UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21727
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
WHEATON, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
WHEATON, IL 60187
(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
Date of fiscal year end: OCTOBER 31
Date of reporting period: APRIL 30, 2009
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
(FIRST TRUST LOGO) (FIDAC LOGO)
FIRST TRUST/FIDAC
MORTGAGE INCOME FUND
(GRAPHIC)
SEMI-ANNUAL
REPORT
FOR THE SIX MONTHS ENDED
APRIL 30, 2009
TABLE OF CONTENTS
FIRST TRUST/FIDAC MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2009
Shareholder Letter ........................................................ 1
At a Glance ............................................................... 2
Portfolio Commentary ...................................................... 3
Portfolio of Investments .................................................. 6
Statement of Assets and Liabilities ....................................... 9
Statement of Operations ................................................... 10
Statements of Changes in Net Assets ....................................... 11
Statement of Cash Flows ................................................... 12
Financial Highlights ...................................................... 13
Notes to Financial Statements ............................................. 14
Additional Information .................................................... 19
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Fixed Income Discount Advisory Company ("FIDAC"
or the "Sub-Advisor") and their respective representatives, taking into account
the information currently available to them. Forward-looking statements include
all statements that do not relate solely to current or historical fact. For
example, forward-looking statements include the use of words such as
"anticipate," "estimate," "intend," "expect," "believe," "plan," "may,"
"should," "would" or other words that convey uncertainty of future events or
outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust/FIDAC Mortgage Income Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or FIDAC and their
respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of certain other risks of investing in the
Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by the personnel of
FIDAC are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST/FIDAC MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2009
Dear Shareholders:
2008 brought all sorts of challenges to investors. Throughout the year, the
financial sector was plagued with failures in banking, insurance and brokerage
firms. By year's end, after a meltdown in the credit markets, historically high
levels of volatility in the stock market, and the resulting turmoil to the
overall economy, the Dow Jones Industrial Average's (the "Dow") total return was
-31.92% (as of 12/31/08). In fact, 2008 was the Dow's third worst calendar year
since its inception in 1896. For the year, the negative total return performance
of the Dow was surpassed only by 1931 and 1907, two years in which the U.S. was
also enduring a major banking crisis. Of the thirty stocks in the Dow, only two
were up in 2008. For the first four months of 2009, however, the market has
shown positive signs. In fact, many economists believe the recession that began
in December, 2007 ended in March, 2009.
Yet, regardless of the market, First Trust Advisors L.P. ("First Trust") has
always believed that in order to be successful in reaching your financial goals,
you should be invested for the long term. A long-term investor understands that
the market, from a historical perspective, has always experienced ups and downs.
But history has shown that the patient investor is typically rewarded over the
long term. While no one has the ability to predict when the markets will
recover, we believe that staying invested in quality products and having a
long-term perspective can help investors reach their financial goals.
The report you hold contains detailed information about your investment in First
Trust/FIDAC Mortgage Income Fund (the "Fund"). It contains a portfolio
commentary from the Fund's portfolio management team that provides a market
recap for the period, a performance analysis and a market and Fund outlook.
Additionally, the report provides the Fund's financial statements for the period
covered by the report. I encourage you to read this document and discuss it with
your financial advisor.
First Trust has been through many types of markets and remains committed to
bringing you quality investment solutions regardless of the inevitable ups and
downs experienced in the market. We offer a variety of products that may fit
many financial plans to help those investors seeking long-term investment
success. As well, we are committed to making available up-to-date information
about your investments so you and your financial advisor have current
information on your portfolio.
We continue to value our relationship with you, and we thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust/FIDAC Mortgage Income Fund
Page 1
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
AT A GLANCE
AS OF APRIL 30, 2009 (UNAUDITED)
FUND STATISTICS
Symbol on New York Stock Exchange FMY
Common Share Price $ 15.93
Common Share Net Asset Value ("NAV") $ 16.81
Premium (Discount) to NAV -5.23%
Net Assets Applicable to Common Shares $68,079,586
Current Monthly Distribution per Common Share (1) $ 0.110
Current Annualized Distribution per Common Share $ 1.320
Current Distribution Rate on Closing Common Share Price (2) 8.29%
Current Distribution Rate on NAV (2) 7.85%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
MKT NAV
----- -----
04/30/08 17.38 18.88
05/02/08 17.18 18.83
05/09/08 17.42 18.81
05/16/08 17.43 18.89
05/23/08 17.25 19.01
05/30/08 17.67 19.10
06/06/08 17.27 19.11
06/13/08 17.13 18.99
06/20/08 16.97 19.04
06/27/08 17.10 19.13
07/03/08 16.87 19.09
07/11/08 16.87 19.07
07/18/08 16.69 19.09
07/25/08 16.89 19.03
08/01/08 16.90 19.25
08/08/08 17.04 19.15
08/15/08 16.95 19.23
08/22/08 16.90 19.07
08/29/08 17.05 18.94
09/05/08 16.88 18.87
09/12/08 16.34 18.22
09/19/08 16.98 18.16
09/26/08 16.15 18.10
10/03/08 16.18 18.08
10/10/08 13.59 18.08
10/17/08 15.57 18.05
10/24/08 15.40 18.09
10/31/08 15.71 18.04
11/07/08 15.74 17.90
11/14/08 16.25 17.84
11/21/08 14.84 17.96
11/28/08 15.65 16.96
12/05/08 16.30 16.36
12/12/08 15.21 16.20
12/19/08 16.22 16.17
12/26/08 16.24 16.35
01/02/09 16.42 16.22
01/09/09 16.46 16.23
01/16/09 16.39 16.25
01/23/09 16.25 16.31
01/30/09 16.27 16.63
02/06/09 16.09 16.46
02/13/09 16.01 16.44
02/20/09 15.48 16.53
02/27/09 15.44 16.52
03/06/09 15.19 16.13
03/13/09 15.54 16.21
03/20/09 15.75 16.12
03/27/09 15.80 16.28
04/03/09 15.71 16.28
04/09/09 15.83 16.39
04/17/09 15.89 16.52
04/24/09 15.89 16.68
04/30/09 15.93 16.81
PORTFOLIO CHARACTERISTICS
Duration -4.72
Average Credit Rating AAA
Weighted Average Life 4.57
PERFORMANCE
Average Annual
Total Return
6 Months Ended 1 Year Ended Inception (5/25/2005)
4/30/2009 4/30/2009 to 4/30/2009
-------------- ------------ ---------------------
Fund Performance
NAV (3) -2.58% -3.45% 3.32%
Market Value (4) 6.02% -0.61% 0.73%
Index Performance
Barclays Capital MBS Fixed Rate Index 8.59% 8.46% 6.16%
% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
-------------------- -----------
U.S. Government Agency and Non-Agency
Collateralized Mortgage Obligations 50.3%
U.S. Government Agency Mortgage-Backed Securities 49.7
-----
Total 100.0%
=====
% OF TOTAL
SECURITY TYPE INVESTMENTS
------------- -----------
Fixed Rate Securities 71.1%
Adjustable Rate Securities 19.4
Interest Only Securities 9.5
-----
Total 100.0%
=====
(1) Most recent distribution paid or declared through 4/30/2009. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 4/30/2009. Subject to
change in the future.
(3) Total return based on NAV is the combination of reinvested distributions
and reinvested capital gain distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share and does not
reflect sales load. Past performance is not indicative of future results.
(4) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price. Past performance is not indicative of future results.
Page 2
PORTFOLIO COMMENTARY
SUB-ADVISOR
Fixed Income Discount Advisory Company ("FIDAC") is the sub-advisor to First
Trust/FIDAC Mortgage Income Fund (the "Fund"). FIDAC is the wholly-owned
registered investment advisor of Annaly Capital Management Inc. ("Annaly"), a
publicly-traded real estate investment trust that trades under the New York
Stock Exchange ("NYSE") symbol of NLY. The Fund trades under the ticker symbol
FMY on the NYSE. Formed in 1994, FIDAC has become one of the leading
fixed-income management companies in the world specializing in mortgage-backed
securities and interest rate sensitive strategies.
FIDAC manages numerous investment vehicles that are marketed globally through
distributor relationships. Overall, the principal business objective is to
generate net income for distribution to investors from the spread between
interest income on mortgage-backed securities and the costs of borrowing to
finance their acquisition. The portfolio management team described below manages
the Fund's portfolio.
PORTFOLIO MANAGEMENT TEAM
WELLINGTON J. DENAHAN-NORRIS
VICE CHAIRMAN, CHIEF INVESTMENT OFFICER AND CHIEF OPERATING OFFICER
Ms. Denahan-Norris was a founder of FIDAC and has served as its Chief Operating
Officer since January 2006. Ms. Denahan-Norris has served as FIDAC's Senior Vice
President since March 1995, Treasurer since July 1994 and Chief Investment
Officer since February 1997. From July 1994 through March 1995 she was a Vice
President of FIDAC. Prior to joining FIDAC, from March 1992 to July 1994, Ms.
Denahan-Norris had been Vice President responsible for asset selection and
financing at Citadel Funding Corporation. Prior to joining Citadel, she had been
a trader on the mortgage-backed securities desk at Schroder Wertheim and Co.
Inc. She attended the New York Institute of Finance for intense mortgage-backed
securities studies.
JAMES P. FORTESCUE
MANAGING DIRECTOR, HEAD OF LIABILITIES
Mr. Fortescue started with FIDAC in June of 1995 where he was in charge of
finding financing on mortgage-backed and corporate bonds for regional dealers,
as well as maintaining a pricing service for a major broker dealer. Mr.
Fortescue has been in charge of liability management for Annaly since its
inception, and continues to oversee all financing activities for FIDAC. Mr.
Fortescue has a Bachelor's Degree in Finance from Siena College.
KRISTOPHER KONRAD
MANAGING DIRECTOR, CO-HEAD OF PORTFOLIO MANAGEMENT
Mr. Konrad is a Portfolio Manager for Annaly and FIDAC and has served in this
capacity since December of 2000. He has been with FIDAC since 1997. Mr. Konrad
has a Bachelor's Degree in Business from Ithaca College and attended the New
York Institute of Finance for intense mortgage-backed securities studies.
ERIC SZABO, CFA, PRM
EXECUTIVE VICE PRESIDENT, INVESTMENT STRATEGIST
Mr. Szabo is an Executive Vice President and Investment Strategist for Annaly
and FIDAC. Prior to joining the companies in April 2004, he worked for
TimesSquare Capital Management as a Mortgage Analyst and Trader. Mr. Szabo has a
Bachelor's Degree from The College of New Jersey and a Master's Degree in
Finance from Boston College. Mr. Szabo is a certified Professional Risk Manager
as designated by PRMIA, the Professional Risk Managers' International
Association, and a CFA charterholder.
ROSE-MARIE LYGHT
MANAGING DIRECTOR, CO-HEAD OF PORTFOLIO MANAGEMENT
Mrs. Lyght is an Executive Vice President and Co-Head of Portfolio Management of
Annaly and FIDAC. She joined both companies in April 1999. Since that time she
has been involved in the asset selection and financing for FIDAC funds and high
net worth separate accounts. She has been a Portfolio Manager on FIDAC's
offshore funds since December 2000. Mrs. Lyght has a Bachelor's of Science
Degree in Finance and a Master's Degree in Business Administration from
Villanova University.
Page 3
PORTFOLIO COMMENTARY - (CONTINUED)
MOHIT MARRIA
SENIOR VICE PRESIDENT
Mr. Marria is a Senior Vice President and Portfolio Manager for Annaly and
FIDAC. Prior to joining the companies in August 2005, Mr. Marria has worked at
both AIG and MetLife, trading mortgage-backed securities for their General
Account portfolios. Mr. Marria has a Bachelor's Degree and a Master's Degree in
Business Administration from Rutgers University.
NANCY MURTHA
SENIOR VICE PRESIDENT
Ms. Murtha is a Senior Vice President and Portfolio Manager for Annaly and
FIDAC. She started with both companies in October of 2002. From 2000 to 2002,
she was a Senior Accountant at Deloitte & Touche LLP where she worked within the
Banking and Securities Group. Ms. Murtha has a Bachelor's Degree in Accounting
and Management Information Systems from Manhattan College.
COMMENTARY
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
The First Trust/FIDAC Mortgage Income Fund commenced trading on May 25, 2005.
The Fund's primary investment objective is to seek a high level of current
income, with a secondary objective of capital preservation. The Fund pursues its
objectives by investing primarily in mortgage-backed securities representing
part ownership in a pool of either residential or commercial mortgage loans
that, in the opinion of FIDAC, offer an attractive combination of credit
quality, yield and maturity. The Fund purchases securities issued by government
agencies or by private originators or issuers, generally in the form of
pass-through certificates, collateralized mortgage obligations, residential
mortgage-backed securities or commercial mortgage-backed securities. The Fund
may use leverage to an aggregate amount of up to 33 1/3% of the Fund's Managed
Assets(1), primarily through the use of reverse repurchase agreements.
MARKET RECAP
The economic rout intensified in the latter half of 2008 and the beginning of
2009, as bad data on housing, jobs and consumption slowed the U.S. economy to a
crawl. The Federal Reserve (the "Fed") and Treasury Department (the "Treasury")
continued to fight back on multiple fronts. Notably, the Treasury introduced the
Public-Private Investment Program ("PPIP"), designed to address "legacy assets"
on bank balance sheets, including both loans and securities. Further, the
Federal Open Market Committee outlined new tools, including an expansion of the
Term Asset-Backed Securities Loan Facility ("TALF") and a commitment to purchase
$1.25 trillion of Agency Mortgage-Backed Securities ("Agency MBS"), and issue
$200 billion of Agency debt and $300 billion in longer-term Treasury securities
"to help improve conditions in private credit markets." The PPIP, the expansion
of the Fed's balance sheet and the new and improved TALF should have a positive
effect on markets, although the ultimate extent of that effect is unknown. Thus
far the Fed has purchased over $400 billion of Agency MBS which has had a
substantial impact on primary mortgage rates and the secondary market for these
securities. Since the Fed first announced the program on November 25, 2008, the
Freddie Mac 30-year mortgage commitment rate has fallen from 6% to below 5%, and
the yield on the current coupon has fallen from over 5% to under 4%.
The announcement of more government programs also had a positive effect on the
equity markets later in the quarter ended April 30, 2009. The Dow Jones
Industrial Average, while down about 12.5% during the first quarter of 2009, was
up almost 8% during March of 2009. The market has continued to respond
positively, choosing to focus on "green shoots", meaning any sign of improvement
in the steep decline of economic activity in the United States. In an
environment like this, less bad is the new good. This is what passes for "good":
The Case-Shiller 20-city home price index fell 2.17% in February after a 2.80%
drop in January, and year-over-year the index fell 18.6% versus the 19% decline
in the prior month. It's not worse, but it's still bad. Existing single-family
home sales dropped another 2.8% in March to an annualized 4.10 million homes,
which means that sales are now in a relatively tight range of 4.05 to 4.25
million over the last five months. Economists have suggested that this may mean
a bottom is being established. Nevertheless, the unemployment rate continues its
upward trajectory, hitting 8.9% in the most recent reading. Although investors
cheered that initial jobless claims may have stopped their rise and settled into
a range, this new range is at peak levels not seen since 1982. Clearly, a
longer-term view of the economic data shows little to cheer about. We believe
our economy and our national balance sheet have been bulked up by the steroids
of credit and we are now witnessing what happens when we stop taking our
steroids. In our opinion, the recovery of the economy will be a painful process,
despite some of the positive indicators we are seeing.
----------
(1) The Fund's Managed Assets are the value of the securities and other
investments the Fund holds plus cash or other assets, including interest
accrued but not yet received minus accrued liabilities other than the
principal amount of borrowings.
Page 4
PORTFOLIO COMMENTARY - (CONTINUED)
FUND PERFORMANCE
For the six-month period ended April 30, 2009, the Fund had a total net asset
value ("NAV") return of -2.58% and a market value return of 6.02%, while the
Fund's benchmark, the Barclays Capital MBS Fixed Rate Index, had a return of
8.59%. As of April 30, 2009, the Fund traded at $15.93, a 5.23% discount to its
NAV.
For the six-month period ended April 30, 2009, the Fund paid $0.71 in dividends
and the Fund's NAV declined 6.77% to $16.81 from $18.03. The Fund's
underperformance relative to its benchmark for the period was primarily a result
of the declining values on the interest-only portion of the portfolio. The
prices and income earnings potential on these securities have come under extreme
pressure as mortgage rates have fallen, causing a re-pricing of prepayment
expectations within the mortgage market. Nevertheless, despite negative
mark-to-market, the Fund's income remained strong and outperformed its benchmark
on an income basis. Lower financing costs and higher yielding Non-Agency
Residential MBS helped the Fund return more income than would have been expected
from a non-levered portfolio holding only Agency fixed-rate mortgage-backed
securities, such as is represented by the Fund's benchmark.
MARKET AND FUND OUTLOOK
With the government intervention into the Agency mortgage market driving
mortgage rates to all-time lows, the prices and income potential of
interest-only securities has been adversely impacted. Thus, in order to help
maintain the Fund's income level, FIDAC has been actively trading some of the
Fund's prepayment risk for credit risk. The Fund does have the ability to buy
securities rated A or above and loss adjusted yields in this arena can be at
double-digit levels, even at the AAA rating level. FIDAC also feels these assets
could continue to benefit from the government programs such as PPIP and TALF as
spreads may tighten as more buyers come to the market.
Page 5
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a)
APRIL 30, 2009 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ------------------------------------------------- ------ -------- ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 65.3%
Federal National Mortgage Association (FNMA)
$ 6,824,661 Pool 256182 .................................. 6.00% 03/01/36 $ 7,084,851
9,457,682 Pool 256328 (b) .............................. 6.50% 07/01/36 9,985,514
6,811,905 Pool 831145 (b) .............................. 6.00% 12/01/35 7,141,453
6,763,084 Pool 843971 (b) .............................. 6.00% 11/01/35 7,090,270
5,083,709 Pool 872303 .................................. 6.00% 05/01/36 5,324,884
7,560,607 Pool 880203 .................................. 6.00% 02/01/36 7,873,310
------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(Cost $42,502,543) ............................................... 44,500,282
------------
U.S. GOVERNMENT AGENCY AND NON-AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS - 66.1%
Banc of America Funding Corp.
1,339,801 Series 2005-F, Class 4A1 (c) ................. 5.31% 09/20/35 859,521
Banc of America Mortgage Securities
118,393 Series 2002-L, Class 1A1 (c) ................. 5.26% 12/25/32 82,354
322,819 Series 2004-K, Class 4A1 (c) ................. 5.17% 12/25/34 232,452
4,040,373 Series 2007-3, Class 2A3 ..................... 7.00% 09/25/37 2,432,555
Chase Mortgage Finance Corp.
2,966,821 Series 2007-A3, Class 3A1 (c) ................ 5.97% 12/25/37 1,731,970
Countrywide Alternative Loan Trust
1,099,132 Series 2004-1T1, Class A1 .................... 5.00% 02/25/34 945,357
Countrywide Home Loans
243,228 Series 2005-20, Class A7 ..................... 5.25% 10/25/35 169,707
Countrywide Home Loans
2,990,852 Series 2005-J4, Class A4 ..................... 5.50% 11/25/35 2,326,537
Federal Home Loan Mortgage Corp.
5,529,670 Series 2676, Class IK, IO .................... 5.00% 02/15/20 267,850
252,134 Series 2716, Class CI, IO .................... 5.00% 05/15/19 6,781
2,881,507 Series 2737, Class IG, IO .................... 5.00% 08/15/27 120,400
11,423,492 Series 2807, Class SB, IO (d) ................ 7.00% 11/15/33 1,201,983
71,384 Series 2836, Class PI, IO .................... 5.00% 09/15/22 30
3,722,751 Series 2852, Class VI, IO .................... 5.00% 06/15/24 73,791
4,739,600 Series 2870, Class JI, IO .................... 5.00% 10/15/27 229,494
792,000 Series 2888, Class OI, IO .................... 5.00% 01/15/27 48,144
1,774,808 Series 2921, Class IQ, IO .................... 5.00% 01/15/29 137,443
1,179,009 Series 2938, Class PI, IO .................... 5.00% 11/15/28 74,324
847,494 Series 2943, Class JI, IO .................... 5.00% 01/15/24 11,338
785,660 Series 2961, Class IP, IO .................... 5.50% 07/15/28 22,988
4,363,688 Series 2964, Class IA, IO .................... 5.50% 02/15/26 74,981
2,479,878 Series 3000, Class SU ........................ 21.58% 04/15/35 2,547,090
1,215,106 Series 3069, Class LI, IO .................... 5.50% 08/15/32 102,358
930,765 Series 3107, Class ST ........................ 42.41% 02/15/31 988,625
427,980 Series 3171, Class CS (d) .................... 36.59% 06/15/36 462,627
1,012,581 Series 3195, Class SX (d) .................... 43.22% 07/15/36 1,276,147
Federal Home Loan Mortgage Corp., STRIP
23,876,382 Series 227, Class IO, IO ..................... 5.00% 12/01/34 3,118,197
8,948,954 Series 232, Class IO, IO ..................... 5.00% 08/01/35 1,083,967
See Notes to Financial Statements
Page 6
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) -- (CONTINUED)
APRIL 30, 2009 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ------------------------------------------------- ------ -------- ------------
U.S. GOVERNMENT AGENCY AND NON-AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS -- (CONTINUED)
Federal National Mortgage Association
$ 3,501,492 Series 2005-122, Class SN (d) ................ 26.85% 01/25/36 $ 3,776,310
1,161,244 Series 2005-39, Class BI, IO ................. 5.00% 06/25/28 52,765
1,588,664 Series 2005-91, Class SH (d) ................. 22.23% 05/25/33 1,684,073
Federal National Mortgage Association, STRIP
9,099,429 Series 360, Class 2, IO ...................... 5.00% 08/01/35 1,108,506
First Horizon Mortgage Trust
3,009,000 Series 2005-8, Class 1A5 ..................... 5.75% 02/25/36 2,454,216
GSR Mortgage Loan Trust
5,581,124 Series 2007-1F, Class 3A10, IO ............... 6.00% 01/25/37 712,384
Harborview Mortgage Loan Trust
417,036 Series 2004-1, Class 2A ...................... 4.63% 04/19/34 316,942
Merrill Lynch Mortgage Investors Trust
2,305,024 Series 2005-A7, Class 2A1 .................... 5.38% 09/25/35 1,420,227
Residential Accredit Loans, Inc.
218,730 Series 2002-QS18, Class A1 ................... 5.50% 12/25/17 203,858
Sequoia Mortgage Trust
4,664,183 Series 2007-1, Class 2A1 (c) ................. 5.80% 02/20/47 2,839,867
Washington Mutual Msc Mortgage Pass-Through
1,548,877 Series 2004-RA1, Class 2A .................... 7.00% 03/25/34 1,225,445
Wells Fargo Mortgage Backed Securities Trust
1,057,029 Series 2005-AR16, Class 1A1 .................. 4.19% 10/25/35 825,302
5,698,735 Series 2006-9, Class 1A32 .................... 6.00% 08/25/36 3,587,843
1,148,435 Series 2006-AR10, Class 5A2 (c) .............. 5.59% 07/25/36 911,702
3,720,991 Series 2007-8, Class 2A7 ..................... 6.00% 07/25/37 3,241,589
------------
TOTAL U.S. GOVERNMENT AGENCY AND NON-AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS (Cost $50,835,078) ................................... 44,990,040
------------
ASSET-BACKED SECURITIES -- 0.0%
Countrywide Asset-Backed Certificates
1,304 Series 2006-12, Class 2A1 (c) ................ 0.51% 12/25/36 1,290
------------
TOTAL ASSET-BACKED SECURITIES
(Cost $1,301) .................................................... 1,290
------------
PREFERRED SECURITIES -- 0.1%
20,000 Fannie Mae, 8.25% (e) ............................................... 16,600
40,000 Freddie Mac, Series Z, 8.38% (e) .................................... 20,400
------------
TOTAL PREFERRED SECURITIES
(Cost $1,500,000) ................................................ 37,000
------------
TOTAL INVESTMENTS -- 131.5%
(Cost $94,838,922) (f) ........................................... 89,528,612
------------
See Notes to Financial Statements
Page 7
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) -- (CONTINUED)
APRIL 30, 2009 (UNAUDITED)
PRINCIPAL
VALUE DESCRIPTION VALUE
------------- --------------------------------------------------------------------- ------------
REVERSE REPURCHASE AGREEMENT -- (29.2)%
$ (19,859,000) With UBS Securities 0.30% dated 4/30/09, to be repurchased at
$19,859,165 on 5/01/09 ........................................... $(19,859,000)
NET OTHER ASSETS AND LIABILITIES -- (2.3)% .......................... (1,590,026)
------------
NET ASSETS -- 100.0% ................................................ $ 68,079,586
============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) This security or a portion of this security is segregated as collateral
for the reverse repurchase agreement.
(c) Floating rate security. The interest rate shown reflects the rate in
effect at April 30, 2009.
(d) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at April 30, 2009.
(e) The U.S. Government took control over this company in September 2008, and
it has since suspended its dividend.
(f) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2009, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $3,766,529 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $9,076,839.
IO Interest Only - represents the interest only portion of a mortgage-backed
security, which allows the holder to receive interest only payments on the
amount of notional principal outstanding.
STRIP Separate Trading of Registered Interest and Principal of Securities -
Stripped Mortgage-Backed Securities are created by separating the interest
payments from the principal payments of underlying mortgage securities to
create new interest only (IO) and principal only (PO) zero coupon
securities.
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2009 is as follows: (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
VALUATION INPUTS INVESTMENTS OTHER FINANCIAL INSTRUMENTS *
------------------------------------------------------- ----------- -----------------------------
Level 1 -- Quoted Prices $ 37,000 $(19,859,000)
Level 2 -- Other Significant Observable Inputs 89,491,612 --
Level 3 -- Significant Unobservable Inputs -- --
----------- ------------
TOTAL $89,528,612 $(19,859,000)
=========== ============
* The other financial instrument is a reverse repurchase agreement referenced
in the Portfolio of Investments.
See Notes to Financial Statements
Page 8
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2009 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $94,838,922) .............................................................................. $ 89,528,612
Cash ............................................................................................... 286,810
Prepaid expenses ................................................................................... 26,550
Interest receivable ................................................................................ 839,306
Dividends receivable ............................................................................... 15
------------
Total Assets .................................................................................... 90,681,293
------------
LIABILITIES:
Reverse repurchase agreements ...................................................................... 19,859,000
Payables:
Investment securities purchased ................................................................. 2,453,777
Interest on reverse repurchase agreements ....................................................... 153,037
Investment advisory fees ........................................................................ 68,519
Audit and tax fees .............................................................................. 31,315
Legal fees ...................................................................................... 11,430
Administrative fees ............................................................................. 8,333
Printing fees ................................................................................... 7,621
Trustees' fees and expenses ..................................................................... 3,541
Transfer agent fees ............................................................................. 2,778
Custodian fees .................................................................................. 1,574
Accrued expenses ................................................................................... 782
------------
Total Liabilities ............................................................................... 22,601,707
------------
NET ASSETS ......................................................................................... $ 68,079,586
============
NET ASSETS CONSIST OF:
Paid-in capital .................................................................................... $ 77,028,486
Par value .......................................................................................... 40,490
Accumulated net realized gain (loss) on investments ................................................ (5,852,613)
Accumulated net investment income (loss) ........................................................... 2,173,533
Net unrealized appreciation (depreciation) on investments .......................................... (5,310,310)
------------
NET ASSETS ......................................................................................... $ 68,079,586
============
NET ASSET VALUE, per Common Share outstanding (par value $0.01 per Common Share) ................... $ 16.81
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) ........ 4,048,993
============
See Notes to Financial Statements
Page 9
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2009 (UNAUDITED)
INVESTMENT INCOME:
Interest ............................................................... $ 4,099,233
Dividends .............................................................. 866
-----------
Total investment income ............................................. 4,100,099
-----------
EXPENSES:
Investment advisory fees ............................................... 422,394
Excise tax expense ..................................................... 105,778
Administrative fees .................................................... 49,999
Interest expense on reverse repurchase agreements ...................... 28,923
Legal fees ............................................................. 26,978
Audit and tax fees ..................................................... 25,127
Trustees' fees and expenses ............................................ 20,120
Printing fees .......................................................... 16,445
Transfer agent fees .................................................... 13,327
Custodian fees ......................................................... 5,094
Other .................................................................. 18,007
-----------
Total expenses ...................................................... 732,192
-----------
NET INVESTMENT INCOME .................................................. 3,367,907
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments ................................ (2,036,292)
Net change in unrealized appreciation (depreciation) on investments .... (3,395,199)
-----------
Net realized and unrealized gain (loss) on investments ................. (5,431,491)
-----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ........ $(2,063,584)
===========
See Notes to Financial Statements
Page 10
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2009 ENDED
(UNAUDITED) 10/31/2008
------------ -----------
OPERATIONS:
Net investment income (loss) ................................................ $ 3,367,907 $ 6,006,542
Net realized gain (loss) .................................................... (2,036,292) --
Net change in unrealized appreciation (depreciation) ........................ (3,395,199) (4,027,883)
------------ -----------
Net increase (decrease) in net assets resulting from operations ............. (2,063,584) 1,978,659
------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ....................................................... (2,873,358) (4,510,438)
------------ -----------
Total distributions to shareholders ......................................... (2,873,358) (4,510,438)
------------ -----------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested ...................................... 60,901 --
------------ -----------
Total capital transactions .................................................. 60,901 --
------------ -----------
Net increase (decrease) in net assets ....................................... (4,876,041) (2,531,779)
NET ASSETS:
Beginning of period ......................................................... 72,955,627 75,487,406
------------ -----------
End of period ............................................................... $ 68,079,586 $72,955,627
============ ===========
Accumulated net investment income (loss) at end of period ................... $ 2,173,533 $ 1,678,984
============ ===========
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period ........................................ 4,045,236 4,045,236
Common Shares issued as reinvestment under the Dividend Reinvestment Plan ... 3,757 --
------------ -----------
Common Shares at end of period .............................................. 4,048,993 4,045,236
============ ===========
See Notes to Financial Statements
Page 11
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2009 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations ........ $ (2,063,584)
Adjustments to reconcile net increase (decrease) in assets resulting
from operations to net cash provided by operating activities:
Purchases of investments ............................................ (26,583,914)
Sales and paydowns of investments ................................... 21,576,769
Net amortization/accretion of premium/discount of investments ....... 2,079,038
Realized gain/loss on investments ................................... 2,036,292
Net change in unrealized appreciation/depreciation on investments ... 3,395,199
CHANGES IN ASSETS AND LIABILITIES:
Increase in interest receivable ..................................... (9,811)
Decrease in dividends receivable .................................... 164
Increase in prepaid expenses. ....................................... (18,220)
Increase in payable for investment securities purchased ............. 2,453,777
Decrease in interest expense on reverse repurchase agreements ....... (68,319)
Decrease in investment advisory fees payable. ....................... (10,790)
Decrease in audit and tax fees payable. ............................. (24,123)
Increase in legal fees payable ...................................... 3,702
Decrease in printing fees payable ................................... (8,743)
Decrease in administrative fees payable. ............................ (5)
Decrease in custodian fees payable .................................. (476)
Decrease in transfer agent fees payable ............................. (2,618)
Increase in Trustees' fees and expenses payable ..................... 615
Decrease in accrued expenses and other liabilities .................. (12,050)
---------------
CASH PROVIDED BY OPERATING ACTIVITIES .................................. $ 2,742,903
CASH FLOWS USED BY FINANCING ACTIVITIES:
Proceeds from Common Shares reinvested .............................. 60,901
Distributions to Common Shareholders from net investment income ..... (2,873,358)
Maturities of reverse repurchase agreements ......................... (2,194,181,000)
Sales of reverse repurchase agreements .............................. 2,193,325,000
---------------
CASH USED BY FINANCING ACTIVITIES ...................................... (3,668,457)
-----------
Decrease in cash ....................................................... (925,554)
Cash at beginning of period ............................................ 1,212,364
-----------
Cash at end of period .................................................. $ 286,810
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ............................... $ 97,242
===========
See Notes to Financial Statements
Page 12
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR PERIOD
4/30/2009 ENDED ENDED ENDED ENDED
(UNAUDITED) 10/31/2008 10/31/2007 10/31/2006 10/31/2005(a)
----------- ---------- ---------- ---------- -------------
Net asset value, beginning of period ........... $ 18.03 $ 18.66 $ 18.41 $ 19.02 $ 19.10(b)
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 0.83 1.49 1.04 1.03 0.36
Net realized and unrealized gain (loss) ........ (1.34) (1.00) 0.23 (0.58) (0.09)
------- ------- ------- ------- -------
Total from investment operations ............... (0.51) 0.49 1.27 0.45 0.27
------- ------- ------- ------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (0.71) (1.12) (1.02) (1.06) (0.31)
------- ------- ------- ------- -------
Total from distributions ....................... (0.71) (1.12) (1.02) (1.06) (0.31)
------- ------- ------- ------- -------
Common Shares offering costs charged to
paid-in capital ............................. -- -- -- -- (0.04)
------- ------- ------- ------- -------
Net asset value, end of period ................. $ 16.81 $ 18.03 $ 18.66 $ 18.41 $ 19.02
======= ======= ======= ======= =======
Market value, end of period .................... $ 15.93 $ 15.71 $ 16.32 $ 16.58 $ 16.40
======= ======= ======= ======= =======
TOTAL RETURN BASED ON NET ASSET VALUE (c)(d) .. (2.58)% 3.38% 7.80% 3.30% 1.37%
======= ======= ======= ======= =======
TOTAL RETURN BASED ON MARKET VALUE (d)(e) ...... 6.02% 2.94% 4.69% 7.89% (16.53)%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $68,080 $72,956 $75,487 $74,458 $76,925
Ratio of total expenses to average net assets .. 2.20%(f) 2.69% 3.24% 3.10% 2.48%(f)
Ratio of net expenses to average net assets .... 2.20%(f) 2.69% 3.24% 3.06% 2.28%(f)
Ratio of net expenses to average net assets
excluding interest expense .................. 2.11%(f) 1.83% 1.71% 1.69% 1.62%(f)
Ratio of net investment income to average
net assets .................................. 10.12%(f) 7.93% 5.70% 5.55% 4.30%(f)
Portfolio turnover rate ........................ 26% 10% 22% 76% 14%
----------
(a) Initial seed date of May 17, 2005. The Fund commenced operations on May 25,
2005.
(b) Net of sales load of $0.90 per share on initial shares issued.
(c) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in net
asset value per share and does not reflect sales load.
(d) Total return is not annualized for periods less than one year.
(e) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price.
(f) Annualized.
See Notes to Financial Statements
Page 13
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2009 (UNAUDITED)
1. FUND DESCRIPTION
First Trust/FIDAC Mortgage Income Fund (the "Fund") is a diversified, closed-end
management investment company organized as a Massachusetts business trust on
February 22, 2005, and is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "1940 Act").
The Fund trades under the ticker symbol FMY on the New York Stock Exchange
("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund seeks to preserve capital. The Fund
pursues these objectives by investing in mortgage-backed securities that, in the
opinion of Fixed Income Discount Advisory Company ("FIDAC" or the
"Sub-Advisor"), offer an attractive combination of credit quality, yield and
maturity. There can be no assurance that the Fund's investment objectives will
be achieved. The Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. Domestic debt securities
and foreign securities are priced using data reflecting the earlier closing of
the principal markets for those securities. The NAV per Common Share is
calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. Securities for which
market quotations are readily available are valued at market value, which is
currently determined using the last reported sale price on the business day as
of which such value is being determined or, if no sales are reported on such day
(as in the case of some securities traded over-the-counter), the last reported
bid price, except that certain U.S. Government securities are valued at the mean
between the last reported bid and asked prices. The Fund values mortgage-backed
securities ("MBS") and other debt securities not traded in an organized market
on the basis of valuations provided by dealers who make markets in such
securities or by an independent pricing service approved by the Fund's Board of
Trustees which uses information with respect to transactions in such securities,
quotations from dealers, market transactions for comparable securities, various
relationships between securities and yield to maturity in determining value.
Debt securities having a remaining maturity of less than sixty days when
purchased are valued at cost adjusted for amortization of premiums and accretion
of discounts.
In the event that market quotations are not readily available, the pricing
service does not provide a valuation for a particular asset, or the valuations
are deemed unreliable, the Fund's Board of Trustees has designated First Trust
Advisors L.P. ("First Trust") to use a fair value method to value the Fund's
securities and other investments. Additionally, if events occur after the close
of the principal market for particular securities (e.g., domestic debt and
foreign securities), but before the Fund values its assets, that could
materially affect NAV, First Trust may use a fair value method to value the
Fund's securities and other investments. The use of fair value pricing by the
Fund is governed by valuation procedures adopted by the Fund's Board of
Trustees, and in accordance with the provisions of the 1940 Act.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
("FAS 157"), effective for fiscal years beginning after November 15, 2007. This
standard clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value and requires additional
disclosures about the use of fair value measurements. FAS 157 became effective
for the Fund as of November 1, 2008, the beginning of its current fiscal year.
The three levels of the fair value hierarchy under FAS 157 are described below:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speeds, credit
risk, etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
Page 14
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2009 (UNAUDITED)
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's investments as of April 30, 2009 is
included within the Fund's Portfolio of Investments.
In April 2009, FASB issued FASB Staff Position No. 157-4, "Determining Fair
Value when the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP
157-4"). FSP 157-4 is effective for fiscal years and interim periods ending
after June 15, 2009. FSP 157-4 provides additional guidance for estimating fair
value in accordance with FAS 157, when the volume and level of activity for the
asset or liability have significantly decreased. FSP 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. Management is currently evaluating the impact the implementation of FSP
157-4 will have on the Fund's financial statement disclosures, if any.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis. Amortization of premiums and the accretion of discounts
are recorded using the effective interest method.
The Fund invests in certain lower credit quality securitized assets that have
contractual cash flows (for example, asset-backed securities, collateralized
mortgage obligations and commercial mortgage-backed securities). For these
securities, if there is a change in the estimated cash flows, based on an
evaluation of current information, then the estimated yield is adjusted on a
prospective basis over the remaining life of the security. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain. Debt obligations may be placed on non-accrual status and related
interest income may be reduced by ceasing current accruals and writing off
interest receivables when the collection of all or a portion of interest has
become doubtful based on consistently applied procedures. A debt obligation is
removed from non-accrual status when the issuer resumes interest payments or
when collectibility of interest is reasonably assured.
C. REVERSE REPURCHASE AGREEMENTS:
The Fund utilizes leverage through the use of reverse repurchase agreements. A
reverse repurchase agreement, although structured as a sale and repurchase
obligation, acts as a financing under which the Fund pledges its assets as
collateral to secure a short-term loan. Generally, the other party to the
agreement makes the loan in an amount equal to a percentage of the market value
of the pledged collateral. At the maturity of the reverse repurchase agreement,
the Fund will be required to repay the loan and will correspondingly receive
back its collateral. While used as collateral, the assets continue to pay
principal and interest which are for the benefit of the Fund.
Information for the six months ended April 30, 2009:
Maximum amount outstanding on any day during the period .......... $24,719,000
Average amount outstanding during the period* .................... $18,111,271
Average monthly shares outstanding during the period ............. 4,047,415
Average debt per share outstanding during the period ............. $ 4.47
* The average amount outstanding during the year was calculated by adding the
borrowings at the end of each day and dividing the sum by the number of
days in the six months ended April 30, 2009.
During the six months ended April 30, 2009, interest rates ranged from 0.10% to
0.70%, with a weighted average interest rate of 0.32%, on borrowings by the Fund
under reverse repurchase agreements, which had interest expense that aggregated
$28,923.
D. INVERSE FLOATING-RATE INSTRUMENTS:
An inverse floating-rate security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specific factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. The price of these securities may be more
volatile than the price of a comparable fixed-rate security. These instruments
are typically used to enhance the yield of the portfolio. These investments are
identified on the Portfolio of Investments.
Page 15
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2009 (UNAUDITED)
E. STRIPPED MORTGAGE-BACKED SECURITIES:
Stripped Mortgage-Backed Securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage securities may be partially stripped so
that each investor class receives some interest and some principal. When
securities are completely stripped, however, all of the interest is distributed
to holders of one type of security, known as an interest-only or IO security,
and all of the principal is distributed to holders of another type of security
known as a principal-only or PO security. These investments are identified on
the Portfolio of Investments.
F. INTEREST ONLY SECURITIES:
An interest only security is the interest only portion of an MBS that receives
some or all of the interest portion of the underlying MBS and little or no
principal. A reference principal value called a notional value is used to
calculate the amount of interest due to the IO security. IOs are sold at a deep
discount to their notional principal amount. Generally speaking, when interest
rates are falling and prepayment rates are increasing, the value of an IO
security will fall. Conversely, when interest rates are rising and prepayment
rates are decreasing, generally the value of an IO security will rise. These
investments are identified on the Portfolio of Investments.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage. Distributions will automatically be reinvested into
additional Common Shares pursuant to the Fund's Dividend Reinvestment Plan
unless cash distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund.
The tax character of distributions paid during the fiscal year ended October 31,
2008 was as follows:
2008
-----------
Distributions paid from:
Ordinary Income .................................................. $ 4,510,438
As of October 31, 2008, the components of distributable earnings on a tax basis
are as follows:
Undistributed Ordinary Income .................................... $ 2,850,709
Net Unrealized Appreciation (Depreciation) ....................... $(3,086,836)
H. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes.
In June 2006, FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes." FIN 48 establishes a minimum threshold for
recognizing, and a system for measuring, the benefits of a tax position taken or
expected to be taken in a tax return, and is effective for the Fund's current
fiscal year. As of April 30, 2009, management has evaluated the application of
FIN 48 to the Fund, and has determined that no provision for income tax is
required in the Fund's financial statements.
As of October 31, 2008, the Fund had a capital loss carryforward for federal
income tax purposes of $3,816,321 expiring on October 31, 2014. During the
fiscal year ended October 31, 2008, the Fund utilized $124,631 of its capital
loss carryforward.
I. EXPENSES:
The Fund pays all expenses directly related to its operations.
Page 16
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2009 (UNAUDITED)
J. ACCOUNTING PRONOUNCEMENT:
In March 2008, FASB released Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS
161"). FAS 161 requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about credit
risk-related contingent features in derivative agreements. The application of
FAS 161 is required for fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. Management is currently evaluating
the impact the adoption of FAS 161 will have on the Fund's financial statement
disclosures, if any.
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets (the value of
the securities and other investments the Fund holds plus cash or other assets,
including interest accrued but not yet received minus accrued liabilities other
than the principal amount of borrowings).
FIDAC serves as the Fund's Sub-Advisor and manages the Fund's portfolio subject
to First Trust's supervision. The Sub-Advisor receives a portfolio management
fee of 0.50% of Managed Assets that is paid monthly by First Trust from its
investment advisory fee.
PNC Global Investment Servicing (U.S.) Inc., an indirect, majority-owned
subsidiary of The PNC Financial Services Group, Inc., serves as the Fund's
Administrator and Transfer Agent in accordance with certain fee arrangements.
PFPC Trust Company, which will be renamed PNC Trust Company effective June 7,
2010, also an indirect, majority-owned subsidiary of The PNC Financial Services
Group, Inc., serves as the Fund's Custodian in accordance with certain fee
arrangements.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustee") is paid an annual retainer of
$10,000 per trust for the first 14 trusts of the First Trust Fund Complex and an
annual retainer of $7,500 per trust for each subsequent trust in the First Trust
Fund Complex. The annual retainer is allocated equally among each of the trusts.
No additional meeting fees are paid in connection with board or committee
meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually, the
Chairman of the Audit Committee is paid $5,000 annually, and each of the
chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $2,500 annually to serve in such capacities, with such compensation paid
by the trusts in the First Trust Fund Complex and divided among those trusts.
Trustees are also reimbursed by the trusts in the First Trust Fund Complex for
travel and out-of-pocket expenses in connection with all meetings. The Lead
Independent Trustee and each Committee chairman will serve two-year terms ending
December 31, 2009 before rotating to serve as chairman of another committee or
as Lead Independent Trustee. The officers and "Interested" Trustee receive no
compensation for serving in such capacities.
4. PURCHASES AND SALES OF SECURITIES
The cost of purchases of U.S. Government securities and non-U.S. Government
securities, excluding short-term investments, for the six months ended April 30,
2009 aggregated $159,528 and $26,424,386, respectively. The proceeds from sales
and paydowns of U.S. Government securities and non-U.S. Government securities,
excluding short-term investments, for the six months ended April 30, 2009
aggregated $5,324,917 and $16,606,488, respectively.
5. COMMON SHARES
As of April 30, 2009, 4,048,993 of $0.01 par value Common Shares were issued. An
unlimited number of Common Shares has been authorized pursuant to the Fund's
Dividend Reinvestment Plan.
6. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2009 (UNAUDITED)
any point in time may be worth less than the original investment, even after
taking into account the reinvestment of Fund dividends and distributions.
Security prices can fluctuate for several reasons including the general
condition of the securities market, or when political or economic events
affecting the issuers occur including the risk that borrowers do not pay their
mortgages. When the Advisor or Sub-Advisor determines that it is temporarily
unable to follow the Fund's investment strategy or that it is impractical to do
so (such as when a market disruption event has occurred and trading in the
securities is extremely limited or absent), the Fund may take temporary
defensive positions.
In 2008, and continuing into 2009, securities markets have been significantly
negatively affected by the financial crisis that initially resulted from the
downturn in the subprime mortgage market in the United States. The potential
impact of the financial crisis on securities markets may prove to be significant
and long-lasting and may have a substantial impact on the value of the Fund.
SUBORDINATED DEBT RISK: The Fund may invest a portion of its Managed Assets in
subordinated classes of MBS, including debt obligations issued by private
originators or issuers backed by residential mortgage loans and multi-class debt
or pass-through or pay-through securities backed by a mortgage loan or pool of
mortgage loans on commercial real estate. Such subordinated classes are subject
to a greater degree of non-payment risk than are senior classes of the same
issuer or agency.
PREPAYMENT RISK: If borrowers prepay their mortgage loans at rates that are
faster than expected, this results in prepayments that are faster than expected
on MBS. These faster than expected prepayments may adversely affect the Fund's
profitability, particularly if the Fund is forced to invest prepayments it
receives in lower yielding securities.
Moreover, the Fund may also acquire MBS that are less affected by prepayments.
While the Fund will seek to minimize prepayment risk to the extent practical,
the Fund must balance prepayment risk against other risks and the potential
returns of each investment in selecting investments. No strategy can completely
insulate the Fund from prepayment risk.
INTEREST RATE RISK: The Fund may also invest in MBS which are interest-only
("IO") securities and principal-only ("PO") securities. Generally speaking, when
interest rates are falling and prepayment rates are increasing, the value of a
PO security will rise and the value of an IO security will fall. Conversely,
when interest rates are rising and prepayment rates are decreasing, generally
the value of a PO security will fall and the value of an IO security will rise.
LEVERAGE RISK: The Fund may borrow an amount up to 33-1/3% (or such other
percentage as permitted by law) of its assets (including the amount borrowed)
less liabilities other than borrowings. The Fund may use leverage for investment
purposes and to meet cash requirements. Its leveraged capital structure creates
special risks not associated with unleveraged funds having similar investment
objectives and policies. These include the possibility of higher volatility of
the NAV of the Fund. The Fund leverages its assets through the use of reverse
repurchase agreements. Reverse repurchase agreements are subject to the risks
that the market value of the securities sold by the Fund may decline below the
price of the securities the Fund is obligated to repurchase, and that the
securities may not be returned to the Fund. The Fund may from time to time
consider changing the amount of the leverage in response to actual or
anticipated changes in interest rates or the value of the Fund's investment
portfolio. There can be no assurance that the leverage strategies will be
successful.
7. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
On April 20, 2009, the Fund declared a dividend of $0.110 per share to Common
Shareholders of record May 5, 2009, payable May 15, 2009.
On May 20, 2009, the Fund declared a dividend of $0.110 per share to Common
Shareholders of record June 3, 2009, payable June 15, 2009.
Page 18
ADDITIONAL INFORMATION
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2009 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by PNC
Global Investment Servicing (U.S.) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price equal
to the greater of (i) NAV per Common Share on that date or (ii) 95% of
the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and will
purchase Common Shares in the open market, on the NYSE or elsewhere,
for the participants' accounts. It is possible that the market price
for the Common Shares may increase before the Plan Agent has completed
its purchases. Therefore, the average purchase price per share paid by
the Plan Agent may exceed the market price at the time of valuation,
resulting in the purchase of fewer shares than if the dividend or
distribution had been paid in Common Shares issued by the Fund. The
Plan Agent will use all dividends and distributions received in cash
to purchase Common Shares in the open market within 30 days of the
valuation date except where temporary curtailment or suspension of
purchases is necessary to comply with federal securities laws.
Interest will not be paid on any uninvested cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 331-1710 in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized, although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing PNC Global Investment
Servicing (U.S.) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
Page 19
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2009 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of Macquarie/First Trust Global
Infrastructure/Utilities Dividend & Income Fund, Energy Income and Growth Fund,
First Trust Enhanced Equity Income Fund, First Trust/Aberdeen Global Opportunity
Income Fund, First Trust/FIDAC Mortgage Income Fund, First Trust Strategic High
Income Fund, First Trust Strategic High Income Fund II, First Trust
Tax-Advantaged Preferred Income Fund, First Trust Specialty Finance and
Financial Opportunities Fund and First Trust Active Dividend Income Fund, was
held on April 16, 2009. At the Annual Meeting, Independent Trustees Richard E.
Erickson and Thomas R. Kadlec were elected by the Common Shareholders of the
First Trust/FIDAC Mortgage Income Fund as Class II Trustees for three-year terms
expiring at the Fund's annual meeting of shareholders in 2012. The number of
votes cast in favor of both Dr. Erickson and Mr. Kadlec was 3,526,422, the
number of votes against was 44,491 and the number of abstentions was 478,080.
James A. Bowen, Robert F. Keith and Niel B. Nielson are the current and
continuing Trustees.
INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL AND CONTINUATION OF INVESTMENT
MANAGEMENT AND SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust/FIDAC Mortgage Income Fund (the "Fund"),
including the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Advisory Agreement") between the Fund and
First Trust Advisors L.P. (the "Advisor") and the Investment Sub-Advisory
Agreement (the "Sub-Advisory Agreement" and together with the Advisory
Agreement, the "Agreements") among the Fund, the Advisor and Fixed Income
Discount Advisory Company (the "Sub-Advisor"), at a meeting held on March 1-2,
2009. The Board determined that the terms of the Agreements are fair and
reasonable and that the Agreements continue to be in the best interests of the
Fund.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services provided by the Advisor and the Sub-Advisor
(including the relevant personnel responsible for these services and their
experience); the advisory and sub-advisory fees for the Fund as compared to fees
charged to other clients of the Advisor and the Sub-Advisor and as compared to
fees charged by investment advisors and sub-advisors to comparable funds;
expenses of the Fund as compared to expense ratios of comparable funds; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall-out benefits to the Advisor and the Sub-Advisor; and
information on the Advisor's and the Sub-Advisor's compliance programs. The
Independent Trustees also met separately with their independent legal counsel to
discuss the information provided by the Advisor and the Sub-Advisor. The Board
applied its business judgment to determine whether the arrangements between the
Fund and the Advisor and among the Fund, the Advisor and the Sub-Advisor are
reasonable business arrangements from the Fund's perspective as well as from the
perspective of shareholders.
In reviewing the Agreements, the Board considered the nature, quality and extent
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund, including
the oversight of the Sub-Advisor. The Board noted the compliance program that
had been developed by the Advisor and considered that the compliance program
includes policies and procedures for monitoring the Sub-Advisor's compliance
with the 1940 Act and the Fund's investment objectives and policies. The Board
also noted the enhancements made by the Advisor to the compliance program in
2008. With respect to the Sub-Advisory Agreement, the Board received a
presentation from representatives of the Sub-Advisor discussing the services
that the Sub-Advisor provides to the Fund and how the Sub-Advisor manages the
Fund's investments. In light of the information presented and the considerations
made, the Board concluded that the nature, quality and extent of services
provided to the Fund by the Advisor and the Sub-Advisor under the Agreements
have been and are expected to remain satisfactory and that the Sub-Advisor,
under the oversight of the Advisor, has managed the Fund consistent with its
investment objectives and policies.
Page 20
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2009 (UNAUDITED)
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees paid to the Advisor by
similar funds, and noted that the Advisor does not provide advisory services to
other clients with investment objectives and policies similar to the Fund's. The
Board also considered information provided by the Sub-Advisor as to the fees it
charges to other clients, noting that the Sub-Advisor does not provide advisory
services to any other clients with investment objectives and policies similar to
the Fund's. In addition, the Board received data prepared by Lipper Inc.
("Lipper"), an independent source, showing the management fees and expense
ratios of the Fund as compared to the management fees and expense ratios of a
combined peer group selected by Lipper and the Advisor. The Board discussed with
representatives of the Advisor the limitations in creating a relevant peer group
for the Fund, including that (i) the peer funds may use different types of
leverage which have different costs associated with them; (ii) most peer funds
do not employ an advisor/sub-advisor management structure; (iii) the peer funds
may not have the same fiscal year as the Fund, which may cause the expense data
used by Lipper to be measured over different time periods; (iv) many of the peer
funds are larger than the Fund; and (v) many of the peer funds have an inception
date prior to the Fund's inception date and their fee and expense structures may
not reflect newer pricing practices in the market. The Board reviewed the Lipper
materials, but based on its discussions with the Advisor, the Board determined
that the Lipper data was of limited value for purposes of its consideration of
the renewal of the Agreements.
The Board also considered performance information for the Fund, noting that,
similar to almost all other funds, the Fund's performance was impacted by the
severe market downturn in 2008. The Board noted that the performance information
included the Fund's quarterly performance report, which is part of the process
that the Board has established for monitoring the Fund's performance on an
ongoing basis. The Board determined that this process continues to be effective
for reviewing the Fund's performance. In addition to the Board's ongoing review
of performance, the Board also received data prepared by Lipper comparing the
Fund's performance to the combined peer group selected by Lipper and the
Advisor, as well as to a larger group and to a benchmark. The Board reviewed the
Lipper materials, but for similar reasons to those described above, the Board
determined that the performance data provided by Lipper was of limited value.
The Board considered an analysis prepared by the Advisor on the continued
benefits provided by the Fund's use of reverse repurchase agreements for
leverage. In addition, the Board considered the market price and net asset value
performance of the Fund since inception, and compared the Fund's
premium/discount to the average and median premium/discount of the combined peer
group, noting that the Fund's premium/discount was generally indicative of the
asset class and market events. Based on the information provided and the Board's
ongoing review of the Fund's performance, and taking into account the historic
market events of 2008, the Board concluded that the Fund's performance was
reasonable.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, quality and extent
of services provided by the Advisor and Sub-Advisor under the Agreements.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and had noted that the advisory fee is not structured to pass the
benefits of any economies of scale on to the shareholders as the Fund's assets
grow. The Board concluded that the management fee reflects an appropriate level
of sharing of any economies of scale. The Board also considered the costs of the
services provided and profits realized by the Advisor from serving as investment
manager to closed-end funds for the twelve months ended December 31, 2008, as
set forth in the materials provided to the Board. The Board noted the inherent
limitations in the profitability analysis, and concluded that the Advisor's
profitability appeared to be not excessive in light of the services provided to
the Fund. In addition, the Board considered and discussed any ancillary benefits
derived by the Advisor from its relationship with the Fund and noted that the
typical fall-out benefits to the Advisor such as soft dollars are not present.
The Board concluded that any other fall-out benefits received by the Advisor or
its affiliates would appear to be limited.
The Board considered the Sub-Advisor's representation that its business is
scalable and that it believes the sub-advisory fee is appropriate. The Board
noted that the Sub-Advisor did not provide data as to the profitability of the
Sub-Advisory Agreement; however, the Board considered that the sub-advisory fee
rate was negotiated at arm's length between the Advisor and the Sub-Advisor, an
unaffiliated third party. The Board concluded that its consideration of the
Advisor's profitability was more relevant. The Board noted that the Sub-Advisor
does not maintain any soft-dollar arrangements and that the Sub-Advisor
indicated that it does not receive any material fall-out benefits from its
relationship to the Fund.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, determined that the terms of the
Agreements continue to be fair and reasonable and that the continuation of the
Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 21
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(FIRST TRUST LOGO)
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Fixed Income Discount Advisory Company
1211 Avenue of the Americas, Suite 2902
New York, NY 10036
ADMINISTRATOR, FUND ACCOUNTANT & TRANSFER AGENT
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
There has been no change, as of the date of this filing, in any of the portfolio
managers identified in response to paragraph (a)(1) of this Item in the
Registrant's most recently filed annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the "1940
Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days
of the filing date of the report that includes the disclosure required
by this paragraph, based on their evaluation of these controls and
procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d)) that occurred during the registrant's second fiscal
quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) FIRST TRUST/FIDAC MORTGAGE INCOME FUND
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date 6/18/09
----------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date 6/18/09
----------------------------------------------------------------------------
By (Signature and Title)* /S/ MARK R. BRADLEY
-------------------------------------------------------
Mark R. Bradley, Treasurer, Controller,
Chief Financial Officer and Chief Accounting Officer
(principal financial officer)
Date 6/18/09
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.