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, 2010
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. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
(FIRST TRUST LOGO) (FIDAC LOGO) FIDAC
Fixed Income Discount Advisory Company
FIRST TRUST/FIDAC
MORTGAGE INCOME FUND
(GRAPHIC)
SEMI-ANNUAL
REPORT
FOR THE SIX MONTHS ENDED
APRIL 30, 2010
TABLE OF CONTENTS
FIRST TRUST/FIDAC MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2010
Shareholder Letter ....................................................... 1
At a Glance .............................................................. 2
Portfolio Commentary ..................................................... 3
Portfolio of Investments ................................................. 6
Statement of Assets and Liabilities ...................................... 10
Statement of Operations .................................................. 11
Statements of Changes in Net Assets ...................................... 12
Statement of Cash Flows .................................................. 13
Financial Highlights ..................................................... 14
Notes to Financial Statements ............................................ 15
Additional Information ................................................... 21
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 Sub-Advisor 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 objectives. 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 regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST/FIDAC MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2010
Dear Shareholders:
I am pleased to present you with the semi-annual report for your investment in
First Trust/FIDAC Mortgage Income Fund (the "Fund").
First Trust Advisors L.P. ("First Trust") has always believed that staying
invested in quality products and having a long-term horizon can help investors
reach their financial goals. The past eighteen months have been challenging, but
successful investors understand that the success they have achieved is typically
because of their long-term investment perspective through all kinds of markets.
The report you hold contains detailed information about your investment; a
portfolio commentary from the Fund's management team that provides a recap of
the period; a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the six month period covered
by this report. I encourage you to read this document and discuss it with your
financial advisor.
First Trust offers a variety of products that can fit many financial plans to
help those investors who are seeking long-term financial success. You may want
to talk to your advisor about the other investments we offer that might fit your
financial plan.
At First Trust we continue to be committed to making available up-to-date
information about your investments so you and your financial advisor have
current information on your portfolio. We 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, 2010 (UNAUDITED)
FUND STATISTICS
Symbol on New York Stock Exchange FMY
Common Share Price $ 18.57
Common Share Net Asset Value ("NAV") $ 20.28
Premium (Discount) to NAV (8.43)%
Net Assets Applicable to Common Shares $82,096,084
Current Monthly Distribution per Common Share (1) $ 0.120
Current Annualized Distribution per Common Share $ 1.440
Current Distribution Rate on Closing Common Share Price(2) 7.75%
Current Distribution Rate on NAV (2) 7.10%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
Common Share Price NAV
------------------ -----
4/30/09 15.93 16.81
5/1/09 15.85 16.8
5/8/09 15.85 16.92
5/15/09 15.78 17.08
5/22/09 15.87 17.31
5/29/09 16.08 17.87
6/5/09 16.18 17.55
6/12/09 16.46 17.87
6/19/09 16.52 17.7
6/26/09 16.48 17.68
7/2/09 16.74 17.67
7/10/09 16.45 17.65
7/17/09 16.82 17.95
7/24/09 16.94 18.24
7/31/09 17.43 18.36
8/7/09 17.16 18.47
8/14/09 17.29 18.75
8/21/09 17.41 18.88
8/28/09 17.47 18.98
9/4/09 17.31 18.96
9/11/09 17.51 19.03
9/18/09 17.53 19.14
9/25/09 17.62 19.16
10/2/09 17.81 19.03
10/9/09 17.85 19.21
10/16/09 17.63 19.59
10/23/09 17.93 19.57
10/30/09 17.91 19.62
11/6/09 17.52 19.55
11/13/09 17.51 19.43
11/20/09 17.35 19.38
11/27/09 17.67 19.4
12/4/09 17.57 19.58
12/11/09 17.92 19.65
12/18/09 18.11 19.64
12/24/09 18.31 19.81
12/31/09 18.24 19.69
1/8/10 18.25 19.86
1/15/10 18.5 19.95
1/22/10 18.5 19.95
1/29/10 18.62 20.12
2/5/10 18.44 20.01
2/12/10 18.4 19.91
2/19/10 18.54 19.99
2/26/10 18.5 19.92
3/5/10 18.34 19.82
3/12/10 18.18 19.8
3/19/10 18.15 19.88
3/26/10 18.42 19.95
4/1/10 18.24 19.89
4/9/10 18.35 19.9
4/16/10 18.33 20.04
4/23/10 18.44 20.21
4/30/10 18.57 20.28
PORTFOLIO CHARACTERISTICS
Weighted Average Duration -3.93
Weighted Average Life 4.44
PERFORMANCE AS OF APRIL 30, 2010
Average Annual
Total Return
6 Months Ended 1 Year Ended Inception (5/25/2005)
4/30/2010 4/30/2010 to 4/30/2010
-------------- ------------ ---------------------
Fund Performance (3)
NAV 8.03% 31.07% 8.42%
Market Value 8.37% 26.65% 5.51%
Index Performance
Barclays Capital MBS Fixed Rate Index 2.03% 5.48% 6.02%
% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
------------------ ------------
AAA 63.1%
AA+ 3.6
AA 4.9
AA- 2.7
A 0.3
A- 0.4
BBB+ 0.6
BBB 3.0
BBB- 1.9
BB 6.4
BB- 0.5
B+ 1.9
B- 1.0
CCC+ 1.0
CCC 6.7
CCC- 1.9
CC 0.1
-----
Total 100.0%
=====
% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
-------------------- -----------
U.S. Government Agency and Non-Agency
Collateralized Mortgage Obligations 65.5%
U.S. Government Agency Mortgage-Backed
Securities 34.4
Preferred Securities 0.1
-----
Total 100.0%
=====
% OF TOTAL
SECURITY TYPE INVESTMENTS
------------- -----------
Fixed Rate Securities 59.6%
Adjustable Rate Securities 28.6
Interest Only Securities 11.8
-----
Total 100.0%
=====
(1) Most recent distribution paid or declared through 4/30/2010. 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 4/30/2010. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan and changes in NAV per share for net asset value
returns and changes in Common Share price for market value returns. Total
returns do not reflect sales load. Past performance is not indicative of
future results.
(4) The credit quality information presented reflects the ratings assigned by
one or more nationally recognized statistical rating organizations
(NRSROs). For situations in which a security is rated by more than one
NRSRO and ratings are not equivalent, the ratings are averaged.
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. As of March 31, 2010 FIDAC
had approximately $14.3 billion in gross assets under management.
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. FIDAC's team of investment professionals has built a
successful long-term track record through some of the most challenging
fixed-income markets in memory.
PORTFOLIO MANAGEMENT TEAM
WELLINGTON J. DENAHAN-NORRIS
VICE CHAIRMAN, CHIEF INVESTMENT OFFICER AND CHIEF OPERATING OFFICER
Ms. Denahan-Norris is the Vice Chairman of Annaly, Chief Investment Officer and
Chief Operating Officer of Annaly and FIDAC. Ms. Denahan-Norris has been with
FIDAC since its inception and was one of the original founders of Annaly. She is
also responsible for the development of in-house portfolio systems. Prior to
joining Annaly and FIDAC, Ms. Denahan-Norris was Vice President at Citadel
Funding Corporation and a trader on the mortgage-backed securities desk at
Wertheim Schroder and Co., Inc. She has a Bachelor's Degree in Business from
Florida State University and 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 Managing Director and Co-Head of Portfolio Management of Annaly
and FIDAC. He has been with both companies 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.
ROSE-MARIE LYGHT
MANAGING DIRECTOR, CO-HEAD OF PORTFOLIO MANAGEMENT
Mrs. Lyght is a Managing Director 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.
ERIC SZABO, CFA, PRM
MANAGING DIRECTOR, CHIEF RISK OFFICER
Mr. Szabo is a Managing Director and the Chief Risk Officer 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 the Professional Risk Managers' International Association, and a CFA
charterholder.
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 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
Mrs. Murtha is a Senior Vice President and Portfolio Manager for Annaly and
FIDAC. She joined 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. Mrs. Murtha has a Bachelor's Degree in Accounting and
Management Information Systems from Manhattan College.
COMMENTARY
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
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 the 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
Economic data over the last 6 months (since the October 2009 annual report),
seems to confirm expectations of a slow and bumpy recovery. GDP growth in the
fourth quarter of 2009 came in at 5.6%, but slowed to 3.2% in the first quarter
of 2010. Roughly 80% of first quarter 2010 GDP growth came from consumer
spending, which is now at a new record high in real terms, despite real personal
income that is stagnant and remains more than 2% below its 2007 peak.
Inflation continues to be tame. The Consumer Price Index (CPI) has stagnated
during 2010, growing 2.2% year-over-year from a depressed base, but still below
its peak in 2008. The April 2010 CPI release by the Bureau of Labor Statistics
showed an unexpected decline, though watchers of the monetary aggregates would
likely not have been surprised. We have been watching a measure of money supply
that adds together various categories of the money supply (M2 with the only
component of M3) that is still measured: institutional money funds. As you can
see below, this measure has been falling recently at a pace not seen since the
Federal Reserve ("Fed") began tracking this data in 1959.
MONEY SUPPLY M2 + INSTITUTIONAL FUNDS
(PERFORMANCE GRAPH)
Money Supply (Billions) Year Over Year Growth
----------------------- ---------------------
March-59 287.8
March-62 340.2 7.6%
March-65 430.4 8.3%
March-68 530.3 9.2%
March-71 641.3 9.1%
March-74 864.7 6.3%
March-77 1177.9 13.3%
March-80 1504.1 8.7%
March-83 2040.0 12.5%
March-86 2589.2 7.1%
March-89 3093.8 4.0%
March-92 3599.4 3.9%
March-95 3722.2 0.8%
March-98 4504.5 7.6%
March-01 5921.7 10.4%
March-04 7246.1 2.4%
March-07 8504.1 7.5%
March-10 10613.9 -2.0%
----------
(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 liabilities other than the principal
amount of borrowings.
Page 4
PORTFOLIO COMMENTARY - (CONTINUED)
More specifically in the mortgage market, on February 10, 2010, both Freddie Mac
and Fannie Mae announced that they would begin conducting buyout programs of
delinquent loans within their mortgage-backed securities ("MBS") trusts. Freddie
bought out all loans more than 120 days delinquent during the month of February
(which showed up in March's prepayment report), while Fannie is expected to
complete buyouts over several months starting in March. The trend of abnormally
slow prepayment speeds has come to an abrupt end, and it is reasonable to assume
these initial buyout programs by Fannie and Freddie will not be completed in
totality any time soon. We believe it is likely that both Fannie and Freddie
will have loans that will continue to transition to 120+ days delinquent. Thus,
both will simply repeat or continue these buyout programs until they have
flushed out all, or substantially all, of their seriously delinquent loans.
These buyouts are passed through as prepayments to the MBS bondholder, meaning
bondholders get back 100 cents on the dollar. Nevertheless, they still have the
potential to negatively impact the Fund's income-generating ability as
reinvestment risk remains high in today's low-yield environment, and the Fund
may have to amortize any premium securities faster than expected.
The housing market has enjoyed some stability in recent months, aided by
government stimulus in the form of the $1.25 trillion Federal Reserve MBS
purchase program and tax credits offered to homebuyers. The Fed purchase program
ended on March 31, 2010, and buyers wishing to use the tax credit needed to
purchase their homes before the April 30, 2010 deadline. The next few quarters
should shine some more light on the impact these programs have had on supporting
housing, economic and capital markets activity and thus we will be watching
carefully. In particular, we will be paying special attention to the market for
Agency MBS as it has been well supported during the last six months by the
Fed-supported liquidity. However, we do expect some of that support to continue
as market participants will likely put some of the cash they receive from the
Fannie and Freddie buyout programs back to work in Agency MBS over the coming
months.
FUND PERFORMANCE
For the six-month period ended April 30, 2010, the Fund had a total net asset
value ("NAV") return(2) of 8.03% and a market value return(2) of 8.37%. As of
April 30, 2010, the Fund traded at a 8.43% discount to its NAV. The Fund's
benchmark, the Barclays Capital MBS Fixed Rate Index, had a return of 2.03% over
the same period.
For the six-month period ended April 30, 2010, the Fund paid $0.81 in dividends
and the Fund's NAV increased 3.31% to $20.28 from $19.63. The Fund's
outperformance relative to its benchmark, the Barclays Capital MBS Fixed Rate
Index, was the result of higher prices on non-agency securities along with
strong income. Prices on non-agency securities have rallied as investors have
searched for yield, and non-agency yields remain attractive versus other asset
classes and therefore continue to draw more participants into the space. During
the period covered by this report, the Fund had an income return of 4.70%,
outperforming its benchmark's return by 289 basis points. Low 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 MBS, such as is represented by the Fund's benchmark.
MARKET AND FUND OUTLOOK
Looking forward, we see a lot of uncertainty surrounding the mortgage market and
the broader economy in 2010. High prepayments, along with the Fed exiting the
market, could leave spreads volatile across all mortgage products, while
regulatory reform and a stubbornly high unemployment rate may weigh on the
economy's nascent recovery. We will continue to stay prudent in this environment
and look for opportunities to add bonds to the Fund's portfolio where we see
relative value. We currently are evaluating the Commercial MBS sector as a
possible investment as yields of certain investment-grade bonds of this sector
remain attractive, particularly for a buy and hold investor.
----------
(2) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan and changes in NAV per share for net asset value
returns and changes in Common Share price for market value returns. Total
return does not reflect sales load. Past performance is not indicative of
future results.
Page 5
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a)
APRIL 30, 2010 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- --------------------------------------------------------------- ------ -------- --------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 40.5%
Federal National Mortgage Association (FNMA)
$ 5,418,201 Pool 256182 ................................................ 6.00% 03/01/36 $ 5,731,836
4,941,370 Pool 256328 (b) ............................................ 6.50% 07/01/36 5,309,966
5,410,977 Pool 831145 (b) ............................................ 6.00% 12/01/35 5,790,985
5,836,134 Pool 843971 (b) ............................................ 6.00% 11/01/35 6,246,001
3,410,416 Pool 872303 (b) ............................................ 6.00% 05/01/36 3,641,400
6,155,880 Pool 880203 ................................................ 6.00% 02/01/36 6,510,291
--------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(Cost $31,188,797) ............................................ 33,230,479
--------------
U.S. GOVERNMENT AGENCY AND NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS - 77.2%
Adjustable Rate Mortgage Trust
570,726 Series 2004-5, Class 1A1 (c) ............................... 3.50% 04/25/35 469,829
Banc of America Funding Corp.
1,174,211 Series 2005-F, Class 4A1 (c) ............................... 5.19% 09/20/35 919,465
Banc of America Mortgage Securities
115,518 Series 2002-L, Class 1A1 (c) ............................... 3.42% 12/25/32 88,108
246,907 Series 2004-K, Class 4A1 (c) ............................... 5.21% 12/25/34 246,850
3,643,190 Series 2007-3, Class 2A3 ................................... 7.00% 09/25/37 1,876,033
Bear Stearns Adjustable Rate Mortgage Trust
1,416,686 Series 2004-9, Class 12A3 (c) .............................. 3.54% 11/25/34 1,225,125
Chase Mortgage Finance Corp.
1,176,653 Series 2007-A3, Class 3A1 (c) .............................. 5.95% 12/25/37 1,000,463
Countrywide Alternative Loan Trust
773,725 Series 2004-14T2, Class A6 ................................. 5.50% 08/25/34 760,172
504,396 Series 2004-1T1, Class A1 .................................. 5.00% 02/25/34 500,284
2,076,817 Series 2005-J1, Class 2A1 .................................. 5.50% 02/25/25 1,809,490
Countrywide Home Loans
412,188 Series 2004-HYB1, Class 2A (c) ............................. 3.31% 05/20/34 348,262
235,297 Series 2005-20, Class A7 ................................... 5.25% 12/25/27 216,120
2,278,654 Series 2005-J4, Class A4 ................................... 5.50% 11/25/35 1,896,345
Credit Suisse First Boston Mortgage Securities Corp.
3,197,992 Series 2004-AR2, Class 1A1 (c) ............................. 3.45% 03/25/34 2,474,272
Federal Home Loan Mortgage Corp.
3,262,873 Series 2676, Class IK, IO .................................. 5.00% 02/15/20 110,706
111,196 Series 2716, Class CI, IO .................................. 5.00% 05/15/19 2,118
1,457,634 Series 2737, Class IG, IO .................................. 5.00% 08/15/27 36,829
9,628,087 Series 2807, Class SB, IO (d) .............................. 7.20% 11/15/33 1,579,957
236,626 Series 2852, Class VI, IO .................................. 5.00% 06/15/24 31
3,461,033 Series 2870, Class JI, IO .................................. 5.00% 10/15/27 109,543
693,479 Series 2888, Class OI, IO .................................. 5.00% 01/15/27 19,675
1,774,808 Series 2921, Class IQ, IO 5.00% 01/15/29 91,987
805,352 Series 2938, Class PI, IO .................................. 5.00% 11/15/28 44,130
493,743 Series 2961, Class IP, IO .................................. 5.50% 07/15/28 15,540
1,432,800 Series 2964, Class IA, IO .................................. 5.50% 02/15/26 12,953
624,766 Series 3000, Class SU (d) .................................. 22.34% 04/15/35 686,120
942,145 Series 3069, Class LI, IO .................................. 5.50% 08/15/32 89,088
See Notes to Financial Statements
Page 6
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
APRIL 30, 2010 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- --------------------------------------------------------------- ------ -------- --------------
U.S. GOVERNMENT AGENCY AND NON-AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS - (CONTINUED)
Federal Home Loan Mortgage Corp. (Continued)
$ 190,687 Series 3171, Class CS (d) .................................. 37.77% 06/15/36 $ 206,827
542,649 Series 3195, Class SX (d) .................................. 44.50% 07/15/36 756,094
Federal Home Loan Mortgage Corp., STRIP
19,449,865 Series 227, Class IO, IO ................................... 5.00% 12/01/34 4,487,572
7,011,314 Series 232, Class IO, IO ................................... 5.00% 08/01/35 1,546,190
Federal National Mortgage Association
3,357,916 Series 2005-122, Class SN (d) .............................. 27.55% 01/25/36 3,901,413
730,830 Series 2005-39, Class BI, IO ............................... 5.00% 06/25/28 30,120
497,991 Series 2005-91, Class SH (d) ............................... 22.87% 05/25/33 624,426
6,171,332 Series 2008-50, Class AI IO ................................ 5.50% 06/25/23 511,721
Federal National Mortgage Association, STRIP
7,494,804 Series 360, Class 2, IO .................................... 5.00% 08/01/35 1,602,428
First Horizon Mortgage Trust
3,009,000 Series 2005-8, Class 1A5 ................................... 5.75% 02/25/36 2,931,935
GMAC Mortgage Corporation Loan Trust
436,146 Series 2004-AR1, Class 22A (c) ............................. 3.29% 06/25/34 380,772
Government National Mortgage Association
3,880,940 Series 2009-65, Class NJ, IO ............................... 5.50% 07/20/39 591,861
GSR Mortgage Loan Trust
1,028,458 Series 2004-5, Class 3A2 (c) ............................... 4.70% 05/25/34 1,030,313
362,957 Series 2005-AR2, Class 5A1 (c) ............................. 3.40% 04/25/35 328,351
4,359,530 Series 2007-1F, Class 3A10, IO ............................. 6.00% 01/25/37 509,086
Harborview Mortgage Loan Trust
350,793 Series 2004-1, Class 2A (c) ................................ 2.90% 04/19/34 318,642
1,433,825 Series 2004-6, Class 3A1 (c) ............................... 3.83% 08/19/34 1,106,348
JP Morgan Mortgage Trust
3,186,780 Series 2005-ALT1, Class 4A1 (c) ............................ 5.60% 10/25/35 2,665,943
JP Morgan Re-REMIC
4,069,525 Series 2009-7, Class 12A1 (c) (e) .......................... 6.25% 01/27/37 4,117,850
Merrill Lynch Mortgage Investors Trust
2,000,070 Series 2005-A7, Class 2A1 (c) .............................. 5.37% 09/25/35 1,866,565
Morgan Stanley Mortgage Loan Trust
301,322 Series 2004-7AR, Class 2A6 (c) ............................. 2.81% 09/25/34 284,892
Provident Funding Mortgage Loan Trust
637,828 Series 2005-1, Class 1A1 (c) ............................... 3.02% 05/25/35 547,999
Residential Accredit Loans, Inc.
170,794 Series 2002-QS18, Class A1 ................................. 5.50% 12/25/17 170,710
1,388,320 Series 2004-QS2, Class CB .................................. 5.75% 02/25/34 1,336,855
Residential Funding Mortgage Securities I
630,000 Series 2005-S5, Class A5 ................................... 5.25% 07/25/35 622,496
Sequoia Mortgage Trust
3,748,624 Series 2007-1, Class 2A1 (c) ............................... 5.58% 02/20/47 3,103,456
Wachovia Mortgage Loan Trust, LLC
1,634,782 Series 2006-A, Class 3A1 (c) ............................... 5.23% 05/20/36 1,575,009
Washington Mutual Msc Mortgage Pass-Through
1,088,278 Series 2004-RA1, Class 2A .................................. 7.00% 03/25/34 1,125,354
See Notes to Financial Statements
Page 7
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
APRIL 30, 2010 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- --------------------------------------------------------------- ------ -------- --------------
U.S. GOVERNMENT AGENCY AND NON-AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS - (CONTINUED)
Wells Fargo Mortgage Backed Securities Trust
$ 875,932 Series 2005-AR16, Class 1A1 (c) ............................ 3.14% 10/25/35 $ 870,912
2,916,682 Series 2006-9, Class 1A32 .................................. 6.00% 08/25/36 1,964,906
562,000 Series 2006-AR10, Class 5A2 (c) ............................ 5.48% 07/25/36 493,743
2,807,090 Series 2007-16, Class 1A1 .................................. 6.00% 12/28/37 2,803,216
2,368,553 Series 2007-8, Class 2A7 ................................... 6.00% 07/25/37 2,302,574
--------------
TOTAL U.S. GOVERNMENT AGENCY AND NON-AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS
(Cost $56,234,663) ............................................ 63,346,074
--------------
SHARES DESCRIPTION VALUE
--------------- ----------------------------------------------------------------------------------- --------------
PREFERRED SECURITIES - 0.1%
20,000 Fannie Mae, 8.25% ................................................................. 29,200
40,000 Freddie Mac, Series Z, 8.38% ...................................................... 64,400
--------------
TOTAL PREFERRED SECURITIES
(Cost $1,500,000) ................................................................. 93,600
--------------
TOTAL INVESTMENTS - 117.8%
(Cost $88,923,460) (f) ............................................................ 96,670,153
PRINCIPAL
VALUE DESCRIPTION VALUE
--------------- ----------------------------------------------------------------------------------- --------------
REVERSE REPURCHASE AGREEMENT - (18.7%)
$ (15,311,000) With UBS Securities 0.24% dated 04/30/10, to be repurchased
at $15,311,306 on 05/03/10 ..................................................... (15,311,000)
NET OTHER ASSETS AND LIABILITIES - 0.9% ........................................... 736,931
--------------
NET ASSETS - 100.0% ............................................................... $ 82,096,084
==============
----------
(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, 2010.
(d) Inverse floating rate instrument. The interest rate shown reflects the rate
in effect at April 30, 2010.
(e) This security is restricted and cannot be offered for public sale without
first being registered under the Securities Act of 1933, as amended. Prior
to registration, restricted securities may only be resold in transactions
exempt from registration. This security was acquired on September 9, 2009.
It has a current carrying cost of $3,879,689 and has a carrying value per
share of $1.01 and represents 5.02% of net assets.
(f) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2010, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $11,324,742 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $3,578,049.
IO Interest Only Security
STRIP Separate Trading of Registered Interest and Principal of Securities
See Notes to Financial Statements
Page 8
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
APRIL 30, 2010 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2010 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL MARKET LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2010 PRICES INPUTS INPUTS
------------ ------- ----------- ------------
U.S. Government Agency Mortgage-Backed Securities ... $33,230,479 $ -- $33,230,479 $ --
U.S. Government Agency and Non-Agency
Collateralized Mortgage Obligations .............. 63,346,074 -- 59,228,224 4,117,850
Preferred Securities ................................ 93,600 93,600 -- --
----------- ------- ----------- ----------
TOTAL INVESTMENTS ................................... $96,670,153 $93,600 $92,458,703 $4,117,850
=========== ======= =========== ==========
The following table presents the activity of the Fund's investments measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the period presented.
TRANSFERS BALANCE
INVESTMENTS AT FAIR VALUE USING BALANCE AS OF IN (OUT) AS OF
SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) OCTOBER 31, 2009 OF LEVEL 3 APRIL 30, 2010
------------------------------------------ ---------------- ---------- --------------
U.S. Government Agency and Non-Agency
Collateralized Mortgage Obligations ... $-- $4,117,850 $4,117,850
--- ---------- ----------
TOTAL INVESTMENTS ........................ $-- $4,117,850 $4,117,850
=== ========== ==========
Net change in unrealized appreciation from Level 3 investments held as of April
30, 2010 was $153,091 and is included in "Net change in unrealized appreciation
(depreciation) on investments" on the Statement of Operations.
See Notes to Financial Statements
Page 9
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2010 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $88,923,460) ......................................................................... $ 96,670,153
Cash .......................................................................................... 281,683
Prepaid expenses .............................................................................. 22,945
Interest receivable ........................................................................... 739,726
------------
Total Assets ............................................................................... 97,714,507
------------
LIABILITIES:
Reverse repurchase agreements ................................................................. 15,311,000
Payables:
Interest on reverse repurchase agreements .................................................. 158,931
Investment advisory fees ................................................................... 81,620
Audit and tax fees ......................................................................... 29,090
Legal fees ................................................................................. 11,671
Printing fees .............................................................................. 10,895
Administrative fees ........................................................................ 8,333
Transfer agent fees ........................................................................ 3,557
Trustees' fees and expenses ................................................................ 1,991
Custodian fees ............................................................................. 1,335
------------
Total Liabilities .......................................................................... 15,618,423
------------
NET ASSETS .................................................................................... $ 82,096,084
============
NET ASSETS CONSIST OF:
Paid-in capital ............................................................................... $ 76,922,708
Par value ..................................................................................... 40,490
Accumulated net investment income (loss) ...................................................... 1,691,449
Accumulated net realized gain (loss) on investments ........................................... (4,305,256)
Net unrealized appreciation (depreciation) on investments ..................................... 7,746,693
------------
NET ASSETS .................................................................................... $ 82,096,084
============
NET ASSET VALUE, per Common Share outstanding (par value $0.01 per Common Share) .............. $ 20.28
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) ... 4,048,993
============
See Notes to Financial Statements
Page 10
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2010 (UNAUDITED)
INVESTMENT INCOME:
Interest .............................................................. $4,584,996
----------
Total investment income ............................................ 4,584,996
----------
EXPENSES:
Investment advisory fees .............................................. 498,375
Excise tax expense .................................................... 153,372
Administrative fees ................................................... 49,999
Audit and tax fees .................................................... 24,947
Interest expense on reverse repurchase agreements ..................... 20,682
Printing fees ......................................................... 19,715
Trustees' fees and expenses ........................................... 18,298
Transfer agent fees ................................................... 16,261
Legal fees ............................................................ 14,481
Custodian fees ........................................................ 6,254
Other ................................................................. 29,273
----------
Total expenses ..................................................... 851,657
----------
NET INVESTMENT INCOME ................................................. 3,733,339
----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net change in unrealized appreciation (depreciation) on investments ... 2,180,339
----------
Net realized and unrealized gain (loss) on investments ................ 2,180,339
----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ....... $5,913,678
==========
See Notes to Financial Statements
Page 11
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2010 ENDED
(UNAUDITED) 10/31/2009
----------- -----------
OPERATIONS:
Net investment income (loss) ................................................ $ 3,733,339 $ 6,359,057
Net realized gain (loss) .................................................... -- (1,849,267)
Net change in unrealized appreciation (depreciation) ........................ 2,180,339 7,481,465
----------- -----------
Net increase (decrease) in net assets resulting from operations ............. 5,913,678 11,991,255
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ....................................................... (3,279,684) (5,545,693)
----------- -----------
Total distributions to shareholders ......................................... (3,279,684) (5,545,693)
----------- -----------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested ...................................... -- 60,901
----------- -----------
Net increase (decrease) in net assets resulting from capital transactions ... -- 60,901
----------- -----------
Total increase (decrease) in net assets ..................................... 2,633,994 6,506,463
NET ASSETS:
Beginning of period ......................................................... 79,462,090 72,955,627
----------- -----------
End of period ............................................................... $82,096,084 $79,462,090
=========== ===========
Accumulated net investment income (loss) at end of period ................... $ 1,691,449 $ 1,237,794
=========== ===========
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period ........................................ 4,048,993 4,045,236
Common Shares issued as reinvestment under the Dividend Reinvestment Plan ... -- 3,757
----------- -----------
Common Shares at end of period .............................................. 4,048,993 4,048,993
=========== ===========
See Notes to Financial Statements
Page 12
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2010 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations ............. $ 5,913,678
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments ................................................. (4,320,737)
Paydowns of investments .................................................. 7,606,636
Net amortization/accretion of premium/discount on investments ............ 1,576,667
Net change in unrealized appreciation/depreciation on investments ........ (2,180,339)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable .......................................... 72,938
Increase in prepaid expenses. ............................................ (12,637)
Decrease in interest payable on reverse repurchase agreements ............ (20,079)
Decrease in investment advisory fees payable ............................. (6,269)
Decrease in audit and tax fees payable ................................... (21,121)
Increase in legal fees payable ........................................... 4,656
Decrease in printing fees payable ........................................ (5,603)
Decrease in administrative fees payable .................................. (45)
Decrease in custodian fees payable ....................................... (623)
Increase in transfer agent fees payable .................................. 1,136
Decrease in Trustees' fees and expenses payable .......................... (1,469)
Decrease in other liabilities. ........................................... (2,635)
---------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 8,604,154
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income .......... (3,279,684)
Maturities of reverse repurchase agreements .............................. (2,495,063,000)
Sales of reverse repurchase agreements ................................... 2,485,256,000
---------------
CASH USED BY FINANCING ACTIVITIES ........................................... (13,086,684)
------------
Decrease in cash ............................................................ (4,482,530)
Cash at beginning of period ................................................. 4,764,213
------------
CASH AT END OF PERIOD ....................................................... $ 281,683
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest .................................... $ 40,761
============
See Notes to Financial Statements
Page 13
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR PERIOD
4/30/2010 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 10/31/2009 10/31/2008 10/31/2007 10/31/2006 10/31/2005(a)
----------- ---------- ---------- ---------- ---------- -------------
Net asset value, beginning of period ............ $ 19.63 $ 18.03 $ 18.66 $ 18.41 $ 19.02 $ 19.10(b)
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .................... 0.92 1.57 1.49 1.04 1.03 0.36
Net realized and unrealized gain (loss) ......... 0.54 1.40 (1.00) 0.23 (0.58) (0.09)
------- ------- ------- ------- ------- -------
Total from investment operations ................ 1.46 2.97 0.49 1.27 0.45 0.27
------- ------- ------- ------- ------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ........................... (0.81) (1.37) (1.12) (1.02) (1.06) (0.31)
------- ------- ------- ------- ------- -------
Total distributions ............................. (0.81) (1.37) (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 .................. $ 20.28 $ 19.63 $ 18.03 $ 18.66 $ 18.41 $ 19.02
======= ======= ======= ======= ======= =======
Market value, end of period ..................... 18.57 $ 17.91 $ 15.71 $ 16.32 $ 16.58 $ 16.40
======= ======= ======= ======= ======= =======
TOTAL RETURN BASED ON NET ASSET VALUE(c) ........ 8.03% 18.21% 3.38% 7.80% 3.30% 1.37%
======= ======= ======= ======= ======= =======
TOTAL RETURN BASED ON MARKET VALUE(c) ........... 8.37% 23.91% 2.94% 4.69% 7.89% (16.53)%
======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ............ $82,096 $79,462 $72,956 $75,487 $74,458 $76,925
Ratio of total expenses to average net assets ... 2.14%(d) 2.07% 2.69% 3.24% 3.10% 2.48%(d)
Ratio of net expenses to average net assets ..... 2.14%(d) 2.07% 2.69% 3.24% 3.06% 2.28%(d)
Ratio of net expenses to average net assets
excluding interest expense ................... 2.09%(d) 1.99% 1.83% 1.71% 1.69% 1.62%(d)
Ratio of net investment income to average
net assets ................................... 9.39%(d) 9.01% 7.93% 5.70% 5.55% 4.30%(d)
Portfolio turnover rate ......................... 4% 39% 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 is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan, and changes in net asset value per share for
net asset value returns and changes in Common Share price for market value
returns. Total returns do not reflect sales load and are not annualized for
periods less than one year.
(d) Annualized.
See Notes to Financial Statements
Page 14
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2010 (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 valuation 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 and 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.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
- Level 1 - Level 1 inputs are quoted prices in active markets for
identical securities. An active market is a market in which
transactions for the security occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
Page 15
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2010 (UNAUDITED)
- Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
- Quoted prices for similar securities in active markets.
- Quoted prices for identical or similar securities in markets
that are non-active. A non-active market is a market where
there are few transactions for the security, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
- Inputs other than quoted prices that are observable for the
security (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and
default rates).
- Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
- Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs
reflect the reporting entity's own assumptions about the assumptions
that market participants would use in pricing the security.
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, 2010 is
included with the Fund's Portfolio of Investments.
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.
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 (for
example, asset-backed securities, collateralized mortgage obligations and
commercial mortgage-backed securities), as well as interest only securities,
that have contractual cash flows. 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. 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.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date; interest income on such securities
is not accrued until settlement date. The Fund maintains liquid assets with a
current value at least equal to the amount of its when-issued or
delayed-delivery purchase commitments. At April 30, 2010, the Fund had no
when-issued or delayed-delivery purchase commitments.
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, 2010:
Maximum amount outstanding during the period ........... $25,118,000
Average amount outstanding during the period* .......... $20,285,320
Average monthly shares outstanding during the period ... 4,048,993
Average debt per share outstanding during the period ... $ 5.01
* The average amount outstanding during the period 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, 2010.
Page 16
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2010 (UNAUDITED)
During the six months ended April 30, 2010, interest rates ranged from 0.08% to
0.28%, with a weighted average interest rate of 0.20%, on borrowings by the Fund
under reverse repurchase agreements, which had interest expense that aggregated
$20,682.
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.
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, if held in the Fund, 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,
2009 was as follows:
Distributions paid from:
Ordinary Income .............................. $5,545,693
As of October 31, 2009, the components of distributable earnings on a tax basis
are as follows:
Undistributed Ordinary Income ................ $ 4,334,502
Net Unrealized Appreciation (Depreciation) ... 2,469,646
Accumulated Capital and other losses ......... (4,305,256)
H. INCOME AND OTHER 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 (the "Code"), 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.
However, due to the timing and amount of distributions, the Fund may be subject
to an excise tax of 4% of the amount by which 98% of the Fund's taxable income
exceeds the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry realized capital losses forward for eight years following the
year of loss and offset any future realized capital gains. The Fund is subject
to certain limitations under U.S. tax rules on the use of capital loss
carryforwards and net unrealized built-in losses. These limitations apply when
there has been a 50% change in ownership. As of October 31, 2009, the Fund had a
capital loss carryforward for federal income tax purposes of $4,305,256, with
$3,756,953 and $548,303 expiring on October 31, 2014 and October 31, 2017,
respectively.
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2010 (UNAUDITED)
The Fund is subject to tax accounting standards that establish 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. Taxable years ending
2009, 2008, 2007 and 2006 remain open to federal and state audit. As of April
30, 2010, management has evaluated the application of these standards to the
Fund, and has determined that no provision for income tax is required in the
Fund's financial statements for uncertain tax provisions.
I. EXPENSES:
The Fund pays all expenses directly related to its operations.
J. ACCOUNTING PRONOUNCEMENT:
In January 2010, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2010-06 "Improving Disclosures about
Fair Value Measurements." ASU 2010-06 amends FASB Accounting Standards
Codification Topic 820, Fair Value Measurements and Disclosures, to require
additional disclosures regarding fair value measurements. Certain disclosures
required by ASU No. 2010-06 are effective for interim and annual reporting
periods beginning after December 15, 2009, and other required disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. Management is currently evaluating the impact
ASU No. 2010-06 will have on the Fund's financial statement disclosures.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
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 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, wholly-owned
subsidiary of The PNC Financial Services Group, Inc. ("PNC"), serves as the
Fund's Administrator, Fund Accountant and Transfer Agent in accordance with
certain fee arrangements. PFPC Trust Company, also an indirect, majority-owned
subsidiary of PNC, serves as the Fund's Custodian in accordance with certain fee
arrangements.
On February 2, 2010, PNC entered into a Stock Purchase Agreement (the "Stock
Purchase Agreement") with The Bank of New York Mellon Corporation ("BNY
Mellon"). Upon the terms and subject to the conditions set forth in the Stock
Purchase Agreement, which has been approved by the board of directors of each
company, PNC will sell to BNY Mellon (the "Stock Sale") 100% of the issued and
outstanding shares of PNC Global Investment Servicing Inc. The Stock Sale
includes PNC Global Investment Servicing (U.S.) Inc. and PFPC Trust Company and
is expected to close in the third quarter of 2010.
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, 2011 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.
Page 18
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2010 (UNAUDITED)
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,
2010 was $566,053 and $3,754,684, respectively. The proceeds from paydowns of
U.S. Government securities and non-U.S. Government securities, excluding
short-term investments, for the six months ended April 30, 2010 was $7,606,636
and $0, respectively.
5. 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 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.
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 Stripped
Mortgage-Backed Securities, 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.
FIXED-INCOME SECURITIES RISK: Debt securities, including high yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the Fund invests the proceeds from matured,
traded or called bonds at market interest rates that are below the Fund
portfolio's current earnings rate; and (iii) credit risk, which is the risk that
a security in the Fund's portfolio will decline in price or the issuer fails to
make interest payments when due because the issuer of the security experiences a
decline in its financial status.
Page 19
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2010 (UNAUDITED)
6. 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.
7. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events:
On April 20, 2010, the Fund declared a dividend of $0.12 per share to Common
Shareholders of record on May 5, 2010, payable May 17, 2010.
On May 20, 2010, the Fund declared a dividend of $0.12 per share to Common
Shareholders of record on June 3, 2010, payable June 15, 2010.
On June 21, 2010, the Fund declared a dividend of $0.12 per share to Common
Shareholders of record on July 6, 2010, payable July 15, 2010.
Page 20
ADDITIONAL INFORMATION
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2010 (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 21
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2010 (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 the Common Shares 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/Aberdeen Emerging Opportunity Fund, First Trust Strategic High
Income Fund III, First Trust Specialty Finance and Financial Opportunities Fund
and First Trust Active Dividend Income Fund was held on April 14, 2010. At the
Annual Meeting, Trustees James A. Bowen and Niel B. Nielson were elected by the
Common Shareholders of the First Trust/FIDAC Mortgage Income Fund as Class III
Trustees for three-year terms expiring at the Fund's annual meeting of
shareholders in 2013. The number of votes cast in favor of Mr. Bowen was
3,634,991, the number of votes against was 46,279 and the number of abstentions
was 367,723. The number of votes cast in favor of Mr. Nielson was 3,634,552, the
number of votes against was 46,718 and the number of abstentions was 367,723.
Richard E. Erickson, Thomas R. Kadlec and Robert F. Keith are the other current
and continuing Trustees.
INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING 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 21-22,
2010. 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
2009. 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
Page 22
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
APRIL 30, 2010 (UNAUDITED)
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.
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees charged by the Advisor to
similar funds and other non-fund clients, 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; and (iv) many of the peer funds are larger than the Fund. 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 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, and had been enhanced to assess portfolio risk
as well. 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, 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 considered whether fee levels reflect any economies of scale
for the benefit of shareholders. The Board concluded that the advisory fee
reflects an appropriate level of sharing of any economies of scale at current
asset levels. The Board also considered the costs of the services provided and
profits realized by the Advisor from serving as investment manager to the Fund
for the twelve months ended December 31, 2009, 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 23
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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 June 24, 2010
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 June 24, 2010
By (Signature and Title)* /s/ Mark R. Bradley
------------------------------------------------------
Mark R. Bradley, Treasurer, Controller,
Chief Financial Officer and Chief Accounting Officer
(principal financial officer)
Date June 24, 2010
* Print the name and title of each signing officer under his or her
signature.