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: October 31, 2009
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
(FIRST TRUST LOGO) (FIDAC LOGO)
FIXED INCOME DISCOUNT ADVISORY COMPANY
FIRST TRUST/FIDAC
MORTGAGE INCOME FUND
(GRAPHIC)
ANNUAL REPORT
FOR THE YEAR ENDED
OCTOBER 31, 2009
TABLE OF CONTENTS
FIRST TRUST/FIDAC MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2009
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
Report of Independent Registered Public Accounting Firm .. 21
Additional Information ................................... 22
Board of Trustees and Officers ........................... 24
Privacy Policy ........................................... 28
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 objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of certain other risks of investing in the
Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by the personnel of
FIDAC are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST/FIDAC MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2009
Dear Shareholders:
2009 has been more positive for the U.S. and global markets, easing many of the
worries of both economists and investors about the recession that gripped us for
eighteen months. Many economists now believe that the recession that began in
December 2007 ended in March 2009. In fact, the Dow Jones Industrial Average's
total return from March 9, 2009 (the statistical end of the bear market) to
October 31, 2009, was 51.13%. Of course, no one can predict that this trend will
continue, but as we have seen better news across the financial markets, the
economy has continued to rise.
First Trust Advisors L.P. ("First Trust") has always believed that in order to
be successful in reaching your financial goals, you should be invested for the
long term. A long-term investor understands that the market, from a historical
perspective, has always experienced ups and downs. But history has shown that
the patient investor is typically rewarded over the long term. We have always
believed that staying invested in quality products and having a long-term
perspective can help investors reach their financial goals.
The report you hold contains detailed information about your investment in First
Trust/FIDAC Mortgage Income Fund (the "Fund"). It contains a portfolio
commentary from the Fund's portfolio management team that provides a market
recap for the period, a performance analysis and a market and Fund outlook.
Additionally, the report provides the Fund's financial statements for the period
covered by the report. I encourage you to read this document and discuss it with
your financial advisor.
Since its inception, First Trust has been through many types of markets. We
remain committed to bringing you quality investment solutions regardless of the
inevitable volatility the market experiences. We offer a variety of products
that can fit many financial plans to help those investors seeking long-term
investment success. As well, we are committed to making available up-to-date
information about your investments so you and your financial advisor have
current information on your portfolio.
We continue to value our relationship with you, and we thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust/FIDAC
Mortgage Income Fund
Page 1
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
AT A GLANCE
AS OF OCTOBER 31, 2009 (UNAUDITED)
FUND STATISTICS
Symbol on New York Stock Exchange FMY
Common Share Price $ 17.91
Common Share Net Asset Value ("NAV") $ 19.63
Premium (Discount) to NAV (8.76)%
Net Assets Applicable to Common Shares $79,462,090
Current Monthly Distribution per Common Share (1) $ 0.110
Current Annualized Distribution per Common Share $ 1.320
Current Distribution Rate on Closing Common Share Price (2) 7.37%
Current Distribution Rate on NAV (2) 6.72%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
Common
Share
Price NAV
------ -----
10/31/08 15.71 18.04
11/7/08 15.74 17.9
11/14/08 16.25 17.84
11/21/08 14.84 17.96
11/28/08 15.65 16.96
12/5/08 16.3 16.36
12/12/08 15.21 16.2
12/19/08 16.22 16.17
12/26/08 16.24 16.35
1/2/09 16.42 16.22
1/9/09 16.46 16.23
1/16/09 16.39 16.25
1/23/09 16.25 16.31
1/30/09 16.27 16.63
2/6/09 16.09 16.46
2/13/09 16.01 16.44
2/20/09 15.48 16.53
2/27/09 15.44 16.52
3/6/09 15.19 16.13
3/13/09 15.54 16.21
3/20/09 15.75 16.12
3/27/09 15.8 16.28
4/3/09 15.71 16.28
4/9/09 15.83 16.39
4/17/09 15.89 16.52
4/24/09 15.89 16.68
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
10/31/09 17.91 19.62
PORTFOLIO CHARACTERISTICS
Duration -2.68
Weighted Average Life 4.64
PERFORMANCE AS OF OCTOBER 31, 2009
Average Annual
Total Return
1 Year Ended Inception (5/25/2005)
10/31/2009 to 10/31/2009
------------ ---------------------
Fund Performance
NAV (3) 18.21% 7.52%
Market Value (4) 23.91% 4.24%
Index Performance
Barclays Capital MBS Fixed Rate Index 12.26% 6.24%
% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (5) INVESTMENTS
------------------ ------------
AAA 70.3%
AA 5.6
A 5.1
BBB 5.7
BB 4.7
B 4.3
CCC 4.2
CC 0.1
-----
Total 100.0%
=====
% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
-------------------- -----------
U.S. Government Agency and Non-Agency
Collateralized Mortgage Obligations 59.2%
U.S. Government Agency Mortgage-Backed Securities 40.7
Preferred Securities 0.1
-----
Total 100.0%
=====
% OF TOTAL
SECURITY TYPE INVESTMENTS
------------- -----------
Fixed Rate Securities 61.9%
Adjustable Rate Securities 28.2
Interest Only Securities 9.9
-----
Total 100.0%
=====
(1) Most recent distribution paid or declared through 10/31/2009. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 10/31/2009. Subject to
change in the future.
(3) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gain distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per share and
does not reflect sales load. Past performance is not indicative of future
results.
(4) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price. Past performance is not indicative of future results.
(5) 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 September 30, 2009,
FIDAC had approximately $17.6 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. As a secondary objective, the Fund seeks to preserve capital. The Fund
pursues its objectives by investing primarily in mortgage-backed securities
representing part ownership in a pool of either residential or commercial
mortgage loans that, in the opinion of FIDAC, offer an attractive combination of
credit quality, yield and maturity. These securities may be 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 leverage to an aggregate amount of up to 33 1/3% of the Fund's Managed
Assets,(1) primarily through the use of repurchase agreements.
MARKET RECAP
Fear of economic "Armageddon" abated quickly in the course of six short months,
thanks to unprecedented policy action by the U.S. Government, Treasury
Department (the "Treasury"), and the Federal Reserve (the "Fed"). The rally in
stocks since the first quarter of 2009 has been impressive. The size of the
rally depended on the level of government activity in that asset class. The
effects of the Fed's $1.25 trillion Agency Mortgage-Backed Securities ("Agency
MBS") purchase program have been mixed. Since the initiation of the program,
mortgage rates haven't moved significantly down, which means the effect on
borrowers has been negligible. However, the Agency MBS spread to treasuries is
significantly tighter than prior to the initiation of the program. The Federal
Open Market Committee announced that it "will gradually slow the pace of
mortgage-backed securities purchases in order to promote a smooth transition in
markets and anticipates that they will be executed by the end of the first
quarter of 2010." The U.S. Government's Public-Private Investment Program
("PPIP"), designed to support prices of legacy securities, is already considered
a success as prices increased immediately in the weeks following the
announcement. Nine investment managers were selected for PPIP, most of whom have
started deploying capital, but not at the pace the market had anticipated.
Positive technical's (analysis of a security through the study of past market
data) should continue to follow Agency and Non-Agency residential
mortgage-backed securities through 2009 and into 2010, in our opinion, but there
is still uncertainty about market conditions beyond March 2010 at the end of the
PPIP program.
Not only have we seen intervention in securities markets, but in the economy as
a whole. We're just starting to see the effects of this intervention in the
United States' 3rd quarter Gross Domestic Product ("GDP") release. Following the
GDP's second quarter loss of -0.7%, the preliminary estimate for 3rd quarter GDP
was positive, coming in at a higher than expected 3.5%. The string of four
consecutive negative readings, the first such string in the post-World War II
era, has been broken. Is this the end of the recession? We won't know officially
until the National Bureau of Economic Research says it is--after the fact--but
many economists raced to call the end of the worst economic contraction in
America since the Great Depression (many economists have said the recession
ended on March 9, 2009). We believe the stimulus put in place by the current
Administration worked, showing up in the expected areas. Private investment in
residential real estate responded to incentives like the $8,000 first-time
homebuyer tax credit and added 0.53% to GDP growth. According to
S&P/Case-Shiller, home prices have ticked up in the last several months, thanks
to these same incentives. "Cash for Clunkers" helped motor vehicle output
contribute 1.66% to GDP growth, accounting for nearly half (47%) of all economic
growth in the quarter. For context, consider that the average contribution of
vehicle output since 1980 has been an addition of 0.09% to average real GDP
growth of 2.75%. The market wanted economic growth, and the stimulus provided
that growth. However, the point of stimulus spending isn't just one-quarter of
growth. The point of the government's economic push is to "prime
Page 4
PORTFOLIO COMMENTARY - (CONTINUED)
the pump," to get the economic fires roaring sustainably. In order to call the
stimulus efforts a success, we now need the multiplier effect to kick in.
Companies that are benefiting from artificial demand need to respond by
increasing hours worked and then hiring more workers, creating new jobs and
stimulating natural demand for goods and services. Is that happening? In short,
it doesn't appear to be yet, as evidenced by the continued rise in unemployment
and fall in wages.
FUND PERFORMANCE
For the twelve-month period ended October 31, 2009, the Fund had a total net
asset value ("NAV") return(2) of 18.21% and a market value return(3) of 23.91%.
As of October 31, 2009, the Fund traded at $17.91, a 8.76% discount to its NAV.
The Fund's benchmark, the Barclays Capital MBS Fixed Rate Index, had a return of
12.26% over the same period.
For the twelve-month period ended October 31, 2009, the Fund paid $1.37 in
dividends and the Fund's NAV rose 8.9% to $19.63 from $18.03. The Fund's
outperformance relative to its benchmark was mostly the result of a dramatic
increase in prices on the Non-Agency securities. As mentioned above, the
introduction of the PPIP, along with the expansion of the Term Asset-Backed
Securities Loan Facility, ("TALF") renewed interest across the sector causing a
remarkable tightening of spreads. Also contributing to the outperformance was
the Fund's strong income return. Lower financing costs, higher yielding
Non-Agency RMBS and strong reinvestment income helped the Fund return more
income than would have been expected from a non-leveraged portfolio of only
Agency fixed-rate MBS as is represented by the Fund's benchmark.
MARKET AND FUND OUTLOOK
We believe the Fund is positioned well for the current environment but continue
to watch prepayments, as refinancing risk remains high and could impact the
prices and income earning potential on the interest only securities. Technicals
still favor the non-agency sector as a lot of money remains on the sidelines
(with PPIP managers, Insurance Companies, Money Managers along with monthly
pay-downs). Fundamentals, however, have remained bleak as housing and job
markets show limited to no signs of a recovery. We intend to stay prudent and
will look for opportunities to add and subtract bonds where we see relative
value.
----------
(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.
(2) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gains distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per share and
does not reflect sales load.
(3) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share Price.
Page 5
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a)
OCTOBER 31, 2009
PRINCIPAL STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------ ------------------------------------------------------- ------ -------- ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 50.9%
Federal National Mortgage Association (FNMA)
$ 6,233,237 Pool 256182 ........................................ 6.00% 03/01/36 $ 6,609,515
8,453,682 Pool 256328 (b) .................................... 6.50% 07/01/36 9,068,031
5,966,042 Pool 831145 (b) .................................... 6.00% 12/01/35 6,366,275
6,105,243 Pool 843971 (b) .................................... 6.00% 11/01/35 6,514,814
4,115,813 Pool 872303 (b) .................................... 6.00% 05/01/36 4,385,492
7,115,787 Pool 880203 ........................................ 6.00% 02/01/36 7,543,117
------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(Cost $37,990,603) ................................. 40,487,244
------------
U.S. GOVERNMENT AGENCY AND NON-AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS - 74.0%
Banc of America Funding Corp.
1,245,128 Series 2005-F, Class 4A1 (c) ....................... 5.30% 09/20/35 925,178
Banc of America Mortgage Securities
117,172 Series 2002-L, Class 1A1 (c) ....................... 4.79% 12/25/32 83,972
266,005 Series 2004-K, Class 4A1 (c) ....................... 5.21% 12/25/34 235,320
3,813,326 Series 2007-3, Class 2A3 ........................... 7.00% 09/25/37 2,259,591
Chase Mortgage Finance Corp.
1,314,370 Series 2007-A3, Class 3A1 (c) ...................... 5.96% 12/25/37 1,081,376
Countrywide Alternative Loan Trust
906,599 Series 2004-14T2, Class A6 ......................... 5.50% 08/25/34 841,562
806,136 Series 2004-1T1, Class A1 .......................... 5.00% 02/25/34 783,934
2,210,075 Series 2005-J1, Class 2A1 .......................... 5.50% 02/25/25 1,996,926
Countrywide Home Loans
445,843 Series 2004-HYB1, Class 2A (c) ..................... 4.35% 05/20/34 361,375
239,315 Series 2005-20, Class A7 ........................... 5.25% 10/25/35 194,252
2,567,646 Series 2005-J4, Class A4 ........................... 5.50% 11/25/35 2,091,318
Federal Home Loan Mortgage Corp.
4,377,998 Series 2676, Class IK, IO ......................... 5.00% 02/15/20 181,295
182,256 Series 2716, Class CI, IO ......................... 5.00% 05/15/19 5,457
2,148,963 Series 2737, Class IG, IO ......................... 5.00% 08/15/27 67,616
10,483,756 Series 2807, Class SB, IO (d) ..................... 7.21% 11/15/33 1,524,186
1,952,011 Series 2852, Class VI, IO ......................... 5.00% 06/15/24 23,384
4,644,388 Series 2870, Class JI, IO ......................... 5.00% 10/15/27 218,658
792,000 Series 2888, Class OI, IO ......................... 5.00% 01/15/27 40,735
1,774,808 Series 2921, Class IQ, IO ......................... 5.00% 01/15/29 140,840
989,216 Series 2938, Class PI, IO ......................... 5.00% 11/15/28 62,555
236,820 Series 2943, Class JI, IO ......................... 5.00% 01/15/24 1,130
637,419 Series 2961, Class IP, IO ......................... 5.50% 07/15/28 26,225
2,875,376 Series 2964, Class IA, IO ......................... 5.50% 02/15/26 67,600
1,133,348 Series 3000, Class SU (d) ......................... 22.38% 04/15/35 1,200,383
1,076,496 Series 3069, Class LI, IO ......................... 5.50% 08/15/32 94,443
421,561 Series 3107, Class ST (d) ......................... 43.85% 02/15/31 460,450
299,738 Series 3171, Class CS (d) ......................... 37.83% 06/15/36 336,702
835,064 Series 3195, Class SX (d) ......................... 44.56% 07/15/36 1,170,685
See Notes to Financial Statements
Page 6
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
OCTOBER 31, 2009
PRINCIPAL STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------ ------------------------------------------------------- ------ -------- ------------
U.S. GOVERNMENT AGENCY AND NON-AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS - (CONTINUED)
Federal Home Loan Mortgage Corp., STRIP
$ 21,520,548 Series 227, Class IO, IO............................. 5.00% 12/01/34 $ 4,442,758
7,993,981 Series 232, Class IO, IO............................. 5.00% 08/01/35 1,578,045
Federal National Mortgage Association
3,501,492 Series 2005-122, Class SN (d)........................ 27.63% 01/25/36 4,074,883
942,622 Series 2005-39, Class BI, IO......................... 5.00% 06/25/28 49,197
613,039 Series 2005-91, Class SH (d)......................... 22.94% 05/25/33 725,491
Federal National Mortgage Association, STRIP
8,200,592 Series 360, Class 2, IO.............................. 5.00% 08/01/35 1,612,642
First Horizon Mortgage Trust
3,009,000 Series 2005-8, Class 1A5............................. 5.75% 02/25/36 2,715,423
GMAC Mortgage Corporation Loan Trust
451,450 Series 2004-AR1, Class 22A (c)....................... 4.61% 06/25/34 401,880
Government National Mortgage Association
4,050,123 Series 2009-65, Class NJ, IO......................... 5.50% 07/20/39 630,526
GSR Mortgage Loan Trust
1,434,795 Series 2004-5, Class 3A2 (c)......................... 4.68% 05/25/34 1,413,451
369,130 Series 2005-AR2, Class 5A1 (c)....................... 3.66% 04/25/35 325,228
4,960,640 Series 2007-1F, Class 3A10, IO....................... 6.00% 01/25/37 616,922
Harborview Mortgage Loan Trust
371,291 Series 2004-1, Class 2A (c).......................... 3.74% 04/19/34 325,013
JP Morgan Re-REMIC
4,662,428 Series 2009-7, Class 12A1 (c) (e).................... 6.25% 01/27/37 4,534,211
Merrill Lynch Mortgage Investors Trust
2,128,343 Series 2005-A7, Class 2A1 (c)........................ 5.37% 09/25/35 1,808,796
Morgan Stanley Mortgage Loan Trust
323,079 Series 2004-7AR, Class 2A6 (c)....................... 3.50% 09/25/34 297,192
Residential Accredit Loans, Inc.
191,478 Series 2002-QS18, Class A1........................... 5.50% 12/25/17 194,006
Sequoia Mortgage Trust
4,144,946 Series 2007-1, Class 2A1 (c)......................... 5.75% 02/20/47 3,368,786
Wachovia Mortgage Loan Trust, LLC
1,855,962 Series 2006-A, Class 3A1 (c)......................... 5.24% 05/20/36 1,582,890
Washington Mutual Msc Mortgage Pass-Through
1,319,127 Series 2004-RA1, Class 2A............................ 7.00% 03/25/34 1,295,598
Wells Fargo Mortgage Backed Securities Trust
952,487 Series 2005-AR16, Class 1A1 (c)...................... 3.66% 10/25/35 918,024
4,194,658 Series 2006-9, Class 1A32............................ 6.00% 08/25/36 2,698,585
855,218 Series 2006-AR10, Class 5A2 (c)...................... 5.59% 07/25/36 798,319
3,181,942 Series 2007-16, Class 1A1............................ 6.00% 12/28/37 3,001,284
3,069,410 Series 2007-8, Class 2A7............................. 6.00% 07/25/37 2,911,838
------------
TOTAL U.S. GOVERNMENT AGENCY AND NON-AGENCY
COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $54,295,423)................................... 58,798,136
------------
See Notes to Financial Statements
Page 7
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
OCTOBER 31, 2009
SHARES DESCRIPTION VALUE
------------ ------------------------------------------------------- ------------
PREFERRED SECURITIES - 0.1%
20,000 Fannie Mae, 8.25% (f).................................. $ 23,000
40,000 Freddie Mac, Series Z, 8.38% (f)....................... 44,000
------------
TOTAL PREFERRED SECURITIES
(Cost $1,500,000)................................... 67,000
------------
TOTAL INVESTMENTS - 125.0%
(Cost $93,786,026) (g).............................. 99,352,380
------------
PRINCIPAL
VALUE DESCRIPTION
------------ -------------------------------------------------------
REVERSE REPURCHASE AGREEMENT - (31.6%)
$(25,118,000) With UBS Securities 0.15% dated 10/30/09, to be
repurchased at $25,118,314 on 11/02/09.............. (25,118,000)
NET OTHER ASSETS AND LIABILITIES - 6.6%................ 5,227,710
------------
NET ASSETS - 100.0%.................................... $ 79,462,090
============
----------
(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 October 31, 2009.
(d) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at October 31, 2009.
(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 $4,444,144 and has a carrying value per
share of $0.97 and represents 5.71% of net assets.
(f) The U.S. Government took control over this company in September 2008, and
it has since suspended its dividend.
(g) Aggregate cost for federal income tax purposes is $96,882,734. As of
October 31, 2009, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$9,093,403 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$6,623,757.
IO Interest Only - represents the interest only portion of a mortgage-backed
security, which allows the holder to receive interest only payments on the
amount of notional principal outstanding.
STRIP Separate Trading of Registered Interest and Principal of Securities -
Stripped Mortgage-Backed Securities are created by separating the interest
payments from the principal payments of underlying mortgage securities to
create new interest only (IO) and principal only (PO) zero coupon
securities.
See Notes to Financial Statements
Page 8
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
OCTOBER 31, 2009
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2009 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
VALUATION INPUTS 10/31/2009 PRICES INPUTS INPUTS
---------------- ------------ ------- ----------- ------------
U.S. Government Agency Mortgage-Backed Securities .. $40,487,244 $ -- $40,487,244 $--
U.S. Government Agency and Non-Agency
Collateralized Mortgage Obligations ............. 58,798,136 -- 58,798,136 --
Preferred Securities ............................... 67,000 67,000 -- --
----------- ------- ----------- ---
TOTAL INVESTMENTS .................................. $99,352,380 $67,000 $99,285,380 $--
=========== ======= =========== ===
See Notes to Financial Statements
Page 9
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2009
ASSETS:
Investments, at value
(Cost $93,786,026) ....................................... $ 99,352,380
Cash ........................................................ 4,764,213
Prepaid expenses ............................................ 10,308
Interest receivable ......................................... 812,664
------------
Total Assets ............................................. 104,939,565
------------
LIABILITIES:
Reverse repurchase agreements ............................... 25,118,000
Payables:
Interest on reverse repurchase agreements ................ 179,010
Investment advisory fees ................................. 87,889
Audit and tax fees ....................................... 50,211
Printing fees ............................................ 16,498
Administrative fees ...................................... 8,378
Legal fees ............................................... 7,015
Trustees' fees and expenses .............................. 3,460
Transfer agent fees ...................................... 2,421
Custodian fees ........................................... 1,958
Accrued expenses ............................................ 2,635
------------
Total Liabilities ........................................ 25,477,475
------------
NET ASSETS .................................................. $ 79,462,090
============
NET ASSETS CONSIST OF:
Paid-in capital ............................................. $ 76,922,708
Par value ................................................... 40,490
Net unrealized appreciation (depreciation) on investments ... 5,566,354
Accumulated net investment income (loss) .................... 1,237,794
Accumulated net realized gain (loss) on investments ......... (4,305,256)
------------
NET ASSETS .................................................. $ 79,462,090
============
NET ASSET VALUE, per Common Share outstanding
(par value $0.01 per Common Share) ....................... $ 19.63
============
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 YEAR ENDED OCTOBER 31, 2009
INVESTMENT INCOME:
Interest ......................................................... $ 7,823,930
-----------
Total investment income ....................................... 7,823,930
-----------
EXPENSES:
Investment advisory fees ......................................... 917,417
Excise tax expense ............................................... 105,778
Administrative fees .............................................. 100,042
Interest expense on reverse repurchase agreements ................ 60,672
Legal fees ....................................................... 53,137
Audit and tax fees ............................................... 52,725
Trustees' fees and expenses ...................................... 39,716
Printing fees .................................................... 38,278
Transfer agent fees .............................................. 31,248
Custodian fees ................................................... 12,026
Other ............................................................ 53,834
-----------
Total expenses ................................................ 1,464,873
-----------
NET INVESTMENT INCOME ............................................ 6,359,057
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments .......................... (1,849,267)
Net change in unrealized appreciation
(depreciation) on investments ................................. 7,481,465
-----------
Net realized and unrealized gain (loss) on investments ........... 5,632,198
-----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .. $11,991,255
===========
See Notes to Financial Statements
Page 11
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
10/31/2009 10/31/2008
----------- -----------
OPERATIONS:
Net investment income (loss) ..................................... $ 6,359,057 $ 6,006,542
Net realized gain (loss) ......................................... (1,849,267) --
Net change in unrealized appreciation (depreciation) ............. 7,481,465 (4,027,883)
----------- -----------
Net increase (decrease) in net assets resulting from operations .. 11,991,255 1,978,659
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................ (5,545,693) (4,510,438)
----------- -----------
Total distributions to shareholders .............................. (5,545,693) (4,510,438)
----------- -----------
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 .......................... 6,506,463 (2,531,779)
NET ASSETS:
Beginning of period .............................................. 72,955,627 75,487,406
----------- -----------
End of period .................................................... $79,462,090 $72,955,627
=========== ===========
Accumulated net investment income (loss) at end of period ........ $ 1,237,794 $ 1,678,984
=========== ===========
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period ............................. 4,045,236 4,045,236
Common Shares issued as reinvestment under the Dividend
Reinvestment Plan ............................................. 3,757 --
----------- -----------
Common Shares at end of period ................................... 4,048,993 4,045,236
=========== ===========
See Notes to Financial Statements
Page 12
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations ..... $ 11,991,255
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash provided by operating
activities:
Purchases of investments ......................................... (41,893,398)
Sales of investments ............................................. 35,048,326
Net amortization/accretion of premium/discount on investments .... 5,156,886
Realized gain/loss on investments ................................ 1,849,267
Net change in unrealized appreciation/depreciation on
investments ................................................... (7,481,465)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable .................................. 16,831
Decrease in dividends receivable ................................. 179
Increase in prepaid expenses ..................................... (1,978)
Decrease in interest payable on reverse repurchase agreements .... (42,346)
Increase in investment advisory fees payable ..................... 8,580
Decrease in audit and tax fees payable ........................... (5,227)
Decrease in legal fees payable ................................... (713)
Increase in printing fees payable ................................ 134
Increase in administrative fees payable .......................... 40
Decrease in custodian fees payable ............................... (92)
Decrease in transfer agent fees payable .......................... (2,975)
Increase in Trustees' fees and expenses payable .................. 534
Decrease in accrued expenses and other liabilities ............... (10,197)
---------------
CASH PROVIDED BY OPERATING ACTIVITIES ............................... $ 4,633,641
---------------
CASH FLOWS USED BY FINANCING ACTIVITIES:
Proceeds from Common Shares reinvested ........................... 60,901
Distributions to Common Shareholders from net investment income .. (5,545,693)
Maturities of reverse repurchase agreements ...................... (5,264,819,000)
Sales of reverse repurchase agreements ........................... 5,269,222,000
---------------
CASH USED BY FINANCING ACTIVITIES ................................... (1,081,792)
---------------
Increase in cash .................................................... 3,551,849
Cash at beginning of period ......................................... 1,212,364
---------------
Cash at end of period ............................................... $ 4,764,213
===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ............................ $ 103,018
===============
See Notes to Financial Statements
Page 13
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
10/31/2009 10/31/2008 10/31/2007 10/31/2006 10/31/2005(a)
---------- ---------- ---------- ---------- -------------
Net asset value, beginning of period .......... $ 18.03 $ 18.66 $ 18.41 $ 19.02 $19.10(b)
------- ------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .................. 1.57 1.49 1.04 1.03 0.36
Net realized and unrealized gain (loss) ....... 1.40 (1.00) 0.23 (0.58) (0.09)
------- ------- ------- ------- ------
Total from investment operations .............. 2.97 0.49 1.27 0.45 0.27
------- ------- ------- ------- ------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ......................... (1.37) (1.12) (1.02) (1.06) (0.31)
------- ------- ------- ------- ------
Total from distributions ...................... (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 ................ $ 19.63 $ 18.03 $ 18.66 $ 18.41 $19.02
======= ======= ======= ======= ======
Market value, end of period ................... $ 17.91 $ 15.71 $ 16.32 $ 16.58 $16.40
======= ======= ======= ======= ======
TOTAL RETURN BASED ON NET ASSET VALUE (c)
(d) ........................................... 18.21% 3.38% 7.80% 3.30% 1.37%
======= ======= ======= ======= ======
TOTAL RETURN BASED ON MARKET VALUE (d) (e) .... 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) .......... $79,462 $72,956 $75,487 $74,458 $76,925
Ratio of total expenses to average net
assets ..................................... 2.07% 2.69% 3.24% 3.10% 2.48%(f)
Ratio of net expenses to average net assets ... 2.07% 2.69% 3.24% 3.06% 2.28%(f)
Ratio of net expenses to average net assets
excluding interest expense ................. 1.99% 1.83% 1.71% 1.69% 1.62%(f)
Ratio of net investment income to average
net assets ................................. 9.01% 7.93% 5.70% 5.55% 4.30%(f)
Portfolio turnover rate ....................... 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 based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in net
asset value per share and does not reflect sales load.
(d) Total return is not annualized for periods less than one year.
(e) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price.
(f) Annualized.
See Notes to Financial Statements
Page 14
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2009
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
OCTOBER 31, 2009
- 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 October 31, 2009 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.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis. Amortization of premiums and the accretion of discounts
are recorded using the effective interest method.
The Fund invests in certain lower credit quality securitized assets (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. Investment income is recorded net of foreign taxes withheld
where recovery of such taxes is uncertain. Debt obligations may be placed on
non-accrual status and related interest income may be reduced by ceasing current
accruals and writing off interest receivables when the collection of all or a
portion of interest has become doubtful based on consistently applied
procedures. A debt obligation is removed from non-accrual status when the issuer
resumes interest payments or when collectibility of interest is reasonably
assured.
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 October 31, 2009, 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 year ended October 31, 2009:
Maximum amount outstanding during the year .............. $25,118,000
Average amount outstanding during the year* ............. $21,162,310
Average monthly shares outstanding during the year ...... 4,048,211
Average debt per share outstanding during the year ...... $ 5.23
* The average amount outstanding during the year was calculated by adding the
borrowings at the end of each day and dividing the sum by the number of
days in the year ended October 31, 2009.
Page 16
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2009
During the year ended October 31, 2009, interest rates ranged from 0.10% to
0.70%, with a weighted average interest rate of 0.28%, on borrowings by the Fund
under reverse repurchase agreements, which had interest expense that aggregated
$60,672.
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. Permanent differences incurred during the fiscal year ended
October 31, 2009, resulting in book and tax accounting differences, have been
reclassified at year end to reflect a decrease in accumulated net investment
income (loss) by $1,254,554, an increase in accumulated net realized gain (loss)
on investments by $1,360,332 and a decrease to paid-in capital of $105,778. Net
assets were not affected by this reclassification.
The tax character of distributions paid during the fiscal years ended October
31, 2009 and October 31, 2008 was as follows:
2009 2008
---------- -----------
Distributions paid from:
Ordinary Income .............. $5,545,693 $4,510,438
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)
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2009
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, 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 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 October
31, 2009, 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.
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. During the fiscal year ended October 31, 2009, the Fund did not
utilize any of its capital loss carryforward.
I. EXPENSES:
The Fund pays all expenses directly related to its operations.
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, majority-owned
subsidiary of The PNC Financial Services Group, Inc., 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
The PNC Financial Services Group, Inc., serves as the Fund's Custodian in
accordance with certain fee arrangements.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustee") is paid an annual retainer of
$10,000 per trust for the first 14 trusts of the First Trust Fund Complex and an
annual retainer of $7,500 per trust for each subsequent trust in the First Trust
Fund Complex. The annual retainer is allocated equally among each of the trusts.
No additional meeting fees are paid in connection with board or committee
meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually, the
Chairman of the Audit Committee is paid $5,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $2,500 annually to serve in such capacities, with such compensation paid
by the trusts in the First Trust Fund Complex and divided among those trusts.
Trustees are also reimbursed by the trusts in the First Trust Fund Complex for
travel and out-of-pocket expenses in connection with all meetings. The Lead
Independent Trustee and each Committee chairman will serve two-year terms ending
December 31, 2009 before rotating to serve as chairman of another committee or
as Lead Independent Trustee. The officers and "Interested" Trustee receive no
compensation for serving in such capacities.
Page 18
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2009
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 year ended October 31,
2009 were $6,504,499 and $35,388,899, respectively. The proceeds from sales of
U.S. Government securities and non-U.S. Government securities, excluding
short-term investments, for the year ended October 31, 2009 were $15,935,379 and
$19,112,947, 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.
The Fund's performance was adversely impacted by the weakness in the credit
markets and broad stock market that occurred beginning in late 2008, and may
continue to be adversely affected if the weakness in the credit or stock markets
continue. In response to the financial crises affecting the banking system and
financial markets, the U.S. and foreign Governments have intervened to an
unprecedented degree in the financial and credit markets. Among other things,
U.S. Government regulators have encouraged, and in some cases structured and
provided financial assistance for, banks, securities firms, insurers and other
financial companies. Additional intervention programs have been adopted and
proposed which may have a further impact on the financial and credit markets.
Many of the recently enacted or proposed Government measures are far-reaching
and without historical precedent. Furthermore, the U.S. Government has stated
its willingness to implement additional measures as it may see fit to address
changes in market conditions. There can be no assurance that any or all of these
measures will succeed in stabilizing and providing liquidity to the U.S.
financial markets.
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.
Page 19
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2009
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.
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
December 23, 2009, the date the financial statements were issued, and has
determined that there were the following subsequent events:
On October 20, 2009, the Fund declared a dividend of $0.11 per share to Common
Shareholders of record November 4, 2009, payable November 16, 2009.
On November 20, 2009, the Fund declared a dividend of $0.11 per share to Common
Shareholders of record December 3, 2009, payable December 11, 2009.
On December 21, 2009, the Fund declared dividends totaling $0.23 per share to
Common Shareholders of record December 31, 2009, payable January 15, 2010. Of
this amount, $0.12 per share represents the Fund's regular monthly dividend and
$0.11 per share represents a special distribution.
Page 20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST/FIDAC MORTGAGE INCOME
FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust/FIDAC Mortgage Income Fund (the "Fund"), including the portfolio of
investments, as of October 31, 2009, and the related statements of operations
and cash flows for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for the periods presented. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2009 by correspondence with the Fund's
custodian. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust/FIDAC Mortgage Income Fund as of October 31, 2009, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for the periods presented, in conformity with accounting principles
generally accepted in the United States of America.
(DELOITTE & TOUCHE LLP)
Chicago, Illinois
December 23, 2009
Page 21
ADDITIONAL INFORMATION
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2009 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by PNC
Global Investment Servicing (U.S.) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price equal
to the greater of (i) NAV per Common Share on that date or (ii) 95% of
the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and will
purchase Common Shares in the open market, on the NYSE or elsewhere,
for the participants' accounts. It is possible that the market price
for the Common Shares may increase before the Plan Agent has completed
its purchases. Therefore, the average purchase price per share paid by
the Plan Agent may exceed the market price at the time of valuation,
resulting in the purchase of fewer shares than if the dividend or
distribution had been paid in Common Shares issued by the Fund. The
Plan Agent will use all dividends and distributions received in cash
to purchase Common Shares in the open market within 30 days of the
valuation date except where temporary curtailment or suspension of
purchases is necessary to comply with federal securities laws.
Interest will not be paid on any uninvested cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 331-1710 in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized, although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing PNC Global Investment
Servicing (U.S.) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
Page 22
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2009 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling (800) SEC-0330.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended October 31, 2009, none qualifies for the
corporate dividends received deduction available to corporate shareholders or as
qualified dividend income.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of June 16, 2009, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR and N-Q contain certifications by the Fund's principal
executive officer and principal financial officer that relate to the Fund's
public disclosure in such reports and are required by Rule 30a-2 under the 1940
Act.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of Macquarie/First Trust Global
Infrastructure/Utilities Dividend & Income Fund, Energy Income and Growth Fund,
First Trust Enhanced Equity Income Fund, First Trust/Aberdeen Global Opportunity
Income Fund, First Trust/FIDAC Mortgage Income Fund, First Trust Strategic High
Income Fund, First Trust Strategic High Income Fund II, First Trust
Tax-Advantaged Preferred Income Fund, First Trust Specialty Finance and
Financial Opportunities Fund and First Trust Active Dividend Income Fund, was
held on April 16, 2009. At the Annual Meeting, Independent Trustees Richard E.
Erickson and Thomas R. Kadlec were elected by the Common Shareholders of the
First Trust/FIDAC Mortgage Income Fund for three-year terms expiring at the
Fund's annual meeting of shareholders in 2012. The number of votes cast in favor
of both Dr. Erickson and Mr. Kadlec was 3,526,422, the number of votes against
was 44,491 and the number of abstentions was 478,080. James A. Bowen, Robert F.
Keith and Niel B. Nielson are the current and continuing Trustees.
Page 23
BOARD OF TRUSTEES AND OFFICERS
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2009 (UNAUDITED)
NUMBER OF
PORTFOLIOS IN OTHER
THE FIRST TRUST TRUSTEESHIPS OR
NAME, ADDRESS, DATE OF BIRTH TERM OF OFFICE AND PRINCIPAL OCCUPATIONS FUND COMPLEX DIRECTORSHIPS
AND POSITION WITH THE FUND LENGTH OF SERVICE(1) DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
----------------------------- --------------------- ------------------------- ------------------- -------------------------
INDEPENDENT TRUSTEES
Richard E. Erickson, Trustee - Three Year Term Physician; President, 61 None
c/o First Trust Advisors L.P. - Since Fund Wheaton Orthopedics;
120 E. Liberty Drive, Inception Co-owner and Co-
Suite 400 Director (January 1996 to
Wheaton, IL 60187 May 2007), Sports Med
D.O.B.: 04/51 Center for Fitness;
Limited Partner,
Gundersen Real Estate
Partnership; Limited
Partner, Sportsmed LLC
Thomas R. Kadlec, Trustee - Three Year Term Senior Vice President and 61 Director of ADM
c/o First Trust Advisors L.P. - Since Fund Chief Financial Officer Investor Services, Inc.
120 E. Liberty Drive, Inception (May 2007 to Present), and ADM Investor
Suite 400 Vice President and Chief Services International
Wheaton, IL 60187 Financial Officer (1990
D.O.B.: 11/57 to May 2007), ADM
Investor Services, Inc.
(Futures Commission
Merchant)
Robert F. Keith, Trustee - Three Year Term President (2003 to 61 None
c/o First Trust Advisors L.P. - Since June 2006 Present), Hibs
120 E. Liberty Drive, Enterprises (Financial
Suite 400 and Management
Wheaton, IL 60187 Consulting)
D.O.B.: 11/56
----------
1 Currently, Robert F. Keith is serving as a trustee until the Fund's 2011
annual meeting of shareholders. Richard E. Erickson and Thomas R. Kadlec
are each serving as trustees until the Fund's 2012 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson are each serving as
trustees until the Fund's 2010 annual meeting. Officers of the Fund have an
indefinite term.
Page 24
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2009 (UNAUDITED)
NUMBER OF
PORTFOLIOS IN OTHER
THE FIRST TRUST TRUSTEESHIPS OR
NAME, ADDRESS, DATE OF BIRTH TERM OF OFFICE AND PRINCIPAL OCCUPATIONS FUND COMPLEX DIRECTORSHIPS
AND POSITION WITH THE FUND LENGTH OF SERVICE(1) DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
----------------------------- --------------------- ------------------------- ------------------- -------------------------
INDEPENDENT TRUSTEES - (CONTINUED)
Niel B. Nielson, Trustee - Three Year Term President (June 2002 to 61 Director of Covenant
c/o First Trust Advisors L.P. - Since Fund Present), Covenant Transport Inc.
120 E. Liberty Drive, Inception College
Suite 400
Wheaton, IL 60187
D.O.B.: 03/54
INTERESTED TRUSTEE
James A. Bowen(2), Trustee, - Three Year Trustee President, First Trust 61 Trustee of Wheaton
President, Chairman of the Term and Advisors L.P. and First College
Board and CEO Indefinite Officer Trust Portfolios L.P.;
120 E. Liberty Drive, Term Chairman of the Board of
Suite 400 - Since Fund Directors, BondWave
Wheaton, IL 60187 Inception LLC (Software
D.O.B.: 09/55 Development
Company/Investment
Advisor) and Stonebridge
Advisors LLC
(Investment Advisor)
PRINCIPAL
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND OCCUPATIONS DURING
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE PAST 5 YEARS
----------------------------- -------------------- ------------------------- --------------------------
OFFICERS WHO ARE NOT TRUSTEES(3)
Mark R. Bradley Treasurer, Controller, - Indefinite Term Chief Financial Officer,
120 E. Liberty Drive, Chief Financial First Trust Advisors L.P.
Suite 400 Officer and Chief - Since Fund Inception and First Trust Portfolios
Wheaton, IL 60187 Accounting Officer L.P.; Chief Financial
D.O.B.: 11/57 Officer, BondWave LLC
(Software Development
Company/Investment
Advisor) and Stonebridge
Advisors LLC (Investment
Advisor)
----------
1 Currently, Robert F. Keith is serving as a trustee until the Fund's 2011
annual meeting of shareholders. Richard E. Erickson and Thomas R. Kadlec
are each serving as trustees until the Fund's 2012 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson are each serving as
trustees until the Fund's 2010 annual meeting. Officers of the Fund have an
indefinite term.
2 Mr Bowen is deemed an "interested person" of the Fund due to his position
as President of First Trust Advisors L.P., investment advisor of the Fund.
3 The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 25
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2009 (UNAUDITED)
PRINCIPAL
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND OCCUPATIONS DURING
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE PAST 5 YEARS
----------------------------- -------------------- ------------------------- --------------------------
OFFICERS WHO ARE NOT TRUSTEES(3) - (CONTINUED)
Erin E. Chapman Assistant Secretary - Indefinite Term Assistant General Counsel
120 E. Liberty Drive, - Since June 2009 (October 2007 to Present),
Suite 400 Associate Counsel (March
Wheaton, IL 60187 2006 to October 2007),
D.O.B.: 08/76 First Trust Advisors L.P.
and First Trust Portfolios
L.P.; Associate Attorney
(November 2003 to March
2006), Doyle & Bolotin,
Ltd.
James M. Dykas Assistant Treasurer - Indefinite Term Senior Vice President
120 E. Liberty Drive, - Since Fund Inception (April 2007 to Present),
Suite 400 Vice President (January
Wheaton, IL 60187 2005 to April 2007), First
D.O.B.: 01/66 Trust Advisors L.P. and
First Trust Portfolios
L.P.; Executive Director
(December 2002 to January
2005), Vice President
(December 2000 to December
2002), Van Kampen Asset
Management and Morgan
Stanley Investment
Management
Christopher R. Fallow Assistant Vice - Indefinite Term Assistant Vice President
120 E. Liberty Drive, President - Since Fund Inception (August 2006 to Present),
Suite 400 Associate (January 2005 to
Wheaton, IL 60187 August 2006), First Trust
D.O.B.: 04/79 Advisors L.P. and First
Trust Portfolios L.P.;
Municipal Bond Trader
(July 2001 to January
2005), BondWave LLC
(Software Development
Company/Investment
Advisor)
W. Scott Jardine Secretary and Chief - Indefinite Term General Counsel, First
120 E. Liberty Drive, Compliance Officer - Since Fund Inception Trust Advisors L.P. and
Suite 400 First Trust Portfolios
Wheaton, IL 60187 L.P.; Secretary, BondWave
D.O.B.: 05/60 LLC (Software Development
Company/Investment
Advisor) and Stonebridge
Advisors LLC (Investment
Advisor)
----------
3 The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 26
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2009 (UNAUDITED)
PRINCIPAL
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND OCCUPATIONS DURING
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE PAST 5 YEARS
----------------------------- -------------------- ------------------------- --------------------------
OFFICERS WHO ARE NOT TRUSTEES(3) - (CONTINUED)
Daniel J. Lindquist Vice President - Indefinite Term Senior Vice President
120 E. Liberty Drive, - Since Fund Inception (September 2005 to
Suite 400 Present), Vice President
Wheaton, IL 60187 (April 2004 to September
D.O.B.: 02/70 2005), First Trust
Advisors L.P. and First
Trust Portfolios L.P.
Coleen D. Lynch Assistant Vice - Indefinite Term Assistant Vice President
120 E. Liberty Drive, President - Since July 2008 (January 2008 to Present),
Suite 400 First Trust Advisors L.P.
Wheaton, IL 60187 and First Trust Portfolios
D.O.B.: 07/58 L.P.; Vice President (May
1998 to January 2008), Van
Kampen Asset Management
and Morgan Stanley
Investment Management
Kristi A. Maher Assistant Secretary - Indefinite Term Deputy General Counsel
120 E. Liberty Drive, and Deputy - Assistant Secretary (May 2007 to Present),
Suite 400 Compliance Officer since Fund Inception Assistant General Counsel
Wheaton, IL 60187 - Deputy Chief Compliance (March 2004 to May 2007),
D.O.B.: 12/66 Officer since November First Trust Advisors L.P.
2009 and First Trust Portfolios
L.P.
----------
3 The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 27
PRIVACY POLICY
FIRST TRUST/FIDAC MORTGAGE INCOME FUND
OCTOBER 31, 2009 (UNAUDITED)
PRIVACY POLICY
The open-end and closed-end funds advised by First Trust (each a "Fund")
consider your privacy an important priority in maintaining our relationship. We
are committed to protecting the security and confidentiality of your personal
information.
SOURCES OF INFORMATION
We may collect nonpublic personal information about you from the following
sources:
- Information we receive from you or your broker-dealer, investment advisor
or financial representative through interviews, applications, agreements or
other forms;
- Information about your transactions with us, our affiliates or others;
- Information we receive from your inquiries by mail, e-mail or telephone;
and
- Information we collect on our website through the use of "cookies." For
example, we may identify the pages on our website that your browser
requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. The permitted uses
include the disclosure of such information to unaffiliated companies for the
following reasons:
- In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your personal
information as described above to unaffiliated financial service providers
and other companies that perform administrative or other services on our
behalf, such as transfer agents, custodians and trustees, or that assist us
in the distribution of investor materials such as trustees, banks,
financial representatives and printers.
- We may release information we have about you if you direct us to do so, if
we are compelled by law to do so, or in other legally limited circumstances
(for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund. Please note,
however, that the California Financial Information Privacy Act contains an "opt
out" mechanism that California consumers may use to prevent us from sharing
nonpublic personal information with affiliates.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, the Fund restricts access to
your nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time; however, if we do change
it, we will tell you promptly.
For questions about our policy, or for additional copies of this notice, please
contact us at (800) 621-1675.
Page 28
(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.
(a) The registrant, as of the end of the period covered by this report,
has adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party.
(c) During the period covered by this report, the code of ethics that
applies to the registrant's principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, and that
relates to any element of the code of ethics description was amended
to name W. Scott Jardine as the Compliance Coordinator for the
implementation and administration of the aforementioned code. The
amended code of ethics is provided as an exhibit pursuant to Item
12(a)(1).
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are
employed by the registrant or a third party, that relates to one or
more of the items set forth in paragraph (b) of this item's
instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES (REGISTRANT) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the
principal accountant for the audit of the registrant's annual
financial statements or services that are normally provided by the
accountant in connection with statutory and regulatory filings or
engagements for those fiscal years were $41,000 for the fiscal year
ended October 31, 2008 and $45,000 for the fiscal year ended October
31, 2009.
(b) AUDIT-RELATED FEES (REGISTRANT) -- The aggregate fees billed in each
of the last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements and
are not reported under paragraph (a) of this Item were $0 for the
fiscal year ended October 31, 2008 and $0 for the fiscal year ended
October 31, 2009.
AUDIT-RELATED FEES (INVESTMENT ADVISOR) -- The aggregate fees billed
in each of the last two fiscal years for assurance and related
services by the principal accountant that are reasonably related to
the performance of the audit of the registrant's financial statements
and are not reported under paragraph (a) of this Item were $0 for the
fiscal year ended October 31, 2008 and $0 for the fiscal year ended
October 31, 2009.
(c) TAX FEES (REGISTRANT) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning were
$5,000 for the fiscal year ended October 31, 2008 and $5,200 for the
fiscal year ended October 31, 2009. These fees were for tax return
preparation.
TAX FEES (INVESTMENT ADVISOR) -- The aggregate fees billed in each of
the last two fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and tax planning
were $0 for the fiscal year ended October 31, 2008 and $0 for the
fiscal year ended October 31, 2009.
(d) ALL OTHER FEES (REGISTRANT) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the
principal accountant to the Registrant, other than the services
reported in paragraphs (a) through (c) of this Item were $0 for the
fiscal year ended October 31, 2008 and $0 for the fiscal year ended
October 31, 2009.
ALL OTHER FEES (INVESTMENT ADVISER) The aggregate fees billed in each
of the last two fiscal years for products and services provided by the
principal accountant to the Registrant, other than the services
reported in paragraphs (a) through (c) of this Item were $0 for the
fiscal year ended October 31, 2008 and $0 for the fiscal year ended
October 31, 2009.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services
Pre-Approval Policy, the Audit Committee (the "COMMITTEE") is responsible for
the pre-approval of all audit services and permitted non-audit services
(including the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the
independent auditor's engagements for non-audit services with the registrant's
adviser (not including a sub-adviser whose role is primarily portfolio
management and is sub-contracted or overseen by another investment adviser) and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant, if the
engagement relates directly to the operations and financial reporting of the
registrant, subject to the DE MINIMIS exceptions for non-audit services
described in Rule 2-01 of Regulation S-X. If the independent auditor has
provided non-audit services to the registrant's adviser (other than any
sub-adviser whose role is primarily portfolio management and is sub-contracted
with or overseen by another investment adviser) and any entity controlling,
controlled by or
under common control with the investment adviser that provides ongoing services
to the registrant that were not pre-approved pursuant to its policies, the
Committee will consider whether the provision of such non-audit services is
compatible with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) for the Registrant and the Registrant's investment adviser
of this Item that were approved by the audit committee pursuant to the
pre-approval exceptions included in paragraph (c)(7)(i)(c) or
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees
was less than fifty percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen
by another investment adviser), and any entity controlling, controlled
by, or under common control with the adviser that provides ongoing
services to the registrant for the Registrant's fiscal year ended
October 31, 2008 were $5,000 for the Registrant and $12,143 for the
Registrant's investment adviser and for the Registrant's fiscal year
ended October 31, 2009 were $36,000 the Registrant and $5,200 for the
Registrant's investment adviser.
(h) The registrant's audit committee of the board of directors has
considered whether the provision of non-audit services that were
rendered to the registrant's investment adviser (not including any
sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser), and any
entity controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal
accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately designated audit committee consisting of
all the independent directors of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
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.
The Proxy Voting Policies are attached herewith.
FIRST TRUST ADVISORS L.P.
PROXY VOTING GUIDELINES
First Trust Advisors L.P. (the "ADVISER") serves as investment adviser
providing discretionary investment advisory services for separate managed
accounts, ERISA accounts and open- and closed-end investment companies (the
"CLIENTS"). As part of these services, the Adviser may have responsibility for
proxy voting and related duties. In fulfilling these duties, the Adviser has
adopted the following policies and procedures:
1. It is the Adviser's policy to seek and to ensure that proxies are voted
on securities in a Client's account consistently and solely in the best economic
interests of the Client.
2. The Adviser shall be responsible for the oversight of Client proxy
voting processes and shall assign a senior member of its staff to be responsible
for this oversight.
3. The Adviser has engaged the services of Institutional Shareholder
Services, Inc. ("ISS") to make recommendations to the Adviser on the voting of
proxies related to securities held by Clients. ISS provides voting
recommendations based on established guidelines and practices. The Adviser has
adopted these ISS Proxy Voting Guidelines.
4. The Adviser shall review the ISS recommendations and generally will vote
proxies in accordance with such recommendations. Notwithstanding the foregoing,
the Adviser may not vote in accordance with the ISS recommendations if the
Adviser believes that the specific ISS recommendation is not in the best
interests of the Client. In addition, whenever a conflict of interest arises
between ISS and a company subject to a proxy vote, the Adviser will vote the
proxy without using the analyses of ISS and will consider the recommendation of
the company and what the Adviser believes to be in the best interests of the
Client. In addition, if the Adviser has actual knowledge of any other type of
material conflict of interest between itself and the respective Client with
respect to the voting of a proxy, the Adviser shall vote the applicable proxy in
accordance with the ISS recommendations to avoid such conflict of interest. With
respect to open- and closed-end funds and variable annuity sub-accounts, if
there is a conflict of interest between fund shareholders and FTA, the fund's
principal underwriter, or sub-adviser, if applicable, FTA will vote the proxy
based on the recommendations of ISS to avoid such conflict of interest.
5. If the Adviser manages the assets or pension fund of a company and any
of the Adviser's Clients hold any securities in that company, the Adviser will
vote proxies relating to such company's securities in accordance with the ISS
recommendations to avoid any conflict of interest.
6. If a Client requests the Adviser to follow specific voting guidelines or
additional guidelines, the Adviser shall review the request and follow such
guidelines, unless the Adviser determines that it is unable to follow such
guidelines. In such case, the Adviser shall inform the Client that it is not
able to follow the Client's request.
7. FTA will monitor changes to the ISS guidelines to determine that such
guidelines continue to result in a voting policy that is in the best interests
of Clients.
8. In certain circumstances, where FTA has determined that it is consistent
with the Client's best interest, FTA will not take steps to ensure that proxies
are voted on securities in the Client's accounts. The following are
circumstances where this may occur:
(a) LIMITED VALUE. Proxies will not be required to be voted on
securities in a Client's account if the value of the Client's economic
interest in the securities is indeterminable or insignificant (less than
$1,000). Proxies will also not be required to be voted for any securities
that are no longer held by the Client's account.
(b) SECURITIES LENDING PROGRAM. When securities are out on loan, they
are transferred into the borrower's name and are voted by the borrower, in
its discretion. In most cases, FTA will not take steps to see that loaned
securities are voted. However, where FTA determines that a proxy vote, or
other shareholder action, is materially important to the Client's account,
FTA will make a good faith effort to recall the security for purposes of
voting, understanding that in certain cases, the attempt to recall the
security may not be effective in time for voting deadlines to be met.
(c) UNJUSTIFIABLE COSTS. In certain circumstances, after doing a
cost-benefit analysis, FTA may choose not to vote where the cost of voting
a Client's proxy would exceed any anticipated benefits to the Client of the
proxy proposal (E.G. foreign securities).
9. For certain open- or closed-end funds relying on Section 12(d)(1)(F) of
the 1940 Act, FTA will vote on proxies of securities of investment companies
held by such funds in the same proportion as all other holders of such
securities (I.E. mirror or echo voting) to the extent possible.
Adopted: September 15, 2003
Amended: December 10, 2007
Amended: September 21, 2009
U.S. Proxy Voting Guidelines Concise Summary
(Digest of Selected Key Guidelines)
January 15, 2009
1. Operational Items:
AUDITOR RATIFICATION
Vote FOR proposals to ratify auditors, unless any of the following apply:
- An auditor has a financial interest in or association with the
company, and is therefore not independent;
- There is reason to believe that the independent auditor has rendered
an opinion which is neither accurate nor indicative of the company's
financial position;
- Poor accounting practices are identified that rise to a serious level
of concern, such as: fraud; misapplication of GAAP; and material
weaknesses identified in Section 404 disclosures; or
- Fees for non-audit services ("Other" fees) are excessive.
Non-audit fees are excessive if:
- Non-audit ("other") fees exceed audit fees + audit-related fees + tax
compliance/preparation fees
Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit
their auditors from engaging in non-audit services.
Vote CASE-BY-CASE on shareholder proposals asking for audit firm rotation,
taking into account:
- The tenure of the audit firm;
- The length of rotation specified in the proposal;
- Any significant audit-related issues at the company;
- The number of Audit Committee meetings held each year;
- The number of financial experts serving on the committee; and
- Whether the company has a periodic renewal process where the auditor
is evaluated for both audit quality and competitive price.
2. Board of Directors:
VOTING ON DIRECTOR(1) NOMINEES IN UNCONTESTED ELECTIONS
Vote on director nominees should be determined on a CASE-BY-CASE basis.
Vote AGAINST or WITHHOLD(2) from individual directors who:
----------
(1) RiskMetrics' classification of directors can be found in U.S. PROXY VOTING
GUIDELINES SUMMARY.
RISKMETRICS Group www.riskmetrics.com
- Attend less than 75 percent of the board and committee meetings
without a valid excuse, such as illness, service to the nation, work
on behalf of the company, or funeral obligations. If the company
provides meaningful public or private disclosure explaining the
director's absences, evaluate the information on a CASE-BY-CASE basis
taking into account the following factors:
- Degree to which absences were due to an unavoidable conflict;
- Pattern of absenteeism; and
- Other extraordinary circumstances underlying the director's
absence;
- Sit on more than six public company boards;
- Are CEOs of public companies who sit on the boards of more than two
public companies besides their own-- withhold only at their outside
boards.
Vote AGAINST or WITHHOLD from all nominees of the board of directors, (except
from new nominees, who should be considered on a CASE-BY-CASE basis) if:
- The company's proxy indicates that not all directors attended 75% of
the aggregate of their board and committee meetings, but fails to
provide the required disclosure of the names of the directors
involved. If this information cannot be obtained, vote
against/withhold from all incumbent directors;
- The company's poison pill has a dead-hand or modified dead-hand
feature. Vote against/withhold every year until this feature is
removed;
- The board adopts or renews a poison pill without shareholder approval,
does not commit to putting it to shareholder vote within 12 months of
adoption (or in the case of an newly public company, does not commit
to put the pill to a shareholder vote within 12 months following the
IPO), or reneges on a commitment to put the pill to a vote, and has
not yet received a withhold/against recommendation for this issue;
- The board failed to act on a shareholder proposal that received
approval by a majority of the shares outstanding the previous year (a
management proposal with other than a FOR recommendation by management
will not be considered as sufficient action taken);
- The board failed to act on a shareholder proposal that received
approval of the majority of shares cast for the previous two
consecutive years (a management proposal with other than a FOR
recommendation by management will not be considered as sufficient
action taken);
- The board failed to act on takeover offers where the majority of the
shareholders tendered their shares;
- At the previous board election, any director received more than 50
percent withhold/against votes of the shares cast and the company has
failed to address the underlying issue(s) that caused the high
withhold/against vote;
- The board is classified, and a continuing director responsible for a
problematic governance issue at the board/committee level that would
warrant a withhold/against vote recommendation is not up for election-
any or all appropriate nominees (except new) may be held accountable;
- The board lacks accountability and oversight, coupled with sustained
poor performance relative to peers. Sustained poor performance is
measured by one- and three-year total shareholder returns in the
bottom half of a company's four-digit GICS industry group (Russell
3000 companies only).
Vote AGAINST or WITHHOLD from Inside Directors and Affiliated Outside Directors
(per the Classification of Directors below) when:
----------
(2) In general, companies with a plurality vote standard use "Withhold" as the
valid opposition vote option in director elections; companies with a
majority vote standard use "Against". However, it will vary by company and
the proxy must be checked to determine the valid opposition vote for the
particular company.
2009 RiskMetrics Group U.S. Proxy Voting Guidelines Concise Summary
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RISKMETRICS Group www.riskmetrics.com
- The inside or affiliated outside director serves on any of the three
key committees: audit, compensation, or nominating;
- The company lacks an audit, compensation, or nominating committee so
that the full board functions as that committee;
- The company lacks a formal nominating committee, even if board attests
that the independent directors fulfill the functions of such a
committee;
- The full board is less than majority independent.
Vote AGAINST or WITHHOLD from the members of the Audit Committee if:
- The non-audit fees paid to the auditor are excessive;
- The company receives an adverse opinion on the company's financial
statements from its auditor; or
- There is persuasive evidence that the audit committee entered into an
inappropriate indemnification agreement with its auditor that limits
the ability of the company, or its shareholders, to pursue legitimate
legal recourse against the audit firm.
Vote CASE-by-CASE on members of the Audit Committee and/or the full board if
poor accounting practices, which rise to a level of serious concern are
indentified, such as: fraud; misapplication of GAAP; and material weaknesses
identified in Section 404 disclosures.
Examine the severity, breadth, chronological sequence and duration, as well as
the company's efforts at remediation or corrective actions in determining
whether negative vote recommendations are warranted against the members of the
Audit Committee who are responsible for the poor accounting practices, or the
entire board.
Vote AGAINST or WITHHOLD from the members of the Compensation Committee if:
- There is a negative correlation between the chief executive's pay and
company performance (see discussion under Equity Compensation Plans);
- The company reprices underwater options for stock, cash or other
consideration without prior shareholder approval, even if allowed in
their equity plan;
- The company fails to submit one-time transfers of stock options to a
shareholder vote;
- The company fails to fulfill the terms of a burn rate commitment they
made to shareholders;
- The company has backdated options (see "Options Backdating" policy);
The company has poor compensation practices (see "Poor Pay Practices" policy).
Poor pay practices may warrant withholding votes from the CEO and potentially
the entire board as well.
Vote AGAINST or WITHHOLD from directors, individually or the entire board, for
egregious actions or failure to replace management as appropriate.
INDEPENDENT CHAIR (SEPARATE CHAIR/CEO)
Generally vote FOR shareholder proposals requiring that the chairman's position
be filled by an independent director, unless the company satisfies ALL of the
following criteria:
The company maintains the following counterbalancing features:
- Designated lead director, elected by and from the independent board
members with clearly delineated and comprehensive duties. (The role
may alternatively reside with a presiding director, vice chairman, or
rotating lead director; however the director must serve a minimum of
one year in order to qualify as a lead director.) The duties should
include, but are not limited to, the following:
- presides at all meetings of the board at which the chairman is
not present, including executive sessions of the independent
directors;
2009 RiskMetrics Group U.S. Proxy Voting Guidelines Concise Summary
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- serves as liaison between the chairman and the independent
directors;
- approves information sent to the board;
- approves meeting agendas for the board;
- approves meeting schedules to assure that there is sufficient
time for discussion of all agenda items;
- has the authority to call meetings of the independent directors;
- if requested by major shareholders, ensures that he is available
for consultation and direct communication;
- Two-thirds independent board;
- All independent key committees;
- Established governance guidelines;
- A company in the Russell 3000 universe must not have exhibited
sustained poor total shareholder return (TSR) performance, defined as
one- and three-year TSR in the bottom half of the company's four-digit
GICS industry group within the Russell 3000 only), unless there has
been a change in the Chairman/CEO position within that time;
- The company does not have any problematic governance or management
issues, examples of which include, but are not limited to:
- Egregious compensation practices;
- Multiple related-party transactions or other issues putting
director independence at risk;
- Corporate and/or management scandals;
- Excessive problematic corporate governance provisions; or
- Flagrant board or management actions with potential or realized
negative impact on shareholders.
MAJORITY VOTE SHAREHOLDER PROPOSALS
Generally vote FOR precatory and binding resolutions requesting that the board
change the company's bylaws to stipulate that directors need to be elected with
an affirmative majority of votes cast, provided it does not conflict with the
state law where the company is incorporated. Binding resolutions need to allow
for a carve-out for a plurality vote standard when there are more nominees than
board seats.
Companies are strongly encouraged to also adopt a post-election policy (also
know as a director resignation policy) that provides guidelines so that the
company will promptly address the situation of a holdover director.
PERFORMANCE/GOVERNANCE EVALUATION FOR DIRECTORS
Vote WITHHOLD/AGAINST on all director nominees if the board lacks accountability
and oversight, coupled with sustained poor performance relative to peers,
measured by one- and three-year total shareholder returns in the bottom half of
a company's four-digit GICS industry group (Russell 3000 companies only).
Evaluate board accountability and oversight at companies that demonstrate
sustained poor performance. Problematic provisions include but are not limited
to:
- a classified board structure;
- a supermajority vote requirement;
- majority vote standard for director elections with no carve out for
contested elections;
- the inability of shareholders to call special meetings;
- the inability of shareholders to act by written consent;
- a dual-class structure; and/or
2009 RiskMetrics Group U.S. Proxy Voting Guidelines Concise Summary
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- a non-shareholder approved poison pill.
If a company exhibits sustained poor performance coupled with a lack of board
accountability and oversight, also take into consideration the company's
five-year total shareholder return and five-year operational metrics in the
evaluation.
3. Proxy Contests
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Vote CASE-BY-CASE on the election of directors in contested elections,
considering the following factors:
- Long-term financial performance of the target company relative to its
industry;
- Management's track record;
- Background to the proxy contest;
- Qualifications of director nominees (both slates);
- Strategic plan of dissident slate and quality of critique against
management;
- Likelihood that the proposed goals and objectives can be achieved
(both slates);
- Stock ownership positions.
REIMBURSING PROXY SOLICITATION EXPENSES
Vote CASE-BY-CASE on proposals to reimburse proxy solicitation expenses. When
voting in conjunction with support of a dissident slate, vote FOR the
reimbursement of all appropriate proxy solicitation expenses associated with the
election.
Generally vote FOR shareholder proposals calling for the reimbursement of
reasonable costs incurred in connection with nominating one or more candidates
in a contested election where the following apply:
- The election of fewer than 50% of the directors to be elected is
contested in the election;
- One or more of the dissident's candidates is elected;
- Shareholders are not permitted to cumulate their votes for directors;
and
- The election occurred, and the expenses were incurred, after the
adoption of this bylaw.
4. Antitakeover Defenses and Voting Related Issues
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS/NOMINATIONS
Vote CASE-BY-CASE on advance notice proposals, giving support to proposals that
allow shareholders to submit proposals/nominations reasonably close to the
meeting date and within the broadest window possible, recognizing the need to
allow sufficient notice for company, regulatory and shareholder review.
To be reasonable, the company's deadline for shareholder notice of a proposal/
nominations must not be more than 60 days prior to the meeting, with a submittal
window of at least 30 days prior to the deadline.
In general, support additional efforts by companies to ensure full disclosure in
regard to a proponent's economic and voting position in the company so long as
the informational requirements are reasonable and aimed at providing
shareholders with the necessary information to review such proposal.
POISON PILLS
Vote FOR shareholder proposals requesting that the company submit its poison
pill to a shareholder vote or redeem it UNLESS the company has: (1) A
shareholder approved poison pill in place; or (2) The company has
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adopted a policy concerning the adoption of a pill in the future specifying that
the board will only adopt a shareholder rights plan if either:
- Shareholders have approved the adoption of the plan; or
- The board, in exercising its fiduciary responsibilities, determines
that it is in the best interest of shareholders under the
circumstances to adopt a pill without the delay that would result from
seeking stockholder approval (i.e., the "fiduciary out" provision). A
poison pill adopted under this "fiduciary out" will be put to a
shareholder ratification vote within 12 months of adoption or expire.
If the pill is not approved by a majority of the votes cast on this
issue, the plan will immediately terminate.
Vote FOR shareholder proposals calling for poison pills to be put to a vote
within a time period of less than one year after adoption. If the company has no
non-shareholder approved poison pill in place and has adopted a policy with the
provisions outlined above, vote AGAINST the proposal. If these conditions are
not met, vote FOR the proposal, but with the caveat that a vote within 12 months
would be considered sufficient.
Vote CASE-by-CASE on management proposals on poison pill ratification, focusing
on the features of the shareholder rights plan. Rights plans should contain the
following attributes:
- No lower than a 20% trigger, flip-in or flip-over;
- A term of no more than three years;
- No dead-hand, slow-hand, no-hand or similar feature that limits the
ability of a future board to redeem the pill;
- Shareholder redemption feature (qualifying offer clause); if the board
refuses to redeem the pill 90 days after a qualifying offer is
announced, 10 percent of the shares may call a special meeting or seek
a written consent to vote on rescinding the pill.
In addition, the rationale for adopting the pill should be thoroughly explained
by the company. In examining the request for the pill, take into consideration
the company's existing governance structure, including: board independence,
existing takeover defenses, and any problematic governance concerns.
For management proposals to adopt a poison pill for the stated purpose of
preserving a company's net operating losses ("NOL pills"), the following factors
should be considered:
- the trigger (NOL pills generally have a trigger slightly below 5%);
- the value of the NOLs;
- the term;
- shareholder protection mechanisms (sunset provision, causing
expiration of the pill upon exhaustion or expiration of NOLs); and
- other factors that may be applicable.
In addition, vote WITHHOLD/AGAINST the entire board of directors, (except new
nominees, who should be considered on a CASE-by-CASE basis) if the board adopts
or renews a poison pill without shareholder approval, does not commit to putting
it to a shareholder vote within 12 months of adoption (or in the case of a newly
public company, does not commit to put the pill to a shareholder vote within 12
months following the IPO), or reneges on a commitment to put the pill to a vote,
and has not yet received a withhold recommendation for this issue.
5. Mergers and Corporate Restructurings
OVERALL APPROACH
For mergers and acquisitions, review and evaluate the merits and drawbacks of
the proposed transaction, balancing various and sometimes countervailing factors
including:
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- VALUATION - Is the value to be received by the target shareholders (or
paid by the acquirer) reasonable? While the fairness opinion may
provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on the offer premium, market
reaction and strategic rationale.
- MARKET REACTION - How has the market responded to the proposed deal? A
negative market reaction should cause closer scrutiny of a deal.
- STRATEGIC RATIONALE - Does the deal make sense strategically? From
where is the value derived? Cost and revenue synergies should not be
overly aggressive or optimistic, but reasonably achievable. Management
should also have a favorable track record of successful integration of
historical acquisitions.
- NEGOTIATIONS AND PROCESS - Were the terms of the transaction
negotiated at arm's-length? Was the process fair and equitable? A fair
process helps to ensure the best price for shareholders. Significant
negotiation "wins" can also signify the deal makers' competency. The
comprehensiveness of the sales process (e.g., full auction, partial
auction, no auction) can also affect shareholder value.
- CONFLICTS OF INTEREST - Are insiders benefiting from the transaction
disproportionately and inappropriately as compared to non-insider
shareholders? As the result of potential conflicts, the directors and
officers of the company may be more likely to vote to approve a merger
than if they did not hold these interests. Consider whether these
interests may have influenced these directors and officers to support
or recommend the merger. The change-in-control figure presented in the
"RMG Transaction Summary" section of this report is an aggregate
figure that can in certain cases be a misleading indicator of the true
value transfer from shareholders to insiders. Where such figure
appears to be excessive, analyze the underlying assumptions to
determine whether a potential conflict exists.
- GOVERNANCE - Will the combined company have a better or worse
governance profile than the current governance profiles of the
respective parties to the transaction? If the governance profile is to
change for the worse, the burden is on the company to prove that other
issues (such as valuation) outweigh any deterioration in governance.
6. State of Incorporation
REINCORPORATION PROPOSALS
Evaluate management or shareholder proposals to change a company's state of
incorporation on a CASE-BY-CASE basis, giving consideration to both financial
and corporate governance concerns including the following:
- Reasons for reincorporation;
- Comparison of company's governance practices and provisions prior to
and following the reincorporation; and
- Comparison of corporation laws of original state and destination state
Vote FOR reincorporation when the economic factors outweigh any neutral or
negative governance changes.
7. Capital Structure
COMMON STOCK AUTHORIZATION
Vote CASE-BY-CASE on proposals to increase the number of shares of common stock
authorized for issuance. Take into account company-specific factors which
include, at a minimum, the following:
- Specific reasons/ rationale for the proposed increase;
- The dilutive impact of the request as determined through an allowable
cap generated by RiskMetrics' quantitative model;
- The board's governance structure and practices; and
- Risks to shareholders of not approving the request.
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Vote FOR proposals to approve increases beyond the allowable cap when a
company's shares are in danger of being delisted or if a company's ability to
continue to operate as a going concern is uncertain.
PREFERRED STOCK
Vote CASE-BY-CASE on proposals to increase the number of shares of preferred
stock authorized for issuance. Take into account company-specific factors which
include, at a minimum, the following:
- Specific reasons/ rationale for the proposed increase;
- The dilutive impact of the request as determined through an allowable
cap generated by RiskMetrics' quantitative model;
- The board's governance structure and practices; and
- Risks to shareholders of not approving the request.
Vote AGAINST proposals authorizing the creation of new classes of preferred
stock with unspecified voting, conversion, dividend distribution, and other
rights ("blank check" preferred stock).
Vote FOR proposals to create "declawed" blank check preferred stock (stock that
cannot be used as a takeover defense).
Vote FOR proposals to authorize preferred stock in cases where the company
specifies the voting, dividend, conversion, and other rights of such stock and
the terms of the preferred stock appear reasonable.
Vote AGAINST proposals to increase the number of blank check preferred stock
authorized for issuance when no shares have been issued or reserved for a
specific purpose.
8. Executive and Director Compensation
EQUITY COMPENSATION PLANS
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity
plan if any of the following factors apply:
- The total cost of the company's equity plans is unreasonable;
- The plan expressly permits the repricing of stock options/stock
appreciation rights (SARs) without prior shareholder approval;
- The CEO is a participant in the proposed equity-based compensation
plan and there is a disconnect between CEO pay and the company's
performance where over 50 percent of the year-over-year increase is
attributed to equity awards;
- The company's three year burn rate exceeds the greater of 2% and the
mean plus one standard deviation of its industry group;
- The plan provides for the acceleration of vesting of equity awards
even though an actual change in control may not occur (e.g., upon
shareholder approval of a transaction or the announcement of a tender
offer); or
- The plan is a vehicle for poor pay practices.
POOR PAY PRACTICES
Vote AGAINST or WITHHOLD from compensation committee members, CEO, and
potentially the entire board, if the company has poor compensation practices.
Vote AGAINST equity plans if the plan is a vehicle for poor compensation
practices.
The following practices, while not exhaustive, are examples of poor compensation
practices that may warrant withhold vote recommendations:
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- Egregious employment contracts - Contracts containing multi-year
guarantees for salary increases, bonuses and equity compensation;
- Excessive perks/tax reimbursements:
- Overly generous perquisites, which may include, but are not
limited to the following: personal use of corporate
aircraft, personal security system maintenance and/or
installation, car allowances;
- Reimbursement of income taxes on executive perquisites or
other payments;
- Perquisites for former executives, such as car allowances,
personal use of corporate aircraft or other inappropriate
arrangements;
Abnormally large bonus payouts without justifiable performance linkage or
proper disclosure - Performance metrics that are changed, canceled or
replaced during the performance period without adequate explanation of the
action and the link to performance;
- Egregious pension/SERP (supplemental executive retirement plan)
payouts:
- Inclusion of additional years of service not worked that
result in significant payouts;
- Inclusion of performance-based equity awards in the pension
calculation;
- New CEO with overly generous new hire package:
- Excessive "make whole" provisions;
- Any of the poor pay practices listed in this policy;
- Excessive severance and/or change in control provisions:
- Inclusion of excessive change in control or severance
payments, especially those with a multiple in excess of 3X
cash pay;
- Payments upon an executive's termination in connection with
performance failure;
- Change in control payouts without loss of job or substantial
diminution of job duties (single-triggered);
- New or materially amended employment or severance agreements
that provide for modified single triggers, under which an
executive may voluntarily leave for any reason and still
receive the change-in-control severance package;
- Liberal change in control definition in individual contracts
or equity plans which could result in payments to executives
without an actual change in control occurring;
- New or materially amended employment or severance agreements
that provide for an excise tax gross-up. Modified gross-ups
would be treated in the same manner as full gross-ups;
- Perquisites for former executives such as car allowances,
personal use of corporate aircraft or other inappropriate
arrangements;
- Dividends or dividend equivalents paid on unvested performance shares
or units;
- Poor disclosure practices:
- Unclear explanation of how the CEO is involved in the pay setting
process;
- Retrospective performance targets and methodology not discussed;
- Methodology for benchmarking practices and/or peer group not
disclosed and explained;
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- Internal Pay Disparity:
- Excessive differential between CEO total pay and that of next
highest paid named executive officer (NEO);
- Options backdating (covered in a separate policy);
- Other excessive compensation payouts or poor pay practices at the
company.
OTHER COMPENSATION PROPOSALS AND POLICIES
ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY) MANAGEMENT PROPOSALS
Vote CASE-BY-CASE on management proposals for an advisory vote on executive
compensation. Vote AGAINST these resolutions in cases where boards have failed
to demonstrate good stewardship of investors' interests regarding executive
compensation practices.
For U.S. companies, consider the following factors in the context of each
company's specific circumstances and the board's disclosed rationale for its
practices:
RELATIVE CONSIDERATIONS:
- Assessment of performance metrics relative to business strategy, as
discussed and explained in the CD& A;
- Evaluation of peer groups used to set target pay or award
opportunities;
- Alignment of company performance and executive pay trends over time
(e.g., performance down: pay down);
- Assessment of disparity between total pay of the CEO and other Named
Executive Officers (NEOs).
DESIGN CONSIDERATIONS:
- Balance of fixed versus performance-driven pay;
- Assessment of excessive practices with respect to perks, severance
packages, supplemental executive pension plans, and burn rates.
COMMUNICATION CONSIDERATIONS:
- Evaluation of information and board rationale provided in CD&A about
how compensation is determined (e.g., why certain elements and pay
targets are used, and specific incentive plan goals, especially
retrospective goals);
- Assessment of board's responsiveness to investor input and engagement
on compensation issues (e.g., in responding to majority-supported
shareholder proposals on executive pay topics).
EMPLOYEE STOCK PURCHASE PLANS-- NON-QUALIFIED PLANS
Vote CASE-by-CASE on nonqualified employee stock purchase plans. Vote FOR
nonqualified employee stock purchase plans with all the following features:
- Broad-based participation (i.e., all employees of the company with the
exclusion of individuals with 5 percent or more of beneficial
ownership of the company);
- Limits on employee contribution, which may be a fixed dollar amount or
expressed as a percent of base salary;
- Company matching contribution up to 25 percent of employee's
contribution, which is effectively a discount of 20 percent from
market value;
- No discount on the stock price on the date of purchase since there is
a company matching contribution.
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Vote AGAINST nonqualified employee stock purchase plans when any of the plan
features do not meet the above criteria. If the company matching contribution
exceeds 25 percent of employee's contribution, evaluate the cost of the plan
against its allowable cap.
OPTION EXCHANGE PROGRAMS/REPRICING OPTIONS
Vote CASE-by-CASE on management proposals seeking approval to exchange/reprice
options, taking into consideration:
- Historic trading patterns--the stock price should not be so volatile
that the options are likely to be back "in-the-money" over the near
term;
- Rationale for the re-pricing--was the stock price decline beyond
management's control?
- Is this a value-for-value exchange?
- Are surrendered stock options added back to the plan reserve?
- Option vesting--does the new option vest immediately or is there a
black-out period?
- Term of the option--the term should remain the same as that of the
replaced option;
- Exercise price--should be set at fair market or a premium to market;
- Participants--executive officers and directors should be excluded.
If the surrendered options are added back to the equity plans for re-issuance,
then also take into consideration the company's total cost of equity plans and
its three-year average burn rate.
In addition to the above considerations, evaluate the intent, rationale, and
timing of the repricing proposal. The proposal should clearly articulate why the
board is choosing to conduct an exchange program at this point in time.
Repricing underwater options after a recent precipitous drop in the company's
stock price demonstrates poor timing. Repricing after a recent decline in stock
price triggers additional scrutiny and a potential AGAINST vote on the proposal.
At a minimum, the decline should not have happened within the past year. Also,
consider the terms of the surrendered options, such as the grant date, exercise
price and vesting schedule. Grant dates of surrendered options should be far
enough back (two to three years) so as not to suggest that repricings are being
done to take advantage of short-term downward price movements. Similarly, the
exercise price of surrendered options should be above the 52-week high for the
stock price.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
OTHER SHAREHOLDER PROPOSALS ON COMPENSATION
ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY)
Generally, vote FOR shareholder proposals that call for non-binding shareholder
ratification of the compensation of the Named Executive Officers and the
accompanying narrative disclosure of material factors provided to understand the
Summary Compensation Table.
GOLDEN COFFINS/EXECUTIVE DEATH BENEFITS
Generally vote FOR proposals calling on companies to adopt a policy of obtaining
shareholder approval for any future agreements and corporate policies that could
oblige the company to make payments or awards following the death of a senior
executive in the form of unearned salary or bonuses, accelerated vesting or the
continuation in force of unvested equity grants, perquisites and other payments
or awards made in lieu of compensation. This would not apply to any benefit
programs or equity plan proposals for which the broad-based employee population
is eligible.
SHARE BUYBACK HOLDING PERIODS
Generally vote AGAINST shareholder proposals prohibiting executives from selling
shares of company stock during periods in which the company has announced that
it may or will be repurchasing shares of its stock. Vote FOR the proposal when
there is a pattern of abuse by executives exercising options or selling shares
during periods of share buybacks.
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STOCK OWNERSHIP OR HOLDING PERIOD GUIDELINES
Generally vote AGAINST shareholder proposals that mandate a minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board. While RMG favors stock ownership on the part of directors, the
company should determine the appropriate ownership requirement.
Vote on a CASE-BY-CASE on shareholder proposals asking companies to adopt
policies requiring Named Executive Officers to retain 75% of the shares acquired
through compensation plans while employed and/or for two years following the
termination of their employment, and to report to shareholders regarding this
policy. The following factors will be taken into account:
- Whether the company has any holding period, retention ratio, or
officer ownership requirements in place. These should consist of:
- Rigorous stock ownership guidelines, or
- A holding period requirement coupled with a significant long-term
ownership requirement, or
- A meaningful retention ratio,
- Actual officer stock ownership and the degree to which it meets or
exceeds the proponent's suggested holding period/retention ratio or
the company's own stock ownership or retention requirements.
- Problematic pay practices, current and past, which may promote a
short-term versus a long-term focus.
TAX GROSS-UP PROPOSALS
Generally vote FOR proposals asking companies to adopt a policy of not providing
tax gross-up payments to executives, except where gross-ups are provided
pursuant to a plan, policy, or arrangement applicable to management employees of
the company, such as a relocation or expatriate tax equalization policy.
9. Corporate Social Responsibility (CSR) Issues
OVERALL APPROACH
When evaluating social and environmental shareholder proposals, RMG considers
the following factors:
- Whether adoption of the proposal is likely to enhance or protect
shareholder value;
- Whether the information requested concerns business issues that relate
to a meaningful percentage of the company's business as measured by
sales, assets, and earnings;
- The degree to which the company's stated position on the issues raised
in the proposal could affect its reputation or sales, or leave it
vulnerable to a boycott or selective purchasing;
- Whether the issues presented are more appropriately/effectively dealt
with through governmental or company-specific action;
- Whether the company has already responded in some appropriate manner
to the request embodied in the proposal;
- Whether the company's analysis and voting recommendation to
shareholders are persuasive;
- What other companies have done in response to the issue addressed in
the proposal;
- Whether the proposal itself is well framed and the cost of preparing
the report is reasonable;
- Whether implementation of the proposal's request would achieve the
proposal's objectives;
- Whether the subject of the proposal is best left to the discretion of
the board;
- Whether the requested information is available to shareholders either
from the company or from a publicly available source; and
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- Whether providing this information would reveal proprietary or
confidential information that would place the company at a competitive
disadvantage.
GENETICALLY MODIFIED INGREDIENTS
Generally vote AGAINST proposals asking suppliers, genetic research companies,
restaurants and food retail companies to voluntarily label genetically
engineered (GE) ingredients in their products and/or eliminate GE ingredients.
The cost of labeling and/or phasing out the use of GE ingredients may not be
commensurate with the benefits to shareholders and is an issue better left to
regulators.
Vote CASE-BY-CASE on proposals asking for a report on the feasibility of
labeling products containing GE ingredients taking into account:
- The company's business and the proportion of it affected by the
resolution;
- The quality of the company's disclosure on GE product labeling,
related voluntary initiatives, and how this disclosure compares with
industry peer disclosure; and
- Company's current disclosure on the feasibility of GE product
labeling, including information on the related costs.
Generally vote AGAINST proposals seeking a report on the social, health, and
environmental effects of genetically modified organisms (GMOs). Studies of this
sort are better undertaken by regulators and the scientific community.
Generally vote AGAINST proposals to completely phase out GE ingredients from the
company's products or proposals asking for reports outlining the steps necessary
to eliminate GE ingredients from the company's products. Such resolutions
presuppose that there are proven health risks to GE ingredients (an issue better
left to regulators) that may outweigh the economic benefits derived from
biotechnology.
PHARMACEUTICAL PRICING, ACCESS TO MEDICINES, AND PRODUCT REIMPORTATION
Generally vote AGAINST proposals requesting that companies implement specific
price restraints on pharmaceutical products unless the company fails to adhere
to legislative guidelines or industry norms in its product pricing.
Vote CASE-BY-CASE on proposals requesting that the company report on their
product pricing policies or their access to medicine policies, considering:
- The nature of the company's business and the potential for
reputational and market risk exposure;
- The existing disclosure of relevant policies;
- Deviation from established industry norms;
- The company's existing, relevant initiatives to provide research
and/or products to disadvantaged consumers;
- Whether the proposal focuses on specific products or geographic
regions; and
- The potential cost and scope of the requested report.
Generally vote FOR proposals requesting that companies report on the financial
and legal impact of their prescription drug reimportation policies unless such
information is already publicly disclosed.
Generally vote AGAINST proposals requesting that companies adopt specific
policies to encourage or constrain prescription drug reimportation. Such matters
are more appropriately the province of legislative activity and may place the
company at a competitive disadvantage relative to its peers.
GENDER IDENTITY, SEXUAL ORIENTATION, AND DOMESTIC PARTNER BENEFITS
Generally vote FOR proposals seeking to amend a company's EEO statement or
diversity policies to prohibit discrimination based on sexual orientation and/or
gender identity, unless the change would result in excessive costs for the
company.
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Generally vote AGAINST proposals to extend company benefits to, or eliminate
benefits from domestic partners. Decisions regarding benefits should be left to
the discretion of the company.
CLIMATE CHANGE
Generally vote FOR resolutions requesting that a company disclose information on
the impact of climate change on the company's operations and investments
considering whether:
- The company already provides current, publicly-available information
on the impacts that climate change may have on the company as well as
associated company policies and procedures to address related risks
and/or opportunities;
- The company's level of disclosure is at least comparable to that of
industry peers; and
- There are no significant, controversies, fines, penalties, or
litigation associated with the company's environmental performance.
LOBBYING EXPENDITURES/INITIATIVES
Vote CASE-BY-CASE on proposals requesting information on a company's lobbying
initiatives, considering:
- Significant controversies, fines, or litigation surrounding a
company's public policy activities,
- The company's current level of disclosure on lobbying strategy, and
- The impact that the policy issue may have on the company's business
operations.
POLITICAL CONTRIBUTIONS AND TRADE ASSOCIATION SPENDING
Generally vote AGAINST proposals asking the company to affirm political
nonpartisanship in the workplace so long as:
- There are no recent, significant controversies, fines or litigation
regarding the company's political contributions or trade association
spending; and
- The company has procedures in place to ensure that employee
contributions to company-sponsored political action committees (PACs)
are strictly voluntary and prohibits coercion.
Vote AGAINST proposals to publish in newspapers and public media the company's
political contributions. Such publications could present significant cost to the
company without providing commensurate value to shareholders.
Vote CASE-BY-CASE on proposals to improve the disclosure of a company's
political contributions and trade association spending, considering:
- Recent significant controversy or litigation related to the company's
political contributions or governmental affairs; and
- The public availability of a company policy on political contributions
and trade association spending including information on the types of
organizations supported, the business rationale for supporting these
organizations, and the oversight and compliance procedures related to
such expenditures of corporate assets.
Vote AGAINST proposals barring the company from making political contributions.
Businesses are affected by legislation at the federal, state, and local level
and barring political contributions can put the company at a competitive
disadvantage.
Vote AGAINST proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
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LABOR AND HUMAN RIGHTS STANDARDS
Generally vote FOR proposals requesting a report on company or company supplier
labor and/or human rights standards and policies unless such information is
already publicly disclosed.
Vote CASE-BY-CASE on proposals to implement company or company supplier labor
and/or human rights standards and policies, considering:
- The degree to which existing relevant policies and practices are
disclosed;
- Whether or not existing relevant policies are consistent with
internationally recognized standards;
- Whether company facilities and those of its suppliers are monitored
and how;
- Company participation in fair labor organizations or other
internationally recognized human rights initiatives;
- Scope and nature of business conducted in markets known to have higher
risk of workplace labor/human rights abuse;
- Recent, significant company controversies, fines, or litigation
regarding human rights at the company or its suppliers;
- The scope of the request; and
- Deviation from industry sector peer company standards and practices.
SUSTAINABILITY REPORTING
Generally vote FOR proposals requesting the company to report on its policies,
initiatives, and oversight mechanisms related to social, economic, and
environmental sustainability, unless:
- The company already discloses similar information through existing
reports or policies such as an Environment, Health, and Safety (EHS)
report; a comprehensive Code of Corporate Conduct; and/or a Diversity
Report; or
- The company has formally committed to the implementation of a
reporting program based on Global Reporting Initiative (GRI)
guidelines or a similar standard within a specified time frame
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ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS.
INFORMATION PROVIDED AS OF JANUARY 8, 2010.
There is no one individual primarily responsible for portfolio management
decisions for the Registrant. Fixed Income Discount Advisory Company ("FIDAC")
serves as the Registrant's investment sub-adviser, making investment decisions
for the Registrant. Investments are made under the direction of a team of FIDAC
professionals led by the individuals described below. Investment decisions are
made in a consultative manner following discussions among some or all of the
individuals described below.
Length of
Name Title with FIDAC Service Business Experience Past 5 Years
---- ---------------- --------- --------------------------------
1. Wellington Denahan-Norris Chief Investment Officer 15 years Been with FIDAC since its inception in
1994
2. Eric Szabo MD, Chief Risk Officer 5 years FIDAC since 2004; Times Square Capital
Management from 2001-2004
3. Rose-Marie Lyght MD, Co-Head Portfolio 10 years FIDAC since 1999
Management
4. Kristopher Konrad MD, Co-Head Portfolio 12 years FIDAC since 1997
Management
5. James Fortescue MD, Head of Liabilities 13 years FIDAC since 1996
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
INFORMATION PROVIDED AS OF OCTOBER 31, 2009.
# of Accounts Total Assets
Managed for for which
Name of Portfolio Total # of which Advisory Advisory Fee
Manager or Accounts Total Fee is Based on is Based on
Team Member* Type of Accounts* Managed Assets Performance Performance
----------------- ----------------- ---------- ------ --------------- ------------
1. Wellington Registered Investment 0 $0 0 $0
Denahan-Norris Companies:
Other Pooled Investment 7 $12.6 0 $0
Vehicles: billion
Other Accounts: 1 $1.3 0 $0
billion
2. Eric Szabo Registered Investment 0 $0 0 $0
Companies:
Other Pooled Investment 1 $960 0 $0
Vehicles: million
Other Accounts: 0 $0 0 $0
3. Rose-Marie Lyght Registered Investment 0 $0 0 $0
Companies:
Other Pooled Investment 0 $0 0 $0
Vehicles:
Other Accounts: 0 $0 0 $0
4. Kristopher Konrad Registered Investment 0 $0 0 $0
Companies:
Other Pooled Investment 1 $1.6 0 $0
Vehicles: billion
Other Accounts: 0 $0 0 $0
5. James Fortescue Registered Investment 0 $0 0 $0
Companies:
Other Pooled Investment 7 $12.6 0 $0
Vehicles: billion
Other Accounts: 1 $1.3 0 $0
billion
* Each of the Portfolio Managers set forth in the above table also have
responsibility for the day-to-day management of Annaly Capital Management,
Inc., a New York Stock Exchange-listed real estate investment trust which,
at September 30, 2009, owned and managed a portfolio of approximately $67.5
billion in residential mortgage-backed securities.
POTENTIAL CONFLICTS OF INTERESTS
As shown in the table above, certain Portfolio Managers may manage other
accounts with investment strategies similar to the Registrant. Fees earned
by FIDAC may vary among these accounts. Such management of other accounts
could create conflicts of interest if a Portfolio Manager identified a
limited investment opportunity that may be appropriate for more than one
account, but the Registrant is not able to take full advantage of that
opportunity due to the need to allocate that opportunity among multiple
accounts. In addition, the Portfolio Manager may execute transactions for
another account that may adversely impact the value of securities held by
the Registrant. However, FIDAC believes that these risks are mitigated by
the fact that: (i) accounts with like investment strategies managed by a
particular Portfolio Manager are generally managed in a similar fashion,
subject to exceptions to account for particular investment restrictions or
policies applicable only to certain accounts, differences in cash flows and
account sizes, and similar factors; (ii) the securities in which the
Registrant will invest are typically highly rated liquid securities; and
(iii) these Portfolio Managers do not invest personally in any of these
accounts. In addition, pursuant to FIDAC's policies, Portfolio Managers
cannot invest in a FIDAC-managed account other than, with the permission of
FIDAC's chief compliance officer, one which is listed on an exchange or one
which owns equities rather than agency mortgage-backed securities.
Moreover, FIDAC has adopted trade allocation procedures that require
equitable allocation of trade orders for a particular security among
participating accounts.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF OCTOBER 31, 2009.
The Portfolio Managers receive all of their compensation from FIDAC and its
parent company, Annaly Capital Management, Inc. ("Annaly"). Compensation is
paid in the form of base salary as well as, subject to the approval of
Annaly's compensation committee, an annual bonus. The sum of the base
salary plus the bonus, if approved, is intended to be an amount equal to a
multiple of Annaly's book value.
The base salary and potential bonus is determined pursuant to employment
contracts. Any discretionary bonuses are determined by Annaly's
compensation committee after consideration of several factors including but
not necessarily limited to:
(a) Individual performance;
(b) Annaly's overall performance; and
(c) Other factors the compensation committee determines to be
appropriate.
Any discretionary bonuses are determined by Annaly's compensation committee
after consideration of several factors including but not necessarily
limited to:
(a) Individual performance;
(b) Annaly's overall performance; and
(c) Other factors the compensation committee determines to be
appropriate.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
INFORMATION PROVIDED AS OF OCTOBER 31, 2009.
Dollar Range of Fund Shares
Name Beneficially Owned
---- ---------------------------
Wellington Denahan-Norris $0
Eric Szabo $0
Rose-Marie Lyght $0
Kristopher Konrad $0
James Fortescue $0
(B) Not applicable.
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) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(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 December 23, 2009
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 December 23, 2009
By (Signature and Title)* /s/ Mark R. Bradley
------------------------------------------------------
Mark R. Bradley, Treasurer, Controller,
Chief Financial Officer and Chief Accounting Officer
(principal financial officer)
Date December 23, 2009
* Print the name and title of each signing officer under his or her
signature.