closed-end management investment
company.
Investment Objective. The Fund's investment objective is to provide a high
level of current income and gains and, to a lesser extent, capital appreciation.
The Fund seeks to achieve its investment objective by investing in a diversified
portfolio of equity securities and writing (selling) call options on at least
80% of the Fund's managed assets. There can be no assurance that the Fund's
investment objective will be achieved.
(continued on following page)
INVESTING IN THE FUND'S COMMON SHARES INVOLVES CERTAIN RISKS THAT ARE
DESCRIBED IN THE "RISKS" SECTION BEGINNING ON PAGE 23 OF THIS PROSPECTUS.
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Per Share Total
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Public offering price $20.00 $370,000,000
Sales load (1) $.90 $16,650,000
Estimated offering expenses (2) $.04 $740,000
Proceeds, after expenses, to the Fund $19.06 $352,610,000
(1) The Fund has agreed to pay the underwriters $.00667 per common share as
a partial reimbursement of expenses incurred in connection with the
offering and to pay certain fees to counsel to the underwriters. The
Fund's investment adviser, First Trust Advisors L.P. (not the Fund),
will pay Merrill Lynch, Pierce, Fenner & Smith Incorporated additional
compensation. In addition, First Trust Advisors L.P. (not the Fund)
will pay A.G. Edwards & Sons, Inc. and Raymond James & Associates, Inc.
an incentive fee. The total amount of the foregoing payments, together
with any reimbursement to First Trust Portfolios, L.P. for distribution
services, will not exceed 4.5% of the total price to the public of the
common shares sold in this offering. See "Underwriting."
(2) Total expenses of the offering of the common shares of the Fund paid by
the Fund (other than sales load, but including the $.00667 per common
share partial reimbursement of certain underwriter expenses) are
estimated to be $740,000, which represents $.04 per common share
issued. The Fund's investment adviser has agreed to pay (i) all
organizational expenses and (ii) all offering costs of the Fund (other
than sales load, but including the reimbursement described above) that
exceed $.04 per common share. The Fund's sub-adviser, Fiduciary Asset
Management, LLC, has agreed to reimburse the Fund's investment adviser
for one-half of such organizational expenses and offering costs of the
Fund that exceed $.04 per common share.
The underwriters may also purchase up to an additional 2,775,000 common
shares at the public offering price, less the sales load, within 45 days of the
date of this prospectus solely to cover overallotments.
Neither the Securities and Exchange Co mmission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The common shares will be ready for delivery on or about August 31, 2004.
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Merrill Lynch & Co. A.G. Edwards Raymond James
Wachovia Securities Advest, Inc. Robert W. Baird & Co.
Ferris, Baker Watts J.J.B. Hilliard, W.L. Lyons, Inc. KeyBanc Capital Markets
Incorporated
Legg Mason Wood Walker Oppenheimer & Co. RBC Capital Markets
Incorporated
Ryan Beck & Co. Wedbush Morgan Securities Inc. Wells Fargo Securities, LLC
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The date of this prospectus is August 26, 2004.
Front Cover
(continued from previous page)
Investment Strategy. Under normal market conditions, the Fund will pursue
an integrated investment strategy in which the Fund will invest substantially
all of its managed assets in a diversified portfolio of common stock of U.S.
corporations and U.S. dollar-denominated equity securities of foreign issuers,
in each case that are traded on U.S. securities exchanges, and on an ongoing and
consistent basis, write (sell) covered call options on at least 80% of the
Fund's managed assets. Common stocks will be selected by the Fund's sub-adviser
utilizing a combination of its proprietary quantitative/qualitative selection
criteria. The Fund will normally write (sell) covered call options against the
equity securities held in the Fund's portfolio with strike prices and expiration
dates that are collectively intended to provide risk/reward characteristics that
are consistent with the Fund's investment objective.
There can be no assurance that the Fund's investment strategy will be
successful or that the Fund will achieve its investment objective. See
"Prospectus Summary-Investment Objective and Policies" for a complete
description of the Fund's investment strategy.
No Prior Trading History. Because the Fund is newly organized, its common
shares have no history of public trading. Shares of closed-end investment
companies frequently trade at a discount from their net asset value. This risk
may be greater for investors who expect to sell their shares in a relatively
short period after completion of the public offering. The Fund's common shares
have been approved for listing on the New York Stock Exchange, subject to notice
of issuance, under the symbol "FFA."
Investment Adviser and Sub-Adviser. First Trust Advisors L.P. ("First Trust
Advisors" or the "Adviser") will be the Fund's investment adviser, responsible
for supervising the Fund's sub-adviser, monitoring the Fund's investment
portfolio, managing the Fund's business affairs and providing certain clerical
and bookkeeping and other administrative services. The Adviser, in consultation
with the Sub-Adviser (as defined below), is also responsible for determining the
Fund's overall investment strategy and overseeing its implementation. Fiduciary
Asset Management, LLC ("Fiduciary Asset Management" or the "Sub-Adviser") will
be the Fund's sub-adviser.
First Trust Advisors serves as investment adviser or portfolio supervisor
to investment portfolios with approximately $12.7 billion in assets which it
managed or supervised as of July 31, 2004. Fiduciary Asset Management serves as
investment adviser or portfolio supervisor to investment portfolios with
approximately $13.1 billion in assets which it managed or supervised as of July
31, 2004. See "Management of the Fund" in this prospectus and "Investment
Adviser" and "Sub-Adviser" in the Fund's Statement of Additional Information
("SAI").
You should read this prospectus, which contains important information about
the Fund, before deciding whether to invest and retain it for future reference.
The SAI, dated August 26, 2004, and as it may be supplemented, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission and is incorporated by reference in its entirety into this
prospectus. You may request a free copy of the SAI, the table of contents of
which is on page 44 of this prospectus, by calling (800) 988-5891 or by writing
to the Fund, or you may obtain a copy (and other information regarding the Fund)
from the Securities and Exchange Commission's web site (http://www.sec.gov).
The Fund's common shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
Page 2
TABLE OF CONTENTS
Page
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Prospectus Summary ..................................................... 4
Summary of Fund Expenses ............................................... 18
The Fund ............................................................... 19
Use of Proceeds ........................................................ 19
The Fund's Investments ................................................. 19
Risks .................................................................. 23
Management of the Fund ................................................. 30
Net Asset Value ........................................................ 31
Distributions .......................................................... 32
Dividend Reinvestment Plan ............................................. 33
Description of Shares .................................................. 34
Certain Provisions in the Declaration of Trust ......................... 34
Structure of the Fund; Common Share Repurchases; Change in
Fund Structure....................................................... 35
Tax Matters............................................................. 37
Underwriting ........................................................... 39
Custodian, Administrator and Transfer Agent ............................ 43
Legal Opinions ......................................................... 43
Table of Contents of the Statement of Additional Information ........... 44
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER THE FUND NOR THE UNDERWRITERS HAVE AUTHORIZED ANY OTHER PERSON TO
PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER THE FUND NOR THE
UNDERWRITERS ARE MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION
APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER ONLY.
Page 3
PROSPECTUS SUMMARY
This is only a summary. This summary does not contain all of the
information that you should consider before investing in the Fund's common
shares. You should review the more detailed information contained in this
prospectus and in the Statement of Additional Information, especially the
information set forth under the heading "Risks."
The Fund......................... First Trust/Fiduciary Asset Management
Covered Call Fund (the "Fund") is a newly
organized, diversified, closed-end
management investment company. The Fund's
principal office is located at 1001
Warrenville Road, Suite 300, Lisle, Illinois
60532, and its telephone number is (630)
241-4141.
The Offering..................... The Fund is offering 18,500,000 common
shares of beneficial interest at $20.00 per
share through a group of underwriters (the
"Underwriters") led by Merrill Lynch,
Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), A.G. Edwards & Sons, Inc.
("A.G. Edwards") and Raymond James &
Associates, Inc. ("Raymond James"). The
common shares of beneficial interest are
called "Common Shares" in this prospectus.
You must purchase at least 100 Common Shares
in this offering. The Fund has given the
Underwriters an option to purchase up to
2,775,000 additional Common Shares to cover
orders in excess of 18,500,000 Common
Shares. First Trust Advisors L.P. ("First
Trust Advisors" or the "Adviser") has agreed
to pay (i) all organizational expenses and
(ii) all offering costs of the Fund (other
than sales load but including a partial
reimbursement of certain underwriting
expenses) that exceed $.04 per Common Share.
Fiduciary Asset Management, LLC ("Fiduciary
Asset Management" or the "Sub-Adviser") has
agreed to reimburse the Adviser for one-half
of such organizational expenses and offering
costs of the Fund that exceed $.04 per
Common Share.
Listing.......................... The Fund's common shares have been approved
for listing on the New York Stock Exchange,
subject to notice of issuance, under the
symbol "FFA."
Investment Objective
and Policies..................... The Fund's investment objective is to
provide a high level of current income and
gains and, to a lesser extent, capital
appreciation. The Fund seeks to achieve its
investment objective by investing in a
diversified portfolio of equity securities
and writing (selling) call options on at
least 80% of the Fund's managed assets. The
term "managed assets" means the average
daily gross assets of the Fund minus the sum
of the Fund's accrued and unpaid dividends
on any outstanding Common Shares and accrued
liabilities (including the value of call
options written (sold)). There can be no
assurance that the Fund's investment
objective will be achieved.
Under normal market conditions, the Fund
will pursue an integrated investment
strategy in which the Fund will invest
substantially all of its managed assets in a
diversified portfolio of common stock of
U.S. corporations and U.S. dollar-
denominated equity securities of foreign
issuers, in each case that are traded on
U.S. securities exchanges, and on an ongoing
Page 4
and consistent basis, write (sell) covered
call options on at least 80% of the Fund's
managed assets. The Fund seeks to produce a
high level of current income and gains
primarily from the premium income it
receives from writing (selling) call
options, from dividends received on the
equity securities held in the Fund's
portfolio and, to a lesser extent, from
capital appreciation in the value of equity
securities underlying such covered call
options.
o Common Stock/Equity Securities--Common
stocks and equity securities will be
selected by the Sub-Adviser utilizing its
proprietary quantitative/qualitative
selection criteria. The Sub-Adviser's
quantitative/qualitative selection
criteria will focus on sectors,
industries and individual common stocks
and equity securities that exhibit strong
fundamental characteristics. The Fund may
invest up to 20% of its managed assets in
U.S. dollar-denominated equity securities
of foreign issuers. In addition, the Fund
may invest up to 10% of its managed
assets in equity securities of other
investment companies that invest
primarily in securities of the type in
which the Fund may invest directly.
o Covered Call Options--The Fund will write
(sell) covered call options, including
Long-Term Equity AnticiPation Securities
("LEAPS(R)"), against the equity
securities held in the Fund's portfolio
with strike prices (defined below) and
expiration dates (defined below) that are
collectively intended to provide
risk/reward characteristics that are
consistent with the Fund's investment
objective. The Fund will write (sell)
covered call options with respect to at
least 80% of its managed assets. The
Sub-Adviser believes that writing
(selling) call options will provide the
Fund with current income and may enhance
the Fund's total return in a neutral to
modestly rising market and provide a
partial hedge in a declining market.
The options the Fund intends to write
(sell) are considered "covered" because
the Fund will own equity securities
against which the options are written
(sold). As a result, the number of call
options the Fund can write (sell) is
normally limited by the number of equity
securities the Fund holds in its
portfolio. The Fund will not write (sell)
"naked" call options; i.e., options on
more equity securities than are held in
the Fund's portfolio. By writing
(selling) covered call options, the
Sub-Adviser seeks to generate income, in
the form of the premiums received for
writing (selling) the call options. The
Sub-Adviser will consider several factors
when writing (selling) call options,
including the overall equity market
outlook, sector and/or industry
attractiveness, individual security
considerations, and relative and/or
historical levels of option premiums.
When the Fund writes (sells) a call
option, it is selling to the buyer (the
"option holder") the right, but not the
obligation, to purchase a particular
asset (e.g., the underlying equity
security) from the Fund at a fixed price
(the "strike price") on or before a
specified date (the "expiration date"). A
call option normally represents the right
Page 5
to purchase 100 shares of the underlying
equity security. In exchange for the
right to purchase the underlying equity
security, the option holder pays a fee or
"premium" to the Fund. For example, the
buyer of one ABC June 110 call option at
$1.00 has paid to the writer (seller) a
premium of $1.00 to acquire the right to
purchase 100 shares of ABC at $110 up
until the call option's June expiration
date. All call options covering ABC are
referred to as an "option class." Each
individual option with a distinctive
trading month and strike price is an
"option series."
The Fund will write (sell) call options
that are generally issued, guaranteed and
cleared by The Options Clearing
Corporation ("OCC"), a registered
clearing corporation. Listed call options
are traded on the American Stock
Exchange, Chicago Board Options Exchange,
International Securities Exchange, New
York Stock Exchange, Pacific Stock
Exchange, Philadelphia Stock Exchange and
various other U.S. options exchanges.
Conventional listed call options have
expiration dates that can generally be up
to nine months from the date the call
options are first listed for trading.
Longer-term call options, such as
LEAPS(R), can have expiration dates up to
three years from the date of listing.
Call options are generally categorized as
American-style options or European-style
options. The call options the Fund
intends to write (sell) will generally be
American- style options, which may be
exercised at any time between the date of
purchase and the expiration date. The
Fund may also write (sell) European-style
options, which may be exercised only
during a specified period of time just
prior to the expiration date. In certain
limited circumstances in which the
illiquidity of a market for a particular
option effectively precludes the Fund
from writing (selling) a covered call
option in a manner consistent with the
Fund's investment objective and strategy,
the Fund may write (sell) over-the-
counter covered calls.
The Fund intends to primarily write
(sell) call options which are "out-
of-the-money." Out-of-the-money call
options are options with a strike price
above the current market price of the
underlying equity security.
Out-of-the-money options will generate
premium income to the Fund as well as
provide for potential appreciation in the
equity security to the extent of the
difference between the strike price and
the purchase price of such equity
security. The Fund may also write (sell)
"in-the-money" and "at-the-money" call
options. In-the-money call options are
call options with a strike price below
the current market price of the
underlying equity security and
at-the-money call options are options
with a strike price equal to the current
price of the underlying equity security.
The Fund may write (sell) in-the-money
and at-the-money call options as a
defensive measure to protect against a
possible decline in the underlying equity
security.
Page 6
As share prices of equity securities held
in the Fund's portfolio approach the call
option's strike price, there is a greater
likelihood that the call option could be
exercised by the option holder and the
Fund forced to sell the equity security.
While this may be beneficial to the Fund
in certain circumstances, the Fund
intends to minimize undesirable option
exercises by entering into covering
transactions in which the Fund will
purchase call options of the same option
series as the written (sold) call option,
which has the economic effect of
canceling the written (sold) call option.
The Fund's investment objective is
considered fundamental and may not be
changed without the approval of the holders
of the Common Shares (the "Common
Shareholders"). Unless otherwise stated in
this prospectus or the SAI, the remainder of
the Fund's investment policies, including
its investment strategy, are considered
non-fundamental and may be changed by the
Board of Trustees of the Fund (the "Board of
Trustees") without Common Shareholder
approval. The Fund will provide investors
with at least 60 days prior notice of any
change in the Fund's investment strategy.
The Fund cannot assure you that it will
achieve its investment objective. See "The
Fund's Investments" and "Risks" in this
prospectus and "Investment Policies and
Techniques" in the SAI.
Investment Adviser
and Sub-Adviser.................. First Trust Advisors will be the Fund's
investment adviser, responsible for
supervising the Sub-Adviser, monitoring the
Fund's investment portfolio, managing the
Fund's business affairs and providing
certain clerical and bookkeeping and other
administrative services. The Adviser, in
consultation with the Sub-Adviser, is also
responsible for determining the Fund's
overall investment strategy and overseeing
its implementation. Fiduciary Asset
Management will be the Fund's sub-adviser,
responsible for the day-to-day execution of
the Fund's investment strategy, providing
investment research and making and executing
recommendations for the purchase and sale of
securities.
First Trust Advisors, a registered
investment adviser, is an Illinois limited
partnership formed in 1991. First Trust
Advisors serves as investment adviser or
portfolio supervisor to investment
portfolios with approximately $12.7 billion
in assets, which it managed or supervised as
of July 31, 2004.
Fiduciary Asset Management is a Missouri
limited liability company and a registered
investment adviser, which manages a broad
range of equity and fixed income strategies
for institutional and private wealth clients
and acts as sub-adviser to another
registered investment company managed by the
Adviser. Founded in 1994, Fiduciary Asset
Management serves as investment adviser or
portfolio supervisor to investment
portfolios with approximately $13.1 billion
in assets, which it managed or supervised as
of July 31, 2004.
Distributions.................... The Fund's present policy, which may be
changed at any time by the Fund's Board of
Trustees, is to distribute at least
quarterly all, or substantially all, of its
Page 7
net investment income as dividends to Common
Shareholders. In addition, the Fund intends
to distribute any net long- term capital
gains to Common Shareholders as long-term
capital gain dividends at least annually.
Dividends from equity securities and short-
term capital gain (for example, premiums
earned in connection with writing (selling)
call options) will be the Fund's main
sources of net investment income. In
addition, the Fund may receive net
investment income from certain hedging and
interest rate transactions and other
investments. Moreover, the Fund may realize
capital gains or losses when it sells its
portfolio securities, depending on whether
the sale prices for the securities are
higher or lower than the purchase prices, or
when call options expire, are exercised or
are cancelled pursuant to a closing
transaction, depending on the timing of such
transactions. Unless you elect to receive
cash distributions, your distributions of
net investment income and capital gains
dividends will automatically be reinvested
into additional Common Shares pursuant to
the Fund's Dividend Reinvestment Plan. See
"Distributions" and "Dividend Reinvestment
Plan."
Distributions by the Fund of its net
investment income and of any net capital
gains, whether paid in cash or reinvested in
additional Common Shares, will be taken into
account in measuring the performance of the
Fund with respect to its investment
objective.
Tax Matters...................... Distributions from the Fund's net investment
income (including dividends and net
short-term capital gains) are generally
taxable to a Common Shareholder as ordinary
income, except to the extent they qualify as
"qualified dividend income" as discussed
below. Fund distributions of net capital
gain (the excess of long-term capital gain
over short-term capital loss) are generally
taxable to a Common Shareholder as long-term
capital gain regardless of how long the
Common Shareholder has held Fund Common
Shares.
Option premiums will be treated by the Fund
as either short-term or long-term capital
gain or loss, depending on whether the call
option expires, is exercised or is canceled
pursuant to a closing transaction, and the
timing of such transaction. See "Tax
Matters" in the SAI. Distributions from
"qualified dividend income" (dividends
received by the Fund from domestic and
certain foreign corporations) may qualify
for reduced individual income tax rates
applicable to long-term capital gains,
provided certain holding period and other
requirements are met by the Fund and by
individuals who own the Common Shares.
The Fund cannot assure you as to what
percentage of the distributions paid on the
Common Shares, if any, will consist of
qualified dividend income or long-term
capital gains, both of which are taxed at
lower rates for individuals than are
ordinary income and short-term capital
gains.
Page 8
If, for any calendar year, the Fund's total
distributions exceed the Fund's net
investment income and net realized capital
gain, such excess would generally be treated
as a tax-deferred return of capital up to
the amount of your tax basis in your Common
Shares.
Custodian, Administrator
and Transfer Agent............... PFPC Trust Company will serve as custodian,
and PFPC Inc. will serve as administrator,
fund accountant and transfer agent for the
Fund. See "Custodian, Administrator and
Transfer Agent."
Closed-End Structure............. Closed-end funds differ from open-end
management investment companies (commonly
referred to as mutual funds) in that
closed-end funds generally list their shares
for trading on a securities exchange and do
not redeem their shares at the option of the
shareholder. By comparison, mutual funds
issue securities redeemable at net asset
value at the option of the shareholder and
typically engage in a continuous offering of
their shares. Mutual funds are subject to
continuous asset in- flows and out-flows
that can complicate portfolio management,
whereas closed-end funds generally can stay
more fully invested in securities consistent
with the closed-end fund's investment
objective and policies. In addition, in
comparison to open-end funds, closed-end
funds have greater flexibility in their
ability to make certain types of
investments, including investments in
illiquid securities, although it is not
expected that the Fund will invest in
illiquid securities.
Shares of closed-end funds listed for
trading on a securities exchange frequently
trade at a discount from net asset value.
The market price of such shares may be
affected by net asset value, dividend or
distribution levels (which are dependent, in
part, on expenses), supply of and demand for
the shares, stability of dividends or
distributions, trading volume of the shares,
general market and economic conditions and
other factors beyond the control of a
closed-end fund. The foregoing factors may
result in the market price of the Common
Shares being greater than, less than or
equal to net asset value.
The Board of Trustees has reviewed the
structure of the Fund in light of its
investment objective and policies and
believes that the closed-end fund structure
is appropriate. As described in this
prospectus, however, the Board of Trustees
may review periodically the trading range
and activity of the Common Shares with
respect to its net asset value and the Board
of Trustees may take certain actions to seek
to reduce or eliminate any such discount.
Such actions may include open market
repurchases or tender offers for the Common
Shares or the possible conversion of the
Fund to an open-end mutual fund. There can
be no assurance that the Board of Trustees
will decide to undertake any of these
actions or that, if undertaken, such actions
would result in the Common Shares trading at
a price equal to or close to net asset value
per Common Share. Investors should assume
that it is highly unlikely that the Board of
Trustees would vote to convert the Fund to
an open-end management investment company.
See "Structure of the Fund; Common Share
Repurchases; Change in Fund Structure."
Page 9
Special Risk
Considerations................... Risk is inherent in all investing. The
following discussion summarizes some of the
risks that you should consider before
deciding whether to invest in the Fund. For
additional information about the risks
associated with investing in
the Fund, see "Risks."
No Operating History. The Fund is a newly
organized, diversified, closed- end
management investment company with no
history of operations.
Investment and Market Risk. An investment in
Common Shares is subject to investment risk,
including the possible loss of the entire
principal amount that you invest. Your
investment in Common Shares represents an
indirect investment in the securities owned
by the Fund. The value of these securities,
like other market investments, may move up
or down, sometimes rapidly and
unpredictably. The value of the securities
in which the Fund invests will affect the
value of the Common Shares. In addition, by
writing (selling) call options on the equity
securities held in the Fund's portfolio, the
capital appreciation potential of such
securities is limited to the difference
between the strike price of the call options
written (sold) and the purchase price of the
equity security underlying such options.
Your Common Shares at any point in time may
be worth less than your original investment,
even after taking into account the
reinvestment of Fund dividends and
distributions.
Management Risk. The Fund is subject to
management risk because it is an actively
managed portfolio. The Adviser and the
Sub-Adviser will apply investment techniques
and risk analyses in making investment
decisions for the Fund, but there can be no
guarantee that these will produce the
desired results.
Common Stock Risk. The Fund will have
significant exposure to common stocks.
Although common stocks have historically
generated higher average returns than
fixed-income securities over the long term,
common stocks also have experienced
significantly more volatility in those
returns and in certain years have
significantly underperformed relative to
fixed-income securities. An adverse event,
such as an unfavorable earnings report, may
depress the value of a particular common
stock held by the Fund. Also, the prices of
common stocks are sensitive to general
movements in the stock market and a drop in
the stock market may depress the prices of
common stocks to which the Fund has
exposure. Common stock prices fluctuate for
several reasons including changes in
investors' perceptions of the financial
condition of an issuer or the general
condition of the relevant stock market, or
when political or economic events affecting
the issuers occur. In addition, common
stocks prices may be particularly sensitive
to rising interest rates, as the cost of
capital rises and borrowing costs increase.
Option Risk. The Fund will write (sell) call
options on at least 80% of the Fund's
managed assets. These call options will give
the option holder the right, but not the
obligation, to purchase a security from the
Fund at the strike price on or prior to the
option's expiration date. The ability to
Page 10
successfully implement the Fund's investment
strategy depends on the Sub-Adviser's
ability to predict pertinent market
movements, which cannot be assured. Thus,
the use of options may require the Fund to
sell portfolio securities at inopportune
times or for prices other than current
market values, may limit the amount of
appreciation the Fund can realize on an
investment, or may cause the Fund to hold an
equity security that it might otherwise
sell. The writer (seller) of an option has
no control over the time when it may be
required to fulfill its obligation as a
writer (seller) of the option. Once an
option writer (seller) has received an
exercise notice, it cannot effect a closing
purchase transaction in order to terminate
its obligation under the option and must
deliver the underlying equity security at
the exercise price. As the writer (seller)
of a covered call option, the Fund forgoes,
during the option's life, the opportunity to
profit from increases in the market value of
the security underlying the call option
above the sum of the premium and the strike
price of the call option, but has retained
the risk of loss should the price of the
underlying security decline. The value of
the options written (sold) by the Fund,
which will be marked-to-market on a daily
basis, will be affected by changes in the
value and dividend rates of the underlying
equity securities, an increase in interest
rates, changes in the actual or perceived
volatility of the stock market and the
underlying equity securities and the
remaining time to the options' expiration.
The value of the options may also be
adversely affected if the market for the
options becomes less liquid or smaller. The
value of the options will be deducted from
the value of the Fund's assets when
determining the Fund's net asset value.
There can be no assurance that a liquid
market for the options will exist when the
Fund seeks to close out an option position.
Reasons for the absence of a liquid
secondary market on an exchange include the
following: (i) there may be insufficient
trading interest in certain options; (ii)
restrictions may be imposed by an exchange
on opening transactions or closing
transactions or both; (iii) trading halts,
suspensions or other restrictions may be
imposed with respect to particular classes
or series of options; (iv) unusual or
unforeseen circumstances may interrupt
normal operations on an exchange; (v) the
facilities of an exchange or the OCC may not
at all times be adequate to handle current
trading volume; or (vi) one or more
exchanges could, for economic or other
reasons, decide or be compelled at some
future date to discontinue the trading of
options (or a particular class or series of
options). If trading were discontinued, the
secondary market on that exchange (or in
that class or series of options) would cease
to exist. However, outstanding options on
that exchange that had been issued by the
OCC as a result of trades on that exchange
would continue to be exercisable in
accordance with their terms. The Fund's
ability to terminate over-the-counter
options is more limited than with
exchange-traded options and may involve the
risk that broker-dealers participating in
such transactions will not fulfill their
obligations. If the Fund were unable to
close out a covered call option that it had
written (sold) on an equity security, it
would not be able to sell the underlying
equity security unless the option expired
without exercise.
Page 11
The hours of trading for options may not
conform to the hours during which the
underlying equity securities are traded. To
the extent that the options markets close
before the markets for the underlying equity
securities, significant price and rate
movements can take place in the underlying
markets that cannot be reflected in the
options markets. Additionally, the exercise
price of an option may be adjusted downward
before the option's expiration as a result
of the occurrence of certain corporate
events affecting the underlying equity
security, such as extraordinary dividends,
stock splits, merger or other extraordinary
distributions or events. In certain
circumstances, a reduction in the exercise
price of an option could reduce the Fund's
capital appreciation potential on the
underlying equity security.
To the extent that the Fund purchases
options pursuant to a hedging strategy, the
Fund will be subject to the following
additional risks. If a put or call option
purchased by the Fund is not sold when it
has remaining value, and if the market price
of the underlying equity security remains
equal to or greater than the exercise price
(in the case of a put), or remains less than
or equal to the exercise price (in the case
of a call), the Fund will lose its entire
investment in the option. Also, where a put
or call option on a particular equity
security is purchased to hedge against price
movements in a related equity security, the
price of the put or call option may move
more or less than the price of the related
equity security. If restrictions on exercise
were imposed, the Fund might be unable to
exercise an option it had purchased. If the
Fund were unable to close out an option that
it had purchased on an equity security, it
would have to exercise the option in order
to realize any profit or the option may
expire worthless.
Investment Companies Risk. The Fund may
invest up to 10% of its managed assets in
equity securities of other open- or
closed-end investment companies or unit
investment trusts ("Investment Companies")
that invest primarily in securities of the
type in which the Fund may invest directly.
The Fund anticipates that these investments
will primarily be in exchange traded funds
("ETFs"). ETFs are registered investment
companies, the shares of which are traded on
a securities exchange like common stock.
ETFs are designed to track the performance
of a particular index. An investment in an
ETF is subject to the risks of any
investment in a broadly based portfolio of
securities, including the risk that the
general level of securities prices may
decline, thereby adversely affecting the
value of such investment. ETFs are subject
to additional risks, including the fact that
ETFs are not actively managed, the net asset
value of ETFs may not always correspond to
the market price of the underlying
securities, market liquidity, and the
possibility that the exchange where the ETF
is traded may halt trading in the
securities. As a stockholder in a registered
investment company, the Fund will bear its
ratable share of the ETF's expenses. Not
only would Common Shareholders in the Fund
bear their ratable share of the Fund's
expenses, they would also indirectly bear
their ratable share of the ETF's expenses if
the Fund invests in an ETF.
Page 12
Industry and Sector Risk. The Fund may
invest up to 25% of its managed assets in
the equity securities of issuers in a single
industry or sector of the economy. If the
Fund is focused in an industry or sector, it
may present more risks than if it were
broadly diversified over numerous industries
and sectors of the economy. Individual
industries or sectors may be subject to
unique risks which may include, among
others, governmental regulation, inflation,
technological innovations that may render
existing products and equipment obsolete,
competition from new entrants, high research
and development costs, and rising interest
rates.
The Fund currently intends to make
significant investments in equity securities
of companies in the technology sector, the
financial institutions sector and the
consumer products sector. However, if market
conditions change, the Fund's portfolio
would not necessarily be composed of equity
securities in these sectors, but could be
composed significantly of equity securities
of issuers in other sectors of the market.
The technology sector may include, for
example, companies that rely extensively on
technology, science or communications in
their product development or operations.
Technology companies are generally subject
to the risks of rapidly changing
technologies; short product life cycles;
fierce competition; aggressive pricing and
reduced profit margins; the loss of patent,
copyright and trademark protections;
cyclical market patterns; and 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. Technology company
stocks, especially those which are
Internet-related, have experienced extreme
price and volume fluctuations that are often
unrelated to the operating performance of
the respective company.
The financial institutions sector may
include, for example, commercial banks,
savings and loan associations, brokerage and
investment companies, insurance companies,
and consumer and industrial finance
companies. The industries within the
financial institutions sector are subject to
extensive government regulation, which can
limit both the amounts and types of loans
and other financial commitments they can
make, and the interest rates and fees they
can charge. Financial institutions are
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.
Profitability can be largely dependent on
the availability and cost of capital funds
and the rate of corporate and consumer debt
defaults, and can fluctuate significantly
when interest rates change. Insurance
companies can be subject to severe price
competition. The financial institutions
industries are currently undergoing
relatively rapid change as existing
distinctions between financial institutions
segments become less clear. For example,
recent business combinations have included
insurance, finance, and securities brokerage
under single ownership.
Page 13
The consumer products sector may include,
for example, companies principally engaged
in the manufacture and distribution of goods
and services to consumers both domestically
and internationally and in merchandising
finished goods and services primarily to
individual consumers. Consumer products
companies are generally subject to the risks
of cyclicality of revenues and earnings;
economic recession; currency fluctuations;
changing consumer tastes; extensive
competition; product liability litigation;
and increased governmental regulation.
Generally, spending on consumer products is
affected by the economic health of
consumers. A weak economy, and its effect on
consumer spending, would adversely affect
consumer products companies.
Income Risk. Net investment income paid by
the Fund to its Common Shareholders is
derived primarily from the premiums it
receives from writing (selling) call options
and, to a lesser extent, from the dividends
and interest it receives from the equity
securities and other investments held in the
Fund's portfolio and short-term gains
thereon. Premiums from writing (selling)
call options and dividends and interest
payments made by the securities in the
Fund's portfolio can vary widely over time.
Dividends on equity securities are not fixed
but are declared at the discretion of an
issuer's board of directors. There is no
guarantee that the issuers of the equity
securities in which the Fund invests will
declare dividends in the future or that if
declared they will remain at current levels
or increase over time. As described further
in "Tax Matters," "qualified dividend
income" received by the Fund, except as
noted below, will generally be eligible for
the reduced tax rate applicable to such
dividends under the "Jobs and Growth Tax
Relief Reconciliation Act of 2003" (the "Tax
Act"). Unless subsequent legislation is
enacted, the reduction to tax rates as set
forth in the Tax Act will expire for taxable
years beginning on or after January 1, 2009.
The Fund cannot assure you as to what
percentage of the dividends paid on the
Common Shares, if any, will consist of
qualified dividend income or long-term
capital gains, both of which are taxed at
lower rates for individuals than are
ordinary income and short-term capital
gains.
See "Tax Matters."
Portfolio Turnover Risk. The Fund's annual
portfolio turnover rate may vary greatly
from year to year. Although the Fund cannot
accurately predict its annual portfolio
turnover rate, it is not expected to exceed
50% under normal circumstances. However, to
the extent options written (sold) by the
Fund are exercised or covered, the Fund's
portfolio turnover rate will increase.
Portfolio turnover rate is not considered a
limiting factor in the execution of
investment decisions for the Fund. A higher
portfolio turnover rate results in
correspondingly greater brokerage
commissions and other transactional expenses
that are borne by the Fund. High portfolio
turnover may result in the realization of
net short-term capital gains by the Fund
which, when distributed to Common
Shareholders, will be taxable as ordinary
income. See "Tax Matters."
Page 14
Non-U.S. Equity Securities Risk. The Fund
may invest a portion of its assets in the
equity securities of issuers domiciled in
jurisdictions other than the United States.
These equity securities are either in the
form of American Depositary Receipts
("ADRs") or are directly listed on a U.S.
securities exchange. Investments in equity
securities of non-U.S. issuers involve
special risks not presented by investments
in equity securities of U.S. issuers,
including: (i) there may be less publicly
available information about non-U.S. issuers
or markets due to less rigorous disclosure
or accounting standards or regulatory
practices; (ii) many non- U.S. markets are
smaller, less liquid and more volatile than
the U.S. market; (iii) potential adverse
effects of fluctuations in currency exchange
rates or controls on the value of the Fund's
investments; (iv) the economies of non-U.S.
countries may grow at slower rates than
expected or may experience a downturn or
recession; (v) the adverse impact of
economic, political, social or diplomatic
events; (vi) certain non-U.S. countries may
impose restrictions on the ability of
non-U.S. issuers to make payments of
principal and interest to investors located
in the U.S., due to blockage of foreign
currency exchanges or otherwise; and (vii)
withholding and other non-U.S. taxes may
decrease the Fund's return. The economies
and social and political climate of
individual countries may differ unfavorably
from those of the United States. Non- U.S.
economies may have less favorable rates of
growth of gross domestic product, rates of
inflation, currency valuation, capital
reinvestment, resource self-sufficiency and
balance of payments positions, factors which
may adversely affect the value of the
non-U.S. equity securities held by the Fund.
Unanticipated political and social
developments may also affect the values of
the Fund's investments and the availability
to the Fund of additional investments in
such countries.
Illiquid Securities Risk. The equity
securities in which the Fund will invest are
publicly traded securities. However, certain
public securities, particularly securities
of smaller capitalized or less seasoned
issuers, may from time to time lack an
active secondary market and may be subject
to more abrupt or erratic price movements
than securities of larger, more established
companies or stock market averages in
general. In the absence of an active
secondary market, the Fund's ability to
purchase or sell such securities at a fair
price may be impaired or delayed. The call
options written (sold) by the Fund generally
are listed and traded on one or more
domestic securities exchanges and are issued
by OCC, except to the extent the Fund writes
(sells) over-the-counter call options. The
value of these options may be adversely
affected if the market for the options
becomes less liquid or smaller. In addition,
if the Fund is unable to close an option
position in a timely or cost effective
basis, the Fund's ability to sell the
underlying equity security may be limited.
Tax Risk. Covered call option premiums will
be treated by the Fund as either short-term
or long-term capital gain or loss, depending
on whether the call option expires, is
exercised or cancelled pursuant to a closing
transaction, and the timing of such
transaction. Thus, the Fund cannot assure
you as to any level of any regular quarterly
distributions of net investment income
(income other than net long-term capital
Page 15
gain) that will be treated as ordinary
income, cannot assure you as to any level of
capital gain distributions and cannot assure
you as to any ratio of regular quarterly
distributions to capital gain distributions.
In addition, there can be no assurance as to
the percentage of distributions on the
Common Shares that will qualify for taxation
to individual Common Shareholders as
"qualified dividend income," and thus be
eligible for taxation at the favorable rates
applicable to long-term capital gains.
Derivatives. In addition to the risks
associated with its option strategy, the
Fund may enter into hedging and strategic
transactions. The Fund may purchase and sell
derivative instruments such as
exchange-listed and over-the-counter put and
call options on securities, equity, fixed
income and interest rate indices, and other
financial instruments, purchase and sell
financial futures contracts and options
thereon, and enter into various interest
rate transactions such as swaps, caps,
floors or collars or credit transactions.
The Fund also may purchase derivative
investments that combine features of these
instruments. Collectively, all of the above
are referred to as "Strategic Transactions."
The Fund's hedging and Strategic
Transactions have risks, including the
imperfect correlation between the value of
such instruments and the underlying assets
of the Fund, the possible default of the
other party to the transaction or
illiquidity of the derivative investments.
Furthermore, the ability to successfully use
hedging and interest rate transactions
depends on the Sub-Adviser's ability to
predict pertinent market movements, which
cannot be assured. Thus, the use of
derivatives for hedging and interest rate
management purposes may result in losses
greater than if they had not been used, may
require the Fund to sell or purchase
portfolio securities at inopportune times or
for prices other than current market values,
may limit the amount of appreciation the
Fund can realize on an investment, or may
cause the Fund to hold a security that it
might otherwise sell. Additionally, amounts
paid by the Fund as premiums and cash or
other assets held in margin accounts with
respect to hedging and Strategic
Transactions are not otherwise available to
the Fund for investment purposes.
See "Risks-Derivatives."
Interest Rate Risk. Interest rate risk is
the risk that equity and debt securities
will decline in value because of changes in
market interest rates. When market interest
rates rise, the market value of the equity
securities in which the Fund invests
generally will fall. The Fund's investment
in such equity securities means that the net
asset value and market price of the Common
Shares will tend to decline if market
interest rates rise. Interest rates are at
or near historic lows, and as a result, they
are likely to rise over time.
Market Disruption Risk. The terrorist
attacks in the United States on September
11, 2001 had a disruptive effect on the
securities markets. The ongoing United
States military and related action in Iraq
and events in the Middle East could have
significant adverse effects on the U.S.
economy, the stock market and world
economies and financial markets generally.
Page 16
The Fund cannot predict the effects of
similar events in the future on the U.S. and
world economies, the value of the Common
Shares or the net asset value of the Fund.
Inflation Risk. Inflation risk is the risk
that the value of assets or income from
investment will be worth less in the future
as inflation decreases the value of money.
As inflation increases, the real value of
the Common Shares and distributions can
decline.
Anti-Takeover Provisions. The Fund's Amended
and Restated Declaration of Trust, dated May
26, 2004, (the "Declaration") includes
provisions that could limit the ability of
other entities or persons to acquire control
of the Fund or convert the Fund to open-end
status. These provisions could have the
effect of depriving the Common Shareholders
of opportunities to sell their Common Shares
at a premium over the then current market
price of the Common Shares. See "Certain
Provisions in the Declaration of Trust" and
"Risks-Anti-Takeover Provisions."
Market Discount From Net Asset Value. Shares
of closed-end investment companies
frequently trade at a discount from their
net asset value. This characteristic is a
risk separate and distinct from the risk
that the Fund's net asset value could
decrease as a result of its investment
activities and may be greater for investors
expecting to sell their Common Shares in a
relatively short period following completion
of this offering. The net asset value of the
Common Shares will be reduced immediately
following the offering as a result of the
payment of certain offering costs. Although
the value of the Fund's net assets is
generally considered by market participants
in determining whether to purchase or sell
Common Shares, whether investors will
realize gains or losses upon the sale of the
Common Shares will depend entirely upon
whether the market price of the Common
Shares at the time of sale is above or below
the investor's purchase price for the Common
Shares. Because the market price of the
Common Shares will be determined by factors
such as net asset value, dividend and
distribution levels (which are dependent, in
part, on expenses), supply of and demand for
the Common Shares, stability of dividends or
distributions, trading volume of the Common
Shares, general market and economic
conditions, and other factors beyond the
control of the Fund, the Fund cannot predict
whether the Common Shares will trade at,
below or above net asset value or at, below
or above the initial public offering price.
Certain Other Risks. An investment in the
Fund is subject to certain other risks
described in the "Risks" section of this
prospectus.
Page 17
SUMMARY OF FUND EXPENSES
The purpose of the table below is to help you understand the fees and
expenses that you, as a Common Shareholder, would bear directly or indirectly.
The expenses shown in the table are based on estimated amounts for the Fund's
first full year of operations. See "Management of the Fund" and "Dividend
Reinvestment Plan."
Shareholder Transaction Expenses
Sales load paid by you (as a percentage of offering price) ............................... 4.50%
Offering expenses borne by the Fund (as a percentage of offering price)................... .20%(1)
Dividend Reinvestment Plan fees........................................................... None(2)
Percentage
of Net Assets
-------------
Annual Expenses
Management Fees........................................................................... 1.00%
Other Expenses............................................................................ .22%(3)
Total Annual Expenses..................................................................... 1.22%
=====
(1) The Adviser has agreed to pay (i) all organizational expenses of the
Fund and (ii) all offering costs of the Fund (other than sales load but
including a partial reimbursement of certain underwriting expenses)
that exceed $.04 per Common Share. The Sub-Adviser has agreed to
reimburse the Adviser for one-half of such organizational expenses and
offering costs of the Fund that exceed $.04 per Common Share.
(2) You will pay brokerage charges if you direct PFPC Inc., as agent for
the Common Shareholders under the Fund's Dividend Reinvestment Plan
(the "Plan Agent"), to sell your Common Shares held in a dividend
reinvestment account.
(3) Other expenses are based on estimated amounts for the Fund's first year
of operations.
The following example illustrates the expenses (including the sales load of
$45 and estimated offering expenses of this offering of $2) that you would pay
on a $1,000 investment in Common Shares, assuming (1) total annual expenses of
1.22% of net assets and (2) a 5% annual return*:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Total expenses incurred $59 $84 $111 $189
* THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE HIGHER OR LOWER. The example assumes that the
estimated "Other Expenses" set forth in the Annual Expenses table are
accurate and that all dividends and distributions are reinvested into
additional Common Shares at net asset value. Actual expenses may be
greater or less than those assumed. Moreover, the Fund's actual rate of
return may be greater or less than the hypothetical 5% return shown in
the example.
Page 18
THE FUND
The Fund is a newly organized, diversified, closed-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund was organized as a Massachusetts business
trust on May 20, 2004, pursuant to a Declaration of Trust governed by the laws
of the Commonwealth of Massachusetts. As a newly organized entity, the Fund has
no operating history. The Fund's principal office is located at 1001 Warrenville
Road, Suite 300, Lisle, Illinois 60532, and its telephone number is (630)
241-4141.
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be approximately
$352,610,000 ($405,501,500 if the Underwriters exercise the overallotment option
in full) after payment of the estimated offering costs. The Adviser has agreed
to pay (i) all organizational expenses and (ii) all offering costs of the Fund
(other than sales load but including a partial reimbursement of certain
underwriting expenses) that exceed $.04 per Common Share. The Sub-Adviser has
agreed to reimburse the Adviser for one-half of such organizational expenses and
offering costs of the Fund that exceed $.04 per Common Share. The Fund will
invest the net proceeds of the offering in accordance with the Fund's investment
objective and policies as stated below. The Fund expects it will be able to
invest substantially all of the net proceeds in equity securities that meet the
investment objective and policies within seven days after the completion of the
offering. Pending such investment, it is anticipated that the proceeds will be
invested in cash or cash equivalents.
THE FUND'S INVESTMENTS
Investment Objective and Policies
The Fund's investment objective is to provide a high level of current
income and gains and, to a lesser extent, capital appreciation. The Fund seeks
to achieve its investment objective by investing in a diversified portfolio of
equity securities and writing (selling) call options on at least 80% of the
Fund's managed assets. There can be no assurance that the Fund's investment
objective will be achieved.
The Fund cannot change its investment objective without the approval of the
holders of a "majority" of the outstanding Common Shares. As defined in the 1940
Act, when used with respect to particular shares of the Fund, a "majority" of
the outstanding shares means (i) 67% or more of the shares present at a meeting,
if the holders of more than 50% of the shares are present or represented by
proxy, or (ii) more than 50% of the shares, whichever is less.
Investment Philosophy and Process
Under normal market conditions, the Fund will pursue an integrated
investment strategy in which the Fund will invest substantially all of its
managed assets in a diversified portfolio of common stock of U.S. corporations
and U.S. dollar- denominated equity securities of foreign issuers, in each case
that are traded on U.S. securities exchanges, and on an ongoing and consistent
basis, write (sell) covered call options on at least 80% of the Fund's managed
assets. The Fund seeks to produce a high level of current income and gains
primarily from the premium income it receives from writing (selling) call
options, from dividends received on the equity securities held in the Fund's
portfolio, and, to a lesser extent, from capital appreciation in the value of
equity securities underlying such covered call options.
o Common Stock/Equity Securities--Common stocks and equity securities
will be selected by the Sub-Adviser utilizing its proprietary
quantitative/qualitative selection criteria. The Sub-Adviser's
quantitative/qualitative selection criteria will focus on sectors,
industries and individual common stocks and equity securities that
exhibit strong fundamental characteristics. Common stock and equity
security selections by the Sub-Adviser will fall into one or more of
the following four categories: sector leaders that are expected to
benefit from macroeconomic developments, strong franchises that are
temporarily out of favor, franchises that diversify portfolio risk and
companies that exhibit sound fundamentals with attractive option
premiums. The Fund may invest up to 20% of its managed assets in U.S.
Page 19
dollar-denominated equity securities of foreign issuers. In addition,
the Fund may invest up to 10% of the Fund's managed assets in equity
securities of other Investment Companies that invest primarily in
securities of the type in which the Fund may invest directly.
o Covered Call Options--The Fund will write (sell) covered call options,
including LEAPS(R), against the equity securities held in the Fund's
portfolio with strike prices and expiration dates that are collectively
intended to provide risk/reward characteristics that are consistent
with the Fund's investment objective. The Fund will write (sell)
covered call options with respect to at least 80% of its managed
assets. The Sub-Adviser believes that writing (selling) call options
will provide the Fund with current income and may enhance the Fund's
total return in a neutral to modestly rising market and provide a
partial hedge in a declining market.
The Fund will only write (sell) call options which are considered
"covered." An option is considered "covered" if the Fund owns the equity
security underlying the call option or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, cash or other assets determined to be liquid by
the Sub-Adviser (in accordance with procedures established by the Board of
Trustees) in such amount are segregated by the Fund's custodian) upon conversion
or exchange of other securities held by the Fund. A call option is also
considered covered if the Fund holds a call option on the same security as the
call option written (sold) where the exercise price of the call held is (i)
equal to or less than the exercise price of the call option written (sold), or
(ii) greater than the exercise price of the call option written (sold), provided
the difference is maintained by the Fund in segregated assets determined to be
liquid by the Sub-Adviser as described above. As a result, the number of call
options the Fund can write (sell) is generally limited by the number of equity
securities the Fund holds in its portfolio. By writing (selling) covered call
options, the Sub-Adviser seeks to generate income, in the form of the premiums
received for writing (selling) the call options. The Sub-Adviser will consider
several factors when writing (selling) call options, including the overall
equity market outlook, sector and/or industry attractiveness, individual
security considerations, and relative and/or historical levels of option
premiums.
When the Fund writes (sells) a call option, it is selling to the buyer (the
"option holder") the right, but not the obligation, to purchase a particular
asset (e.g., the underlying equity security) from the Fund at a fixed price (the
"strike price") on or before a specified date (the "expiration date"). A call
option normally represents the right to purchase 100 shares of the underlying
equity security. In exchange for the right to purchase the underlying equity
security, the option holder pays a fee or "premium" to the Fund. For example,
the buyer of one ABC June 110 call option at $1.00 has paid to the writer
(seller) a premium of $1.00 to acquire the right to purchase 100 shares of ABC
at $110 up until the call option's June expiration date. All call options
covering ABC are referred to as an "option class." Each individual option with a
distinctive trading month and strike price is an "option series."
The Fund will write (sell) call options that are generally issued,
guaranteed and cleared by OCC, a registered clearing corporation. Listed call
options are traded on the American Stock Exchange, Chicago Board Options
Exchange, International Securities Exchange, New York Stock Exchange, Pacific
Stock Exchange, Philadelphia Stock Exchange or various other U.S. options
exchanges. Conventional listed call options have expiration dates that can
generally be up to nine months from the date the call options are first listed
for trading. Longer-term call options, such as LEAPS(R), can have expiration
dates up to three years from the date of listing. The Fund may also write (sell)
over-the-counter call options. Call options are generally categorized as
American-style options or European-style options. The call options the Fund
intends to write (sell) will generally be American-style options, which may be
exercised at any time between the date of purchase and the expiration date. The
Fund may also write (sell) European-style options, which may be exercised only
during a specified period of time just prior to the expiration date. In certain
limited circumstances in which the illiquidity of a market for a particular
option effectively precludes the Fund from writing (selling) a covered call
option in a manner consistent with the Fund's investment objective and strategy
the Fund may write (sell) over-the-counter covered calls.
The Fund intends to primarily write (sell) call options which are
"out-of-the-money." Out-of-the-money call options are options with a strike
price above the current market price of the underlying equity security.
Out-of-the-money options will generate premium income to the Fund as well as
provide for potential appreciation in the equity security to the extent of the
difference between the strike price and the purchase price of such equity
security. The Fund may also write (sell) "in-the-money" and "at-the-money" call
Page 20
options. In-the-money call options are call options with a strike price below
the current market price of the underlying equity security and at-the-money call
options are options written (sold) with a strike price equal to the current
price of the underlying equity security. The Fund may write (sell) in-the-money
and at- the-money call options as a defensive measure to protect against a
possible decline in the underlying equity security.
The number of call options the Fund can write (sell) is limited by the
amount of equity securities the Fund holds in its portfolio. The Fund will not
write (sell) "naked" or uncovered call options. Furthermore, the Fund's options
transactions may be subject to limitations established by each of the exchanges
or other trading facilities on which such options are traded. These limitations
govern the maximum number of options in each class which may be written (sold)
or purchased by a single investor or group of investors acting in concert,
regardless of whether the options are written (sold) or purchased on the same or
different exchanges or other trading facilities or are held or written (sold) in
one or more accounts or through one or more brokers. Thus, the number of options
which the Fund may write (sell) or purchase may be affected by options written
(sold) or purchased by other investment advisory clients of the Adviser or
Sub-Adviser. An exchange or other trading facility may order the liquidation of
positions found to be in excess of these limits, and it may impose certain other
sanctions.
Unlike equity securities, which can be sold, the call options the Fund
writes (sells) will either be exercised, expire or be cancelled pursuant to a
closing transaction. If the price of the underlying equity security exceeds the
option's exercise price, it is likely that the option holder will exercise the
option. If a call option written (sold) by the Fund is exercised, the Fund would
be obligated to deliver the underlying equity security to the option holder upon
payment of the exercise price. In this case the call option premium received by
the Fund will be added to the amount realized on the sale of the equity security
for purposes of determining gain or loss. If the price of the underlying equity
security is less than the call option's exercise price, the call option will
likely expire without being exercised. In this scenario, the Fund will retain
the equity security and expects to write (sell) a new call option against those
same shares. The call option premium will be treated as short term capital gain
on the expiration date of the call option. The Fund may also elect to close out
its position in a call option prior to its expiration by purchasing a call
option of the same option series as the call option written (sold) by the Fund.
In this case, the call option premium received by the Fund, less the purchase
price of the call option will result in short term gain or loss regardless of
the length of time the option was held. There is, however, no assurance that the
Fund will be able to enter into an offsetting call option purchase when the Fund
desires.
Portfolio Composition
The Fund's portfolio will be composed principally of the following
investments. A more detailed description of the Fund's investment policies and
restrictions and more detailed information about the Fund's portfolio
investments are contained in the SAI.
Common Stocks. The Fund intends to invest substantially all, but in no
event less than 90%, of its managed assets in common stocks. Common stock
generally represents an equity ownership interest in an issuer. Although common
stocks have historically generated higher average returns than fixed-income
securities over the long term, common stocks also have experienced significantly
more volatility in those returns and in certain years have significantly
underperformed relative to fixed-income securities. An adverse event, such as an
unfavorable earnings report, may depress the value of a particular common stock
held by the Fund. Also, prices of common stocks are sensitive to general
movements in the stock market and a drop in the stock market may depress the
prices of common stocks to which the Fund has exposure. Common stock prices
fluctuate for several reasons including changes in investors' perceptions of the
financial condition of an issuer or the general condition of the relevant stock
market, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
Non-U.S. Equity Securities. The Fund may invest up to 20% of its managed
assets in U.S. dollar-denominated equity securities of foreign issuers. These
equity securities are either in the form of ADRs or are directly listed on a
U.S. securities exchange. Investments in equity securities of non-U.S. issuers
involve special risks not presented by investments in equity securities of U.S.
issuers, including the following: (i) less publicly available information about
non-U.S. issuers or markets may be available due to less rigorous disclosure or
accounting standards or regulatory practices; (ii) many non-U.S. markets are
Page 21
smaller, less liquid and more volatile, meaning that in a changing market, the
Adviser may not be able to sell the Fund's portfolio securities at times, in
amounts and at prices it considers reasonable; (iii) potential adverse effects
of fluctuations in currency exchange rates or controls on the value of the
Fund's investments; (iv) the economies of non- U.S. countries may grow at slower
rates than expected or may experience a downturn or recession; (v) the impact of
economic, political, social or diplomatic events; (vi) certain non-U.S.
countries may impose restrictions on the ability of non-U.S. issuers to make
payments of principal and interest to investors located in the U.S., due to
blockage of foreign currency exchanges or otherwise; and (vii) withholding and
other non-U.S. taxes may decrease the Fund's return. The economies and social
and political climate of individual countries may differ unfavorably from those
of the United States.
Investment Companies. The Fund may invest up to 10% of its managed assets
in equity securities of other Investment Companies that invest primarily in
securities of the type in which the Fund may invest directly. The Fund
anticipates that these investments will primarily be in ETFs. ETFs are
registered investment companies, the shares of which are traded on a securities
exchange like common stock. ETFs are designed to track the performance of a
particular index. An investment in an ETF is subject to the risks of any
investment in a broadly based portfolio of securities, including the risk that
the general level of securities prices may decline, thereby adversely affecting
the value of such investment. ETFs are subject to additional risks, including
the fact that ETFs are not actively managed, the net asset value of ETFs may not
always correspond to the market price of the underlying securities, market
liquidity, and the possibility that the exchange where the ETF is traded may
halt trading in the securities. As a stockholder in a registered investment
company, the Fund will bear its ratable share of the ETF's expenses. Not only
would Common Shareholders in the Fund bear their ratable share of the Fund's
expenses, they would also indirectly bear their ratable share of the ETF's
expenses if the Fund invests in an ETF.
Covered Call Options. When the Fund purchases equity securities, it will
simultaneously write (sell) covered call options on substantially all of such
equity securities. The number of call options the Fund can write (sell) is
limited by the amount of equity securities the Fund holds in its portfolio. The
Fund will not write (sell) "naked" or uncovered call options. By writing
(selling) call options, the Fund seeks to generate additional income, in the
form of premiums received for writing (selling) the options, and provide a
partial hedge against a market decline in the underlying equity security. Call
options are marked-to-market daily and their value will be affected by changes
in the value and dividend rates of the underlying equity securities, an increase
in interest rates, changes in the actual or perceived volatility of the
securities markets and the underlying equity securities and the remaining time
to the options' expiration. The value of call options may also be adversely
affected if the market for the options becomes less liquid or smaller.
Short-Term Debt Securities; Temporary Defensive Position; Invest-Up Period.
During the period during which the net proceeds of the offering of Common Shares
are being invested, or during periods in which the Adviser or Sub-Adviser
determines that it is temporarily unable to follow the Fund's investment
strategy or that it is impractical to do so, the Fund may deviate from its
investment strategy and invest all or any portion of its managed assets in cash
or cash equivalents. The Adviser's or Sub-Adviser's determination that it is
temporarily unable to follow the Fund's investment strategy or that it is
impractical to do so will generally occur only in situations in which a market
disruption event has occurred and where trading in the securities selected
through application of the Fund's investment strategy is extremely limited or
absent. In such a case, Common Shares of the Fund may be adversely affected and
the Fund may not pursue or achieve its investment objective. For a further
description of these temporary investments, see the SAI under "Investment
Policies and Techniques."
Investment Practices
Hedging and Strategic Transactions. In addition to the Fund's covered call
option writing (selling), the Fund may, but is not required to, use various
hedging and strategic transactions described below to facilitate portfolio
management and mitigate risks. Hedging and Strategic Transactions are generally
accepted under modern portfolio management theory and are regularly used by many
mutual funds and other institutional investors. Although the Sub-Adviser seeks
to use such practices to further the Fund's investment objective, no assurance
can be given that these practices will achieve this result.
The Fund may purchase and sell derivative instruments such as
exchange-listed and over-the-counter put and call options on securities, equity,
fixed income and interest rate indices, and other financial instruments,
purchase and sell financial futures contracts and options thereon, and enter
into various interest rate transactions such as swaps, caps, floors or collars
Page 22
or credit transactions. The Fund also may purchase derivative investments that
combine features of these instruments. Collectively, all of the above are
referred to as "Strategic Transactions." The Fund generally seeks to use
Strategic Transactions as a portfolio management or hedging technique to protect
against possible adverse changes in the market value of securities held in or to
be purchased for the Fund's portfolio, protect the value of the Fund's
portfolio, facilitate the sale of certain securities for investment purposes,
manage the effective interest rate exposure of the Fund or establish positions
in the derivative markets as a temporary substitute for purchasing or selling
particular securities.
Strategic Transactions have risks, including the imperfect correlation
between the value of such instruments and the underlying assets, the possible
default of the other party to the transactions or illiquidity of the derivative
investments. Furthermore, the ability to successfully use Strategic Transactions
depends on the Sub-Adviser's ability to predict pertinent market movements,
which cannot be assured. Thus, the use of Strategic Transactions may result in
losses greater than if they had not been used, may require the Fund to sell or
purchase portfolio securities at inopportune times or for prices other than
current market values, may limit the amount of appreciation the Fund can realize
on an investment, or may cause the Fund to hold a security that it might
otherwise sell. Additionally, amounts paid by the Fund as premiums and cash or
other assets held in margin accounts with respect to Strategic Transactions are
not otherwise available to the Fund for investment purposes. See
"Risks-Derivatives" in this prospectus and "Other Investment Policies and
Techniques" in the SAI for further information on Strategic Transactions and
their risks.
Portfolio Turnover. The Fund's annual portfolio turnover rate may vary
greatly from year to year. Although the Fund cannot accurately predict its
annual portfolio turnover rate, it is not expected to exceed 50% under normal
circumstances. However, to the extent options written (sold) by the Fund are
exercised or covered, the Fund's portfolio turnover rate will increase.
Portfolio turnover rate is not considered a limiting factor in the execution of
investment decisions for the Fund. There are no limits on the rate of portfolio
turnover, and investments may be sold without regard to length of time held when
the Fund's investment strategy so dictates. A higher portfolio turnover rate
results in correspondingly greater brokerage commissions and other transactional
expenses that are borne by the Fund. High portfolio turnover may result in the
realization of net short-term capital gains by the Fund which, when distributed
to Common Shareholders, will be taxable as ordinary income. See "Tax Matters."
RISKS
Risk is inherent in all investing. The following discussion summarizes some
of the risks that a Common Shareholder should consider before deciding whether
to invest in the Fund. For additional information about the risks associated
with investing in the Fund, see "Investment Risks" in the SAI.
No Operating History
The Fund is a newly organized, diversified, closed-end management
investment company and has no operating history.
Investment and Market Risk
An investment in Common Shares is subject to investment risk, including the
possible loss of the entire principal amount that you invest. Your investment in
Common Shares represents an indirect investment in the securities owned by the
Fund. The value of these securities, like other market investments, may move up
or down, sometimes rapidly and unpredictably. The value of the securities in
which the Fund invests will affect the value of the Common Shares. In addition,
by writing (selling) call options on the equity securities held in the Fund's
portfolio, the capital appreciation potential of such securities is limited to
the difference between the strike price of the call options written (sold) and
the purchase price of the equity security underlying such options. Your Common
Shares at any point in time may be worth less than your original investment,
even after taking into account the reinvestment of Fund dividends and
distributions.
Page 23
Management Risk
The Fund is subject to management risk because it is an actively managed
portfolio. The Adviser and the Sub-Adviser will apply investment techniques and
risk analyses in making investment decisions for the Fund, but there can be no
guarantee that these will produce the desired results.
Common Stock Risk
The Fund will have significant exposure to common stocks. Although common
stocks have historically generated higher average returns than fixed-income
securities over the long term, common stocks also have experienced significantly
more volatility in those returns and in certain years have significantly
underperformed relative to fixed- income securities. An adverse event, such as
an unfavorable earnings report, may depress the value of a particular common
stock held by the Fund. Also, the prices of common stocks are sensitive to
general movements in the stock market and a drop in the stock market may depress
the prices of common stocks to which the Fund has exposure. Common stock prices
fluctuate for several reasons including changes in investors' perceptions of the
financial condition of an issuer or the general condition of the relevant stock
market, or when political or economic events affecting the issuers occur. In
addition, common stocks prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
Option Risk
The Fund will write (sell) call options on at least 80% of the Fund's
managed assets. These call options will give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to the option's expiration date. The ability to successfully implement
the Fund's investment strategy depends on the Sub-Adviser's ability to predict
pertinent market movements, which cannot be assured. Thus, the use of options
may require the Fund to sell portfolio securities at inopportune times or for
prices other than current market values, may limit the amount of appreciation
the Fund can realize on an investment, or may cause the Fund to hold a security
that it might otherwise sell. The writer (seller) of an option has no control
over the time when it may be required to fulfill its obligation as a writer
(seller) of the option. Once an option writer (seller) has received an exercise
notice, it cannot effect a closing purchase transaction in order to terminate
its obligation under the option and must deliver the underlying security at the
exercise price. As the writer (seller) of a covered call option, the Fund
forgoes, during the option's life, the opportunity to profit from increases in
the market value of the security underlying the call option above the sum of the
premium and the strike price of the call option, but has retained the risk of
loss should the price of the underlying security decline. The value of the
options written (sold) by the Fund, which will be marked-to-market on a daily
basis, will be affected by changes in the value and dividend rates of the
underlying equity securities, an increase in interest rates, changes in the
actual or perceived volatility of the stock market and the underlying equity
securities and the remaining time to the options' expiration. The value of the
options may also be adversely affected if the market for the options becomes
less liquid or smaller. The value of the options will be deducted from the value
of the Fund's assets when determining the Fund's net asset value.
There can be no assurance that a liquid market for the options will exist
when the Fund seeks to close out an option position. Reasons for the absence of
a liquid secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or the OCC may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options). If trading were
discontinued, the secondary market on that exchange (or in that class or series
of options) would cease to exist. However, outstanding options on that exchange
that had been issued by the OCC as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. The Fund's ability to
terminate over-the-counter options is more limited than with exchange-traded
options and may involve the risk that broker-dealers participating in such
transactions will not fulfill their obligations. If the Fund were unable to
close out a covered call option that it had written (sold) on a security, it
would not be able to sell the underlying security unless the option expired
without exercise.
Page 24
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. Additionally, the exercise price of an option may be
adjusted downward before the option's expiration as a result of the occurrence
of certain corporate events affecting the underlying equity security, such as
extraordinary dividends, stock splits, merger or other extraordinary
distributions or events. In certain circumstances, a reduction in the exercise
price of an option could reduce the Fund's capital appreciation potential on the
underlying security.
To the extent that the Fund purchases options pursuant to a hedging
strategy, the Fund will be subject to the following additional risks. If a put
or call option purchased by the Fund is not sold when it has remaining value,
and if the market price of the underlying security remains equal to or greater
than the exercise price (in the case of a put), or remains less than or equal to
the exercise price (in the case of a call), the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. If restrictions on exercise were imposed, the Fund might be
unable to exercise an option it had purchased. If the Fund were unable to close
out an option that it had purchased on a security, it would have to exercise the
option in order to realize any profit or the option may expire worthless.
Investment Companies Risk
The Fund may invest up to 10% of its managed assets in equity securities of
other Investment Companies that invest primarily in securities of the type in
which the Fund may invest directly. The Fund anticipates that these investments
will primarily be in ETFs. ETFs are registered investment companies, the shares
of which are traded on a securities exchange like common stock. ETFs are
designed to track the performance of a particular index. An investment in an ETF
is subject to the risks of any investment in a broadly based portfolio of
securities, including the risk that the general level of securities prices may
decline, thereby adversely affecting the value of such investment. ETFs are
subject to additional risks, including the fact that ETFs are not actively
managed, the net asset value of ETFs may not always correspond to the market
price of the underlying securities, market liquidity, and the possibility that
the exchange where the ETF is traded may halt trading in the securities. As a
stockholder in a registered investment company, the Fund will bear its ratable
share of the ETF's expenses. Not only would Common Shareholders in the Fund bear
their ratable share of the Fund's expenses, they would also indirectly bear
their ratable share of the ETF's expenses if the Fund invests in an ETF.
Industry and Sector Risk
The Fund may invest up to 25% of its managed assets in the equity
securities of issuers in a single industry or sector of the economy. If the Fund
is focused in an industry or sector, it may present more risks than if it were
broadly diversified over numerous industries and sectors of the economy.
Individual industries or sectors may be subject to unique risks which may
include, among others, governmental regulation, inflation, technological
innovations that may render existing products and equipment obsolete,
competition from new entrants, high research and development costs, and rising
interest rates.
The Fund currently intends to make significant investments in equity
securities of companies in the technology sector, the financial institutions
sector and the consumer products sector. However, if market conditions change,
the Fund's portfolio would not necessarily be composed of equity securities in
these sectors, but could be composed significantly of equity securities of
issuers in other sectors of the market.
The technology sector may include, for example, companies that rely
extensively on technology, science or communications in their product
development or operations. Technology companies are generally subject to the
risks of rapidly changing technologies; short product life cycles; fierce
competition; aggressive pricing and reduced profit margins; the loss of patent,
copyright and trademark protections; cyclical market patterns; and evolving
industry standards and frequent new product introductions. Technology companies
may be smaller and less experienced companies, with limited product lines,
Page 25
markets or financial resources and fewer experienced management or marketing
personnel. Technology company stocks, especially those which are
Internet-related, have experienced extreme price and volume fluctuations that
are often unrelated to the operating performance of the respective company.
The financial institutions sector may include, for example, commercial
banks, savings and loan associations, brokerage and investment companies,
insurance companies, and consumer and industrial finance companies. The
industries within the financial institutions sector are subject to extensive
government regulation, which can limit both the amounts and types of loans and
other financial commitments they can make, and the interest rates and fees they
can charge. Financial institutions are 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. Profitability can be
largely dependent on the availability and cost of capital funds and the rate of
corporate and consumer debt defaults, and can fluctuate significantly when
interest rates change. Insurance companies can be subject to severe price
competition. The financial institutions industries are currently undergoing
relatively rapid change as existing distinctions between financial institutions
segments become less clear. For example, recent business combinations have
included insurance, finance, and securities brokerage under single ownership.
The consumer products sector may include, for example, companies
principally engaged in the manufacture and distribution of goods and services to
consumers both domestically and internationally and in merchandising finished
goods and services primarily to individual consumers. Consumer products
companies are generally subject to the risks of cyclicality of revenues and
earnings; economic recession; currency fluctuations; changing consumer tastes;
extensive competition; product liability litigation; and increased governmental
regulation. Generally, spending on consumer products is affected by the economic
health of consumers. A weak economy, and its effect on consumer spending, would
adversely affect consumer products companies.
Income Risk
Net investment income paid by the Fund to its Common Shareholders is
derived primarily from the premiums it receives from writing (selling) call
options and, to a lesser extent, from the dividends and interest it receives
from the equity securities and other investments held in the Fund's portfolio
and short-term gains thereon. Premiums from writing (selling) call options and
dividends and interest payments made by the securities in the Fund's portfolio
can vary widely over time. Dividends on equity securities are not fixed but are
declared at the discretion of an issuer's board of directors. There is no
guarantee that the issuers of the equity securities in which the Fund invests
will declare dividends in the future or that if declared they will remain at
current levels or increase over time. As described further in "Tax Matters,"
"qualified dividend income" received by the Fund, except as noted below, will
generally be eligible for the reduced tax rate applicable to such dividends
under the Tax Act. Unless subsequent legislation is enacted, the reduction to
tax rates as set forth in the Tax Act will expire for taxable years beginning on
or after January 1, 2009. The Fund cannot assure you as to what percentage of
the dividends paid on the Common Shares, if any, will consist of "qualified
dividend income" or long-term capital gains, both of which are taxed at lower
rates for individuals than are ordinary income and short-term capital gains. See
"Tax Matters."
Portfolio Turnover Risk
The Fund's annual portfolio turnover rate may vary greatly from year to
year. Although the Fund cannot accurately predict its annual portfolio turnover
rate, it is not expected to exceed 50% under normal circumstances. However, to
the extent options written (sold) by the Fund are exercised or covered, the
Fund's portfolio turnover rate will increase. Portfolio turnover rate is not
considered a limiting factor in the execution of investment decisions for the
Fund. Additionally, there are no limits on the rate of portfolio turnover, and
investments may be sold without regard to length of time held when the Fund's
investment strategy so dictates. A higher portfolio turnover rate results in
correspondingly greater brokerage commissions and other transactional expenses
that are borne by the Fund. High portfolio turnover may result in the
realization of net short-term capital gains by the Fund which, when distributed
to Common Shareholders, will be taxable as ordinary income. See "Tax Matters."
Page 26
Non-U.S. Equity Securities
The Fund may invest in equity securities of companies domiciled in
jurisdictions other than the United States. These equity securities are either
in the form of ADRs or are directly listed on a U.S. securities exchange.
Investments in equity securities of non-U.S. issuers involve special risks not
presented by investments in equity securities of U.S. issuers, including the
following: (i) less publicly available information about non-U.S. issuers or
markets may be available due to less rigorous disclosure or accounting standards
or regulatory practices; (ii) many non-U.S. markets are smaller, less liquid and
more volatile, meaning that in a changing market, the Adviser may not be able to
sell the Fund's portfolio securities at times, in amounts and at prices it
considers reasonable; (iii) potential adverse effects of fluctuations in
currency exchange rates or controls on the value of the Fund's investments; (iv)
the economies of non- U.S. countries may grow at slower rates than expected or
may experience a downturn or recession; (v) the adverse impact of economic,
political, social or diplomatic events; (vi) certain non-U.S. countries may
impose restrictions on the ability of non-U.S. issuers to make payments of
principal and interest to investors located in the U.S., due to blockage of
foreign currency exchanges or otherwise; and (vii) withholding and other
non-U.S. taxes may decrease the Fund's return. The economies and social and
political climate of individual countries may differ unfavorably from those of
the United States. Non-U.S. economies may have less favorable rates of growth of
gross domestic product, rates of inflation, currency valuation, capital
reinvestment, resource self-sufficiency and balance of payments positions,
factors which may adversely affect the value of the non-U.S. equity securities
held by the Fund. Unanticipated political and social developments may also
affect the values of the Fund's investments and the availability to the Fund of
additional investments in such countries.
Illiquid Securities Risk
The equity securities in which the Fund will invest are publicly traded
securities. However, certain public securities, particularly securities of
smaller capitalized or less seasoned issuers, may from time to time lack an
active secondary market and may be subject to more abrupt or erratic price
movements than securities of larger, more established companies or stock market
averages in general. In the absence of an active secondary market, the Fund's
ability to purchase or sell such securities at a fair price may be impaired or
delayed. The call options written (sold) by the Fund are listed and traded on
one or more domestic securities exchanges and are issued by OCC. The value of
these options may be adversely affected if the market for the options becomes
less liquid or smaller. In addition, if the Fund is unable to close an option
position in a timely or cost effective basis, the Fund's ability to sell the
underlying equity security may be limited.
Tax Risk
Covered call option premiums will be treated by the Fund as either
short-term or long-term capital gain or loss, depending whether the call option
expires, is exercised or cancelled pursuant to a covering transaction, and the
timing of such transaction. Thus, the Fund cannot assure you as to any level of
any regular quarterly distributions of net investment income (income other than
net long-term capital gain) that will be treated as ordinary income, cannot
assure you as to any level of capital gain distributions and cannot assure you
as to any ratio of regular quarterly distributions to capital gain
distributions. In addition, there can be no assurance as to the percentage of
distributions on the Common Shares that will qualify for taxation to individual
Common Shareholders as "qualified dividend income." Qualified dividend income
received by individual Common Shareholders is taxed at long-term capital gains
rates, which reach a maximum of 15%. The special tax treatment afforded to
qualified dividend income is set to end as of December 31, 2008 (assuming such
special tax treatment is not repealed by Congress on or prior to such date).
Higher tax rates will apply beginning in 2009 unless further legislative action
is taken by Congress. See "Tax Matters."
Derivatives
In addition to the risks associated with its option strategy, the Fund may
enter into Strategic Transactions. Strategic Transactions have risks, including
the imperfect correlation between the value of such instruments and the
underlying assets, the possible default of the other party to the transaction or
illiquidity of the derivative investments. Furthermore, the ability to
successfully use Strategic Transactions depends on the Sub-Adviser's ability to
predict pertinent market movements, which cannot be assured. Thus, the use of
Strategic Transactions may result in losses greater than if they had not been
used, may require the Fund to sell or purchase portfolio securities at
inopportune times or for prices other than current market values, may limit the
Page 27
amount of appreciation the Fund can realize on an investment or may cause the
Fund to hold a security that it might otherwise sell. Additionally, amounts paid
by the Fund as premiums and cash or other assets held in margin accounts with
respect to Strategic Transactions will not otherwise be available to the Fund
for investment purposes.
There are several risks associated with transactions in options on
securities. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. See
"Risks-Option Risk" for a discussion of these risks.
There are several risks associated with the use of futures contracts and
futures options. The purchase or sale of a futures contract may result in losses
in excess of the amount invested in the futures contract. While the Fund may
enter into futures contracts and options on futures contracts for hedging
purposes, the use of futures contracts and options on futures contracts might
result in a poorer overall performance for the Fund than if it had not engaged
in any such transactions. There may be an imperfect correlation between the
Fund's portfolio holdings and futures contracts or options on futures contracts
entered into by the Fund, which may prevent the Fund from achieving the intended
hedge or expose the Fund to risk of loss. The degree of imperfection of
correlation depends on circumstances such as variations in market demand for
futures, options on futures and their related securities, including technical
influences in futures and futures options trading, and differences between the
securities markets and the securities underlying the standard contracts
available for trading. Further, the Fund's use of futures contracts and options
on futures contracts to reduce risk involves costs and will be subject to the
Sub-Adviser's ability to predict correctly changes in interest rate
relationships or other factors.
Depending on whether the Fund would be entitled to receive net payments
from the counterparty on a swap or cap, which in turn would depend on the
general state of short-term interest rates at that point in time, a default by a
counterparty could negatively impact the performance of the Common Shares. In
addition, at the time an interest rate swap or cap transaction reaches its
scheduled termination date, there is a risk that the Fund would not be able to
obtain a replacement transaction or that the terms of the replacement would not
be as favorable as on the expiring transaction. If this occurs, it could have a
negative impact on the performance of the Common Shares.
The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. Depending on market conditions in
general, the Fund's use of swaps or caps could enhance or harm the overall
performance of the Common Shares. To the extent there is a decline in interest
rates, the value of the interest rate swap or cap could decline, and could
result in a decline in the net asset value of the Common Shares. In addition, if
short-term interest rates are lower than the Fund's fixed rate of payment on the
interest rate swap, the swap will reduce Common Share net earnings. If, on the
other hand, short-term interest rates are higher than the fixed rate of payment
on the interest rate swap, the swap will enhance Common Share net earnings.
Buying interest rate caps could decrease the net earnings of the Common Shares
in the event that the premium paid by the Fund to the counterparty exceeds the
additional amount the Fund would have been required to pay had it not entered
into the cap agreement. The Fund has no current intention of selling an interest
rate swap or cap.
Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
the Fund is contractually obligated to make. If the counterparty defaults, the
Fund would not be able to use the anticipated net receipts under the swap or cap
to offset any declines in the value of the Fund's portfolio assets being hedged.
Depending on whether the Fund would be entitled to receive net payments from the
counterparty on the swap or cap, which in turn would depend on the general state
of the market rates at that point in time, such a default could negatively
impact the performance of the Common Shares.
Page 28
Interest Rate Risk
Interest rate risk is the risk that equity and debt securities will decline
in value because of changes in market interest rates. When market interest rates
rise, the market value of the equity securities in which the Fund invests
generally will fall. The Fund's investment in such equity securities means that
the net asset value and market price of the Common Shares will tend to decline
if market interest rates rise. Interest rates are at or near historic lows, and
as a result, they are likely to rise over time.
Market Disruption Risk
The terrorist attacks in the United States on September 11, 2001 had a
disruptive effect on the securities markets. The ongoing United States military
and related action in Iraq and events in the Middle East could have significant
adverse effects on the U.S. economy, the stock market and world economies and
financial markets generally. The Fund cannot predict the effects of similar
events in the future on the U.S. and world economies, the value of the Common
Shares or the net asset value of the Fund.
Inflation Risk
Inflation risk is the risk that the value of assets or income from
investment will be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of the Common Shares and
distributions can decline.
Certain Affiliations
Certain broker-dealers may be considered to be affiliated persons of the
Fund or First Trust Advisors. Absent an exemption from the Securities and
Exchange Commission or other regulatory relief, the Fund is generally precluded
from effecting certain principal transactions with affiliated brokers, and its
ability to utilize affiliated brokers for agency transactions is subject to
restrictions. This could limit the Fund's ability to engage in securities
transactions and take advantage of market opportunities. In addition, unless and
until the underwriting syndicate is broken in connection with the initial public
offering of the Common Shares, the Fund will be precluded from effecting
principal transactions with brokers who are members of the syndicate.
Anti-Takeover Provisions
The Fund's Declaration includes provisions that could limit the ability of
other entities or persons to acquire control of the Fund or convert the Fund to
open-end status. These provisions could have the effect of depriving the Common
Shareholders of opportunities to sell their Common Shares at a premium over the
then current market price of the Common Shares. See "Certain Provisions in the
Declaration of Trust."
Market Discount From Net Asset Value
Shares of closed-end investment companies frequently trade at a discount
from their net asset value. This characteristic is a risk separate and distinct
from the risk that the Fund's net asset value could decrease as a result of its
investment activities and may be greater for investors expecting to sell their
Common Shares in a relatively short period following completion of this
offering. The net asset value of the Common Shares will be reduced immediately
following the offering as a result of the payment of certain offering costs.
Although the value of the Fund's net assets is generally considered by market
participants in determining whether to purchase or sell Common Shares, whether
investors will realize gains or losses upon the sale of the Common Shares will
depend entirely upon whether the market price of the Common Shares at the time
of sale is above or below the investor's purchase price for the Common Shares.
Because the market price of the Common Shares will be determined by factors such
as net asset value, dividend and distribution levels (which are dependent, in
part, on expenses), supply of and demand for the Common Shares, stability of
dividends or distributions, trading volume of the Common Shares, general market
and economic conditions, and other factors beyond the control of the Fund, the
Fund cannot predict whether the Common Shares will trade at, below or above net
asset value or at, below or above the initial public offering price.
Page 29
MANAGEMENT OF THE FUND
Trustees and Officers
The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by the Adviser. The names and
business addresses of the trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the SAI.
Investment Adviser
First Trust Advisors, 1001 Warrenville Road, Suite 300, Lisle, Illinois
60532, is the investment adviser to the Fund and is responsible for managing the
Fund's net assets. First Trust Advisors serves as investment adviser or
portfolio supervisor to investment portfolios with approximately $12.7 billion
in assets which it managed or supervised as of July 31, 2004.
First Trust Advisors will be responsible for the ongoing monitoring of the
Fund's investment portfolio, managing the Fund's business affairs and providing
certain clerical, bookkeeping and other administrative services.
First Trust Advisors, a registered investment adviser, is an Illinois
limited partnership formed in 1991 and an investment adviser registered with the
Securities and Exchange Commission under the Investment Advisers Act of 1940.
First Trust Advisors is a limited partnership with one limited partner, Grace
Partners of DuPage L.P. ("Grace Partners"), and one general partner, The Charger
Corporation. Grace Partners is a limited partnership with one general partner,
The Charger Corporation, and a number of limited partners. Grace Partners' and
The Charger Corporation's primary business is investment advisory and
broker/dealer services through their interests. The Charger Corporation is an
Illinois corporation controlled by the Robert Donald Van Kampen family. First
Trust Advisors is controlled by Grace Partners and The Charger Corporation.
For additional information concerning First Trust Advisors, including a
description of the services provided, see the SAI under "Investment Adviser."
Sub-Adviser
The Sub-Adviser, Fiduciary Asset Management, LLC, located at 8112 Maryland
Avenue, Suite 400, St. Louis, Missouri 63105, is a registered investment adviser
and serves as investment adviser or portfolio supervisor to investment
portfolios with approximately $13.1 billion in assets as of July 31, 2004.
Fiduciary Asset Management invests in a broad range of equity, hedged
equity, master limited partnership, and fixed income strategies for
institutional and high net worth clients. Fiduciary Asset Management's clients
include Fortune 500 companies, public pensions and large endowments and
foundations. Fiduciary Asset Management was established as an independent
investment firm in 1994 and has managed covered call option portfolios for
clients since 1997.
Fiduciary Asset Management was founded in 1994 by Charles D. Walbrandt.
From 1974 through 1994 Mr. Walbrandt served in various capacities with General
Dynamics Corporation, including Corporate Vice President, Trust Investment and
Treasurer. While at General Dynamics, Mr. Walbrandt created the internal
investment department in 1983, designed the investment management process and
managed both equity and fixed income portfolios. Mr. Walbrandt holds a B.S.
degree in economics from the University of Wisconsin, a M.B.A. in finance from
St. Louis University and is a Chartered Financial Analyst. Fiduciary Asset
Management is controlled by Mr. Walbrandt.
Fiduciary Asset Management will be responsible for the day-to-day execution
of the Fund's investment strategy, providing investment research and making and
executing recommendations for the purchase and sale of securities.
Fiduciary Asset Management's strategy committee collects and reviews
general macroeconomic data with the goal of developing an overall strategic
theme for the firm. This strategic theme incorporates such macroeconomic data
into a general economic view as to the direction of the economy, the rate at
which the economy is currently changing, the current market cycle and how that
cycle co-exists with the current economic cycle, and specific sectors and/or
Page 30
industries that appear attractive given potential future economic and market
conditions. The analysis of Fiduciary Asset Management's strategy committee is
utilized by Fiduciary Asset Management's portfolio managers and research
professionals to screen, research and select equity securities for the Fund and
determine the option strategy employed. Fiduciary Asset Management's strategy
committee includes Charles D. Walbrandt, Wiley D. Angell, Mohammed Riad, James
J. Cunnane Jr., and Joseph E. Gallagher.
Mohammed Riad will serve as the primary portfolio manager for the Fund. Mr.
Riad is a member of the portfolio management team and performs securities
research. Mr. Riad currently heads Fiduciary Asset Management's options- based
large-cap Hedged Core Equity and Stable Return Hedged Equity portfolios, which
employ covered call writing strategies on behalf of institutional accounts. Mr.
Riad is also responsible for the development and oversight of Fiduciary Asset
Management's small/mid-cap strategies. Mr. Riad has been instrumental in
developing large scale options programs, working on both strategy and
implementation and Mr. Riad oversees the trading strategies for Fiduciary Asset
Management's St. Louis equity group. Mr. Riad joined the firm in June 1999 after
earning his M.B.A. from Washington University. Prior to this, Mr. Riad worked
for six years at Legg Mason Wood Walker in the Washington D.C. office, and as an
Administrative Manager in Legg Mason Wood Walker's New York office. Mr. Riad
also holds a Bachelor of Science degree in Business from Wake Forest University.
Investment Management Agreement
Pursuant to an investment management agreement (the "Investment Management
Agreement") between First Trust Advisors and the Fund, the Fund has agreed to
pay for the services and facilities provided by First Trust Advisors an annual
management fee, payable on a monthly basis, equal to 1.00% of the Fund's managed
assets.
For purposes of calculation of the management fee, the Fund's "managed
assets" means the average daily gross assets of the Fund, minus the sum of the
Fund's accrued and unpaid dividends on any outstanding Common Shares and accrued
liabilities (including the value of call options written (sold)).
In addition to the fee of First Trust Advisors, the Fund pays all other
costs and expenses of its operations, including compensation of its trustees
(other than those affiliated with First Trust Advisors), custodian, transfer
agency, administrative, accounting and dividend disbursing expenses, legal fees,
leverage expenses, expenses of independent auditors, expenses of repurchasing
Common Shares, expenses of preparing, printing and distributing shareholder
reports, notices, proxy statements and reports to governmental agencies, and
taxes, if any.
The Sub-Adviser receives a portfolio management fee equal to .50% of the
Fund's managed assets. The Sub-Adviser's fee is paid by the Adviser out of the
Adviser's management fee.
The Adviser has agreed to pay (i) all organizational expenses and (ii) all
offering costs of the Fund (other than sales load but including a reimbursement
of certain underwriting expenses) that exceed $.04 per Common Share. The
Sub-Adviser has agreed to reimburse the Adviser for one-half of such
organizational expenses and offering costs of the Fund that exceed $.04 per
Common Share. The Sub-Adviser has also agreed to reimburse the Adviser for
one-half of the quarterly incentive fees payable by the Adviser to A.G. Edwards
and Raymond James as described in "Underwriting- Additional Compensation and
Other Relationships."
NET ASSET VALUE
The Fund will determine the net asset value of its Common Shares daily, as
of 4:15 p.m. Eastern Time, every day on which the New York Stock Exchange is
open. Net asset value is computed by dividing the value of all assets of the
Fund (including accrued interest and dividends), less all liabilities (including
accrued expenses, the value of call options written (sold) and dividends
declared but unpaid), by the total number of Common Shares outstanding.
For purposes of determining the net asset value of the Fund, readily
marketable portfolio securities listed on any exchange other than The NASDAQ
National Market are valued, except as indicated below, at the last sale price on
the business day as of which such value is being determined. If there has been
no sale on such day, the securities are valued at the mean of the most recent
Page 31
bid and asked prices on such day. Securities admitted to trade on The NASDAQ
National Market are valued at the NASDAQ Official Closing Price as determined by
NASDAQ. Portfolio securities traded on more than one securities exchange are
valued at the last sale price on the business day as of which such value is
being determined at the close of the exchange representing the principal market
for such securities.
Equity securities traded in the over-the-counter market, but excluding
securities admitted to trading on The NASDAQ National Market, are valued at the
closing bid prices. Fixed income securities with a remaining maturity of 60 days
or more will be valued by the Fund 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 on an amortized cost basis. The Fund values exchange-traded options and
other derivative contracts at the closing price on the exchange on which it is
traded, or if not traded, or no closing price is available, at the mean between
the last bid and asked price.
The value of any portfolio security held by the Fund for which reliable
market quotations are not readily available, including illiquid securities, or
if a valuation is deemed inappropriate, will be determined by the Board of
Trustees or its designee in a manner that most fairly reflects fair market value
of the security on the valuation date.
Any derivative transaction that the Fund enters into may, depending on the
applicable market environment, have a positive or negative value for purposes of
calculating net asset value. Forward foreign currency exchange contracts which
are traded in the United States on regulated exchanges are valued by calculating
the mean between the last bid and asked quotation supplied to a pricing service
by certain independent dealers in such contracts. Any option transaction that
the Fund enters into may, depending on the applicable market environment, have
no value or a positive value. Exchange traded options and futures contracts are
valued at the closing price in the market where such contracts are principally
traded.
DISTRIBUTIONS
The Fund's present policy, which may be changed at any time by the Fund's
Board of Trustees, is to distribute at least quarterly all, or substantially
all, of its net investment income as dividends to Common Shareholders. In
addition, the Fund intends to distribute any net long-term capital gains to
Common Shareholders as long-term capital gain dividends at least annually.
Dividends from equity securities and short-term capital gain (for example,
premiums earned in connection with writing (selling) call options) will be the
Fund's main sources of net investment income. In addition, the Fund may receive
net investment income from certain hedging and interest rate transactions and
other investments. Moreover, the Fund may realize capital gains or losses when
it sells portfolio securities, depending on whether the sale prices for the
securities are higher or lower than the purchase prices, or when call options
expire, are exercised or are cancelled pursuant to a closing transaction,
depending on the timing of such transactions. Distributions consisting of
"qualified dividend income" (income from domestic and certain foreign
corporations) may qualify for reduced individual income tax rates applicable to
long-term capital gains, provided certain holding period and other requirements
are met by the Fund and by the individuals who own the Common Shares. See "Tax
Matters."
Unless you elect to receive cash distributions, your distributions of net
investment income and capital gains dividends will automatically be reinvested
into additional Common Shares pursuant to the Fund's Dividend Reinvestment Plan.
See "Dividend Reinvestment Plan."
Distributions by the Fund of its net investment income and of any net
capital gains, whether paid in cash or reinvested in additional Common Shares,
will be taken into account in measuring the performance of the Fund with respect
to its investment objective.
Page 32
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold
your Common Shares with a brokerage firm that participates in the Fund's
Dividend Reinvestment Plan (the "Plan"), unless you elect to receive cash
distributions, all dividends, including any capital gain dividends, on your
Common Shares will be automatically reinvested by the Plan Agent, PFPC Inc., in
additional Common Shares under the Plan. If you elect to receive cash
distributions, you will receive all distributions in cash paid by check mailed
directly to you by PFPC Inc., as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you
will receive will be determined as follows:
(1) If the Common Shares are trading at or above net asset value at the
time of valuation, the Fund will issue new Common Shares at a price equal to the
greater of (i) net asset value per Common Share on that date or (ii) 95% of the
market price on that date.
(2) If Common Shares are trading below net asset value at the time of
valuation, the Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the New York Stock Exchange
or elsewhere, for the participants' accounts. It is possible that the market
price for the Common Shares may increase before the Plan Agent has completed its
purchases. Therefore, the average purchase price per Common Share paid by the
Plan Agent may exceed the market price at the time of valuation, resulting in
the purchase of fewer Common Shares than if the dividend or distribution had
been paid in Common Shares issued by the Fund. The Plan Agent will use all
dividends and distributions received in cash to purchase Common Shares in the
open market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with federal
securities laws. Interest will not be paid on any uninvested cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone in accordance with such
reasonable requirements as the Plan Agent and Fund may agree upon. If you
withdraw or the Plan is terminated, you will receive a certificate for each
whole Common Share in your account under the Plan and you will receive a cash
payment for any fraction of a Common Share in your account. If you wish, the
Plan Agent will sell your Common Shares and send you the proceeds, minus
brokerage commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and
gives written confirmation of all transactions in the accounts, including
information you may need for tax records. Common Shares in your account will be
held by the Plan Agent in non-certificated form. The Plan Agent will forward to
each participant any proxy solicitation material and will vote any Common Shares
so held only in accordance with proxies returned to the Fund. Any proxy you
receive will include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or
distributions in Common Shares. However, all participants will pay a pro rata
share of brokerage commissions incurred by the Plan Agent when it makes open
market purchases.
Electing to automatically reinvest dividends and distributions will not
effect a Common Shareholder's tax liability on those dividends and
distributions. See "Tax Matters."
If you hold your Common Shares with a brokerage firm that does not
participate in the Plan, you will not be able to participate in the Plan and any
dividend reinvestment may be effected on different terms than those described
above. Consult your financial advisor for more information.
The Fund reserves the right to amend or terminate the Plan if in the
judgment of the Board of Trustees the change is warranted. There is no direct
service charge to participants in the Plan; however, the Fund reserves the right
to amend the Plan to include a service charge payable by the participants.
Additional information about the Plan may be obtained from PFPC Inc., 301
Bellevue Parkway, Wilmington, Delaware 19809.
Page 33
DESCRIPTION OF SHARES
Common Shares
The Declaration authorizes the issuance of an unlimited number of Common
Shares. The Common Shares being offered have a par value of $.01 per Common
Share and have equal rights to the payment of dividends and the distribution of
assets upon liquidation. The Common Shares being offered will, when issued, be
fully paid and, subject to matters discussed in "Certain Provisions in the
Declaration of Trust," non-assessable, and currently have no preemptive or
conversion rights (except as may otherwise be determined by the Trustees in
their sole discretion) or rights to cumulative voting.
The Fund's common shares have been approved for listing on the New York
Stock Exchange, subject to notice of issuance, under the symbol "FFA." The Fund
intends to hold annual meetings of Common Shareholders so long as the Common
Shares are listed on a national securities exchange and such meetings are
required as a condition to such listing.
The Fund's net asset value per Common Share generally increases when prices
of the Fund's investments increase, and decreases when prices of the Fund's
investments decrease. Net asset value will be reduced immediately following the
offering by the amount of the sales load and offering expenses paid by the Fund.
The Adviser has agreed to pay (i) all organizational expenses and (ii) all
offering costs of the Fund (other than sales load but including a reimbursement
of certain underwriting expenses) that exceed $.04 per Common Share. The
Sub-Adviser has agreed to reimburse the Adviser for one-half of such
organizational expenses and offering costs of the Fund that exceed $.04 per
Common Share. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a Common
Shareholder determines to buy additional Common Shares or sell Common Shares
already held, the Common Shareholder may conveniently do so by trading on the
exchange through a broker or otherwise. Shares of closed-end investment
companies may frequently trade on an exchange at prices lower than net asset
value. Shares of closed-end investment companies like the Fund have during some
periods traded at prices higher than net asset value and during other periods
have traded at prices lower than net asset value. Because the market value of
the Common Shares may be influenced by such factors as dividend levels (which
are in turn affected by expenses), dividend stability, portfolio credit quality,
net asset value, relative demand for and supply of such Common Shares in the
market, general market and economic conditions, and other factors beyond the
control of the Fund, the Fund cannot assure you that Common Shares will trade at
a price equal to or higher than net asset value in the future. The Common Shares
are designed primarily for long-term investors, and investors in the Common
Shares should not view the Fund as a vehicle for trading purposes. See
"Structure of the Fund; Common Share Repurchases; Change in Fund Structure."
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, Common Shareholders could, in certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration contains an express disclaimer of Common Shareholder
liability for debts or obligations of the Fund and requires that notice of such
limited liability be given in each agreement, obligation or instrument entered
into or executed by the Fund or the Trustees. The Declaration further provides
for indemnification out of the assets and property of the Fund for all loss and
expense of any Common Shareholder held personally liable for the obligations of
the Fund solely by reason of being or having been a Common Shareholder of the
Fund. Thus, the risk of a Common Shareholder incurring financial loss on account
of Common Shareholder liability is limited to circumstances in which the Fund
would be unable to meet its obligations. The Fund believes that the likelihood
of such circumstances is remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Generally, the Declaration requires a vote by holders of at
least two-thirds of the Common Shares, except as described below and in the
Declaration, to authorize: (1) a conversion of the Fund from a closed-end to an
open-end investment company; (2) a merger or consolidation of the Fund with any
corporation, association, trust or other organization, including a series or
class of such other organization (subject to a limited exception if the
Page 34
acquiring fund is not an operating entity immediately prior to the transaction);
(3) a sale, lease or exchange of all or substantially all of the Fund's assets
(other than in the regular course of the Fund's investment activities, in
connection with the termination of the Fund, and other limited circumstances set
forth in the Declaration); (4) in certain circumstances, a termination of the
Fund; (5) a removal of Trustees by Common Shareholders; or (6) certain
transactions in which a Principal Shareholder (as defined in the Declaration) is
a party to the transaction. However, with respect to (1) through (3), if such
transaction has already been authorized by the affirmative vote of two-thirds of
the trustees, then the affirmative vote of the majority of the outstanding
voting securities, as defined in the 1940 Act (a "Majority Shareholder Vote"),
is required. Such affirmative vote or consent shall be in addition to the vote
or consent of the holders of the Common Shares otherwise required by law or any
agreement between the Fund and any national securities exchange. Approval of
Common Shareholders is not required, however, for any transaction, whether
deemed a merger, consolidation, reorganization, exchange of Common Shares or
otherwise whereby the Fund issues Common Shares in connection with the
acquisition of assets (including those subject to liabilities) from any other
investment company or similar entity. None of the foregoing provisions may be
amended except by the vote of at least two-thirds of the Common Shares
outstanding and entitled to vote. See the SAI under "Certain Provisions in the
Declaration of Trust."
The provisions of the Declaration described above could have the effect of
depriving the Common Shareholders of opportunities to sell their Common Shares
at a premium over the then current market price of the Common Shares by
discouraging a third party from seeking to obtain control of the Fund in a
tender offer or similar transaction. The overall effect of these provisions is
to render more difficult the accomplishment of a merger or the assumption of
control by a third party. They provide, however, the advantage of potentially
requiring persons seeking control of the Fund to negotiate with its management
regarding the price to be paid and facilitating the continuity of the Fund's
investment objective and policies. The Board of Trustees of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are in
the best interests of the Fund and its Common Shareholders.
Reference should be made to the Declaration on file with the Securities and
Exchange Commission for the full text of these provisions.
STRUCTURE OF THE FUND; COMMON SHARE REPURCHASES;
CHANGE IN FUND STRUCTURE
Closed-End Structure
Closed-end funds differ from open-end management investment companies
(commonly referred to as mutual funds) in that closed-end funds generally list
their shares for trading on a securities exchange and do not redeem their shares
at the option of the shareholder. By comparison, mutual funds issue securities
redeemable at net asset value at the option of the shareholder and typically
engage in a continuous offering of their shares. Mutual funds are subject to
continuous asset in-flows and out-flows that can complicate portfolio
management, whereas closed-end funds generally can stay more fully invested in
securities consistent with the closed-end fund's investment objective and
policies. In addition, in comparison to open-end funds, closed-end funds have
greater flexibility in their ability to make certain types of investments,
including investments in illiquid securities, although it is not expected that
the Fund will invest in illiquid securities.
Shares of closed-end investment companies listed for trading on a
securities exchange frequently trade at a discount from net asset value, but in
some cases trade at a premium. The market price may be affected by trading
volume of the shares, general market and economic conditions and other factors
beyond the control of the closed-end fund. The foregoing factors may result in
the market price of the Common Shares being greater than, less than or equal to
net asset value. The Board of Trustees has reviewed the structure of the Fund in
light of its investment objective and policies and has determined that the
closed-end structure is in the best interests of the Common Shareholders. As
described below, however, the Board of Trustees will review periodically the
trading range and activity of the Common Shares with respect to its net asset
value and the Board may take certain actions to seek to reduce or eliminate any
such discount. Such actions may include open market repurchases or tender offers
for the Common Shares at net asset value or the possible conversion of the Fund
to an open-end mutual fund. There can be no assurance that the Board will decide
to undertake any of these actions or that, if undertaken, such actions would
Page 35
result in the Common Shares trading at a price equal to or close to net asset
value per Common Share. In addition, as noted above, the Board of Trustees has
determined in connection with this initial offering of Common Shares of the Fund
that the closed-end structure is desirable, given the Fund's investment
objective and policies. Investors should assume, therefore, that it is highly
unlikely that the Board would vote to convert the Fund to an open-end investment
company.
Repurchase of Common Shares and Tender Offers
In recognition of the possibility that the Common Shares might trade at a
discount to net asset value and that any such discount may not be in the
interest of Common Shareholders, the Fund's Board of Trustees, in consultation
with the Adviser and any corporate finance services and consulting agent that
the Adviser may retain, from time to time will review possible actions to reduce
any such discount. The Board of Trustees of the Fund will consider from time to
time open market repurchases of and/or tender offers for Common Shares to seek
to reduce any market discount from net asset value that may develop. In
connection with its consideration from time to time of open-end repurchases of
and/or tender offers for Common Shares, the Board of Trustees of the Fund will
consider whether to commence a tender offer or share-repurchase program at the
first quarterly board meeting following a calendar year in which the Common
Shares have traded at an average weekly discount from net asset value of more
than 10% in the last 12 weeks of that calendar year. After any consideration of
potential actions to seek to reduce any significant market discount, the Board
may, subject to its fiduciary obligations and compliance with applicable state
and federal laws, authorize the commencement of a share-repurchase program or
tender offer. The size and timing of any such share-repurchase program or tender
offer will be determined by the Board of Trustees in light of the market
discount of the Common Shares, trading volume of the Common Shares, information
presented to the Board of Trustees regarding the potential impact of any such
share-repurchase program or tender offer, and general market and economic
conditions. There can be no assurance that the Fund will in fact effect
repurchases of or tender offers for any of its Common Shares. The Fund may incur
debt to finance such repurchases or a tender offer. Interest on any such
borrowings would increase the Fund's expenses and reduce the Fund's net income.
There can be no assurance that repurchases of Common Shares or tender
offers, if any, will cause the Common Shares to trade at a price equal to or in
excess of their net asset value. Nevertheless, the possibility that a portion of
the Fund's outstanding Common Shares may be the subject of repurchases or tender
offers may reduce the spread between market price and net asset value that might
otherwise exist. In the opinion of the Fund, sellers may be less inclined to
accept a significant discount in the sale of their Common Shares if they have a
reasonable expectation of being able to receive a price of net asset value for a
portion of their Common Shares in conjunction with an announced repurchase
program or tender offer for the Common Shares.
Although the Board of Trustees believes that repurchases or tender offers
generally would have a favorable effect on the market price of the Common
Shares, the acquisition of Common Shares by the Fund will decrease the total
assets of the Fund and therefore will have the effect of increasing the Fund's
expense ratio. Because of the nature of the Fund's investment objective,
policies and portfolio, the Adviser does not anticipate that repurchases of
Common Shares or tender offers should interfere with the ability of the Fund to
manage its investments in order to seek its investment objective, and does not
anticipate any material difficulty in borrowing money or disposing of portfolio
securities to consummate repurchases of or tender offers for Common Shares,
although no assurance can be given that this will be the case.
Conversion to Open-End Fund
The Fund may be converted to an open-end investment company at any time if
approved by the holders of two-thirds of the Common Shares outstanding and
entitled to vote; provided, however, that such vote shall be by Majority
Shareholder Vote if the action in question was previously approved by the
affirmative vote of two-thirds of the Trustees. Such affirmative vote or consent
shall be in addition to the vote or consent of the holders of the Common Shares
otherwise required by law or any agreement between the Fund and any national
securities exchange. In the event of conversion, the Common Shares would cease
to be listed on the New York Stock Exchange or other national securities
exchange or market system. The Board of Trustees believes, however, that the
closed-end structure is desirable, given the Fund's investment objective and
policies. Investors should assume, therefore, that it is unlikely that the Board
of Trustees would vote to convert the Fund to an open-end investment company.
Page 36
Shareholders of an open-end investment company may require the company to redeem
their shares at any time (except in certain circumstances as authorized by or
under the 1940 Act) at their net asset value, less such redemption charge, if
any, as might be in effect at the time of a redemption. The Fund expects to pay
all such redemption requests in cash, but intends to reserve the right to pay
redemption requests in a combination of cash or securities. If such partial
payment in securities were made, investors may incur brokerage costs in
converting such securities to cash. If the Fund were converted to an open-end
fund, it is likely that new Common Shares would be sold at net asset value plus
a sales load.
TAX MATTERS
The following discussion of federal income tax matters is based on the
advice of Chapman and Cutler LLP, counsel to the Fund.
This section and the discussion in the SAI summarize the material U.S.
federal income tax consequences of purchasing, owning and selling Common Shares
of the Fund. This section is current as of the date of this prospectus. Tax laws
and interpretations change frequently, possibly with retroactive effects, and
this summary does not describe all of the tax consequences to all taxpayers. For
example, this summary generally does not describe your situation if you are a
corporation, a non-U.S. person, a broker-dealer, or other investor with special
circumstances. In addition, this section does not address your state, local or
foreign taxes. This summary assumes that you hold your Common Shares as capital
assets (generally, assets held for investment). Investors should consult their
own tax advisors regarding the particular tax consequences to them of investing
in the Fund.
Fund Status
The Fund intends to elect and to qualify annually as a "regulated
investment company" under the federal tax laws. If the Fund qualifies as a
regulated investment company and distributes its income as required by the tax
law, the Fund generally will not pay federal income taxes.
Distributions
Fund distributions are generally taxable to you whether or not you elect to
automatically reinvest them. Regular distributions of net investment income are
generally taxed at ordinary tax rates, but certain ordinary income dividends
received from the Fund may qualify as "qualified dividend income" taxed at
reduced individual tax rates equal to those applicable to long-term capital
gains. An option premium will be treated by the Fund as either short-term or
long-term capital gain or loss, depending on whether the call option expires, is
exercised or is cancelled pursuant to a closing transaction, and the timing of
such transaction. Generally, you will treat all capital gain dividend
distributions as long- term capital gains regardless of how long you have owned
your Common Shares. To determine your tax liability for capital gain, you must
calculate your net capital gain or loss for the tax year after considering Fund
capital gain dividends and all of your other long-term capital gain and loss
transactions, as described below. Fund distributions that are in excess of the
Fund's current and accumulated earnings and profits will be treated as a
non-taxable return of capital to the extent of your tax basis in Common Shares
and, thereafter, will be treated as capital gain from the sale or exchange of
Common Shares. The tax laws may require you to treat certain distributions made
to you in January as if you had received them on December 31 of the previous
year. After the end of each year, you will receive a tax statement that
separates your Fund distributions into two categories, ordinary income dividends
and capital gain dividends and identifies any portion of your ordinary income
dividends potentially eligible for "qualified dividend income" treatment by you.
Dividends Received Deduction
A corporation that owns Common Shares generally will not be entitled to the
dividends received deduction with respect to distributions received from the
Fund. However, certain distributions on the Common Shares attributable to
qualifying dividends received by the Fund from domestic corporations may be
designated by the Fund as being eligible for the corporate dividends received
deduction.
Page 37
If You Sell Shares
If you sell your Common Shares, you will generally recognize a taxable gain
or loss equal to the difference between your tax basis in your Common Shares and
the amount you receive in the exchange. Your tax basis in your Common Shares is
generally equal to the cost of your Common Shares, including sales charges and
reinvested distributions. In some cases, however, you may have to adjust your
tax basis after you purchase your Common Shares.
Taxation of Capital Gains and Losses and Certain Ordinary Income Dividends
Under the Tax Act, if you are an individual, the maximum marginal federal
tax rate for net capital gain is generally 15% (5% for certain taxpayers in the
10% and 15% tax brackets). These capital gains rates are generally effective for
taxable years beginning before January 1, 2009. Higher tax rates will apply
after 2008 unless further legislative action is taken by Congress.
Net capital gain equals the excess of net long-term capital gain over net
short-term capital loss. Generally, capital gain or loss from a sale or other
disposition of Common Shares is long-term if the holding period for the Common
Shares is more than one year and is short-term if the holding period for the
Common Shares is one year or less. You must exclude the date you purchase your
Common Shares to determine your holding period. However, if you receive a
capital gain distribution from the Fund and sell your Common Shares at a loss
after holding them for six months or less, the loss will be recharacterized as
long-term capital loss to the extent of the capital gain dividend received. The
tax rates for capital gains realized from assets held for one year or less are
generally the same as the rates applicable to ordinary income. In addition, the
Internal Revenue Code treats certain capital gains as ordinary income in special
situations.
Pursuant to the Tax Act, regular investment income distributions received
by an individual Common Shareholder from a regulated investment company such as
the Fund are not treated as "qualified dividend income" and taxed at the reduced
rates that apply to net capital gain (as discussed above), unless certain
holding period and other requirements are satisfied with respect to your Common
Shares and the distributions are attributable to qualified dividend income
received by the Fund itself. Dividends received by the Fund from foreign
corporations may not be qualified dividend income eligible for this lower tax
rate. These special rules relating to the taxation of regular investment income
distributions from regulated investment companies generally apply to taxable
years beginning before January 1, 2009. Higher tax rates will apply after 2008,
unless further legislative action is taken by Congress. The Fund will provide
notice to its Common Shareholders of the amount of any distribution which may be
eligible for the reduced capital gains tax rates.
Backup Withholding
The Fund may be required to withhold U.S. federal income tax from all
taxable distributions and sale proceeds payable to a Common Shareholder who
fails to provide the Fund with his or her correct taxpayer identification number
or to make required certifications, or who has been notified by the Internal
Revenue Service that he or she is subject to backup withholding. This
withholding is not an additional tax. Any amounts withheld may be credited
against the Common Shareholder's U.S. federal income tax liability, if any, or
refunded to the Common Shareholder provided that the required information is
furnished to the Internal Revenue Service.
Page 38
UNDERWRITING
Subject to the terms and conditions stated in a purchase agreement dated
August 26, 2004, each Underwriter named below, for which Merrill Lynch, Pierce,
Fenner & Smith Incorporated is acting as representative, has severally agreed to
purchase, and the Fund has agreed to sell to such Underwriter, the number of
Common Shares set forth opposite the name of such Underwriter.
Number of
Underwriter Common Shares
----------- -------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ........................................... 4,500,000
A.G. Edwards & Sons, Inc. ......................................... 2,050,000
Raymond James & Associates, Inc. .................................. 1,740,000
Wachovia Capital Markets, LLC ...................................... 4,300,000
Advest, Inc. ...................................................... 200,000
Robert W. Baird & Co. Incorporated ................................. 150,000
Ferris, Baker Watts, Incorporated .................................. 175,000
J.J.B. Hilliard, W.L. Lyons, Inc. ................................. 150,000
KeyBanc Capital Markets, a division of McDonald Investments Inc. .. 150,000
Legg Mason Wood Walker, Incorporated ............................... 750,000
Oppenheimer & Co. Inc. ............................................. 400,000
RBC Capital Markets Corporation .................................... 575,000
Ryan Beck & Co., Inc. .............................................. 175,000
Wedbush Morgan Securities Inc. ..................................... 150,000
Wells Fargo Securities, LLC ........................................ 700,000
BB&T Capital Markets, a division of Scott & Stringfellow, Inc. ..... 80,000
Crowell, Weedon & Co. .............................................. 80,000
D.A. Davidson & Co. ................................................ 80,000
Doft & Co., Inc. ................................................... 80,000
Harris Nesbitt Corp. ............................................... 80,000
Morgan Keegan & Company, Inc. ...................................... 80,000
Needham & Company, Inc. ............................................ 80,000
Parker/Hunter Incorporated ......................................... 80,000
Piper Jaffray & Co. ............................................... 80,000
Quick & Reilly, Inc. ............................................... 80,000
Stephens Inc. ...................................................... 80,000
SunTrust Capital Markets, Inc. .................................... 80,000
TD Waterhouse Investor Services, Inc. .............................. 80,000
Axiom Capital Management, Inc. ..................................... 35,000
Arthurs, Lestrange & Company, Incorporated ......................... 35,000
William Blair & Company, L.L.C. ................................... 35,000
BrookStreet Securities Corp. ....................................... 35,000
CMG Institutional Trading, LLC ..................................... 35,000
Chatsworth Securities LLC .......................................... 35,000
The Concord Equity Group, LLC ...................................... 35,000
Dominick & Dominick LLC ............................................ 35,000
First Montauk Securities Corp. ..................................... 35,000
First Southwest Company ............................................ 35,000
Gilford Securities Incorporated .................................... 35,000
GunnAllen Financial, Inc. .......................................... 35,000
Page 39
Number of
Underwriter Common Shares
----------- -------------
Hoefer & Arnett Incorporated ....................................... 35,000
Howe Barnes Investments, Inc. ...................................... 35,000
Huntleigh Securities Corporation ................................... 35,000
Johnston, Lemon & Co. Incorporated ................................. 35,000
LaSalle St. Securities, LLC ........................................ 35,000
Maxim Group LLC .................................................... 35,000
Mesirow Financial, Inc. ............................................ 35,000
Morgan Wilshire Securities, Inc. ................................... 35,000
NatCity Investments, Inc. ......................................... 35,000
National Securities Corporation .................................... 35,000
Newbridge Securities Corporation ................................... 35,000
Northeast Securities, Inc. ......................................... 35,000
David A. Noyes & Company ........................................... 35,000
Nutmeg Securities, Ltd. ............................................ 35,000
Ormes Capital Markets, Inc. ........................................ 35,000
Paulson Investment Company, Inc. ................................... 35,000
Peacock, Hislop, Staley & Given, Inc. ............................. 35,000
Sanders Morris Harris Inc. ........................................ 35,000
Sands Brothers & Co., Ltd. ......................................... 35,000
Source Capital Group Inc. .......................................... 35,000
Southwest Securities, Inc. ......................................... 35,000
Sterling Financial Investment Group, Inc. .......................... 35,000
M.L. Stern & Co., LLC .............................................. 35,000
Stone & Youngberg LLC .............................................. 35,000
Torrey Pines Securities, Inc. ..................................... 35,000
----------
Total .................................................... 18,500,000
==========
The purchase agreement provides that the obligations of the Underwriters
are subject to certain conditions, including the absence of any materially
adverse change in the Fund's business and the receipt of certain certificates,
opinions and letters from the Fund and the Fund's attorneys and independent
accountants. The nature of the Underwriters' obligation is such that they are
committed to purchase all Common Shares offered hereby if they purchase any of
the Common Shares. The Fund, First Trust Advisors and Fiduciary Asset Management
have each agreed to indemnify the several Underwriters for or to contribute to
the losses arising out of certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
Commissions and Discounts
The Underwriters propose to initially offer some of the Common Shares
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the Common Shares to certain dealers at the
public offering price less a concession not in excess of $.60 per Common Share.
The sales load the Fund will pay of $.90 per Common Share is equal to 4.5% of
the initial offering price. The Underwriters may allow, and the dealers may
reallow, a discount not in excess of $.10 per Common Share on sales to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed. Investors must pay for any Common Shares
purchased on or before August 31, 2004.
The following table shows the public offering price, estimated offering
expenses, sales load and proceeds to the Fund. The information assumes either no
exercise or full exercise by the underwriters of their overallotment option.
Page 40
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
Public offering price............................. $20.00 $370,000,000 $425,500,000
Sales load........................................ $.90 $16,650,000 $19,147,500
Estimated offering expenses....................... $.04 $740,000 $851,000
Proceeds, after expenses, to the Fund............. $19.06 $352,610,000 $405,501,500
The Fund will pay its Common Share offering costs up to and including $.04
per Common Share. The Fund has agreed to pay the Underwriters $.00667 per Common
Share as a partial reimbursement of expenses incurred in connection with the
offering. The amount paid by the Fund as this partial reimbursement to the
Underwriters will not exceed .03335% of the total price to the public of the
Common Shares sold in this offering. The Fund has also agreed to pay certain
fees to counsel to the Underwriters in an amount up to $7,500, which will not
exceed .00178% of the total price to the public of the Common Shares sold in
this offering. The Adviser has agreed to pay (i) all organizational costs and
(ii) all offering costs of the Fund (other than sales load but including the
partial reimbursement of certain underwriter expenses described above) that
exceed $.04 per Common Share. The Sub-Adviser has agreed to reimburse the
Adviser for one-half of such organizational expenses and offering costs of the
Fund that exceed $.04 per Common Share. To the extent that aggregate offering
expenses are less than $.04 per Common Share, up to .10% of the public offering
price of the securities sold in this offering, up to such expense limit, will be
paid to First Trust Portfolios, L.P. as reimbursement for the distribution
services it provides to the Fund (the "Contingent Reimbursement Amount"). First
Trust Portfolios, L.P. is an affiliate of the Adviser.
Overallotment Option
The Fund has granted the underwriters an option to purchase up to 2,775,000
additional Common Shares at the public offering price, less the sales load,
within 45 days from the date of this prospectus solely to cover any
overallotments. If the underwriters exercise this option, each will be
obligated, subject to conditions contained in the purchase agreement, to
purchase a number of additional Common Shares proportionate to that
underwriter's initial amount reflected in the above table.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the Common Shares is complete, Securities and
Exchange Commission rules may limit underwriters and selling group members from
bidding for and purchasing the Common Shares. However, the representatives may
engage in transactions that stabilize the price of the Common Shares, such as
bids or purchases to peg, fix or maintain that price.
If the underwriters create a short position in the Common Shares in
connection with the offering, i.e., if they sell more Common Shares than are
listed on the cover of this prospectus, the representative may reduce that short
position by purchasing Common Shares in the open market. The representative may
also elect to reduce any short position by exercising all or part of the
overallotment option described above. The underwriters also may impose a penalty
bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Shares sold in this offering for their
account may be reclaimed by the syndicate if such Common Shares are repurchased
by the syndicate in stabilizing or covering transactions. Purchases of the
Common Shares to stabilize the price or to reduce a short position may cause the
price of the Common Shares to be higher than it might be in the absence of such
purchases.
Neither the Fund nor any of the underwriters makes any representations or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition, neither
the Fund nor any of the underwriters makes any representation that the
representative will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
The Fund has agreed not to offer or sell any additional Common Shares for a
period of 180 days after the date of the purchase agreement without the prior
written consent of the underwriters, except for the sale of the Common Shares to
the underwriters pursuant to the purchase agreement and certain transactions
relating to the Fund's Dividend Reinvestment Plan.
Page 41
The Fund anticipates that the underwriters may from time to time act as
brokers or, after they have ceased to be underwriters, dealers in executing the
Fund's portfolio transactions. The underwriters are active underwriters of, and
dealers in, securities and act as market-makers in a number of such securities,
and therefore can be expected to engage in portfolio transactions with the Fund.
Common Shares will be sold so as to ensure that New York Stock Exchange
distribution standards (i.e., round lots, public shares and aggregate market
value) will be met.
Additional Compensation and Other Relationships
The Adviser (and not the Fund) has agreed to pay from its own assets
additional compensation to Merrill Lynch. This additional compensation will be
payable quarterly at the annual rate of .15% of the Fund's total assets during
the continuance of the Investment Management Agreement or other investment
management agreement between the Adviser and the Fund. Merrill Lynch has agreed
to provide, as requested by the Adviser, specified after-market support services
designed to maintain the visibility of the Fund on an ongoing basis; relevant
information, studies or reports regarding the Fund and the closed end investment
company industry; and consultation regarding market discounts of the Fund. The
total amount of these additional compensation payments to Merrill Lynch will not
exceed 2.33485% of the total price to the public of the Common Shares sold in
this offering.
The Adviser (and not the Fund) has agreed to pay from its own assets to
A.G. Edwards a quarterly incentive fee at an annual rate of up to .15% of the
Fund's average weekly total assets attributable to Common Shares sold in this
offering by A.G. Edwards and the other Underwriters (except for those Common
Shares sold by Merrill Lynch), such fees to be payable during the continuance of
the Investment Management Agreement or other investment management agreement
between the Adviser and the Fund. The Adviser (and not the Fund) has also agreed
to pay from its own assets to Raymond James a quarterly incentive fee at an
annual rate of up to .10% of the Fund's average weekly total assets attributable
to Common Shares sold in this offering by Raymond James, such fees to be payable
during the continuance of the Investment Management Agreement or other
investment management agreement between the Adviser and the Fund. The total
amount of the quarterly incentive fee payable to A.G. Edwards will not exceed
1.86629% of the total price to the public of the Common Shares sold in this
offering. The total amount of the quarterly incentive fee payable to Raymond
James will not exceed .16373% of the total price to the public of the Common
Shares sold in this offering.
For purposes of the preceding two paragraphs, "total assets" means the
total assets of the Fund (including any assets attributable to any preferred
shares that may be outstanding or otherwise attributable to the use of leverage)
minus the sum of the Fund's accrued and unpaid dividends on any outstanding
shares and accrued liabilities (other than debt representing financial leverage,
but including the value of call options written (sold)).
First Trust Portfolios, L.P., an affiliate of the Adviser, will provide
distribution assistance in connection with the sale of the Common Shares of the
Fund, and may pay compensation out of its own assets (and not the assets of the
Fund) to its respective employees who assist in marketing securities. In
connection with this distribution assistance, to the extent the offering
expenses payable by the Fund are less than $.04 per Common Share, the Fund will
pay the Contingent Reimbursement Amount of up to .10% of the amount of the total
price to the public of the Common Shares sold in this offering, up to such
expense limit, to First Trust Portfolios, L.P. as reimbursement for its
distribution assistance. Accordingly, the Contingent Reimbursement Amount will
not exceed .10% of the total price to the public of the Common Shares sold in
this offering.
The total amount of the additional compensation payments to Merrill Lynch
described above, plus the amounts paid by the Fund as the $.00667 per Common
Share partial reimbursement to the Underwriters and as payment of certain fees
to counsel to the Underwriters, the quarterly incentive fees payable to A.G.
Edwards and Raymond James and the Contingent Reimbursement Amount payable to
First Trust Portfolios, L.P., will not exceed 4.5% of the total price to the
public of the Common Shares sold in this offering. The sum total of all
compensation to or reimbursement of Underwriters and First Trust Portfolios,
L.P. in connection with this public offering of Common Shares, including sales
load and all forms of additional compensation to Underwriters, will be limited
to 9% of the total price to the public of the Common Shares sold in this
offering.
Page 42
The address of Merrill Lynch is 4 World Financial Center, New York, New
York 10080. The address of A.G. Edwards is One North Jefferson Avenue, St.
Louis, Missouri 63101. The address of Raymond James is 880 Carillon Parkway, St.
Petersburg, Florida 33716.
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT
The custodian of the assets of the Fund is PFPC Trust Company, 301 Bellevue
Parkway, Wilmington, Delaware 19809. The Fund's transfer, shareholder services
and dividend paying agent is PFPC Inc., 301 Bellevue Parkway, Wilmington,
Delaware 19809. Pursuant to an Administration and Accounting Services Agreement,
PFPC Inc. also provides certain administrative and accounting services to the
Fund, including maintaining the Fund's books of account, records of the Fund's
securities transactions, and certain other books and records; acting as liaison
with the Fund's independent public accountant providing such accountant with
various audit-related information with respect to the Fund; and providing other
continuous accounting and administrative services. As compensation for
administrative and accounting services, the Fund has agreed to pay PFPC Inc. an
annual fee, calculated daily and payable on a monthly basis, of .10% of the
Fund's average net assets, subject to decrease with respect to additional Fund
net assets.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Chapman and Cutler LLP, Chicago, Illinois, and for the
Underwriters by Clifford Chance US LLP, New York, New York. Chapman and Cutler
LLP and Clifford Chance US LLP may rely as to certain matters of Massachusetts
law on the opinion of Bingham McCutchen LLP.
Page 43
TABLE OF CONTENTS OF
THE STATEMENT OF ADDITIONAL INFORMATION
Page
----
Use of Proceeds ......................................................... 1
Investment Objective .................................................... 1
Investment Policies and Techniques ...................................... 3
Investment Risks ........................................................ 9
Other Investment Policies and Techniques ................................ 21
Management of the Fund .................................................. 32
Investment Adviser ...................................................... 36
Sub-Adviser ............................................................. 40
Portfolio Transactions and Brokerage .................................... 42
Distributions ........................................................... 43
Description of Shares ................................................... 43
Certain Provisions in the Declaration of Trust .......................... 44
Repurchase of Fund Shares; Conversion to Open-End Fund .................. 46
Tax Matters ............................................................. 49
Performance Related and Comparative Information ......................... 55
Experts ................................................................. 57
Custodian, Administrator and Transfer Agent ............................. 57
Independent Registered Public Accounting Firm ........................... 57
Additional Information .................................................. 58
Report of Independent Registered Public Accounting Firm ................. 59
Financial Statements .................................................... 60
Appendix A - Fiduciary Asset Management, LLC Proxy Voting Policy......... A-1
Page 44
This page is intentionally left blank.
Page 45
This page is intentionally left blank.
Page 46
===============================================================================
Until September 20, 2004 (25 days after the date of this prospectus), all
dealers that buy, sell or trade the Common Shares, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
18,500,000 SHARES
FIRST TRUST/FIDUCIARY ASSET MANAGEMENT
COVERED CALL FUND
COMMON SHARES
$20.00 PER SHARE
----------
PROSPECTUS
----------
MERRILL LYNCH & CO.
A.G. EDWARDS
RAYMOND JAMES
WACHOVIA SECURITIES
ADVEST, INC.
ROBERT W. BAIRD & CO.
FERRIS, BAKER WATTS
INCORPORATED
J.J.B. HILLIARD, W.L. LYONS, INC.
KEYBANC CAPITAL MARKETS
LEGG MASON WOOD WALKER
INCORPORATED
OPPENHEIMER & CO.
RBC CAPITAL MARKETS
RYAN BECK & CO.
WEDBUSH MORGAN SECURITIES
WELLS FARGO SECURITIES, LLC
August 26, 2004
===============================================================================
Back Cover
FIRST TRUST/FIDUCIARY ASSET MANAGEMENT COVERED CALL FUND
STATEMENT OF ADDITIONAL INFORMATION
First Trust/Fiduciary Asset Management Covered Call Fund (the "Fund")
is a newly organized, diversified closed-end management investment company.
This Statement of Additional Information relating to common shares of
beneficial interest of the Fund ("Common Shares") is not a prospectus, but
should be read in conjunction with the Fund's Prospectus relating thereto dated
August 26, 2004 (the "Prospectus"). This Statement of Additional Information
does not include all information that a prospective investor should consider
before purchasing Common Shares. Investors should obtain and read the Fund's
Prospectus prior to purchasing such shares. A copy of the Fund's Prospectus may
be obtained without charge by calling (800) 988-5891. You may also obtain a copy
of the Fund's Prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the meanings ascribed to them in the Prospectus.
This Statement of Additional Information is dated August 26, 2004.
TABLE OF CONTENTS
PAGE
USE OF PROCEEDS...............................................................1
INVESTMENT OBJECTIVE..........................................................1
INVESTMENT POLICIES AND TECHNIQUES............................................3
INVESTMENT RISKS..............................................................9
OTHER INVESTMENT POLICIES AND TECHNIQUES.....................................21
MANAGEMENT OF THE FUND.......................................................32
INVESTMENT ADVISER...........................................................36
SUB-ADVISER..................................................................40
PORTFOLIO TRANSACTIONS AND BROKERAGE.........................................42
DISTRIBUTIONS................................................................43
DESCRIPTION OF SHARES........................................................43
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST...............................44
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND.......................46
TAX MATTERS..................................................................49
PERFORMANCE RELATED AND COMPARATIVE INFORMATION..............................55
EXPERTS......................................................................57
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT..................................57
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM................................57
ADDITIONAL INFORMATION.......................................................58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM......................59
FINANCIAL STATEMENTS.........................................................60
Appendix A -- Fiduciary Asset Management, LLC Proxy Voting Policy........A-1
USE OF PROCEEDS
The net proceeds of the offering of Common Shares of the Fund will be
approximately: $352,610,000 ($405,501,500 if the Underwriters exercise the
overallotment option in full) after payment of the estimated offering costs. The
Fund expects it will be able to invest substantially all of the net proceeds in
common stocks that meet the investment objective and policies within seven days
after completion of the offering.
For the Fund, First Trust Advisors L.P. ("First Trust Advisors" or
"Adviser") has agreed to pay (i) all organizational expenses and (ii) all
offering costs of the Fund (other than sales load but including partial a
reimbursement of certain underwriting expenses) that exceed $.04 per Common
Share and Fiduciary Asset Management, LLC ("Fiduciary Asset Management" or
"Sub-Adviser") has agreed to reimburse the Adviser for one-half of such
organizational expenses and offering costs of the Fund that exceed $.04 per
Common Share.
Pending investment in securities that meet the Fund's investment
objective and policies, the net proceeds of the offering will be invested in
cash or cash equivalents.
INVESTMENT OBJECTIVE
Investment Objective. The Fund's investment objective is to provide a
high level of current income and gains and, to a lesser extent, capital
appreciation. The Fund seeks to achieve its investment objective by investing in
a diversified portfolio of equity securities and writing (selling) call options
on at least 80% of the Fund' managed assets. There can be no assurance that the
Fund's investment objective will be achieved.
The Fund cannot change its investment objective without the approval of
the holders of a "majority of the outstanding" Common Shares. As defined in the
Investment Company Act of 1940, as amended, (the "1940 Act"), when used with
respect to particular shares of the Fund, a "majority of the outstanding" Common
Shares means (i) 67% or more of the shares present at a meeting, if the holders
of more than 50% of the Fund's outstanding voting shares are present or
represented by proxy, or (ii) more than 50% of the Fund's outstanding voting
shares, whichever is less.
INVESTMENT RESTRICTIONS
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares:
(1) issue senior securities, as defined in the 1940 Act,
other than the borrowings permitted by investment restriction (2) set
forth below;
(2) borrow money, except as permitted by the 1940 Act;
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(3) act as underwriter of another issuer's securities, except
to the extent that the Fund may be deemed to be an underwriter within
the meaning of the Securities Act of 1933 in connection with the
purchase and sale of portfolio securities;
(4) purchase or sell real estate, but this shall not prevent
the Fund from investing in securities of companies that deal in real
estate or are engaged in the real estate business, including real
estate investment trusts, and securities secured by real estate or
interests therein and the Fund may hold and sell real estate or
mortgages on real estate acquired through default, liquidation, or
other distributions of an interest in real estate as a result of the
Fund's ownership of such securities;
(5) purchase or sell physical commodities (but this shall not
prevent the Fund from purchasing or selling options, futures contracts,
derivative instruments or from investing in securities or other
instruments backed by physical commodities);
(6) make loans of funds or other assets, other than by
entering into repurchase agreements, lending portfolio securities and
through the purchase of debt securities in accordance with its
investment objectives, policies and limitations;
(7) with respect to 75% of its total assets, purchase any
securities, if as a result more than 5% of the Fund's total assets
would then be invested in securities of any single issuer or if, as a
result, the Fund would hold more than 10% of the outstanding voting
securities of any single issuer; provided, that Government securities
(as defined in the 1940 Act), securities issued by other investment
companies and cash items (including receivables) shall not be counted
for purposes of this limitation; and
(8) invest 25% or more of its total assets in securities of
issuers in any single industry or sector of the economy, provided there
shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
For the purpose of applying the limitation set forth in subparagraph
(7) above, an issuer shall be deemed the sole issuer of a security when its
assets and revenues are separate from other governmental entities and its
securities are backed only by its assets and revenues. Similarly, in the case of
a non-governmental issuer, such as an industrial corporation or a privately
owned or operated hospital, if the security is backed only by the assets and
revenues of the non-governmental issuer, then such non-governmental issuer would
be deemed to be the sole issuer. Where a security is also backed by the
enforceable obligation of a superior or unrelated governmental or other entity
(other than a bond insurer), it shall also be included in the computation of
securities owned that are issued by such governmental or other entity. Where a
security is guaranteed by a governmental entity or some other facility, such as
a bank guarantee or letter of credit, such a guarantee or letter of credit would
be considered a separate security and would be treated as an issue of such
government, other entity or bank. When a municipal bond is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such municipal bond will be determined in
accordance with the principles set forth above.
-2-
In addition to the foregoing fundamental investment policies, the Fund
is also subject to the following non-fundamental restrictions and policies,
which may be changed by the Board of Trustees without a shareholder vote. The
Fund may not:
(1) sell securities short, unless the Fund owns or has the
right to obtain securities equivalent in kind and amount to the
securities sold at no added cost, and provided that transactions in
options, futures contracts, options on futures contracts, or other
derivative instruments are not deemed to constitute selling securities
short; or
(2) purchase securities of companies for the purpose of
exercising control.
The restrictions and other limitations set forth above will apply only
at the time of purchase of securities and will not be considered violated unless
an excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objectives, policies, and techniques that are described in the Fund's
Prospectus.
INVESTMENT PHILOSOPHY AND PROCESS
Under normal market conditions, the Fund will pursue an integrated
investment strategy in which the Fund will invest substantially all of its
managed assets in a diversified portfolio of common stock of U.S. corporations
and U.S. dollar-denominated equity securities of foreign issuers, in each case
that are traded on U.S. securities exchanges, and on an ongoing and consistent
basis, write (sell) covered call options on at least 80% of the Fund's managed
assets. The Fund seeks to produce a high level of current income and gains
primarily from the premium income it receives from writing (selling) call
options, from dividends received on the equity securities held in the Fund's
portfolio, and, to a lesser extent, from capital appreciation in the value of
equity securities underlying such covered call options.
o Common Stock/Equity Securities. Common stocks and equity securities
will be selected by the Sub-Adviser utilizing its proprietary
quantitative/qualitative selection criteria. The Sub-Adviser's
quantitative/qualitative selection criteria will focus on sectors,
industries and individual common stocks and equity securities that
exhibit strong fundamental characteristics. Common stock and equity
security selections by the Sub-Adviser will fall into one or more
of the following four categories: sector leaders that are expected
to benefit from macroeconomic developments, strong franchises that
are temporarily out of favor, franchises that diversify portfolio
risk and companies that exhibit sound fundamentals with attractive
option premiums. The Fund may invest up to 20% of its managed
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assets in U.S. dollar-denominated equity securities of foreign
issuers. In addition, the Fund may invest up to 10% of the Fund's
managed assets in equity securities of other investment companies
that invest primarily in securities of the type in which the Fund
may invest directly.
o Covered Call Options. The Fund will write (sell) covered call
options, including Long-Term Equity AnticiPation Securities
("LEAPS(R)"), against the equity securities held in the Fund's
portfolio with strike prices (defined below) and expiration dates
(defined below) that are collectively intended to provide
risk/reward characteristics that are consistent with the Fund's
investment objective. The Fund will write (sell) covered call
options with respect to at least 80% of its managed assets. The
Sub-Adviser believes that writing (selling) call options will
provide the Fund with current income and may enhance the Fund's
total return in a neutral to modestly rising market and provide a
partial hedge in a declining market.
The options the Fund intends to write (sell) are considered "covered"
because the Fund will own equity securities against which the options are
written (sold). As a result, the number of call options the Fund can write
(sell) is limited by the number of equity securities the Fund holds in its
portfolio. The Fund will not write (sell) "naked" call options; i.e., options on
more equity securities than are held in the Fund's portfolio. By writing
(selling) covered call options, the Sub-Adviser seeks to generate income, in the
form of the premiums received for writing (selling) the call options. The
Sub-Adviser will consider several factors when writing (selling) call options,
including the overall equity market outlook, sector and/or industry
attractiveness, individual security considerations, and relative and/or
historical levels of option premiums.
When the Fund writes (sells) a call option, it is selling to the buyer
(the "option holder") the right, but not the obligation, to purchase a
particular asset (e.g., the underlying equity security) from the Fund at a fixed
price (the "strike price") on or before a specified date (the "expiration
date"). A call option normally represents the right to purchase 100 shares of
the underlying equity security. In exchange for the right to purchase the
underlying equity security, the option holder pays a fee or "premium" to the
Fund. For example, the buyer of one ABC June 110 call option at $1.00 has paid
to the writer (seller) a premium of $1.00 to acquire the right to purchase 100
shares of ABC at $110 up until the call option's June expiration date. All call
options covering ABC are referred to as an "option class." Each individual
option with a distinctive trading month and strike price is an "option series."
The Fund will write (sell) call options that are generally issued,
guaranteed and cleared by The Options Clearing Corporation ("OCC"), a registered
clearing corporation. Listed call options are traded on the American Stock
Exchange, Chicago Board Options Exchange, International Securities Exchange, New
York Stock Exchange, Pacific Stock Exchange, Philadelphia Stock Exchange and
various other U.S. options exchanges. Conventional listed call options have
expiration dates that can generally be up to nine months from the date the call
options are first listed for trading. Longer-term call options, such as
LEAPS(R), can have expiration dates up to three years from the date of listing.
Call options are generally categorized as American-style options or
European-style options. The call options the Fund intends to write (sell) will
generally be American-style options, which may be exercised at any time between
the date of purchase and the expiration date. The Fund may also write (sell)
-4-
European-style options, which may be exercised only during a specified period of
time just prior to the expiration date. In certain limited circumstances in
which the illiquidity of a market for a particular option effectively precludes
the Fund from writing (selling) a covered call option in a manner consistent
with the Fund's investment objective and strategies, the Fund may write (sell)
over-the-counter covered calls.
The Fund intends to primarily write (sell) call options which are
"out-of-the-money." Out-of-the-money call options are options with a strike
price above the current market price of the underlying equity security.
Out-of-the-money options will generate premium income to the Fund as well as
provide for potential appreciation in the equity security to the extent of the
difference between the strike price and the purchase price of such equity
security. The Fund may also write (sell) "in-the-money" and "at-the-money" call
options. In-the-money call options are call options with a strike price below
the current market price of the underlying equity security and at-the-money call
options are options with a strike price equal to the current price of the
underlying equity security. The Fund may write (sell) in-the-money and
at-the-money call options as a defensive measure to protect against a possible
decline in the underlying equity security.
As share prices of equity securities held in the Fund's portfolio
approach the call options' strike price, there is a greater likelihood that the
call options could be exercised by the option holder and the Fund forced to sell
the equity security. While this may be beneficial to the Fund in certain
circumstances, the Fund intends to minimize undesirable option exercises by
entering into covering transactions in which the Fund will purchase call options
of the same option series as the written (sold) call option, which has the
economic effect of canceling the written (sold) call option.
The number of call options the Fund can write (sell) is limited by the
amount of equity securities the Fund holds in its portfolio. The Fund will not
write (sell) "naked" or uncovered call options. Furthermore, the Fund's options
transactions may be subject to limitations established by each of the exchanges
or other trading facilities on which such options are traded. These limitations
govern the maximum number of options in each class which may be written (sold)
or purchased by a single investor or group of investors acting in concert,
regardless of whether the options are written (sold) or purchased on the same or
different exchanges or other trading facilities or are held or written (sold) in
one or more accounts or through one or more brokers. Thus, the number of options
which the Fund may write (sell) or purchase may be affected by options written
(sold) or purchased by other investment advisory clients of the Adviser or
Sub-Adviser. An exchange or other trading facility may order the liquidation of
positions found to be in excess of these limits, and it may impose certain other
sanctions.
Unlike equity securities, which can be sold, the call options the Fund
writes (sells) will either be exercised, expire or cancelled pursuant to a
closing transaction. If the price of the underlying equity security exceeds the
option's exercise price, it is likely that the option holder will exercise the
option. If a call option written (sold) by the Fund is exercised, the Fund would
be obligated to deliver the underlying equity security to the option holder upon
payment of the exercise price. In this case, the call option premium received by
the Fund will be added to the amount realized on the sale of the equity security
-5-
for purposes of determining gain or loss. If the price of the underlying equity
security is less than the call option's exercise price, the call option will
likely expire without being exercised. In this scenario, the Fund will retain
the equity security and expects to write (sell) a new call option against those
same shares. The call option premium will be treated as short term capital gain
on the expiration date of the call option. The Fund may also elect to close out
its position in a call option prior to its expiration by purchasing a call
option of the same option series as the call option written (sold) by the Fund.
There is, however, no assurance that the Fund will be able to enter into an
offsetting call option purchase when the Fund desires.
PORTFOLIO COMPOSITION
Common Stocks. The Fund intends to invest substantially all, but in no
event less than 90%, of its managed assets in common stocks. Common stock
generally represents an equity ownership interest in an issuer. Although common
stocks have historically generated higher average returns than fixed-income
securities over the long term, common stocks also have experienced significantly
more volatility in those returns and in recent years have significantly
underperformed relative to fixed-income securities. An adverse event, such as an
unfavorable earnings report, may depress the value of a particular common stock
held by the Fund. Also, prices of common stocks are sensitive to general
movements in the stock market and a drop in the stock market may depress the
prices of common stocks to which the Fund has exposure. Common stock prices
fluctuate for several reasons including changes in investors' perceptions of the
financial condition of an issuer or the general condition of the relevant stock
market, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
Non-U.S. Equity Securities. The Fund may invest up to 20% of its
managed assets in U.S. dollar-denominated equity securities of foreign issuers.
These equity securities are either in the form of ADRs or are directly listed on
a U.S. securities exchange. Investments in equity securities of non-U.S. issuers
involve special risks not presented by investments in equity securities of U.S.
issuers, including the following: (i) less publicly available information about
non-U.S. issuers or markets may be available due to less rigorous disclosure or
accounting standards or regulatory practices; (ii) many non-U.S. markets are
smaller, less liquid and more volatile, meaning that in a changing market, the
Adviser may not be able to sell the Fund's portfolio securities at times, in
amounts and at prices it considers reasonable; (iii) potential adverse effects
of fluctuations in currency exchange rates or controls on the value of the
Fund's investments; (iv) the economies of non-U.S. countries may grow at slower
rates than expected or may experience a downturn or recession; (v) the impact of
economic, political, social or diplomatic events; (vi) certain non-U.S.
countries may impose restrictions on the ability of non-U.S. issuers to make
payments of principal and interest to investors located in the U.S., due to
blockage of foreign currency exchanges or otherwise; and (vii) withholding and
other non-U.S. taxes may decrease the Fund's return. The economies and social
and political climate of individual countries may differ unfavorably from those
of the United States. Non-U.S. economies may have less favorable rates of growth
of gross domestic product, rates of inflation, currency valuation, capital
reinvestment, resource self-sufficiency and balance of payments positions,
factors which may adversely affect the value of the Fund's non-U.S. equity
-6-
securities. Unanticipated political and social developments may also affect the
values of the Fund's investments and the availability to the Fund of additional
investments in such countries.
Investment Companies. The Fund may invest up to 10% of its managed
assets in equity securities of other open- or closed-end investment companies or
unit investment trusts ("Investment Companies") that invest primarily in
securities of the type in which the Fund may invest directly. The Fund
anticipates that these investments will primarily be in exchange traded funds
("ETFs"). ETFs are registered investment companies, the shares of which are
traded on a securities exchange like common stock. ETFs are designed to track
the performance of a particular index. An investment in an ETF is subject to the
risks of any investment in a broadly based portfolio of securities, including
the risk that the general level of securities prices may decline, thereby
adversely affecting the value of such investment. ETFs are subject to additional
risks, including the fact that ETFs are not actively managed, the net asset
value of ETFs may not always correspond to the market price of the underlying
securities, market liquidity, and the possibility that the exchange where the
ETF is traded may halt trading in the securities. As a stockholder in a
registered investment company, the Fund will bear its ratable share of the ETF's
expenses. Not only would the holders of the Common Shares ("Common
Shareholders") in the Fund bear their ratable share of the Fund's expenses, they
would also indirectly bear their ratable share of the ETF's expenses if the Fund
invests in an ETF.
Covered Call Options. When the Fund purchases equity securities, it
will simultaneously write (sell) covered call options on substantially all of
such equity securities. The number of call options the Fund can write (sell) is
limited by the amount of equity securities the Fund holds in its portfolio. The
Fund will not write (sell) "naked" or uncovered call options. By writing
(selling) call options, the Fund seeks to generate additional income, in the
form of premiums received for writing (selling) the options, and provide a
partial hedge against a market decline in the underlying equity security. Call
options are marked-to-market daily and their value will be affected by changes
in the value and dividend rates of the underlying equity securities, an increase
in interest rates, changes in the actual or perceived volatility of the
securities markets and the underlying equity securities and the remaining time
to the options' expiration. The value of call options may also be adversely
affected if the market for the options becomes less liquid or smaller.
Short-Term Debt Securities; Temporary Defensive Position; Invest-Up
Period. During the period when the net proceeds of the offering of Common Shares
are being invested or during periods in which the Adviser or Sub-Adviser
determines that it is temporarily unable to follow the Fund's investment
strategy or that it is impractical to do so, the Fund may deviate from its
investment strategy and invest all or any portion of its net assets in cash and
cash equivalents. The Adviser's or Sub-Adviser's determination that it is
temporarily unable to follow the Fund's investment strategy or that it is
impracticable to do so will generally occur only in situations in which a market
disruption event has occurred and where trading in the securities selected
through application of the Fund's investment strategy is extremely limited or
absent. In such a case, the Fund may not pursue or achieve its investment
objective. These investments are defined to include, without limitation, the
following:
-7-
(1) U.S. government securities, including bills, notes and
bonds differing as to maturity and rates of interest that 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 the 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. Consequently, the value of such securities may
fluctuate.
(2) Certificates of Deposit issued against funds deposited in
a bank or a savings and loan association. Such certificates are for a
definite period of time, earn a specified rate of return, and are
normally negotiable. The issuer of a certificate of deposit 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 the Fund may
not be fully insured.
(3) Repurchase agreements, which involve purchases and sales
of debt securities. At the time the Fund purchases securities pursuant
to a repurchase agreement, it simultaneously agrees to resell and
redeliver such securities to the seller, who also simultaneously agrees
to buy back the securities at a fixed price and time. This assures a
predetermined yield for the Fund during its holding period, since the
resale price is always greater than the purchase price and reflects an
agreed-upon market rate. Such actions afford an opportunity for the
Fund to invest temporarily available cash. The Fund may enter into
repurchase agreements only with respect to obligations of the U.S.
government, its agencies or instrumentalities; certificates of deposit;
or bankers' acceptances in which the Fund may invest. Repurchase
agreements may be considered loans to the seller, collateralized by the
underlying securities. The risk to the Fund is limited to the ability
of the seller to pay the agreed-upon sum on the repurchase date; in the
event of default, the repurchase agreement provides that the Fund is
entitled to sell the underlying collateral. If the seller defaults
under a repurchase agreement when the value of the underlying
collateral is less than the repurchase price, the Fund could incur a
loss of both principal and interest. The Adviser 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. The Adviser does so in an
effort to determine that the value of the collateral always equals or
exceeds the agreed-upon repurchase price to be paid to the Fund. If the
-8-
seller were to be subject to a federal bankruptcy proceeding, the
ability of the Fund to liquidate the collateral could be delayed or
impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes
are direct lending arrangements between the Fund and a corporation.
There is no secondary market for such notes. However, they are
redeemable by the Fund at any time. First Trust Advisors will consider
the financial condition of the corporation (e.g., earning power, cash
flow, and other liquidity measures) and will continuously monitor the
corporation's ability to meet all of its financial obligations, because
the Fund's liquidity might be impaired if the corporation were unable
to pay principal and interest on demand. Investments in commercial
paper will be limited to commercial paper rated in the highest
categories by a nationally recognized statistical rating organization
and which mature within one year of the date of purchase or carry a
variable or floating rate of interest.
(5) The Fund may invest in 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.
(6) The Fund may invest in 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.
(7) The Fund may invest in shares of money market funds in
accordance with the provisions of the 1940 Act.
INVESTMENT RISKS
NO OPERATING HISTORY
The Fund is a newly organized, diversified, closed-end management
investment company and has no operating history.
INVESTMENT AND MARKET RISK
An investment in Common Shares is subject to investment risk, including
the possible loss of the entire principal amount that you invest. Your
investment in Common Shares represents an indirect investment in the securities
-9-
owned by the Fund. The value of these securities, like other market investments,
may move up or down, sometimes rapidly and unpredictably. The value of the
securities in which the Fund invests will affect the value of the Common Shares.
In addition, by writing (selling) call options on the equity securities held in
the Fund's portfolio, the capital appreciation potential of such securities is
limited to the difference between the strike price of the call options written
(sold) and the purchase price of the equity security underlying such options.
Accordingly, your Common Shares at any point in time may be worth less
than your original investment, even after taking into account the reinvestment
of Fund dividends and distributions.
MANAGEMENT RISK
The Fund is subject to management risk because it is an actively
managed portfolio. The Adviser and the Sub-Adviser will apply investment
techniques and risk analyses in making investment decisions for the Fund, but
there can be no guarantee that these will produce the desired results.
COMMON STOCK RISK
An investment in the Fund should be made with an understanding of the
risks which an investment in common stocks entails, including the risk that the
financial condition of the issuers of the equity securities or the general
condition of the common stock market may worsen and the value of the equity
securities and therefore the value of the Fund may decline. The Fund may not be
an appropriate investment for those who are unable or unwilling to assume the
risks involved generally with an equity investment. The past market and earnings
performance of any of the equity securities included in the Fund is not
predictive of their future performance. Common stocks are especially susceptible
to general stock market movements and to volatile increases and decreases of
value as market confidence in and perceptions of the issuers change. These
perceptions are based on unpredictable factors including expectations regarding
government, economic, monetary and fiscal policies, inflation and interest
rates, economic expansion or contraction, and global or regional political,
economic or banking crises. Neither the Adviser or the Sub-Adviser can 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 the Fund have a right to receive dividends only when and if, and in the
amounts, declared by the issuer's board of directors and have a right to
participate in amounts available for distribution by the issuer only after all
other claims on the issuer have been paid 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
-10-
remain outstanding, and thus the value of the equity securities in the Fund will
fluctuate over the life of the Fund and may be more or less than the price at
which they were purchased by the Fund. The equity securities held in the Fund
may appreciate or depreciate in value (or pay dividends) depending on the full
range of economic and market influences affecting these securities, including
the impact of the Fund's purchase and sale of the equity securities and other
factors.
Holders of common stocks incur more risk than holders of preferred
stocks and debt obligations because common stockholders, as owners of the
issuer, 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.
Neither the Adviser or Sub-Adviser shall be liable in any way for any
default, failure or defect in any equity security held in the Fund's portfolio.
OPTION RISK
The Fund will write (sell) call options on at least 80% of the Fund's
managed assets. These call options will give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to (in the case of American style options) the option's expiration
date. The ability to successfully implement the Fund's investment strategy
depends on the Sub-Adviser's ability to predict pertinent market movements,
which cannot be assured. Thus, the use of options may require the Fund to sell
portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Fund can realize on an
investment, or may cause the Fund to hold a security that it might otherwise
sell. As the writer (seller) of a covered call option, the Fund forgoes, during
the option's life, the opportunity to profit from increases in the market value
of the security covering the call option above the sum of the premium and the
strike price of the call option, but has retained the risk of loss should the
price of the underlying security decline. The value of the options written
(sold) by the Fund, which will be marked-to-market on a daily basis, will be
affected by changes in the value and dividend rates of the underlying equity
securities, an increase in interest rates, changes in the actual or perceived
volatility of the stock market and the underlying equity securities and the
remaining time to the options' expiration. The value of the options may also be
adversely affected if the market for the options becomes less liquid or smaller.
The value of the options will be deducted from the value of the Fund's assets
when determining the Fund's net asset value.
There can be no assurance that a liquid market for the options will
exist when the Fund seeks to close out an option position. Reasons for the
absence of a liquid secondary market on an exchange include the following: (i)
there may be insufficient trading interest in certain options; (ii) restrictions
may be imposed by an exchange on opening transactions or closing transactions or
both; (iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
-11-
of an exchange or the OCC may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options). If trading were
discontinued, the secondary market on that exchange (or in that class or series
of options) would cease to exist. However, outstanding options on that exchange
that had been issued by the OCC as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. The Fund's ability to
terminate over-the-counter options is more limited than with exchange-traded
options and may involve the risk that broker-dealers participating in such
transactions will not fulfill their obligations. If the Fund were unable to
close out a covered call option that it had written (sold) on a security, it
would not be able to sell the underlying security unless the option expired
without exercise. The Sub-Adviser will determine the liquidity of each
over-the-counter option in accordance with guidelines adopted by the Board of
Trustees of the Fund (the "Board"or the "Trustees").
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. Additionally, the exercise price of an option
may be adjusted downward before the option's expiration as a result of the
occurrence of certain corporate events affecting the underlying equity security,
such as extraordinary dividends, stock splits, merger or other extraordinary
distributions or events. In certain circumstances, a reduction in the exercise
price of an option could reduce the Fund's capital appreciation potential on the
underlying security.
To the extent that the Fund purchases options pursuant to a hedging
strategy, the Fund will be subject to the following additional risks. If a put
or call option purchased by the Fund is not sold when it has remaining value,
and if the market price of the underlying security remains equal to or greater
than the exercise price (in the case of a put), or remains less than or equal to
the exercise price (in the case of a call), the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. If restrictions on exercise were imposed, the Fund might be
unable to exercise an option it had purchased. If the Fund were unable to close
out an option that it had purchased on a security, it would have to exercise the
option in order to realize any profit or the option may expire worthless.
The writing (selling) and purchase of options is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. The successful use
of options depends in part on the Sub-Adviser's ability to predict future price
fluctuations and, for hedging transactions, the degree of correlation between
the options and securities or currency markets.
-12-
INVESTMENT COMPANIES RISK
The Fund may invest up to 10% of its managed assets in equity
securities of other Investment Companies that invest primarily in securities of
the type in which the Fund may invest directly. The Fund anticipates that these
investments will primarily be in ETFs. ETFs are registered investment companies,
the shares of which are traded on a securities exchange like common stock. ETFs
are designed to track the performance of a particular index. An investment in an
ETF is subject to the risks of any investment in a broadly based portfolio of
securities, including the risk that the general level of securities price may
decline, thereby adversely affecting the value of such investment. ETFs are
subject to additional risks, including the fact that ETFs are not actively
managed, the net asset value of ETFs may not always correspond to the market
price of the underlying securities, market liquidity, and the possibility that
the exchange where the ETF is traded may halt trading in the securities. As a
stockholder in a registered investment company, the Fund will bear its ratable
share of the ETF's expenses. Not only would Common Shareholders in the Fund bear
their ratable share of the Fund's expenses, they would also indirectly beat
their ratable share of the ETF's expenses if the Fund invests in an ETF.
LEGISLATION
At any time after the date of the Prospectus, legislation may be
enacted that could negatively affect the equity securities in the Fund or the
issuers of the equity securities. Changing approaches to regulation may have a
negative impact on certain companies represented in the Fund. There can be no
assurance that future legislation, regulation or deregulation will not have a
material adverse effect on the Fund or will not impair the ability of the
issuers of the equity securities held in the Fund to achieve their business
goals.
INDUSTRY AND SECTOR RISK
The Fund may invest up to 25% of its managed assets in the equity
securities of issuers in a single industry or sector of the economy. If the Fund
is focused in an industry or sector, it may face more risks than if it were
broadly diversified over numerous industries and sectors of the economy.
Individual industries or sectors may be subject to unique risks which may
include, among others, governmental regulation, inflation, technological
innovations that may render existing products and equipment obsolete,
competition from new entrants, high research and development costs, rising
interest rates. See "Risks -- Industry and Sector Risk" in the Fund's
Prospectus.
The Fund currently intends to make significant investments in equity
securities of companies in the technology sector, the financial institutions
sector and the consumer products sector. However, if market conditions change,
the Fund's portfolio would not necessarily be composed of equity securities in
these sectors, but could be composed significantly of equity securities of
issuers in other sectors of the market.
The technology sector may include, for example, companies that rely
extensively on technology, science or communications in their product
-13-
development or operations. Technology companies are generally subject to the
risks of rapidly changing technologies; short product life cycles; fierce
competition; aggressive pricing and reduced profit margins; the loss of patent,
copyright and trademark protections; cyclical market patterns; and 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. Technology company stocks, especially those which are
Internet-related, have experienced extreme price and volume fluctuations that
are often unrelated to the operating performance of the respective company.
The financial institutions sector may include, for example, commercial
banks, savings and loan associations, brokerage and investment companies, and
consumer and industrial finance companies. The industries within the financial
institutions sector are subject to extensive government regulation, which can
limit both the amounts and types of loans and other financial commitments they
can make, and the interest rates and fees they can charge. Financial
institutions are 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. Profitability can be largely dependent on the availability
and cost of capital funds and the rate of corporate and consumer debt defaults,
and can fluctuate significantly when interest rates change. Insurance companies
can be subject to severe price competition. The financial institutions
industries are currently undergoing relatively rapid change as existing
distinctions between financial institutions segments become less clear. For
example, recent business combinations have included insurance, finance, and
securities brokerage under single ownership.
The consumer products sector may include, for example, companies
principally engaged in the manufacture and distribution of goods and services to
consumers both domestically and internationally and in merchandising finished
goods and services primarily to individual consumers. Consumer products
companies are generally subject to the risks of cyclicality of revenues and
earnings; economic recession; currency fluctuations; changing consumer tastes;
extensive competition; product liability litigation; and increased governmental
regulation. Generally, spending on consumer products is affected by the economic
health of consumers. A weak economy, and its effect on consumer spending, would
adversely affect consumer products companies.
INCOME RISK
Net investment income paid by the Fund to its Common Shareholders is
derived primarily from the premiums it receives from writing (selling) call
options and, to a lesser extent, from the dividends and interest it receives
from the equity securities and other investments held in the Fund's portfolio
and short-term gains thereon. Premiums from writing (selling) call options and
dividends and interest payments made by the securities in the Fund's portfolio
can vary widely over time. Dividends on equity securities are not fixed but are
declared at the discretion of an issuer's board of directors.
There is no guarantee that the issuers of the equity securities in
which the Fund invests will declare dividends in the future or that if declared
-14-
they will remain at current levels or increase over time. As described further
in "Tax Matters," "qualified dividend income" received by the Fund, except as
noted below, will generally be eligible for the reduced tax rate applicable to
such dividends under the Tax Act. Unless subsequent legislation is enacted, the
reduction to tax rates as set forth in the Tax Act will expire for taxable years
beginning on or after January 1, 2009. The Fund cannot assure you as to what
percentage of the dividends paid on the Common Shares, if any, will consist of
"qualified dividend income" or long-term capital gains, both of which are taxed
at lower rates for individuals than are ordinary income and short-term capital
gains. See "Tax Matters."
PORTFOLIO TURNOVER RISK
The Fund's annual portfolio turnover rate may vary greatly from year to
year. Although the Fund cannot accurately predict its annual portfolio turnover
rate, it is not expected to exceed 50% under normal circumstances. However, to
the extent options written (sold) by the Fund are exercised or covered, the
Fund's portfolio turnover rate will increase.
Portfolio turnover rate is not considered a limiting factor in the
execution of investment decisions for the Fund. Additionally, there are no
limits on the rate of portfolio turnover, and investments may be sold without
regard to length of time held when the Fund's investment strategy so dictates. A
higher portfolio turnover rate results in correspondingly greater brokerage
commissions and other transactional expenses that are borne by the Fund. High
portfolio turnover may result in the realization of net short-term capital gains
by the Fund which, when distributed to Common Shareholders, will be taxable as
ordinary income. See "Tax Matters."
NON-U.S. EQUITY SECURITIES
The Fund may invest in equity securities of companies domiciled in
jurisdictions other than the United States. These equity securities are either
in the form of ADRs or are directly listed on a U.S. securities exchange.
Investments in equity securities of non-U.S. issuers involve special risks not
presented by investments in equity securities of U.S. issuers, including the
following: (i) less publicly available information about non-U.S. issuers or
markets may be available due to less rigorous disclosure or accounting standards
or regulatory practices; (ii) many non-U.S. markets are smaller, less liquid and
more volatile, meaning that in a changing market, the Adviser may not be able to
sell the Fund's portfolio securities at times, in amounts and at prices it
considers reasonable; (iii) potential adverse effects of fluctuations in
currency exchange rates or controls on the value of the Fund's investments; (iv)
the economies of non- U.S. countries may grow at slower rates than expected or
may experience a downturn or recession; (v) the adverse impact of economic,
political, social or diplomatic events; (vi) certain non-U.S. countries may
impose restrictions on the ability of non-U.S. issuers to make payments of
principal and interest to investors located in the U.S., due to blockage of
foreign currency exchanges or otherwise; and (vii) withholding and other
non-U.S. taxes may decrease the Fund's return. The economies and social and
political climate of individual countries may differ unfavorably from those of
the United States. Non-U.S. economies may have less favorable rates of growth of
gross domestic product, rates of inflation, currency valuation, capital
reinvestment, resource self-sufficiency and balance of payments positions,
factors which may adversely affect the value of the non-U.S. equity securities
-15-
held by the Fund. Unanticipated political and social developments may also
affect the values of the Fund's investments and the availability to the Fund of
additional investments in such countries.
ILLIQUID SECURITIES RISK
The equity securities in which the Fund will invest are publicly traded
securities. However, certain public securities, particularly securities of
smaller capitalized or less seasoned issuers, may from time to time lack an
active secondary market and may be subject to more abrupt or erratic price
movements than securities of larger, more established companies or stock market
averages in general. In the absence of an active secondary market, the Fund's
ability to purchase or sell such securities at a fair price may be impaired or
delayed. The call options written (sold) by the Fund are listed and traded on
one or more domestic securities exchanges and are issued by OCC. The value of
these options may be adversely affected if the market for the options becomes
less liquid or smaller. In addition, if the Fund is unable to close an option
position in a timely or cost effective basis, the Fund's ability to sell the
underlying equity security may be limited.
TAX RISK
Covered call option premiums will be treated by the Fund as either
short-term or long-term capital gain or loss, depending whether the call option
expires, is exercised or cancelled pursuant to a covering transaction, and the
timing of such transaction. Thus, the Fund cannot assure you as to any level of
any regular quarterly distributions of net investment income (income other than
net long-term capital gain) that will be treated as ordinary income, cannot
assure you as to any level of capital gain distributions and cannot assure you
as to any ratio of regular quarterly distributions to capital gain
distributions. In addition, there can be no assurance as to the percentage of
distributions on the Common Shares that will qualify for taxation to individual
Common Shareholders as "qualified dividend income." Qualified dividend income
received by individual Common Shareholders is taxed at long-term capital gains
rates, which reach a maximum of 15%. The special tax treatment afforded to
qualified dividend income is set to end as of December 31, 2008 (assuming such
special tax treatment is not repealed by Congress on or prior to such date).
Higher tax rates will apply beginning in 2009 unless further legislative action
is taken by Congress. See "Tax Matters."
DERIVATIVES
In addition to the risks associated with its option strategy, the Fund
may enter into Strategic Transactions. Strategic Transactions have risks,
including the imperfect correlation between the value of such instruments and
the underlying assets, the possible default of the other party to the
transaction or illiquidity of the derivative investments. Furthermore, the
ability to successfully use Strategic Transactions depends on the Sub-Adviser's
ability to predict pertinent market movements, which cannot be assured. Thus,
the use of Strategic Transactions may result in losses greater than if they had
not been used, may require the Fund to sell or purchase portfolio securities at
inopportune times or for prices other than current market values, may limit the
amount of appreciation the Fund can realize on an investment or may cause the
-16-
Fund to hold a security that it might otherwise sell. Additionally, amounts paid
by the Fund as premiums and cash or other assets held in margin accounts with
respect to Strategic Transactions are not otherwise available to the Fund for
investment purposes.
There are several risks associated with transactions in options on
securities. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. See
"Risks - Option Risk" for a discussion of these risks.
There are several risks associated with the use of futures contracts
and futures options. The purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. While the Fund
may enter into futures contracts and options on futures contracts for hedging
purposes, the use of futures contracts and options on futures contracts might
result in a poorer overall performance for the Fund than if it had not engaged
in any such transactions. There may be an imperfect correlation between the
Fund's portfolio holdings and futures contracts or options on futures contracts
entered into by the Fund, which may prevent the Fund from achieving the intended
hedge or expose the Fund to risk of loss. The degree of imperfection of
correlation depends on circumstances such as variations in market demand for
futures, options on futures and their related securities, including technical
influences in futures and futures options trading, and differences between the
securities markets and the securities underlying the standard contracts
available for trading. Further, the Fund's use of futures contracts and options
on futures contracts to reduce risk involves costs and will be subject to the
Sub-Adviser's ability to predict correctly changes in interest rate
relationships or other factors.
Depending on whether the Fund would be entitled to receive net payments
from the counterparty on a swap or cap, which in turn would depend on the
general state of short-term interest rates at that point in time, a default by a
counterparty could negatively impact the performance of the Common Shares. In
addition, at the time an interest rate swap or cap transaction reaches its
scheduled termination date, there is a risk that the Fund would not be able to
obtain a replacement transaction or that the terms of the replacement would not
be as favorable as on the expiring transaction. If this occurs, it could have a
negative impact on the performance of the Common Shares.
The use of interest rate swaps and caps is a highly specialized
activity that involves investment techniques and risks different from those
associated with ordinary portfolio security transactions. Depending on market
conditions in general, the Fund's use of swaps or caps could enhance or harm the
overall performance of the Common Shares. To the extent there is a decline in
interest rates, the value of the interest rate swap or cap could decline, and
could result in a decline in the net asset value of the Common Shares. In
addition, if short-term interest rates are lower than the Fund's fixed rate of
payment on the interest rate swap, the swap will reduce Common Share net
earnings. If, on the other hand, short-term interest rates are higher than the
fixed rate of payment on the interest rate swap, the swap will enhance Common
Share net earnings. Buying interest rate caps could enhance the performance of
-17-
the Common Shares by providing a maximum leverage expense. Buying interest rate
caps could also decrease the net earnings of the Common Shares in the event that
the premium paid by the Fund to the counterparty exceeds the additional amount
the Fund would have been required to pay had it not entered into the cap
agreement. The Fund has no current intention of selling an interest rate swap or
cap.
Interest rate swaps and caps do not involve the delivery of securities
or other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate swaps is limited to the net amount of interest payments
that the Fund is contractually obligated to make. If the counterparty defaults,
the Fund would not be able to use the anticipated net receipts under the swap or
cap to offset any declines in the value of the Fund's portfolio assets being
hedged. Depending on whether the Fund would be entitled to receive net payments
from the counterparty on the swap or cap, which in turn would depend on the
general state of the market rates at that point in time, such a default could
negatively impact the performance of the Common Shares.
In addition to the foregoing, the use of derivative instruments
involves certain general risks and considerations as described below.
(1) Market Risk. Market risk is the risk that the value of
the underlying assets may go up or down. Adverse movements in the value
of an underlying asset can expose the Fund to losses. Market risk is
the primary risk associated with derivative transactions. Derivative
instruments may include elements of leverage and, accordingly,
fluctuations in the value of the derivative instrument in relation to
the underlying asset may be magnified. The successful use of derivative
instruments depends upon a variety of factors, particularly the
portfolio manager's ability, to predict correctly changes in the
relationships of such hedge instruments to the Fund's portfolio
holdings, and there can be no assurance the advisor's judgment in this
respect will be accurate. Consequently, the use of derivatives for
hedging purposes might result in a poorer overall performance for the
Fund, whether or not adjusted for risk, than if the Fund had not hedged
its portfolio holdings.
(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, the Fund will bear the risk that the
counterparty will default, and this could result in a loss of the
expected benefit of the derivative transactions and possibly other
losses to the Fund. The Fund will enter into transactions in derivative
instruments only with counterparties that First Trust Advisors
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
-18-
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 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. In addition, the Fund's success in using
hedging instruments is subject to the Adviser's ability to correctly
predict changes in relationships of such hedge instruments to the
Fund's portfolio holdings, and there can be no assurance that the
Adviser's judgment in this respect with be accurate. An imperfect
correlation may prevent the Fund from achieving the intended hedge or
expose the Fund to a risk of loss.
(4) Liquidity Risk. Liquidity risk is the risk that a
derivative instrument cannot be sold, closed out, or replaced quickly
at or very close to its fundamental value. Generally, exchange
contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out
with the other party to the transaction. The Fund might be required by
applicable regulatory requirements to maintain assets as "cover,"
maintain segregated accounts and/or make margin payments when it takes
positions in derivative instruments involving obligations to third
parties (i.e., instruments other than purchase options). If the Fund is
unable to close out its positions in such instruments, it might be
required to continue to maintain such accounts or make such payments
until the position expires, matures, or is closed out. These
requirements might impair the Fund's ability to sell a security or make
an investment at a time when it would otherwise be favorable to do so,
or require that the Fund sell a portfolio security at a disadvantageous
time. The Fund's ability to sell or close out a position in an
instrument prior to expiration or maturity depends upon the existence
of a liquid secondary market or, in the absence of such a market, the
ability and willingness of the counterparty to enter into a transaction
closing out the position. Due to liquidity risk, there is no assurance
that any derivatives position can be sold or closed out at a time and
price that is favorable to 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
-19-
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.
INTEREST RATE RISK
Interest rate risk is the risk that equity and debt securities will
decline in value because of changes in market interest rates. When market
interest rates rise, the market value of the equity securities in which the Fund
invests generally will fall. The Fund's investment in such equity securities
means that the net asset value and market price of the Common Shares will tend
to decline if market interest rates rise. Interest rates are at or near historic
lows, and as a result, they are likely to rise over time.
MARKET DISRUPTION RISK
The terrorist attacks in the United States on September 11, 2001 had a
disruptive effect on the securities markets. The ongoing United States military
and related action in Iraq and events in the Middle East could have significant
adverse effects on the U.S. economy, the stock market and world economies and
financial markets generally. The Fund cannot predict the effects of similar
events in the future on the U.S. and world economies, the value of the Common
Shares or the net asset value of the Fund.
INFLATION RISK
Inflation risk is the risk that the value of assets or income from
investment will be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of the Common Shares and
distributions can decline.
CERTAIN AFFILIATIONS
Certain broker-dealers may be considered to be affiliated persons of
the Fund or First Trust Advisors. Absent an exemption from the Securities and
Exchange Commission or other regulatory relief, the Fund is generally precluded
from effecting certain principal transactions with affiliated brokers, and its
ability to utilize affiliated brokers for agency transactions is subject to
restrictions. This could limit the Fund's ability to engage in securities
transactions and take advantage of market opportunities. In addition, unless and
until the underwriting syndicate is broken in connection with the initial public
offering of the Common Shares, the Fund will be precluded from effecting
principal transactions with brokers who are members of the syndicate.
-20-
ANTI-TAKEOVER PROVISIONS
The Fund's Declaration includes provisions that could limit the ability
of other entities or persons to acquire control of the Fund or convert the Fund
to open-end status. These provisions could have the effect of depriving the
Common Shareholders of opportunities to sell their Common Shares at a premium
over the then current market price of the Common Shares. See "Certain Provisions
in the Declaration of Trust."
MARKET DISCOUNT FROM NET ASSET VALUE
Shares of closed-end investment companies frequently trade at a
discount from their net asset value. This characteristic is a risk separate and
distinct from the risk that the Fund's net asset value could decrease as a
result of its investment activities and may be greater for investors expecting
to sell their Common Shares in a relatively short period following completion of
this offering. The net asset value of the Common Shares will be reduced
immediately following the offering as a result of the payment of certain
offering costs. Although the value of the Fund's net assets is generally
considered by market participants in determining whether to purchase or sell
Common Shares, whether investors will realize gains or losses upon the sale of
the Common Shares will depend entirely upon whether the market price of the
Common Shares at the time of sale is above or below the investor's purchase
price for the Common Shares. Because the market price of the Common Shares will
be determined by factors such as net asset value, dividend and distribution
levels (which are dependent, in part, on expenses), supply of and demand for the
Common Shares, stability of dividends or distributions, trading volume of the
Common Shares, general market and economic conditions, and other factors beyond
the control of the Fund, the Fund cannot predict whether the Common Shares will
trade at, below or above net asset value or at, below or above the initial
public offering price.
OVER-THE-COUNTER MARKET
The Fund may invest in over-the-counter stocks or write (sell)
over-the-counter call options. In contrast to the securities exchanges, the
over-the-counter market is not a centralized facility that limits trading
activity to securities of companies which initially satisfy certain defined
standards. Generally, the volume of trading in an unlisted or over-the-counter
common stock or option is less than the volume of trading in a listed stock or
option. This means that the depth of market liquidity of some stocks or options
in which the Fund invests may not be as great as that of other securities and,
if the Fund were to dispose of such a stock or option, it might have to offer
the shares or options at a discount from recent prices, or sell the shares or
options in small lots over an extended period of time.
OTHER INVESTMENT POLICIES AND TECHNIQUES
HEDGING AND INTEREST RATE TRANSACTIONS
General Description of Hedging and Interest Rate Transactions. The Fund
may, but is not required to, enter into various hedging and strategic
-21-
transactions to seek to facilitate portfolio management and mitigate risks.
Certain of these hedging and strategic transactions involve derivative
instruments. A derivative is a financial instrument whose performance is derived
at least in part from the performance of an underlying index, security or asset.
The values of certain derivatives can be affected dramatically by even small
market movements, sometimes in ways that are difficult to predict. There are
many different types of derivatives, with many different uses. The Fund may
purchase and sell derivative instruments such as exchange-listed and
over-the-counter put and call options on securities, equity, fixed income and
interest rate indices, and other financial instruments, purchase and sell
financial futures contracts and options thereon, enter into various interest
rate transactions such as swaps, caps, floors or collars or credit transactions
and credit default swaps. The Fund also may purchase derivative instruments that
combine features of these instruments. Collectively, all of the above are
referred to as "Strategic Transactions." The Fund generally seeks to use
Strategic Transactions as a portfolio management of hedging technique to seek to
protect against possible adverse changes in the market value of securities held
in or to be purchased for the Fund's portfolio, protect the value of the Fund's
portfolio, facilitate the sale of certain securities for investment purposes, or
establish positions in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Market conditions will determine
whether and in what circumstances the Fund would employ any of the hedging and
strategic techniques described below. The Fund will incur brokerage and other
costs in connection with its hedging transactions.
Strategic transactions on securities generally are used to hedge
against price movements in one or more particular securities positions that the
Fund owns or intends to acquire. Such instruments may also be used to "lock-in"
realized but unrecognized gains in the value of portfolio securities. Hedging
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, the Fund's ability to use hedging instruments may be limited by tax
considerations.
Options on Securities and Securities Indices. The Fund may purchase and
write (sell) call and put options on any securities and securities indices.
These options may be listed on national domestic securities exchanges or foreign
securities exchanges or traded in the over-the-counter market. The Fund may
write (sell) covered put and call options and purchase put and call options as a
substitute for the purchase or sale of securities or to protect against declines
in the value of the portfolio securities and against increases in the cost of
securities to be acquired.
Writing Covered Options. To generate additional income, the Fund
intends, on a consistent and ongoing basis, to write (or sell) covered call
options on the equity securities held in the Fund's portfolio. A call option on
securities written (sold) by the Fund obligates the Fund to sell specified
securities to the holder of the option at a specified price if the option is
exercised at any time before the expiration date. A put option on securities
written (sold) by the Fund obligates the Fund to purchase specified securities
from the option holder at a specified price if the option is exercised at any
-22-
time before the expiration date. Options on securities indices are similar to
options on securities, except that the exercise of securities index options
requires cash settlement payments and does not involve the actual purchase or
sale of securities. In addition, securities index options are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security. Writing covered call
options may deprive the Fund of the opportunity to profit from an increase in
the market price of the securities in its portfolio. Writing covered put options
may deprive the Fund of the opportunity to profit from a decrease in the market
price of the securities to be acquired for its portfolio.
All call and put options written (sold) by the Fund are covered. A
written (sold) call option or put option may be covered by (i) maintaining cash
or liquid securities in a segregated account with a value at least equal to the
Fund's obligation under the option, (ii) entering into an offsetting forward
commitment and/or (iii) purchasing an offsetting option or any other option
which, by virtue of its exercise price or otherwise, reduces the Fund's net
exposure on its written option position. A written (sold) call option on
securities is typically covered by maintaining the securities that are subject
to the option in a segregated account. The Fund may cover call options on a
securities index by owning securities whose price changes are expected to be
similar to those of the underlying index.
The Fund may terminate its obligations under an exchange traded call or
put option by purchasing an option identical to the one it has written (sold).
Obligations under over-the-counter options may be terminated only by entering
into an offsetting transaction with the counterparty to such option. Such
purchases are referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts"), in the market value of securities of the type in which it
may invest. The Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle the Fund, in return for the
premium paid, to purchase specified securities or currency at a specified price
during the option period. The Fund would ordinarily realize a gain on the
purchase of a call option if, during the option period, the value of such
securities or currency exceeded the sum of the exercise price, the premium paid
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for
the premium paid, to sell specified securities at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities. Put
options may also be purchased by the Fund for the purpose of affirmatively
benefiting from a decline in the price of securities which it does not own. The
Fund would ordinarily realize a gain if, during the option period, the value of
the underlying securities decreased below the exercise price sufficiently to
cover the premium and transaction costs; otherwise the Fund would realize either
-23-
no gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities.
The Fund's options transactions will be subject to limitations
established by each of the exchanges or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written (sold) or purchased by a single investor or
group of investors acting in concert, regardless of whether the options are
written (sold) or purchased on the same or different exchanges, boards of trade
or other trading facilities or are held or written in one or more accounts or
through one or more brokers. Thus, the number of options which the Fund may
write (sell) or purchase may be affected by options written (sold) or purchased
by other investment advisory clients of the Sub-Adviser. An exchange, board of
trade or other trading facility may order the liquidation of positions found to
be in excess of these limits, and it may impose certain other sanctions.
General Limitations on Futures and Options Transactions. The Fund 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 Fund is not
subject to regulation as a commodity pool under the CEA.
The foregoing limitations are not fundamental policies of the Fund and
may be changed without shareholder approval as regulatory agencies permit.
Various exchanges and regulatory authorities have undertaken reviews of options
and Futures trading in light of market volatility. Among the possible actions
that have been presented are proposals to adopt new or more stringent daily
price fluctuation limits for Futures and options transactions and proposals to
increase the margin requirements for various types of futures transactions.
Asset Coverage for Futures and Options Positions. The Fund will comply
with the regulatory requirements of the SEC and the CFTC with respect to
coverage of options and Futures positions by registered investment companies
and, if the guidelines so require, will 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.
Options. As an anticipatory hedge, the Fund may purchase put and call
options on stock or other securities. A put option embodies the right of its
purchaser to compel the writer (seller) of the option to purchase from the
option holder an underlying security or its equivalent at a specified price at
any time during the option period. In contrast, a call option gives the
purchaser the right to buy the underlying security covered by the option or its
equivalent from the writer of the option at the stated exercise price.
As a holder of a put option, the Fund will have the right to sell the
securities underlying the option and as the holder of a call option, the Fund
will have the right to purchase the securities underlying the option, in each
case at their exercise price at any time prior to the option's expiration date.
-24-
The Fund may seek to terminate its option positions prior to their expiration by
entering into closing transactions. The ability of the Fund to enter into a
closing sale transaction depends on the existence of a liquid secondary market.
There can be no assurance that a closing purchase or sale transaction can be
effected when the Fund so desires.
Certain Considerations Regarding Options. 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 options involves the risk that
the premium and transaction costs paid by the Fund in purchasing an option will
be lost as a result of unanticipated movements in prices of the securities on
which the option is based. 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.
Some, but not all, of the derivative instruments may be traded and
listed on an exchange. There is no assurance that a liquid secondary market on
an options exchange will exist for any particular option, or at any particular
time, and for some options no secondary market on an exchange or elsewhere may
exist. If the Fund is unable to 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.
Futures Contracts. The Fund may enter into stock-related Futures
Contracts, including security futures contracts as an anticipatory hedge. The
Fund's hedging may include sales of Futures as an offset against the effect of
expected declines in stock prices and purchases of Futures as an offset against
the effect of expected increases in stock prices. The Fund will not enter into
Futures Contracts which are prohibited under the CEA and will, to the extent
required by regulatory authorities, enter only into Futures Contracts that are
traded on exchanges and are standardized as to maturity date and underlying
financial instrument. A security futures contract is a legally binding agreement
between two parties to purchase or sell in the future a specific quantity of
shares of a security or of the component securities of a narrow-based security
index, at a certain price. A person who buys a security futures contract enters
into a contract to purchase an underlying security and is said to be "long" the
contract. A person who sells a security futures contact enters into a contract
to sell the underlying security and is said to be "short" the contract. The
price at which the contract trades (the "contract price") is determined by
relative buying and selling interest on a regulated exchange.
Transaction costs are incurred when a Futures Contract is bought or
sold and margin deposits must be maintained. In order to enter into a security
futures contract, the Fund must deposit funds with its custodian in the name of
the futures commodities merchant equal to a specified percentage (usually at
least 20 percent) of the current market value of the contract as a performance
bond. Moreover, all security futures contracts are marked-to-market at least
-25-
daily, usually after the close of trading. At that time, the account of each
buyer and seller reflects the amount of any gain or loss on the security futures
contract based on the contract price established at the end of the day for
settlement purposes.
An open position, either a long or short position, is closed or
liquidated by entering into an offsetting transaction (i.e., an equal and
opposite transaction to the one that opened the position) prior to the contract
expiration. Traditionally, most futures contracts are liquidated prior to
expiration through an offsetting transaction and, thus, holders do not incur a
settlement obligation. If the offsetting purchase price is less than the
original sale price, a gain will be realized. Conversely, if the offsetting sale
price is more than the original purchase price, a gain will be realized; if it
is less, a loss will be realized. The transaction costs must also be included in
these calculations. There can be no assurance, however, that the Fund will be
able to enter into an offsetting transaction with respect to a particular
Futures Contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the Futures Contract, the Fund may not be able to realize a
gain in the value of its future position, or prevent losses from mounting. This
inability to liquidate could occur, for example, if trading is halted due to
unusual trading activity in either the security futures contract or the
underlying security; if trading is halted due to recent news events involving
the issuer of the underlying security; if systems failures occur on an exchange
or at the firm carrying the position; or if the position is on an illiquid
market. Even if the Fund can liquidate its position, it may be forced to do so
at a price that involves a large loss.
Under certain market conditions, it may also be difficult or impossible
to manage the risk from open security futures positions by entering into an
equivalent but opposite position in another contract month, on another market,
or in the underlying security. This inability to take positions to limit the
risk could occur, for example, if trading is halted across markets due to
unusual trading activity in the security futures contract or the underlying
security or due to recent news events involving the issuer of the underlying
security.
There can be no assurance that a liquid market will exist at a time
when the Fund seeks to close out a Futures contract 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.
Security futures contracts that are not liquidated prior to expiration
must be settled in accordance with the terms of the contract. Some security
futures contracts are settled by physical delivery of the underlying security.
At the expiration of a security futures contract that is settled through
physical delivery, a person who is long the contract must pay the final
settlement price set by the regulated exchange or the clearing organization and
take delivery of the underlying shares. Conversely, a person who is short the
contract must make delivery of the underlying shares in exchange for the final
settlement price. Settlement with physical delivery may involve additional
costs.
-26-
Other security futures contracts are settled through cash settlement.
In this case, the underlying security is not delivered. Instead, any positions
in such security futures contracts that are open at the end of the last trading
day are settled through a final cash payment based on a final settlement price
determined by the exchange or clearing organization. Once this payment is made,
neither party has any further obligations on the contract.
As noted above, margin is the amount of funds that must be deposited by
the Fund 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.
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, the Fund will mark to market the current value of its open Futures
Contracts. The Fund expects to earn interest income on its margin deposits.
Because of the low margin deposits required, Futures Contracts trading
involves an extremely high degree of leverage. As a result, a relatively small
price movement in a Futures Contract may result in immediate and substantial
loss, as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the Futures Contract is deposited as margin, a subsequent
10% decrease in the value of the Futures Contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the Future Contracts were closed out.
Thus, a purchase or sale of a Futures Contract may result in losses in excess of
the amount initially invested in the Futures Contract. However, the Fund would
presumably have sustained comparable losses if, instead of the Futures Contract,
it had invested in the underlying financial instrument and sold it after the
decline.
In addition to the foregoing, imperfect correlation between the Futures
Contracts and the underlying securities may prevent the Fund from achieving the
intended hedge or expose the Fund to risk of loss. Under certain market
conditions, the prices of security futures contracts may not maintain their
customary or anticipated relationships to the prices of the underlying security
or index. These pricing disparities could occur, for example, when the market
for the security futures contract is illiquid, when the primary market for the
underlying security is closed, or when the reporting of transactions in the
underlying security has been delayed.
In addition, the value of a position in security futures contracts
could be affected if trading is halted in either the security futures contract
or the underlying security. In certain circumstances, regulated exchanges are
required by law to halt trading in security futures contracts. For example,
trading on a particular security futures contract must be halted if trading is
halted on the listed market for the underlying security as a result of pending
-27-
news, regulatory concerns, or market volatility. Similarly, trading of a
security futures contract on a narrow-based security index must be halted under
such circumstances if trading is halted on securities accounting for at least 50
percent of the market capitalization of the index. In addition, regulated
exchanges are required to halt trading in all security futures contracts for a
specified period of time when the Dow Jones Industrial Average ("DJIA")
experiences one-day declines of 10-, 20- and 30-percent. The regulated exchanges
may also have discretion under their rules to halt trading in other
circumstances - such as when the exchange determines that the halt would be
advisable in maintaining a fair and orderly market.
A trading halt, either by a regulated exchange that trades security
futures or an exchange trading the underlying security or instrument, could
prevent the Fund from liquidating a position in security futures contracts in a
timely manner, which could prevent the Fund from liquidating a position in
security futures contracts at that time.
Each regulated exchange trading a security futures contract may also
open and close for trading at different times than other regulated exchanges
trading security futures contracts or markets trading the underlying security or
securities. Trading in security futures contracts prior to the opening or after
the close of the primary market for the underlying security may be less liquid
than trading during regular market hours.
Hedging and Other Strategies. Hedging is an attempt to establish with
more certainty than would otherwise be possible the effective price or rate of
return on portfolio securities or securities that the Fund proposes to acquire
or the exchange rate of currencies in which the portfolio securities are quoted
or denominated. When securities prices are falling, the Fund can seek to offset
a decline in the value of its current portfolio securities through the sale of
futures contracts. When securities prices are rising, the Fund, through the
purchase of futures contracts, can attempt to secure better rates or prices than
might later be available in the market when it effects anticipated purchases.
If, in the opinion of the Sub-Adviser, there is a sufficient degree of
correlation between price trends for the Fund's portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in the
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Sub-Adviser will attempt to estimate the extent of this
volatility difference based on historical patterns and compensate for any
differential by having the Fund enter into a greater or lesser number of futures
contracts or by attempting to achieve only a partial hedge against price changes
affecting the Fund's portfolio securities.
When a short hedging position is successful, any depreciation in the
value of portfolio securities will be substantially offset by appreciation in
the value of the futures position. On the other hand, any unanticipated
appreciation in the value of the Fund's portfolio securities would be
substantially offset by a decline in the value of the futures position. On other
occasions, the Fund may take a "long" position by purchasing futures contracts.
-28-
Options on Futures Contracts. The purchase of put and call options on
futures contracts will give the Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, the Fund obtains the benefit of the futures position if
prices move in a favorable direction but limits its risk of loss in the event of
an unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of the Fund's assets. By
writing a call option, the Fund becomes obligated, in exchange for the premium
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that the Fund intends to
purchase. However, the Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. The loss incurred by the Fund in writing options
on futures is potentially unlimited and may exceed the amount of the premium
received.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option of the same series.
There is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related
options transactions either for bona fide hedging or for other purposes as
permitted by the CFTC. These purposes may include using futures and options on
futures as a substitute for the purchase or sale of securities to increase or
reduce exposure to particular markets. To the extent that the Fund is using
futures and related options for hedging purposes, futures contracts will be sold
to protect against a decline in the price of securities that the Fund owns or
futures contracts will be purchased to protect the Fund against an increase in
the price of securities it intends to purchase. The Fund will determine that the
price fluctuations in the futures contracts and options on futures used for
hedging purposes are substantially related to price fluctuations in securities
held by the Fund or securities or instruments which it expects to purchase. As
evidence of its hedging intent, the Fund expects that on occasions on which it
takes a long futures or option position (involving the purchase of futures
contracts), the Fund will generally have purchased, or will be in the process of
purchasing, equivalent amounts of related securities in the cash market at the
time when the futures or option position is closed out. However, in particular
cases, when it is economically advantageous for the Fund to do so, a long
futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
Transactions in futures contracts and options on futures involve
brokerage costs, require margin deposits and, in the case of contracts and
options obligating the Fund to purchase securities, require the Fund to
establish a segregated account consisting of cash or liquid securities in an
amount equal to the underlying value of such contracts and options.
-29-
While transactions in futures contracts and options on futures may
reduce certain risks, these transactions themselves entail certain other risks.
For example, unanticipated changes in interest rates or securities prices may
result in a poorer overall performance for the Fund than if it had not entered
into any futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio
positions will be impossible to achieve. In the event of an imperfect
correlation between a futures position and a portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Fund may be exposed to risk of loss.
Some futures contracts or options on futures may become illiquid under
adverse market conditions. In addition, during periods of market volatility, a
commodity exchange may suspend or limit trading in a futures contract or related
option, which may make the instrument temporarily illiquid and difficult to
price. Commodity exchanges may also establish daily limits on the amount that
the price of a futures contract or related option can vary from the previous
day's settlement price. Once the daily limit is reached, no trades may be made
that day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Equity Swaps and Interest Rate Swaps, Collars, Caps and Floors. In
order to hedge the value of the Fund's portfolio against fluctuations in the
market value of equity securities, interest rates or to enhance the Fund's
income, the Fund may, but is not required to, enter into equity swaps and
various interest rate transactions such as interest rate swaps and the purchase
or sale of interest rate caps and floors. To the extent that the Fund enters
into these transactions, the Fund expects to do so primarily to preserve a
return or spread on a particular investment or portion of its portfolio, to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date. The Fund intends to use these transactions primarily
as a hedge. However, the Fund also may invest in equity and interest rate swaps
to enhance income or to increase the Fund's yield, for example, during periods
of steep interest rate yield curves (i.e., wide differences between short-term
and long-term interest rates). The Fund is not required to hedge its portfolio
and may choose not to do so. The Fund cannot guarantee that any hedging
strategies it uses will work.
In an equity swap, the cash flows exchanged by the Fund and the
counterparty are based on the total return on some stock market index and an
interest rate (either a fixed rate or a floating rate). In an interest rate
swap, the Fund exchanges with another party their respective commitments to pay
or receive interest (e.g., an exchange of fixed rate payments for floating rate
payments). For example, if the Fund holds a debt instrument with an interest
rate that is reset only once each year, it may swap the right to receive
interest at this fixed rate for the right to receive interest at a rate that is
reset every week. This would enable the Fund to offset a decline in the value of
the debt instrument due to rising interest rates but would also limit its
ability to benefit from falling interest rates. Conversely, if the Fund holds a
debt instrument with an interest rate that is reset every week and it would like
to lock in what it believes to be a high interest rate for one year, it may swap
the right to receive interest at this variable weekly rate for the right to
receive interest at a rate that is fixed for one year. Such a swap would protect
the Fund from a reduction in yield due to falling interest rates and may permit
-30-
the Fund to enhance its income through the positive differential between one
week and one year interest rates, but would preclude it from taking full
advantage of rising interest rates.
The Fund usually will enter into equity and interest rate swaps on a
net basis (i.e., the two payment streams are netted out with the Fund receiving
or paying, as the case may be, only the net amount of the two payments). The net
amount of the excess, if any, of the Fund's obligations over its entitlements
with respect to each swap contract will be accrued on a daily basis, and an
amount of cash or liquid instruments having an aggregate net asset value at
least equal to the accrued excess will be maintained in a segregated account by
the Fund's custodian. If the swap transaction is entered into on other than a
net basis, the full amount of the Fund's obligations will be accrued on a daily
basis, and the full amount of the Fund's obligations will be maintained in a
segregated account by the Fund's custodian.
The Fund also may engage in interest rate transactions in the form of
purchasing or selling interest rate caps or floors. The Fund will not sell
interest rate caps or floors that it does not own. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments equal to the difference of the
index and the predetermined rate on a notional principal amount (i.e., the
reference amount with respect to which interest obligations are determined
although no actual exchange of principal occurs) from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate price, to receive payments at the difference of the index and the
predetermined rate on a notional principal amount from the party selling such
interest rate floor.
Typically, the parties with which the Fund will enter into equity and
interest rate transactions will be broker-dealers and other financial
institutions. The Fund will not enter into any equity swap, interest rate swap,
cap or floor transaction unless the unsecured senior debt or the claims-paying
ability of the other party thereto is rated investment grade quality by at least
one nationally recognized statistical rating organization at the time of
entering into such transaction or whose creditworthiness is believed by the
Sub-Adviser to be equivalent to such rating. If there is a default by the other
party to such a transaction, the Fund will have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid in
comparison with other similar instruments traded in the interbank market. Caps
and floors, however, are less liquid than swaps. Certain federal income tax
requirements may limit the Fund's ability to engage in interest rate swaps.
The Fund may in the future employ new or additional investment
strategies and hedging instruments if those strategies and instruments are
consistent with the Fund's investment objective and are permissible under
applicable regulations governing the Fund.
PORTFOLIO TURNOVER RATE
The Fund's annual portfolio turnover rate may vary greatly from year to
year. Although the Fund cannot accurately predict its annual portfolio turnover
rate, it is not expected to exceed 50% under normal circumstances. However, to
-31-
the extent options written (sold) by the Fund are exercised or covered, the
Fund's portfolio turnover rate will increase. Portfolio turnover rate is not
considered a limiting factor in the execution of investment decisions for the
Fund. Additionally, there are no limits on the rate of portfolio turnover, and
investments may be sold without regard to length of time held when the Fund's
investment strategy so dictates. A higher portfolio turnover rate results in
correspondingly greater brokerage commissions and other transactional expenses
that are borne by the Fund. High portfolio turnover may result in the
realization of net short-term capital gains by the Fund which, when distributed
to shareholders, will be taxable as ordinary income.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The management of the Fund, including general supervision of the duties
performed for the Fund under the Investment Management Agreement and
Sub-Advisory Agreement, is the responsibility of the Board of Trustees. The
Trustees set broad policies for the Fund and choose the Fund's officers. The
following is a list of the Trustees and officers of the Fund 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
1940 Act) of the Fund identified as such.
Number of
Portfolios
in Fund
Term of Office Complex Other
and Year First Overseen by Trusteeships
Position and Elected or Principal Occupations Trustee or Held by
Name, Address and Age Offices with Fund Appointed During Past 5 Years Officer Trustee
--------------------- ----------------- -------------- --------------------- ------------ ------------
Trustee who is an Interested
Person of the Fund
----------------------------
James A. Bowen(1)* President, o One Year(2) President, First 19 Portfolios None
D.O.B.: 09/55 Chairman of the o 2004 Trust Portfolios and
1001 Warrenville Road, Board, Chief First Trust Advisors;
Suite 300 Executive Officer Chairman of the Board
Lisle, IL 60532 and Trustee of Directors, Bond
Wave, LLC
Trustees who are not Interested
Persons of the Fund
-------------------------------
Richard E. Erickson Trustee o One Year(2) Physician, 19 Portfolios None
D.O.B.: 04/51 o 2004 Sportsmed/Wheaton
c/o First Trust Advisors L.P. Orthopedics
1001 Warrenville Road,
Suite 300
Lisle, IL 60532
Niel B. Nielson Trustee o One Year(2) President (2002 to 19 Portfolios Director of
D.O.B.: 03/54 o 2004 Present), Covenant Good News
c/o First Trust Advisors L.P. College; Pastor (1997 Publishers -
1001 Warrenville Road, to 2002), College Crossway
Suite 300 Church in Wheaton Books; Covenant
Lisle, IL 60532 Transport Inc.
-32-
Number of
Portfolios
in Fund
Term of Office Complex Other
and Year First Overseen by Trusteeships
Position and Elected or Principal Occupations Trustee or Held by
Name, Address and Age Offices with Fund Appointed During Past 5 Years Officer Trustee
--------------------- ----------------- -------------- --------------------- ------------ ------------
Thomas R. Kadlec Trustee o One Year(2) Vice President, Chief 19 Portfolios None
D.O.B.: 11/57 o 2004 Financial Officer
c/o First Trust Advisors L.P. (1990 to Present),
1001 Warrenville Road, ADM Investor
Suite 300 Services, Inc.
Lisle, IL 60532 (Futures Commission
Merchant); Registered
Representative (2000
to Present), Segerdahl
& Company, Inc., an NASD
member (Broker-Dealer)
David M. Oster Trustee o One Year(2) Trader (Self-Employed) 8 Portfolios None
D.O.B.: 03/64 o 2004 (1987 to Present)
c/o First Trust Advisors L.P. (Options Trading
1001 Warrenville Road, and Market Making)
Suite 300
Lisle, IL 60532
Officers of the Fund
--------------------
Mark R. Bradley Treasurer, o Indefinite Chief Financial 19 Portfolios N/A
D.O.B.: 11/57 Controller, Chief term Officer, Managing
1001 Warrenville Road, Financial Officer o 2004 Director, First Trust
Suite 300 and Chief Portfolios and First
Lisle, IL 60532 Accounting Officer Trust Advisors
Susan M. Brix Assistant Vice o Indefinite Representative, First 19 Portfolios N/A
D.O.B.: 01/60 President term Trust Portfolios;
1001 Warrenville Road, o 2004 Assistant Portfolio
Suite 300 Manager, First Trust
Lisle, IL 60532 Advisors
Robert F. Carey Vice President o Indefinite Senior Vice 19 Portfolios N/A
D.O.B.: 07/63 term President, First
1001 Warrenville Road, o 2004 Trust Portfolios and
Suite 300 First Trust Advisors
Lisle, IL 60532
W. Scott Jardine Secretary and o Indefinite General Counsel, 19 Portfolios N/A
D.O.B.: 05/60 Chief Compliance term First Trust
1001 Warrenville Road, Officer o 2004 Portfolios and First
Suite 300 Trust Advisors;
Lisle, IL 60532 Secretary, Bond Wave,
LLC
Kristi A. Maher Assistant o Indefinite Assistant General 19 Portfolios N/A
D.O.B.:12/66 Secretary term Counsel (March 2004
1001 Warrenville Road, o 2004 to Present), First
Suite 300 Trust Portfolios;
Lisle, IL 60532 Associate (1995 to
March 2004), Chapman
and Cutler LLP
Roger Testin Vice President o Indefinite Vice President 19 Portfolios N/A
D.O.B.: 06/66 term (August 2001 to
1001 Warrenville Road, o 2004 Present), First Trust
Suite 300 Advisors; Analyst
Lisle, IL 60532 (1998 to 2001), Dolan
Capital Management
____________________
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his
position of President of First Trust Advisors, investment adviser of the
Fund.
(2) Trustees are elected each year by shareholders and serve a one year term
until their successors are elected. Mr. Bowen's officer positions with
the Fund have an indefinite term.
The Board of Trustees of the Fund has four standing committees, the
Executive Committee (and Pricing and Dividend Committee), the Nominating and
Governance Committee, the Valuation Committee, and the Audit Committee. The
Executive Committee, which meets between Board meetings, is authorized to
exercise all powers of and to act in the place of the Board of Trustees to the
extent permitted by the Fund's Declaration of Trust and By-laws. The members of
the Executive Committee shall also serve as a special committee of the Board
-33-
known as the Pricing and Dividend Committee which is authorized to exercise all
of the powers and authority of the Board in respect of the issuance and sale,
through an underwritten public offering, of the Common Shares of the Fund and
all other such matters relating to such financing, including determining the
price at which such shares are to be sold and approval of the final terms of the
underwriting agreement, including approval of the members of the underwriting
syndicate. Such committee is also responsible for the declaration and setting of
dividends. Messrs. Kadlec and Bowen are members of the Executive Committee. The
Nominating and Governance Committee is responsible for appointing and nominating
non-interested persons to the Fund's Board of Trustees. Messrs. Erickson,
Nielson, Kadlec and Oster are members of the Nominating and Governance
Committee. If there is no vacancy on the Board of Trustees, the Board will not
actively seek recommendations from other parties, including Shareholders. When a
vacancy on the Board occurs and nominations are sought to fill such vacancy, the
Nominating and Governance Committee may seek nominations from those sources it
deems appropriate in its discretion, including Shareholders of the Fund. To
submit a recommendation for nomination as a candidate for a position on the
Board, Shareholders of the Fund shall mail such recommendation to W. Scott
Jardine at the Fund's address, 1001 Warrenville Road, Suite 300, Lisle, Illinois
60532. Such recommendation shall include the following information: (a) evidence
of Fund ownership of the person or entity recommending the candidate (if a Fund
Shareholder), (b) a full description of the proposed candidate's background,
including their education, experience, current employment, and date of birth,
(c) names and addresses of at least three professional references for the
candidate, (d) information as to whether the candidate is an "interested person"
in relation to such Fund, as such term is defined in the 1940 Act, as amended,
and such other information that may be considered to impair the candidate's
independence and (e) any other information that may be helpful to the Committee
in evaluating the candidate. If a recommendation is received with satisfactorily
completed information regarding a candidate during a time when a vacancy exists
on the Board or during such other time as the Nominating and Governance
Committee is accepting recommendations, the recommendation will be forwarded to
the Chair of the Nominating and Governance Committee and the outside counsel to
the independent trustees. Recommendations received at any other time will be
kept on file until such time as the Nominating and Governance Committee is
accepting recommendations, at which point they may be considered for nomination.
The Valuation Committee is responsible for the oversight of the pricing
procedures of the Fund. Messrs. Erickson, Kadlec and Oster are members of the
Valuation Committee. The Audit Committee is responsible for overseeing the
Fund's accounting and financial reporting process, the system of internal
controls, audit process and evaluating and appointing independent auditors
(subject also to Board approval). Messrs. Erickson, Nielson, Kadlec and Oster
serve on the Audit Committee. Because the Fund is newly organized, none of the
committees have met during the Fund's last fiscal year.
Messrs. Erickson, Nielson, Kadlec and Bowen are also trustees of First
Defined Portfolio Fund, LLC, an open-end fund advised by First Trust Advisors
with 11 portfolios. Messrs. Bowen, Erickson, Nielson, Kadlec and Oster are also
trustees of the First Trust Value Line(R) 100 Fund, First Trust Value Line(R)
Dividend Fund, First Trust/Four Corners Senior Floating Rate Income Fund,
Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund,
First Trust/Value Line(R) & Ibbotson Equity Allocation Fund, First Trust/Four
Corners Senior Floating Rate Income Fund II and Energy Income and Growth Fund,
closed-end funds advised by First Trust Advisors. None of the Trustees who are
not "interested persons" of the Fund, nor any of their immediate family members,
-34-
has ever been a director, officer or employee of, or consultant to, First Trust
Advisors, First Trust Portfolios or their affiliates. In addition, Mr. Bowen and
the other officers of the Fund, hold the same positions with the First Defined
Portfolio Fund, LLC, First Trust Value Line(R) 100 Fund, First Trust Value
Line(R) Dividend Fund, First Trust/Four Corners Senior Floating Rate Income
Fund, Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income
Fund, First Trust/Value Line(R) & Ibbotson Equity Allocation Fund, First
Trust/Four Corners Senior Floating Rate Income Fund II and Energy Income and
Growth Fund (collectively, the "First Trust Fund Complex") as they hold with the
Fund.
Effective June 7, 2004, the Trustees approved a revised compensation plan.
Under the revised plan, the Fund pays each Trustee who is not an officer or
employee of First Trust Advisors, any sub-adviser or any of their affiliates
("Independent Trustees") an annual retainer of $10,000 which includes
compensation for all regular quarterly board meetings and regular committee
meetings. No additional meeting fees are paid in connection with regular
quarterly board meetings or regular committee meetings. Additional fees of
$1,000 and $500 are paid to Independent Trustees for special board meetings and
non-regular committee meetings, respectively. These additional fees are shared
by the funds in the First Trust Fund complex that participate in the particular
meeting and are not per fund fees. Trustees are also reimbursed for travel and
out-of-pocket expenses in connection with all meetings. The Trustees adopted the
revised plan because the increase in the number of funds in the First Trust
complex had the effect of rapidly increasing their compensation under the
previous arrangements. Prior to June 7, 2004, the Fund paid each Independent
Trustee an annual fee of $10,000 plus $1,000 as compensation for each board
meeting (in-person or by electronic means) and $500 per committee meeting
(in-person or by electronic means) attended. The following table sets forth
estimated compensation to be paid by the Fund projected during the Fund's first
full fiscal year to each of the Independent Trustees and estimated total
compensation to be paid to each of the Independent Trustees by the First Trust
Fund Complex for a full calendar year. The Fund has no retirement or pension
plans.
ESTIMATED
TOTAL COMPENSATION
ESTIMATED AGGREGATE FROM FUND AND
NAME OF TRUSTEE COMPENSATION FROM FUND(1) FUND COMPLEX(2)
--------------- ------------------------- ------------------
Richard E. Erickson $10,000 $90,000
Thomas R. Kadlec $10,000 $90,000
Niel B. Nielson $10,000 $90,000
David M. Oster $10,000 $80,000
--------------------
(1) The compensation estimated to be paid by the Fund to the Independent
Trustees for the first full fiscal year for services to the Fund.
(2) The total estimated compensation to be paid to Messrs. Erickson, Kadlec
and Nielson, Independent Trustees, from the Fund and Fund Complex for a
full calendar year is based on estimated compensation to be paid to these
Trustees for a full calendar year for services as Trustees to the First
Defined Portfolio Fund, LLC, an open-end fund (with 11 portfolios)
advised by First Trust Advisors plus estimated compensation to be paid to
these Trustees by the First Value Line(R) 100 Fund, the First Trust Value
Line(R) Dividend Fund, the First Trust/Four Corners Senior Floating Rate
Income Fund, the Macquarie/First Trust Global Infrastructure/Utilities
Dividend & Income Fund, the First Trust/Value Line(R) & Ibbotson Equity
Allocation Fund, First Trust/Four Corners Senior Floating Rate Income
-35-
Fund II, Energy Income and Growth Fund and the Fund for a full calendar
year. Mr. Oster is currently not a Trustee of the First Defined Portfolio
Fund, LLC. Accordingly, his estimated total compensation is based on the
estimated compensation to be paid by the First Trust Value Line(R) 100
Fund, the First Trust Value Line(R) Dividend Fund, the First Trust/Four
Corners Senior Floating Rate Income Fund, the Macquarie/First Trust
Global Infrastructure/Utilities Dividend & Income Fund, the First
Trust/Value Line(R) & Ibbotson Equity Allocation Fund, First Trust/Four
Corners Senior Floating Rate Income Fund II, Energy Income and Growth
Fund and the Fund for a full calendar year.
The Fund has no employees. Its officers are compensated by First Trust
Advisors. The Shareholders of the Fund will elect trustees at the next annual
meeting of shareholders.
The following table sets forth the dollar range of equity securities
beneficially owned by the Trustees in the Fund and in other funds overseen by
the Trustees in the First Trust Fund Complex as of July 31, 2004:
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN ALL
DOLLAR RANGE OF REGISTERED INVESTMENT COMPANIES
EQUITY SECURITIES OVERSEEN BY TRUSTEE IN
TRUSTEE IN THE FUND FIRST TRUST FUND COMPLEX
------- ----------------- -------------------------------
Mr. Bowen None Over $100,000
Mr. Erickson None $1-$10,000
Mr. Kadlec None $50,001-$100,000
Mr. Nielson None $10,000-$50,000
Mr. Oster None $50,001-$100,000
As of July 31, 2004, the Trustees of the Fund who are not
"interested persons" of the Fund and immediate family members do not own
beneficially or of record any class of securities of an investment adviser or
principal underwriter of the Fund or any person directly or indirectly
controlling, controlled by, or under common control with an investment adviser
or principal underwriter of the Fund.
As of August 26, 2004, First Trust Portfolios L.P. owned both
beneficially and of record all of the Common Shares of the Fund.
INVESTMENT ADVISER
First Trust Advisors L.P., 1001 Warrenville Road, Suite 300, Lisle,
Illinois 60532, is the investment adviser to the Fund. As Adviser, First Trust
Advisors provides the Fund with professional investment supervision and
management and permits any of its officers or employees to serve without
compensation as Trustees or officers of the Fund if elected to such positions.
First Trust Advisors will be responsible for supervising the Sub-Adviser,
monitoring the Fund's investment portfolio, managing the Fund's business affairs
and providing certain clerical and bookkeeping and other administrative
services. The Adviser, in consultation with the Sub-Adviser, is also responsible
for determining the Fund's overall investment strategy and overseeing its
implementation.
-36-
First Trust Advisors 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 Advisors is a limited partnership with one limited
partner, Grace Partners of DuPage L.P. ("Grace Partners"), and one general
partner, The Charger Corporation. Grace Partners is a limited partnership with
one general partner, The Charger Corporation, and a number of limited partners.
Grace Partners' and The Charger Corporation's primary business is investment
advisory and broker/dealer services through their interests. The Charger
Corporation is an Illinois corporation controlled by the Robert Donald Van
Kampen family. First Trust Advisors is controlled by Grace Partners and The
Charger Corporation.
First Trust Advisors is also adviser or sub-adviser to approximately
eight mutual funds and eight closed-end funds (including the Fund) and is the
portfolio supervisor of certain unit investment trusts sponsored by First Trust
Portfolios. First Trust Portfolios specializes in the underwriting, trading and
distribution of unit investment trusts and other securities. First Trust
Portfolios, an Illinois limited partnership formed in 1991, acts as sponsor for
successive series of 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.
First Trust Portfolios introduced the first insured unit investment trust in
1974 and to date, more than $48 billion in First Trust Portfolios unit
investment trusts have been deposited.
First Trust Advisors acts as investment adviser to the Fund pursuant to
an Investment Management Agreement. The Investment Management Agreement
continues in effect for the 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
Fund, or the vote of a majority of the outstanding voting securities of the
Fund. It may be terminated at any time without the payment of any penalty upon
60 days' written notice by either party, or by action of the Board or by a
majority vote of the outstanding voting securities of the Fund (accompanied by
appropriate notice), and will terminate automatically upon assignment. The
Investment Management Agreement may also be terminated, at any time, without
payment of any penalty, by the Board or by vote of a majority of the outstanding
voting securities of the Fund, in the event that it shall have been established
by a court of competent jurisdiction that the Adviser, or any officer or
director of the Adviser, has taken any action which results in a breach of the
covenants of the Adviser set forth in the Investment Management Agreement. The
Investment Management Agreement provides that First Trust Advisors shall not be
liable for any loss sustained by reason of the purchase, sale or retention of
any security, whether or not such purchase, sale or retention shall have been
based upon the investigation and research made by any other individual, firm or
corporation, if such recommendation shall have been selected with due care and
in good faith, except loss resulting from willful misfeasance, bad faith or
gross negligence on the part of the Adviser in performance of its obligations
and duties, or by reason of its reckless disregard of its obligations and duties
under the Investment Management Agreement. As compensation for its services, the
Fund pays First Trust Advisors a fee as described in the Prospectus. Provisions
regarding expense limitations are described in the Prospectus. See "Summary of
Fund Expenses" and "Management of the Fund -- Investment Management Agreement"
in the Fund's Prospectus.
-37-
In addition to the fee of First Trust Advisors, the Fund pays all other
costs and expenses of its operations, including compensation of its Trustees
(other than those affiliated with First Trust Advisors), custodian, transfer
agency, administrative, accounting and dividend disbursing expenses, legal fees,
expenses of independent auditors, expenses of repurchasing shares, expenses of
preparing, printing and distributing shareholder reports, notices, proxy
statements and reports to governmental agencies, and taxes, if any. All fees and
expenses are accrued daily and deducted before payment of dividends to
investors.
On June 7, 2004, the Trustees of the Fund met with members of the
Adviser and the Sub-Adviser to consider, among other things, the possible
approval of the Investment Management Agreement between the Fund and First Trust
Advisors and the Sub-Advisory Agreement between the Adviser, the Sub-Adviser and
the Fund. Prior to the meeting, the Independent Trustees received a memorandum
describing their legal obligations and duties relating to the approval of an
investment advisory contract, including the duties of the Trustees under the
1940 Act and the general principles of state law; the requirements of the 1940
Act in such matters; the fiduciary duty of the Adviser; the standards used in
determining whether boards of trustees have fulfilled their duties; and various
factors to be considered by the Trustees in voting on whether to approve
advisory agreements. In evaluating the Investment Management Agreement and the
Sub-Advisory Agreement, the Independent Trustees met with their legal counsel
privately to discuss their responsibilities and obligations with respect to the
Investment Management Agreement and Sub-Advisory Agreement and the terms of the
proposed agreements.
In evaluating the Investment Management Agreement and the Sub-Advisory
Agreement, the Trustees considered narrative information concerning, among other
things, the nature of the services to be provided by the respective adviser or
sub-adviser (as described below), the fees to be paid to the respective adviser
and sub-adviser and the experience, resources and staffing of the respective
adviser and sub-adviser.
More specifically, because First Trust Advisors already serves as
investment adviser on the various funds in the First Trust Fund Complex and in
such regard previously provided the Trustees with information as to its
personnel, staffing, experience, investment philosophy and fees paid by other
clients, the Trustees noted that they were already well informed as to the
services to be provided by and the fees paid to First Trust Advisors. In
evaluating the Investment Management Agreement, the Trustees considered the
supervisory services to be provided by First Trust Advisors, as the investment
adviser, the personnel resources available to fulfill such function (including
the job descriptions and background of newly-hired employees) and the advisory
fees to be paid to First Trust Advisors. More specifically, First Trust Advisors
updated the Trustees regarding its activities that are designed to strengthen
its regulatory oversight systems and its ability to monitor the various
sub-advisers serving the funds. In this regard, First Trust Advisors has hired
an Assistant General Counsel as well as a manager responsible for sub-adviser
oversight. The Trustees reviewed the division of services provided to the Fund
by the Adviser and the Sub-Adviser and the corresponding allocation of fees,
which were the product of arm's length negotiations between the parties.
In evaluating the Sub-Advisory Agreement with Fiduciary Asset
Management, the Trustees similarly considered the nature of the services to be
-38-
provided and the fees to be paid. More specifically, because Fiduciary Asset
Management already serves as a sub-adviser to a fund in the First Trust Fund
Complex which invests in equity securities, the Trustees noted that they had
been previously provided with information concerning Fiduciary Asset
Management's experience and skill with the equity securities asset class
(including the performance of the existing fund), its personnel, resources,
investment personnel (their qualifications, duties and their historical
experience with the equity securities and call option asset classes), investment
philosophy and process and fees received for similar services, and took these
factors into account when considering Fiduciary Asset Management as sub-adviser
for the Fund. In particular, the Portfolio Manager of the Fund, Mr. Riad, has
been significantly involved in the management of portfolios of equity securities
and options since 1999. In addition, the Trustees reviewed the financial
resources and ownership of Fiduciary Asset Management and reviewed Fiduciary
Asset Management's regulatory filings (e.g., its most recent Form ADV filing).
In approving the Sub-Advisory Agreement and the fees payable thereunder, the
Trustees also took into account, in particular, the level of complexity required
in managing this asset class, Fiduciary Asset Management's investment philosophy
and the experience of the Portfolio Manager in managing this asset class. The
Trustees were also made aware of Fiduciary Asset Management's performance
history in the equity securities and call options asset classes.
In considering the overall advisory arrangement, the Trustees also
received and reviewed written information regarding advisory fees paid by other
analogous funds and their respective expense ratios. The Board of Trustees,
including all of the Independent Trustees of the Fund, and the sole shareholder
of the Fund, each approved the Investment Management Agreement and the
Sub-Advisory Agreement. The Independent Trustees determined that the terms of
the Fund's Investment Management Agreement and the Sub-Advisory Agreement,
including the fees, are fair and reasonable, and that they will enable the Fund
to obtain high quality investment management services. The Trustees did not
identify in their discussions any single factor as controlling but rather
reviewed all pertinent information as part of their deliberations.
CODE OF ETHICS
The Fund, the Adviser and the Sub-Adviser have adopted codes of ethics
under Rule 17j-1 under the 1940 Act. These codes permit personnel subject to the
code to invest in securities, including securities that may be purchased or held
by the Fund. These codes can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at (202) 942-8090. The codes
of ethics are available on the EDGAR Database on the SEC's web site
(http://www.sec.gov), and copies of these code may be obtained, after paying a
duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the SEC Public Reference Section, Washington,
D.C. 20549-0102.
PROXY VOTING PROCEDURES
The Fund has adopted a proxy voting policy that seeks to ensure that
proxies for securities held by the Fund are voted consistently and solely in the
best economic interests of the Fund.
-39-
The Board of Trustees is responsible for oversight of the Fund's proxy
voting process. The Board has delegated day-to-day proxy voting responsibility
to Fiduciary Asset Management. Fiduciary Asset Management's Proxy Voting Policy
is set forth in Appendix A to this Statement of Additional Information.
When required by applicable regulations, information regarding how the
Fund voted proxies relating to portfolio securities will be available without
charge by calling (800) 988-5891 or by accessing the SEC's website at
http://www.sec.gov.
SUB-ADVISER
The Sub-Adviser, Fiduciary Asset Management, LLC, located at 8112
Maryland Avenue, Suite 400, St. Louis, MO 63105, is a registered investment
adviser and serves as investment adviser or portfolio supervisor to investment
portfolios with approximately $13.1 billion of assets as of July 31, 2004.
Fiduciary Asset Management invests in a broad range of equity, hedged
equity, master limited partnership, and fixed income strategies for
institutional and high net worth clients. Fiduciary Asset Management's clients
include Fortune 500 companies, public pensions and large endowments and
foundations. Fiduciary Asset Management was established as an independent
investment firm in 1994 and has managed covered call option portfolios for
clients since 1997.
Fiduciary Asset Management was founded in 1994 by Charles D. Walbrandt.
From 1974 through 1994, Mr. Walbrandt served in various capacities with General
Dynamics Corporation, including Corporate Vice President, Trust Investment and
Treasurer. While at General Dynamics, Mr. Walbrandt created the internal
investment department in 1983, designed the investment management process and
managed both equity and fixed income portfolios. Mr. Walbrandt holds a B.S.
degree in economics from the University of Wisconsin, a M.B.A. in finance from
St. Louis University and is a Chartered Financial Analyst. Fiduciary Asset
Management is controlled by Mr. Walbrandt.
Fiduciary Asset Management will be responsible for the day-to-day
execution of the Fund's investment strategy, providing investment research and
making executive recommendations for the purchase and sale of securities.
Fiduciary Asset Management's strategy committee collects and reviews
general macroeconomic data with the goal of developing an overall firm strategic
theme. This strategic theme incorporates such macroeconomic data into a general
economic view as to the direction of the economy, the rate at which the economy
is currently changing, the current market cycle and how that cycle co-exists
with the economic cycle, and specific sectors and/or industries that appear
attractive given potential future economic and market conditions. The analysis
of Fiduciary Asset Management's strategy committee is utilized by Fiduciary
Asset Management's portfolio managers and research professionals to screen,
research and select equity securities for the Fund and determine the option
-40-
strategy employed. Fiduciary Asset Management's strategy committee includes
Charles D. Walbrandt, Wiley D. Angell, Mohammed Riad, James J. Cunnane Jr., and
Joseph E. Gallagher.
Mohammed Riad will serve as the primary portfolio manager for the Fund.
Mr. Riad is a member of the portfolio management team and performs securities
research. Mr. Riad currently heads Fiduciary Asset Management's options-based
large-cap Hedged Core Equity & Stable Return Hedged Equity portfolios and
Fiduciary Asset Management's small/mid-cap strategies. Mr. Riad has been
instrumental in developing large scale options programs, working on both
strategy and implementation and Mr. Riad oversees the trading strategies for
Fiduciary Asset Management's St. Louis equity group. Mr. Riad joined the firm in
June 1999 after earning his M.B.A. from Washington University. Prior to this,
Mr. Riad worked for six years at Legg Mason Wood Walker in the Washington D.C.
office, and as an Administrative Manager in Legg Mason Wood Walker's New York
office. Mr. Riad also holds a Bachelor of Science degree in Business from Wake
Forest University.
The Sub-Adviser, subject to the Trustees' and the Adviser's
supervision, provides the Fund with discretionary investment services.
Specifically, the Sub-Adviser is responsible for managing the investments of the
Fund in accordance with the Fund's investment objective, policies, and
restrictions as provided in the Prospectus and this Statement of Additional
Information, as may be subsequently changed by the Board of Trustees and
publicly described. The Sub-Adviser further agrees to conform to all applicable
laws and regulations of the SEC in all material respects and to conduct its
activities under the Sub-Advisory Agreement in accordance with applicable
regulations of any governmental authority pertaining to its investment advisory
services. In the performance of its duties, the Sub-Adviser will satisfy any
applicable fiduciary duties it may have to the Fund, will monitor the Fund's
investments, and will comply with the provisions of the Fund's Declaration of
Trust and By-laws, as amended from time to time, and the stated investment
objective, policies and restrictions of the Fund. The Sub-Adviser is responsible
for effecting all security transactions for the Fund's assets. The Sub-Advisory
Agreement provides that the Sub-Adviser shall not be liable for any loss
suffered by the Fund (including, without limitation, by reason of the purchase,
sale or retention of any security) in connection with the performance of the
Sub-Adviser's duties under the Sub-Advisory Agreement, except for a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Sub-Adviser in performance of its duties under such Sub-Advisory Agreement,
or by reason of its reckless disregard of its obligations and duties under such
Sub-Advisory Agreement.
Pursuant to the Sub-Advisory Agreement between the Adviser, the
Sub-Adviser and the Fund, the Adviser has agreed to pay for the services and
facilities provided by the Sub-Adviser through sub-advisory fees, as set forth
in the Fund's Prospectus.
The Sub-Advisory Agreement may be terminated without the payment of any
penalty by First Trust Advisors, the Fund's Board of Trustees, or a majority of
the outstanding voting securities of the Fund (as defined in the 1940 Act), upon
60 days' written notice to the Sub-Adviser.
-41-
All fees and expenses are accrued daily and deducted before payment of
dividends to investors. The Sub-Advisory Agreement has been approved by a
majority of the disinterested trustees of the Fund and the sole shareholder of
the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Trustees, the Sub-Adviser is
responsible for decisions to buy and sell securities for the Fund and for the
placement of the Fund's securities business, the negotiation of the commissions
to be paid on brokered transactions, the prices for principal trades in
securities, and the allocation of portfolio brokerage and principal business. It
is the policy of the Sub-Adviser 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 the Sub-Adviser 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, the Sub-Adviser considers, among
other things, the firm's reliability, the quality of its execution services on a
continuing basis and its financial condition. The selection of a broker-dealer
may take into account the sale of products sponsored or advised by the Adviser,
the Sub-Adviser and/or their 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, the Sub-Adviser may
consider investment and market information and other research, such as economic,
securities and performance measurement research, provided by such brokers, and
the quality and reliability of brokerage services, including execution
capability, performance, and financial responsibility. Accordingly, the
commissions charged by any such broker may be greater than the amount another
firm might charge if the Sub-Adviser 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 the Sub-Adviser or
the Registrant. The Sub-Adviser believes that the research information received
in this manner provides the Fund with benefits by supplementing the research
otherwise available to the Fund. The investment advisory fees paid by the
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Adviser to the Sub-Adviser under the Sub-Advisory Agreement are not reduced as a
result of receipt by the Sub-Adviser of research services.
The Sub-Adviser places portfolio transactions for other advisory
accounts advised by it, and research services furnished by firms through which
the Fund effects their securities transactions may be used by the Sub-Adviser in
servicing all of its accounts; not all of such services may be used by the
Sub-Adviser in connection with the Fund. The Sub-Adviser believes it is not
possible to measure separately the benefits from research services to each of
the accounts (including the Fund) advised by it. Because the volume and nature
of the trading activities of the accounts are not uniform, the amount of
commissions in excess of those charged by another broker paid by each account
for brokerage and research services will vary. However, the Sub-Adviser believes
such costs to the Fund will not be disproportionate to the benefits received by
the Fund on a continuing basis. The Sub-Adviser seeks to allocate portfolio
transactions equitably whenever concurrent decisions are made to purchase or
sell securities by the Fund and another advisory account. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to the Fund. In making such allocations between the Fund and other
advisory accounts, the main factors considered by the Sub-Adviser 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, and the opinions of the persons
responsible for recommending investments to the Fund and such other accounts and
funds.
DISTRIBUTIONS
Net investment income of the Fund consists of all income (other than
net capital gain) less all expenses of the Fund. Expenses are accrued each day.
As described in the Fund's Prospectus, the Fund's present policy, which may be
changed at any time by the Fund's Board of Trustees, is to distribute at least
quarterly all, or substantially all, of its net investment income as dividends
to shareholders. In addition, at least annually, the Fund also intends to
distribute any net capital gains to shareholders as capital gain dividends. The
Board of Trustees may at its discretion in the future change the Fund's dividend
policy. Unless you elect to receive cash distributions, your dividends of net
investment income and capital gain dividends will automatically be reinvested
into additional Common Shares pursuant to the Fund's Dividend Reinvestment Plan.
DESCRIPTION OF SHARES
COMMON SHARES
The beneficial interest of the Fund may be divided from time to time
into shares of beneficial interest ("Shares") of such classes and of such
designations and par value (if any) and with such rights, preferences,
privileges and restrictions as shall be determined by the Trustees in their sole
discretion, without shareholder vote. The Fund's Amended and Restated
Declaration of Trust (the "Declaration") initially authorizes the issuance of an
unlimited number of Common Shares. The Common Shares being offered have a par
value of $0.01 per share and, subject to the rights of holders of preferred
shares, if issued, have equal rights as to the payment of dividends and the
distribution of assets upon liquidation of the Fund. The Common Shares being
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offered will, when issued, be fully paid and, subject to matters discussed in
"Certain Provisions in the Declaration of Trust," non-assessable, and currently
have no pre-emptive or conversion rights (except as may otherwise be determined
by the Trustees in their sole discretion) or rights to cumulative voting in the
election of trustees.
The Common Shares have been approved for listing on the New York Stock
Exchange. The Fund intends to hold annual meetings of shareholders so long as
the Common Shares are listed on a national securities exchange and such meetings
are required as a condition to such listing.
Shares of closed-end investment companies may frequently trade at
prices lower than net asset value. Net asset value will be reduced immediately
following the offering after payment of the sales load and organization and
offering expenses. Although the value of the Fund's net assets is generally
considered by market participants in determining whether to purchase or sell
shares, whether investors will realize gains or losses upon the sale of Common
Shares will depend entirely upon whether the market price of the Common Shares
at the time of sale is above or below the original purchase price for the
shares. Since the market price of the Fund's Common Shares will be determined by
factors beyond the control of the Fund, the Fund cannot predict whether the
Common Shares will trade at, below, or above net asset value or at, below or
above the initial public offering price. Accordingly, the Common Shares are
designed primarily for long-term investors, and investors in the Common Shares
should not view the Fund as a vehicle for trading purposes. See "Repurchase of
Fund Shares; Conversion to Open-End Fund" below and "The Fund's Investments" in
the Fund's Prospectus.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, in certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the Trustees. The Declaration further provides for indemnification
out of the assets and property of the Fund for all loss and expense of any
shareholder held personally liable for the obligations of the Fund solely by
reason of his or her being a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations. The
Fund believes that the likelihood of such circumstances is remote.
The Declaration includes provisions that could limit the ability of
other entities or persons to acquire control of the Fund or to convert the Fund
to open-end status. Specifically, the Declaration requires the affirmative vote
or consent by holders of at least two-thirds of the Shares outstanding and
entitled to vote, except as described below, to authorize (1) a conversion of
the Fund from a closed-end to an open-end investment company, (2) a merger or
consolidation of the Fund with any corporation, association, trust or other
organization, including a series or class of such other organization (other than
a merger, consolidation, reorganization or sale of assets with an acquiring fund
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that is not an operating entity immediately prior to the transaction), (3) a
sale, lease or exchange of all or substantially all of the Fund's assets (other
than in the regular course of business of the Fund, sales of assets in
connection with the termination of the Fund as provided in the Declaration of
Trust, or sale of assets with an acquiring fund that is not an operating entity
immediately prior to the transaction), (4) in certain circumstances, a
termination of the Fund, (5) removal of Trustees by shareholders, or (6) certain
transactions in which a Principal Shareholder (as defined below) is a party to
the transactions. However, with respect to items (1), (2) and (3) above, if the
applicable transaction has been already approved by the affirmative vote of
two-thirds of the Trustees, then the majority of the outstanding voting
securities as defined in the 1940 Act (a "Majority Shareholder Vote") is
required. In addition, if there are then preferred shares outstanding, with
respect to (1) above, two-thirds of the preferred shares voting as a separate
class shall also be required unless the action has already been approved by
two-thirds of the Trustees, in which case then a Majority Shareholder Vote is
required. Such affirmative vote or consent shall be in addition to the vote or
consent of the holders of the Shares otherwise required by law or by the terms
of any class or series of preferred stock, whether now or hereafter authorized,
or any agreement between the Fund and any national securities exchange. Further,
in the case of items (2) or (3) that constitute a plan of reorganization (as
such term is used in the 1940 Act) which adversely affects the preferred shares
within the meaning of section 18(a)(2)(D) of the 1940 Act, except as may
otherwise be required by law, the approval of the action in question will also
require the affirmative vote of two thirds of the preferred shares voting as a
separate class, provided, however, that such separate class vote shall be by a
Majority Shareholder Vote if the action in question has previously been approved
by the affirmative vote of two-thirds of the Trustees.
Approval of shareholders is not required, however, for any transaction,
whether deemed a merger, consolidation, reorganization or otherwise whereby the
Fund issues shares in connection with the acquisition of assets (including those
subject to liabilities) from any other investment company or similar entity.
None of the foregoing provisions may be amended except by the vote of at least
two-thirds of the Shares outstanding and entitled to vote.
As noted above, pursuant to the Declaration of Trust, the affirmative
approval of two-thirds of the Shares outstanding and entitled to vote, subject
to certain exceptions, shall be required for the following transactions in which
a Principal Shareholder (as defined below) is a party: (i) the merger or
consolidation of the Fund or any subsidiary of the Fund with or into any
Principal Shareholder; (ii) the issuance of any securities of the Fund to any
Principal Shareholder for cash other than pursuant to a dividend reinvestment or
similar plan available to all Shareholders; (iii) the sale, lease or exchange of
all or any substantial part of the assets of the Fund to any Principal
Shareholder (except assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purpose of such computation all assets sold,
leased or exchanged in any series of similar transactions within a twelve-month
period); (iv) the sale, lease or exchange to the Fund or any subsidiary thereof,
in exchange for securities of the Fund, of any assets of any Principal
Shareholder (except assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purposes of such computation all assets sold,
leased or exchanged in any series of similar transactions within a twelve-month
period). However, shareholder approval for the foregoing transactions shall not
be applicable to (i) any transaction, including, without limitation, any rights
offering, made available on a pro rata basis to all Shareholders of the Fund or
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class thereof unless the Trustees specifically make such transaction subject to
this voting provision, (ii) any transaction if the Trustees shall by resolution
have approved a memorandum of understanding with such Principal Shareholder with
respect to and substantially consistent with such transaction or (iii) any such
transaction with any corporation of which a majority of the outstanding shares
of all classes of stock normally entitled to vote in elections of directors is
owned of record or beneficially by the Fund and its subsidiaries. As described
in the Declaration of Trust, a Principal Shareholder shall mean any corporation,
person or other entity which is the beneficial owner, directly or indirectly, of
more than 5% of the outstanding Shares and shall include any affiliate or
associate (as such terms are defined in the Declaration of Trust) of a Principal
Shareholder. The above affirmative vote shall be in addition to the vote of the
Shareholders otherwise required by law or by the terms of any class or series of
preferred stock, whether now or hereafter authorized, or any agreement between
the Fund and any national securities exchange.
The provisions of the Declaration described above could have the effect
of depriving the Common Shareholders of opportunities to sell their Common
Shares at a premium over market value by discouraging a third party from seeking
to obtain control of the Fund in a tender offer or similar transaction. The
overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a third party. They
provide, however, the advantage of potentially requiring persons seeking control
of a Fund to negotiate with its management regarding the price to be paid and
facilitating the continuity of the Fund's investment objective and policies. The
Board of Trustees of the Fund has considered the foregoing anti-takeover
provisions and concluded that they are in the best interests of the Fund and its
Common Shareholders.
Reference should be made to the Declaration on file with the SEC for
the full text of these provisions.
The Declaration provides that the obligations of the Fund are not
binding upon the Trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the Trustees shall not be liable to any person in
connection with the Fund property or the affairs of the Fund or for any neglect
or wrongdoing of any officer, employee or agent of the Fund or for the act or
omission of any other Trustee. Nothing in the Declaration, however, protects a
Trustee against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office with or on behalf of the
Fund.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's Common Shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value ("NAV"), call protection, price,
dividend stability, relative demand for and supply of such shares in the market,
general market and economic conditions and other factors. Because shares of a
closed-end investment company may frequently trade at prices lower than NAV, the
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Trustees, in consultation with the Fund's Adviser, Sub-Adviser and any corporate
finance services and consulting agent that the Adviser may retain from time to
time, may review possible actions to reduce any such discount. Actions may
include the repurchase of such shares in the open market or in private
transactions, the making of a tender offer for such shares, or the conversion of
the Fund to an open-end investment company. There can be no assurance, however,
that the Trustees will decide to take any of these actions, or that share
repurchases or tender offers, if undertaken, will reduce a market discount.
After any consideration of potential actions to seek to reduce any significant
market discount, the Trustees may, subject to their fiduciary obligations and
compliance with applicable state and federal laws, authorize the commencement of
a share-repurchase program or tender offer. The size and timing of any such
share repurchase program or tender offer will be determined by the Trustees in
light of the market discount of the Common Shares, trading volume of the Common
Shares, information presented to the Trustees regarding the potential impact of
any such share repurchase program or tender offer, and general market and
economic conditions. There can be no assurance that the Fund will in fact effect
repurchases of or tender offers for any of its Common Shares. Before deciding
whether to take any action if the Fund's Common Shares trade below NAV, the
Trustees would consider all relevant factors, including the extent and duration
of the discount, the liquidity of the Fund's portfolio, the impact of any action
that might be taken on the Fund or its Shareholders and market considerations.
Based on these considerations, even if the Fund's shares should trade at a
discount, the Trustees may determine that, in the interest of the Fund and its
Shareholders, no action should be taken.
Further, the staff of the SEC currently requires that any tender offer
made by a closed-end investment company for its shares must be at a price equal
to the NAV of such shares on the close of business on the last day of the tender
offer. Any service fees incurred in connection with any tender offer made by the
Fund will be borne by the Fund and will not reduce the stated consideration to
be paid to tendering Shareholders.
Subject to its investment limitations, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will increase the Fund's
expenses and reduce the Fund's net income. Any share repurchase, tender offer or
borrowing that might be approved by the Trustees would have to comply with the
Securities Exchange Act of 1934, as amended, and the 1940 Act and the rules and
regulations thereunder.
Although the decision to take action in response to a discount from NAV
will be made by the Trustees at the time they consider such issue, it is the
Trustees' present policy, which may be changed by the Trustees, not to authorize
repurchases of Common Shares or a tender offer for such shares if (1) such
transactions, if consummated, would (a) result in the delisting of the Common
Shares from the New York Stock Exchange, or (b) impair status as a registered
closed-end investment company under the 1940 Act; (2) the Fund would not be able
to liquidate portfolio securities in an orderly manner and consistent with the
Fund's investment objective and policies in order to repurchase shares; or (3)
there is, in the Board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Fund, (b) general suspension of or limitation on prices
for trading securities on the New York Stock Exchange, (c) declaration of a
banking moratorium by Federal or state authorities or any suspension of payment
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by United States or state banks in which the Fund invests, (d) material
limitation affecting the Fund or the issuers of its portfolio securities by
Federal or state authorities on the extension of credit by lending institutions
or on the exchange of non-U.S. currency, (e) commencement of war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States, or (f) other event or condition which would have a
material adverse effect (including any adverse tax effect) on the Fund or its
shareholders if shares were repurchased. The Trustees may in the future modify
these conditions in light of experience with respect to the Fund.
Conversion to an open-end company would require the approval of the
holders of at least two-thirds of the Fund's shares outstanding and entitled to
vote; provided, however, that unless otherwise provided by law, if there are
preferred shares outstanding, the affirmative vote of two-thirds of the
preferred shares voting as a separate class shall be required; provided,
however, that such votes shall be by the affirmative vote of the majority of the
outstanding voting securities, as defined in the 1940 Act, if the action in
question was previously approved by the affirmative vote of two-thirds of the
Trustees. Such affirmative vote or consent shall be in addition to the vote or
consent of the holders of the shares otherwise required by law or by the terms
of any class or series of preferred shares, whether now or hereafter authorized,
or any agreement between the Fund and any national securities exchange. See the
Prospectus under "Closed-End Fund Structure" for a discussion of voting
requirements applicable to conversion of the Fund to an open-end company. If the
Fund converted to an open-end company, the Fund's Common Shares would no longer
be listed on the New York Stock Exchange. Any Preferred Shares or other
Borrowings would need to be redeemed or repaid upon conversion to an open-end
investment company. Shareholders of an open-end investment company may require
the company to redeem their shares on any business day (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
less such redemption charge, if any, as might be in effect at the time of
redemption. In order to avoid maintaining large cash positions or liquidating
favorable investments to meet redemptions, open-end companies typically engage
in a continuous offering of their shares. Open-end companies are thus subject to
periodic asset in-flows and out-flows that can complicate portfolio management.
The Trustees may at any time propose conversion of the Fund to an open-end
company depending upon their judgment as to the advisability of such action in
light of circumstances then prevailing.
The repurchase by the Fund of its shares at prices below NAV will
result in an increase in the NAV of those shares that remain outstanding.
However, there can be no assurance that share repurchases or tenders at or below
NAV will result in the Fund's shares trading at a price equal to their NAV.
Nevertheless, the fact that the Fund's shares may be the subject of repurchase
or tender offers from time to time may reduce any spread between market price
and NAV that might otherwise exist.
In addition, a purchase by the Fund of its Common Shares will decrease
the Fund's Managed Assets which would likely have the effect of increasing the
Fund's expense ratio.
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TAX MATTERS
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based upon
the advice of Chapman and Cutler LLP, counsel to the Fund.
Set forth below is a discussion of the material U.S. federal income tax
issues concerning the Fund and the purchase, ownership and disposition of Fund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances. Unless otherwise noted, this discussion
assumes you are a United States person (as defined for U.S. federal income tax
purposes) and that you hold your shares as a capital asset. This discussion is
based upon present provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), the regulations promulgated thereunder, and judicial and
administrative ruling authorities, all of which are subject to change, which
change may be retroactive. Prospective investors should consult their own tax
advisors with regard to the federal tax consequences of the purchase, ownership,
or disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, locality, non-U.S. country, or other taxing jurisdiction.
The Fund intends to elect and to qualify annually to be treated as a
regulated investment company under the Code.
To qualify for the favorable U.S. federal income tax treatment
generally accorded to regulated investment companies, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer generally
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Fund's total assets and not greater than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities (other than U.S. Government
securities or the securities of other regulated investment companies) of any one
issuer, or two or more issuers which the Fund controls which are engaged in the
same, similar or related trades or businesses; and (c) distribute at least 90%
of its investment company taxable income (which includes, among other items,
dividends, interest and net short-term capital gains in excess of net long-term
capital losses) and at least 90% of its net tax-exempt interest income each
taxable year.
As a regulated investment company, the Fund generally will not be
subject to U.S. federal income tax on its investment company taxable income (as
that term is defined in the Code, but without regard to the deduction for
dividends paid) and net capital gain (the excess of net long-term capital gain
over net short-term capital loss), if any, that it distributes to shareholders.
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The Fund intends to distribute to its shareholders, at least annually,
substantially all of its investment company taxable income and net capital gain.
If the Fund retains any net capital gain or investment company taxable income,
it will generally be subject to federal income tax at regular corporate rates on
the amount retained. In addition, amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% federal excise tax unless, generally, the Fund distributes
during each calendar year at least an amount equal to the sum of (1) 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for the one-year period ending October 31
of the calendar year, and (3) any ordinary income and capital gains for previous
years that were not distributed during those years. To prevent application of
the excise tax, the Fund intends to make its distributions in accordance with
the calendar year distribution requirement. A distribution will be treated as
paid on December 31 of the current calendar year if it is declared by the Fund
in October, November or December with a record date in such a month and paid by
the Fund during January of the following calendar year. Such distributions will
be taxable to shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
If the Fund failed to qualify as a regulated investment company or
failed to satisfy the 90% distribution requirement in any taxable year, the Fund
would be taxed as an ordinary corporation on its taxable income (even if such
income were distributed to its shareholders) and all distributions out of
earnings and profits would be taxed to shareholders as ordinary income. In
addition, the Fund could be required to recognize unrealized gains, pay taxes
and make distributions (which could be subject to interest charges) before
requalifying as a regulated investment company.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income are
generally taxable to a shareholder as ordinary income to the extent of the
Fund's earnings and profits, whether paid in cash or reinvested in additional
shares. However, pursuant to the "Jobs and Growth Tax Relief Reconciliation Act
of 2003" (the "Tax Act"), certain ordinary income dividends received from the
Fund may be taxed at reduced capital gains tax rates. In particular, under the
Tax Act, ordinary income dividends received by an individual shareholder from a
regulated investment company such as the Fund are generally taxed at the same
rates that apply to net capital gain, provided certain holding period and other
requirements are satisfied and provided the dividends are attributable to
"qualified dividend income" received by the Fund itself. Dividends received by
the Fund from REITs and foreign corporations are qualifying dividends eligible
for this lower tax rate only in certain circumstances. These special rules
relating to the taxation of ordinary income dividends from regulated investment
companies generally apply to taxable years beginning after December 31, 2002 and
beginning before January 1, 2009. Higher tax rates will be imposed in 2009
unless further legislative action is taken by Congress. The Fund will provide
notice to its shareholders of the amount of any distribution which may be taken
into account as a dividend which is eligible for the reduced capital gains tax
rates. There can be no assurance that a portion of the Fund's income
distributions will not be fully taxable as ordinary income.
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A corporation that owns shares generally will not be entitled to the
dividends received deduction with respect to many dividends received from the
Fund because the dividends received deduction generally is not available for
distributions from regulated investment companies. However, certain ordinary
income dividends on shares that are attributable to qualifying dividends
received by the Fund from certain domestic corporations may be designated by the
Fund as being eligible for the dividends received deduction.
Distributions of net capital gain (the excess of net long-term capital
gain over net short-term capital loss), if any, properly designated as capital
gain dividends are taxable to a shareholder as long-term capital gains,
regardless of how long the shareholder has held Fund shares. Shareholders
receiving distributions in the form of additional shares, rather than cash,
generally will have a cost basis in each such share equal to the value of a
share of the Fund on the reinvestment date. A distribution of an amount in
excess of the Fund's current and accumulated earnings and profits will be
treated by a shareholder as a return of capital which is applied against and
reduces the shareholder's basis in his or her shares. To the extent that the
amount of any such distribution exceeds the shareholder's basis in his or her
shares, the excess will be treated by the shareholder as gain from a sale or
exchange of the shares.
The Fund may retain for investment its net capital gain and pay
corporate income tax on the amount retained. If the Fund retains any net capital
gain, it may designate the retained amount as undistributed capital gains in a
notice to its shareholders who, if subject to U.S. federal income tax on
long-term capital gains, (1) will be required to include in income as long-term
capital gain their share of such undistributed capital gain and (2) will be
entitled to credit their proportionate share of the tax paid by the Fund against
their U.S. federal income tax liability, if any, and to claim refunds to the
extent the credit exceeds such liability. For U.S. federal income tax purposes,
the tax basis of shares owned by a shareholder of the Fund will be increased by
the amount of undistributed capital gain included in the gross income of such
shareholder less the tax deemed paid by such shareholder under clause (2) of the
immediately preceding sentence.
Dividends and interest received, and gains realized, by the Fund on
foreign securities may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions (collectively "foreign taxes") that
would reduce the return on its securities. Tax conventions between certain
countries and the United States, however, may reduce or eliminate foreign taxes,
and many foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors.
Shareholders will be notified annually as to the U.S. federal income
tax status of distributions, and shareholders receiving distributions in the
form of additional shares will receive a report as to the value of those shares.
SALE OR EXCHANGE OF FUND SHARES
Upon the sale or other disposition of shares of the Fund, a shareholder
may realize a capital gain or loss. The amount of the gain or loss will be equal
to the difference between the amount realized and the shareholder's tax basis in
his shares and will be long-term or short-term, depending upon the shareholder's
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holding period for the shares. Generally, a shareholder's gain or loss will be a
long-term gain or loss if the shares have been held for more than one year.
Any loss realized on a sale or exchange will be disallowed to the
extent that shares disposed of are replaced (including through reinvestment of
dividends) within a period of 61 days beginning 30 days before and ending 30
days after disposition of shares or to the extent that the shareholder, during
such period, acquires or enters into an option or contract to acquire,
substantially identical stock or securities. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends received by the shareholder with
respect to such shares.
NATURE OF FUND'S INVESTMENTS
Certain of the Fund's investment practices are subject to special and
complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (iv)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur or (vi) adversely alter the characterization of
certain complex financial transactions. The Fund will monitor its transactions
and may make certain tax elections to mitigate the effect of these rules and
prevent the disqualification of the Fund from being taxed as a regulated
investment company.
FUTURES CONTRACTS AND OPTIONS
The Fund's transactions in futures contracts and options will be
subject to special provisions of the Code that, among other things, may affect
the character of gains and losses realized by the Fund (i.e., may affect whether
gains or losses are ordinary or capital, or short-term or long-term), may
accelerate recognition of income to the Fund and may defer Fund losses. These
rules could, therefore, affect the character, amount and timing of distributions
to shareholders. These provisions also (a) will require the Fund to
mark-to-market certain types of the positions in its portfolio (i.e., treat them
as if they were closed out), and (b) may cause the Fund to recognize income
without receiving cash with which to make distributions in amounts necessary to
satisfy the 90% distribution requirement for qualifying to be taxed as a
regulated investment company and the 98% distribution requirement for avoiding
excise taxes. The Fund will monitor its transactions, will make the appropriate
tax elections and will make the appropriate entries in its books and records
when it acquires any futures contract, option or hedged investment in order to
mitigate the effect of these rules and prevent disqualification of the Fund from
being taxed as a regulated investment company.
In particular, the Fund expects to write (sell) call options with
respect to certain securities held by the Fund. Depending on whether such
options are exercised or lapse, or whether the securities or options are sold,
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the existence of these options will affect the amount and timing of the
recognition of income and whether the income qualifies as long-term capital
gain.
The Fund's covered call writing strategy may result in certain of its
positions being treated as tax straddles. The tax straddle rules are extremely
complex and include provisions which could result in the deferral of tax
recognition of certain realized losses, reductions in the holding period of any
position that is part of the straddle and the capitalization of certain interest
expense and carrying charges. To the extent that any of the Fund's positions
constitute tax straddles which do not qualify as a "qualified covered call"
under Section 1092(c)(4), the impact upon the Fund's income taxes will include:
dividends received on the long common stock leg of the straddle may not be
eligible for distributions that qualify as "qualified dividend income" or for
the corporate dividends received deduction, the Fund will generally realize
short-term gain or loss on the long common stock leg of the straddle (to the
extent losses are not otherwise deferred) and, realized losses on either the
long common stock or the written (short) option legs of the straddle may be
deferred for tax purposes to the extent that both legs of the straddle are not
closed within the same tax year.
In general, a "qualified covered call option" is an option that is
written (sold) with respect to stock that is held or acquired by a taxpayer in
connection with granting the option which meets certain requirements, including:
the option is exchange-traded or, if over-the-counter, meets certain IRS
requirements, is granted more than 30 days prior to expiration, is not
"deep-in-the-money" (within the meaning of Section 1092), is not granted by an
options dealer (within the meaning of Section 1256(g)(8)) in connection with the
option dealer's activity of dealing in options, and gain or loss with respect to
such option is not ordinary income or loss. Provided the Fund's covered calls
meet the definition of qualified covered calls and are not part of a larger
straddle, the general tax straddle holding period termination rules will not
apply. As a result, dividend income received with respect to the long common
stock leg of the straddle may be eligible for qualified dividend income and
corporate dividends received deduction treatment (assuming all other relevant
requirements are met). In addition, the general tax straddle rules requiring
loss deferral and the capitalization of certain interest expense and carrying
charges will not apply. Qualified covered call option positions are, however,
subject to special rules in the case of options which are in-the-money (but
still not "deep-in-the-money") or for positions which are closed near year end
(and not within the same year end). Legislation has been proposed (Senate Bill
1637) that, if enacted, may negatively impact the availability of the qualified
covered call exception. No assurance can be given as to the likelihood of such
legislation being enacted.
The Fund may enter into transactions that would be treated as "Section
1256 Contracts" under the Code. In general, the Fund would be required to treat
any Section 1256 Contracts as if they were sold for their fair market value at
the end of the Fund's taxable year, and would be required to recognize gain or
loss on such deemed sale for federal income tax purposes even though the Fund
did not actually sell the contract and receive cash. Forty percent of such gain
or loss would be treated as short-term capital gain or loss and sixty percent of
such gain or loss would be treated as long-term capital gain or loss.
BACKUP WITHHOLDING
The Fund may be required to withhold U.S. federal income tax from all
taxable distributions and sale proceeds payable to shareholders who fail to
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provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the IRS that they are
subject to backup withholding. The withholding rate is 28% until 2011, when the
rate will revert to 31% unless amended by Congress. Corporate shareholders and
certain other shareholders specified in the Code generally are exempt from such
backup withholding. This withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder's U.S. federal income tax
liability, if any, or refunded to the shareholder provided that the required
information is furnished to the IRS.
NON-U.S. SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ("non-U.S. shareholder") depends on whether the income of
the Fund is "effectively connected" with a U.S. trade or business carried on by
the shareholder.
Income Not Effectively Connected. If the income from the Fund is not
"effectively connected" with a U.S. trade or business carried on by the non-U.S.
shareholder, distributions of investment company taxable income will be subject
to a U.S. withholding tax of 30% (or lower treaty rate), which tax is generally
withheld from such distributions. Non-U.S. shareholders must provide the Fund
with a properly completed IRS Form W-8BEN certifying that they are not United
States persons and to claim any applicable treaty benefits.
Distributions of capital gain dividends and any amounts retained by the
Fund which are designated as undistributed capital gains will not be subject to
U.S. withholding tax at the rate of 30% (or lower treaty rate) unless the
non-U.S. shareholder is a nonresident alien individual and is physically present
in the United States for more than 182 days during the taxable year and meets
certain other requirements. However, this 30% tax on capital gains of
nonresident alien individuals who are physically present in the United States
for more than the 182 day period generally applies only in exceptional cases
because any individual present in the United States for more than 182 days
during the taxable year is generally treated as a resident for U.S. federal
income tax purposes; in that case, he or she would be subject to U.S. income tax
on his or her worldwide income at the graduated rates applicable to U.S.
citizens, rather than the 30% U.S. withholding tax. In the case of a non-U.S.
shareholder who is a nonresident alien individual, the Fund may be required to
withhold U.S. income tax from distributions of net capital gain unless the
non-U.S. shareholder certifies his or her non-U.S. status under penalties of
perjury (generally on IRS Form W-8BEN) or otherwise establishes an exemption. If
a non-U.S. shareholder is a nonresident alien individual, any gain such
shareholder realizes upon the sale or exchange of such shareholder's shares of
the Fund in the United States will ordinarily be exempt from U.S. tax.
Income Effectively Connected. If the income from the Fund is
"effectively connected" with a U.S. trade or business carried on by a non-U.S.
shareholder and the non-U.S. shareholder provides the Fund with a properly
completed IRS Form W-8ECI, then distributions of investment company taxable
income and capital gain dividends, any amounts retained by the Fund which are
designated as undistributed capital gains and any gains realized upon the sale
or exchange of shares of the Fund will not be subject to the 30% U.S.
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withholding tax described above, but rather will be subject to U.S. federal
income tax at the graduated rates applicable to U.S. citizens, residents and
domestic corporations. Non-U.S. corporate shareholders may also be subject to
the branch profits tax imposed by the Code. The tax consequences to a non-U.S.
shareholder entitled to claim the benefits of an applicable tax treaty may
differ from those described herein. Non-U.S. shareholders are advised to consult
their own tax advisors with respect to the particular tax consequences to them
of an investment in the Fund.
OTHER TAXES
Fund shareholders may be subject to state, local and foreign taxes with
respect to their investment in Fund Shares. Shareholders are advised to consult
their own tax advisors with respect to the particular tax consequences to them
of an investment in the Fund.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund may quote certain performance-related information and may
compare certain aspects of its portfolio and structure to other substantially
similar closed-end funds. In reports or other communications to shareholders of
the Fund or in advertising materials, the Fund may compare its performance with
that of (i) other investment companies listed in the rankings prepared by
Lipper, Inc. ("Lipper"), Morningstar Inc. or other independent services;
publications such as Barrons, Business Week, Forbes, Fortune, Institutional
Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual Fund Values,
The New York Times, The Wall Street Journal and USA Today; or other industry or
financial publications or (ii) the Standard and Poor's Index of 500 Stocks, the
Dow Jones Industrial Average, Nasdaq Composite Index and other relevant indices
and industry publications. The Fund may also compare the historical volatility
of its portfolio to the volatility of such indices during the same time periods.
(Volatility is a generally accepted barometer of the market risk associated with
a portfolio of securities and is generally measured in comparison to the stock
market as a whole -- the beta -- or in absolute terms -- the standard
deviation.) Comparison of the Fund to an alternative investment should be made
with consideration of differences in features and expected performance. The Fund
may obtain data from sources or reporting services, such as Bloomberg Financial
("Bloomberg") and Lipper, that the Fund believes to be generally accurate.
The Fund may, from time to time, show the standard deviation of either
the Fund or the Fund's investment strategy and the standard deviation of the
Fund's benchmark index. Standard deviation is a statistical measure of the
historical volatility of a portfolio. Standard deviation is the measure of
dispersion of historical returns around the mean rate of return.
From time to time, the Fund may quote the Fund's total return,
aggregate total return or yield in advertisements or in reports and other
communications to shareholders. The Fund's performance will vary depending upon
market conditions, the composition of its portfolio and its operating expenses.
Consequently any given performance quotation should not be considered
representative of the Fund's performance in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investments comparing the Fund's
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performance with that of other investment companies should give consideration to
the quality and type of the respective investment companies' portfolio
securities.
The Fund's "average annual total return" is computed according to a
formula prescribed by the SEC. The formula can be expressed as follows:
Average Annual Total Return will be computed as follows:
ERV = P(1+T)/n/
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1-, 5-, or 10-year
periods at the end of the 1-, 5-, or 10-year periods (or
fractional portion).
The Funds may also quote after-tax total returns to show the impact of
assumed federal income taxes on an investment in a Fund. A Fund's total return
"after taxes on distributions" shows the effect of taxable distributions, but
not any taxable gain or loss, on an investment in shares of the Fund for a
specified period of time. A Fund's total return "after taxes on distributions
and sale of Fund shares" shows the effect of both taxable distributions and any
taxable gain or loss realized by the shareholder upon the sale of fund shares at
the end of a specified period. To determine these figures, all income,
short-term capital gain distributions, and long-term capital gains distributions
are assumed to have been taxed at the highest marginal individualized federal
tax rate then in effect. Those maximum tax rates are applied to distributions
prior to reinvestment and the after-tax portion is assumed to have been
reinvested in the Fund. State and local taxes are ignored.
Actual after-tax returns depend on a shareholder's tax situation and
may differ from those shown. After-tax returns reflect past tax effects and are
not predictive of future tax effects.
Average Annual Total Return (After Taxes on Distributions) will be
computed as follows:
ATV/D/ = P(1+T)/n/
Where: P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on distributions)
n = number of years
ATV/D/ = ending value of a hypothetical $1,000 investment made
at the beginning of the period, at the end of the period
(or fractional portion thereof), after taxes on fund
distributions but not after taxes on redemptions.
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Average Annual Total Return (After Taxes on Distributions and Sale of
Fund Shares) will be computed as follows:
ATV/DR/ = P(1+T)/n/
Where: P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on distributions
and redemption) n = number of years
ATV/DR/ = ending value of a hypothetical $1,000 investment made
at the beginning periods, at the end of the periods (or
fractional portion thereof), after taxes on fund
distributions and redemptions.
Quotations of yield for the Fund will be based on all investment income
per share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income") and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
Yield = 2 [( a-b/cd +1)/6/ - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
Past performance is not indicative of future results. At the time
Common Shareholders sell their shares, they may be worth more or less than their
original investment.
EXPERTS
The Financial Statements of the Fund as of August 17, 2004, appearing
in this Statement of Additional Information have been audited by Deloitte &
Touche LLP, independent registered public accounting firm, as set forth in their
report thereon appearing elsewhere herein, and is included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing. Deloitte & Touche LLP provides accounting and auditing services to the
Fund. The principal business address of Deloitte & Touche LLP is 180 North
Stetson Avenue, Chicago, Illinois 60601.
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT
PFPC Trust Company, 301 Bellevue Parkway, Wilmington, Delaware 19809,
serves as custodian for the Fund. As such, PFPC Trust Company has custody of all
securities and cash of the Fund 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 Fund. PFPC Inc., 301 Bellevue
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Parkway, Wilmington, Delaware 19809 is the transfer, registrar, dividend
disbursing agent and shareholder servicing agent for the Fund and provides
certain clerical, bookkeeping, shareholder servicing and administrative services
necessary for the operation of the Fund and maintenance of shareholder accounts.
PFPC Inc. also provides certain accounting and administrative services to the
Fund pursuant to an Administration and Accounting Services Agreement, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records; acting as liaison with the
Fund's independent public accountant and providing the accountant with certain
Fund accounting information; and providing other continuous accounting and
administrative services.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Funds' independent registered public accounting firm, Deloitte &
Touche LLP, 180 North Stetson Avenue, Chicago, Illinois 60601, audit and report
on the Fund's annual financial statements, and perform other professional
accounting, auditing and advisory services when engaged to do so by the Fund.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the SEC, Washington, D.C. The Fund's Prospectus and this Statement of
Additional Information do not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the shares offered hereby,
reference is made to the Fund's Registration Statement. Statements contained in
the Fund's Prospectus and this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of the
Registration Statement may be inspected without charge at the SEC's principal
office in Washington, D.C., and copies of all or any part thereof may be
obtained from the SEC upon the payment of certain fees prescribed by the SEC.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholder of
First Trust/Fiduciary Asset Management Covered Call Fund
We have audited the accompanying statement of assets and liabilities of
First Trust/Fiduciary Asset Management Covered Call Fund (the "Fund"), as of
August 17, 2004. This statement of assets and liabilities is the responsibility
of the Fund's management. Our responsibility is to express an opinion on this
statement of assets and liabilities based on our audit.
We conducted our audit in accordance with standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
statement of assets and liabilities is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement. Our procedures included confirmation of
cash owned as of August 17, 2004, by correspondence with the Fund's custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the statement of assets and liabilities referred to
above presents fairly, in all material respects, the financial position of First
Trust/Fiduciary Asset Management Covered Call Fund as of August 17, 2004, in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Chicago, Illinois
August 24, 2004
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FIRST TRUST/FIDUCIARY ASSET MANAGEMENT COVERED CALL FUND
FINANCIAL STATEMENTS
-60-
FIRST TRUST/FIDUCIARY ASSET MANAGEMENT COVERED CALL FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 17, 2004
ASSETS:
Cash $100,008
Offering costs $600,000
--------
$700,008
========
LIABILITIES:
Offering costs payable $600,000
--------
Net Assets $100,008
========
NET ASSETS - Applicable to 5,236 shares $100,008
========
NET ASSET VALUE PER SHARE (net assets divided by 5,236 shares.) $19.100
=======
Notes to Statement of Assets and Liabilities:
Note 1. Organization
First Trust/Fiduciary Asset Management Covered Call Fund (the "Fund") is a newly
organized, diversified, closed-end management investment company registered
under the Investment Company Act of 1940 (the "1940 Act"). The Fund was
organized as a Massachusetts business trust on May 20, 2004, pursuant to a
Declaration of Trust governed by the laws of the Commonwealth of Massachusetts.
As a newly organized entity, the Fund has no operating history. The Fund has had
no operations through August 17, 2004 other than those relating to
organizational matters and the sale and issuance of 5,236 common shares of
beneficial interest to First Trust Advisors L.P. (the "Adviser").
Note 2. Significant Accounting Policies
The Adviser has assumed organization costs estimated to be $50,000. The Adviser
has also agreed to assume offering costs in excess of $.04 a share, if any.
The Fund's statement of assets and liabilities is prepared in conformity with
accounting principles generally accepted in the United States of America which
require management to make estimates and assumptions that affect the reported
amounts and disclosures in the statement of assets and liabilities. Actual
results could differ from those estimates.
The Fund intends to comply in its initial fiscal year and thereafter with
provisions of the Internal Revenue Code applicable to regulated investment
companies and as such, will not be subject to federal income taxes on otherwise
taxable income (including net realized capital gains) distributed to
shareholders.
Offering costs will be charged to paid-in-capital in proportion to the number of
shares sold during the offering period.
Note 3. Fees and Other Transactions with Affiliated Parties
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On June 7, 2004, the Fund's Board of Trustees approved an Investment Management
Agreement with the Adviser. The Fund has agreed to pay an annual management fee
for the services and facilities provided by the Adviser, payable on a monthly
basis, equal to the annual rate of 1.00% of the Fund's average daily managed
assets.
The Sub-Adviser receives a portfolio management fee equal to 0.50% of the Fund's
managed assets. The Sub-Adviser's fee is paid by the Adviser out of the
Adviser's management fee.
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FIRST TRUST/FIDUCIARY ASSET MANAGEMENT COVERED CALL FUND
18,500,000 COMMON SHARES
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 26, 2004
Back Cover
APPENDIX A
FIDUCIARY ASSET MANAGEMENT, LLC
PROXY VOTING POLICY
A. STATEMENT OF POLICY
1. It is the policy of Fiduciary Asset Management, LLC ("FAM") to vote
all proxies over which it has voting authority in the best interest of FAM's
clients.
B. DEFINITIONS
2. By "best interest of FAM's clients," FAM means clients' best
economic interest over the long term -- that is, the common interest that all
clients share in seeing the value of a common investment increase over time.
Clients may have differing political or social interests, but their best
economic interest is generally uniform.
3. By "material conflict of interest," FAM means circumstances when
FAM itself knowingly does business with a particular proxy issuer or closely
affiliated entity, and may appear to have a significant conflict of interest
between its own interests and the interests of clients in how proxies of that
issuer are voted.
C. FAM INVESTS WITH MANAGEMENTS THAT SEEK SHAREHOLDERS' BEST INTERESTS
4. Under its investment philosophy, FAM generally invests client funds
in a company only if FAM believes that the company's management seeks to serve
shareholders' best interests. Because FAM has confidence in the managements of
the companies in which it invests, it believes that management decisions and
recommendations on issues such as proxy voting generally are likely to be in
shareholders' best interests.
5. FAM may periodically reassess its view of company managements. If
FAM concludes that a company's management no longer serves shareholders' best
interests, FAM generally sells its clients' shares of the company. FAM believes
that clients do not usually benefit from holding shares of a poorly managed
company or engaging in proxy contests with management.
D. FAM'S PROXY VOTING PROCEDURES
6. When companies in which FAM has invested client funds issue
proxies, FAM routinely votes the proxies as recommended by management, because
it believes that recommendations by these companies' managements generally are
in shareholders' best interests, and therefore in the best economic interest of
FAM's clients.
7. If FAM has decided to sell the shares of a company, whether because
of concerns about the company's management or for other reasons, FAM generally
abstains from voting proxies issued by the company after FAM has made the
decision to sell. FAM generally will not notify clients when this type of
routine abstention occurs.
8. FAM also may abstain from voting proxies in other circumstances.
FAM may determine, for example, that abstaining from voting is appropriate if
voting may be unduly burdensome or expensive, or otherwise not in the best
economic interest of clients, such as when foreign proxy issuers impose
unreasonable voting or holding requirements. FAM generally will not notify
clients when this type of routine abstention occurs.
9. The procedures in this policy apply to all proxy voting matters
over which FAM has voting authority, including changes in corporate governance
structures, the adoption or amendment of compensation plans (including stock
options), and matters involving social issues or corporate responsibility.
E. ALTERNATIVE PROCEDURES FOR POTENTIAL MATERIAL CONFLICTS OF INTEREST
10. In certain circumstances, such as when the proponent of a proxy
proposal is also a client of FAM, an appearance might arise of a potential
conflict between FAM's interests and the interests of affected clients in how
the proxies of that issuer are voted.
11. Because FAM does not exercise discretion in voting proxies, but
routinely votes proxies as recommended by management, no potential conflict of
interest could actually affect FAM's voting of the proxies.
12.a. Nevertheless, when FAM itself knowingly does business with a
particular proxy issuer and a material conflict of interest between FAM's
interests and clients' interests may appear to exist, FAM generally would, to
avoid any appearance concerns, follow an alternative procedure rather than vote
proxies as recommended by management. Such an alternative procedure generally
would involve causing the proxies to be voted in accordance with the
recommendations of an independent service provider that FAM may use to assist in
voting proxies. FAM generally will not notify clients if it uses this procedure
to resolve an apparent material conflict of interest. FAM will document the
identification of any material conflict of interest and its procedure for
resolving the particular conflict.
12.b. In unusual cases, FAM may use other alternative procedures to
address circumstances when a material conflict of interest may appear to exist,
such as, without limitation:
(i) Notifying affected clients of the conflict of interest
(if practical), and seeking a waiver of the conflict to permit FAM to
vote the proxies under its usual policy;
(ii) Abstaining from voting the proxies; or
A-2
(iii) Forwarding the proxies to clients so that clients may
vote the proxies themselves.
FAM generally will notify affected clients if it uses one of these
alternative procedures to resolve a material conflict of interest.
F. OTHER EXCEPTIONS
13. On an exceptions basis, FAM may for other reasons choose to depart
from its usual procedure of routinely voting proxies as recommended by
management.
G. VOTING BY CLIENT INSTEAD OF FAM
14. A FAM client may vote its own proxies instead of directing FAM to
do so. FAM recommends this approach if a client believes that proxies should be
voted based on political or social interests.
15. FAM generally will not accept proxy voting authority from a client
(and will encourage the client to vote its own proxies) if the client seeks to
impose client-specific voting guidelines that may be inconsistent with FAM's
guidelines or with the client's best economic interest in FAM's view.
16. FAM generally will abstain from voting on (or otherwise
participating in) the commencement of legal proceedings such as shareholder
class actions or bankruptcy proceedings.
H. PERSONS RESPONSIBLE FOR IMPLEMENTING FAM'S POLICY
17. FAM's client services staff has primary responsibility for
implementing FAM's proxy voting procedures, including ensuring that proxies are
timely submitted. FAM also may use a service provider to assist in voting
proxies, recordkeeping, and other matters.
18. FAM's security analysts routinely review proxy proposals as part of
their ongoing reassessment of companies and their managements.
I. RECORDKEEPING
19. FAM or a service provider maintains, in accordance with Rule 204-2
of the Investment Advisers Act:
(i) Copies of all proxy voting policies and procedures;
(ii) Copies of proxy statements received (unless maintained
elsewhere as described below);
A-3
(iii) Records of proxy votes cast on behalf of clients;
(iv) Documents prepared by FAM that are material to a decision
on how to vote or memorializing the basis for a decision; and
(v) Written client requests for proxy voting information, and
(vi) written responses by FAM to written or oral client requests.
20. FAM will obtain an undertaking from any service provider that the
service provider will provide copies of proxy voting records and other documents
promptly upon request if FAM relies on the service provider to maintain related
records.
21. FAM or its service provider may rely on the SEC's EDGAR system to
keep records of certain proxy statements if the proxy statements are maintained
by issuers on that system (as is generally true in the case of larger U.S.-based
issuers).
22. All proxy related records will be maintained in an easily
accessible place for five years (and an appropriate office of FAM or a service
provider for the first two years).
J. AVAILABILITY OF POLICY AND PROXY VOTING RECORDS TO CLIENTS
23. FAM will initially inform clients of this policy and how a client
may learn of FAM's voting record for the client's securities through summary
disclosure in Part II of FAM's Form ADV. Upon receipt of a client's request for
more information, FAM will provide to the client a copy of this proxy voting
policy and/or how FAM voted proxies for the client during the period since this
policy was adopted.
Adopted effective August 1, 2003 and as amended September 9, 2003.
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