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 811-21756
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FIRST TRUST STRATEGIC HIGH INCOME FUND
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(Exact name of registrant as specified in charter)
1001 Warrenville Road, Suite 300
LISLE, IL 60532
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
1001 Warrenville Road, Suite 300
LISLE, IL 60532
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(Name and address of agent for service)
registrant's telephone number, including area code: (630) 241-4141
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Date of fiscal year end: OCTOBER 31
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Date of reporting period: APRIL 30, 2006
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
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FIRST TRUST STRATEGIC HIGH INCOME FUND
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED APRIL 30, 2006
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TABLE OF CONTENTS
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FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2006
Shareholder Letter.................................................... 1
Portfolio Commentary ................................................. 2
Portfolio Components ................................................. 3
Portfolio of Investments.............................................. 4
Statement of Assets and Liabilities................................... 8
Statement of Operations............................................... 9
Statements of Changes in Net Assets................................... 10
Financial Highlights.................................................. 11
Notes to Financial Statements......................................... 12
Additional Information................................................ 16
Dividend Reinvestment Plan
Proxy Voting Policies and Procedures
Portfolio Holdings
By-Law Amendment
Submission of Matters to a Vote of Shareholders
Board Approval of Advisory and Sub-Advisory Agreements
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This Semi-Annual Report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933. Forward-looking statements
include statements regarding the goals, beliefs, plans or current expectations
of First Trust Advisors L.P. (the "Advisor") and/or Valhalla Capital Partners,
LLC, ("Valhalla") 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 First Trust Strategic High Income Fund's (the
"Fund") actual results, performance or achievements 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
Semi-Annual Report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and/or
Valhalla 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.
HOW TO READ THIS REPORT
This report contains information that can 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 letter from the Fund's President, James A. Bowen, together with
the portfolio commentary by the portfolio management team at the Fund's
sub-advisor, Valhalla, you will obtain an understanding of how the market
environment affected the Fund's performance. The statistical information that
follows can 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 Mr. Bowen,
personnel of the Advisor and Valhalla personnel 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. Of course, the risks of investing in the Fund are spelled out in the
prospectus.
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SHAREHOLDER LETTER
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FIRST TRUST STRATEGIC HIGH INCOME FUND (FHI)
SEMI-ANNUAL REPORT
APRIL 30, 2006
Dear Shareholders:
We are pleased to present this semi-annual report of First Trust Strategic High
Income Fund (the "Fund") (NYSE Symbol: FHI). During the six-month reporting
period, the Fund produced positive performance results based in both market
price and net asset value ("NAV"). We are delighted that the Fund's market price
traded above the NAV in January and the Fund's market price remains at a premium
to its NAV.
Effective April 28, 2006, Valhalla Capital Partners, LLC ("Valhalla") succeeded
Hilliard Lyons Asset Management ("HLAM") as the sub-advisor of the Fund as
approved by shareholders at a recent shareholder meeting. The persons
responsible for management of the FHI portfolio at HLAM are the same persons
responsible for management of the FHI portfolio at Valhalla. Valhalla is a
boutique asset management firm focused on managing high-yield portfolios with an
emphasis on structured finance securities. The three managing partners have 47
years combined industry experience and the investment team has an average of
over 10 years experience working with high-yield and structured finance
securities. Valhalla currently manages approximately $350 million in assets.
As you know, the Fund's primary investment objective is to seek a high level of
current income. As a secondary objective, the Fund seeks capital growth. The
Fund currently pursues this high income strategy by investing at least 80% of
its managed assets in a diversified portfolio of high income producing
securities that Valhalla believes offer attractive yield and capital
appreciation potential. The Fund's primary focus is on structured finance
securities with limited exposure to corporate bonds and convertible securities.
Investing in these securities provides greater diversification than corporate
bonds alone by spreading risk across a broader range of asset classes, which
include both corporate and consumer debt.
The emphasis on structured finance securities within the portfolio has helped to
stabilize the NAV. Structured finance securities exhibited less volatility, in
general, than the corporate holdings over this reporting period. I encourage you
to read the portfolio commentary found on the following page. It includes a
review of the Fund's performance and the portfolio managers' outlook for the
markets.
We thank you for your continued confidence in First Trust Advisors L.P. and
Valhalla and will work diligently to keep earning it.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust Strategic High Income Fund
June 15, 2006
Page 1
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PORTFOLIO COMMENTARY
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OVERVIEW
For the six month period ended April 30, 2006, the bond and equity markets
produced a mix of returns reflective of the overall macroeconomic landscape. The
interest-rate environment was mildly negative for bonds, as rates rose roughly
0.50% in the intermediate and long parts of the yield curve, but economic data,
inflation numbers, and corporate earnings were mostly favorable. Consequently,
the more interest-rate sensitive sectors of the bond market struggled, while
stocks and lower-rated bonds outperformed. This divergence is evident in the
most recent six month numbers of several key indices. The Lehman Brothers
Intermediate U.S. Aggregate Index posted a near flat total return of only 0.95%;
the Lehman Brothers U.S. Corporate High Yield Index returned 4.96%; and the S&P
500 and Russell 2000 indices generated 9.64% and 18.93%, respectively for the
six months ended April 30, 2006. In short, the market's appetite for higher
returns, combined with its positive outlook, drove the performance of the major
segments of the market.
PERFORMANCE REVIEW
The First Trust Strategic High Income Fund ("FHI" or the "Fund") benefited from
these trends, which helped it post a solid six month performance. The total
return performance based on net asset value ("NAV") was 6.43% for the six months
ended April 30, 2006. The Fund's Benchmark, the Lehman Brothers Ba U.S. High
Yield Index, produced a 2.90% total return over the same period. The Fund's
outperformance was attributable to both its net, annualized yield advantage over
the Index of roughly 3.30% and relative stability. This stability came from a
mixed, but balanced price performance across some of the Fund's larger sectors.
For example, aircraft leased-backed bonds and commercial mortgage-backed
securities generally experienced positive movements over the six month period,
while corporate bonds and residential mortgage-backed securities were flat to
slightly negative. This was evidenced by the NAV which started the period at
$19.13 and ended it at $19.13. In contrast, the Index declined 0.79% in value
over the same time period. Most of the NAV stability came from Fund's emphasis
on structured finance securities, which exhibited less volatility, in general,
than its corporate holdings.
The market price performance was also positive. Negative trends in the
closed-end fund space reversed from the fourth quarter of 2005, helping the Fund
produce an even stronger total return of 9.77% for the six months ended April
30, 2006. This was driven by a greater than 3.00% increase in the stock price.
Near the end of January, the market price traded above the NAV, and the Fund
remained at a premium for the rest of the calendar quarter. As of April 30,
2006, the yield stood at 9.91%, versus 10.38% at calendar year-end.
OUTLOOK
Favorable economic trends may keep yields depressed and prices high, making
diversification critical to future performance. The strong bid for riskier
assets will remain intact only if investors maintain their confidence in the
economy. If the market's chief concern shifts from rising interest rates to
deteriorating credit metrics, lower-rated assets will likely come under
pressure. With the preponderance of its portfolio in seasoned structured finance
securities, the Fund is well-positioned for such an environment.
Page 2
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO COMPONENTS+
APRIL 30, 2006 (UNAUDITED)
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Equity 4.3%
Franchise 12.9%
Residential Mortgage 26.9%
Equipment Lease Receivables 2.9%
Manufactured Housing 5.9%
Commercial Mortgage-Backed Securities 14.3%
Collateralized Debt Obligations 15.1%
Corporate Bonds 17.7%
+ Percentages are based on total investments. Please note that the
percentages shown on the Portfolio of Investments are based on net assets.
See Notes to Financial Statements. Page 3
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 2006 (UNAUDITED)
PRINCIPAL MARKET
VALUE DESCRIPTION VALUE
------------- ------------------------------------------------------------------ ------------
ASSET-BACKED SECURITIES - 58.0%
$ 2,000,000 ACE Securities Corp., Home Equity Loan Trust,
Series 2003-OP1, Class B, 6.00%, 12/25/33+.................... $ 1,950,977
2,000,000 ACE Securities Corp., Home Equity Loan Trust,
Series 2005-HE5, Class M10, 7.96%, 8/25/35**+.................. 1,839,067
5,000,000 ACLC Business Loan Receivables Trust, Series 1999-1,
Class A3, 7.39%, 8/15/20**..................................... 4,575,855
2,356,787 Aircraft Finance Trust, Series 1999-1A,
Class A2, 5.40%, 5/15/24+...................................... 2,213,907
612,715 EMAC Owner Trust, LLC, Series 1999-1,
Class A1, 6.42%, 10/15/25**.................................... 380,266
48,583 Empire Funding Home Loan Owner Trust,
Series 1998-1, Class B2, 10.24%, 6/25/24+...................... 47,957
3,000,000 Equinox Funding, Series 1A, Class D, 11.45%, 11/15/12**+.......... 1,438,125
4,905,000 Falcon Franchise Loan Trust, Series 2000-1,
Class E, 6.50%, 4/05/16**...................................... 3,776,222
4,231,000 Falcon Franchise Loan Trust, Series 2003-1,
Class E, 6.00%, 1/05/25**..................................... 2,768,458
5,000,000 FFCA Secured Lending Corp., Series 1998-1,
Class D1, 7.81%, 10/18/25**.................................... 4,415,348
5,000,000 FFCA Secured Lending Corp., Series 1999-2,
Class B1, 8.27%, 5/18/26**..................................... 2,837,038
2,976,889 FMAC Loan Receivables Trust, Series 1997-B,
Class A, 6.85%, 9/15/19**...................................... 2,825,705
1,000,000 Forte CDO (Cayman) Ltd., Series B,
Senior Secured Note, 8.04%, 4/12/13**.......................... 913,865
537,259 Green Tree Financial Corp., Series 1997-4,
Class B1, 7.23%, 2/15/29....................................... 83,924
1,000,000 Green Tree Financial Corp., Series 1998-4,
Class M1, 6.83%, 4/01/30....................................... 384,875
5,000,000 Green Tree Financial Corp., Series 1998-6
Class M1, 6.63%, 6/01/30....................................... 2,403,125
6,000,000 Green Tree Financial Corp., Series 1999-2,
Class M1, 6.80%, 12/01/30...................................... 1,798,420
2,500,000 Green Tree Financial Corp., Series 1999-3,
Class M1, 6.96%, 2/01/31....................................... 570,200
10,000,000 GreenPoint Manufactured Housing Contract Trust,
Series 1999-5, Class M2, 9.23%, 12/15/29....................... 4,253,179
5,000,000 GSAMP Trust, Series 2004-AR2,
Class B4, 5.00%, 8/25/34**+.................................... 4,192,370
3,700,000 Halyard CBO I, Ltd., Series 1A, Class B, 6.52%, 3/24/10**+........ 2,518,390
4,000,000 Helios Series I, Multi Asset CBO I, Ltd.,
Series 1A, Class B, 5.49%, 12/13/36**+......................... 3,260,000
2,000,000 Home Equity Mortgage Trust, Series 2005-3,
Class B2, 7.00%, 11/25/35...................................... 1,653,028
2,375,000 IndyMac Residential Asset Backed Trust, Series 2005-B,
Class M10, 8.32%, 8/25/35+..................................... 2,176,150
2,601,134 Long Beach Mortgage Loan Trust, Series 2002-1,
Class M3, 7.46%, 5/25/32+...................................... 1,989,331
3,505,836 Long Beach Mortgage Loan Trust, Series 2002-2,
Class M3, 7.21%, 7/25/32+...................................... 3,152,745
Page 4 See Notes to Financial Statements.
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2006 (UNAUDITED)
PRINCIPAL MARKET
VALUE DESCRIPTION VALUE
------------- ------------------------------------------------------------------ ------------
ASSET-BACKED SECURITIES - CONTINUED
$ 2,810,069 Longhorn CDO Ltd., Series 1, Class C, 10.97%, 5/10/12**+.......... $ 2,641,465
1,266,224 Morgan Stanley Dean Witter Capital I, Series 2001-NC3,
Class B1, 7.03%, 10/25/31+..................................... 1,248,750
4,500,000 North Street Referenced Linked Notes, Series 2000-1A,
Class C, 6.41%, 7/30/10**+..................................... 2,975,625
7,000,000 North Street Referenced Linked Notes, Series 2000-2A,
Class B, 5.29%, 10/30/11**+.................................... 6,164,375
1,000,000 Oakwood Mortgage Investors, Inc., Series 2002-B,
Class M1, 7.62%, 6/15/32....................................... 275,000
3,000,000 Park Place Securities, Inc., Series 2004-WCW2,
Class M10, 7.57%, 10/25/34**+.................................. 2,779,552
3,000,000 Park Place Securities, Inc., Series 2005-WHQ4,
Class M10, 7.46%, 9/25/35**+................................... 2,538,732
3,113,380 Pegasus Aviation Lease Securitization III, Series 2001-1A,
Class A3, 5.56%, 3/10/14**+.................................... 2,695,020
6,000,000 Soundview Home Equity Loan Trust, Series 2005-A,
Class B2, 7.96%, 4/25/35**+.................................... 5,379,421
2,651,000 Structured Asset Investment Loan Trust, Series 2004-8,
Class B2, 5.00%, 9/25/34....................................... 2,405,654
1,620,000 Structured Asset Securitites Corp., Series 2003-BC3,
Class B, 7.96%, 4/25/33**+..................................... 1,502,427
4,500,000 Structured Asset Securities Corp., Series 2005-S1,
Class B4, 7.32%, 3/25/35**+.................................... 3,839,562
5,000,000 Summit CBO I, Ltd., Series 1A, Class B, 5.59%, 5/23/11**+......... 1,303,125
5,000,000 Wilbraham CBO Ltd., Series 1A, Class A2, 5.39%, 7/13/12**+........ 3,950,000
------------
TOTAL ASSET-BACKED SECURITIES..................................... 98,117,235
(Cost $99,177,402) ------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 4.9%
3,992,327 CWALT, Inc., Pass-Through Certificates, Series 2005-56,
Class B4, 6.07%, 11/25/35**+................................... 2,356,064
8,982,735 CWALT, Inc., Pass-Through Certificates, Series 2005-56,
Class B5, 6.07%, 11/25/35**+................................... 1,786,010
4,999,611 HarborView Mortgage Loan Trust, Series 2005-9,
Class B10, 6.67%, 6/20/35+..................................... 4,073,783
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS......................... 8,215,857
(Cost $8,295,297) ------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 14.1%
1,171,422 Banc of America Commercial Mortgage Inc., Series 2000-1,
Class M, 6.00%, 11/15/31**..................................... 903,228
2,878,166 Banc of America Structured Securities Trust, Series 2002-X1,
Class O, 7.00%, 10/11/33**..................................... 2,479,189
2,878,166 Banc of America Structured Securities Trust, Series 2002-X1,
Class P, 7.00%, 10/11/33**..................................... 2,034,121
1,776,400 Bear Stearns Commercial Mortgage Securities, Series 2000-WF1,
Class K, 6.50%, 2/15/32........................................ 1,458,359
See Notes to Financial Statements. Page 5
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2006 (UNAUDITED)
PRINCIPAL MARKET
VALUE DESCRIPTION VALUE
------------- ------------------------------------------------------------------ ------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - CONTINUED
$ 1,000,000 GMAC Commercial Mortgage Securities, Inc., Series 1999-C3,
Class G, 6.97%, 8/15/36**...................................... $ 890,119
113,540,929 Government National Mortgage Association, Series 2003-47,
Class XA, IO, 0.02%, 6/16/43+.................................. 6,101,973
22,304,372 Government National Mortgage Association, Series 2003-59,
Class XA, IO, 0.62%, 6/16/34+.................................. 1,986,079
7,000,000 GS Mortgage Securities Corp. II, Series 1998-C1,
Class H, 6.00%, 10/18/30**..................................... 3,578,792
3,025,000 LB-UBS Commercial Mortgage Trust, Series 2001-C7,
Class Q, 5.87%, 11/15/33**..................................... 2,149,605
2,951,002 LB-UBS Commercial Mortgage Trust, Series 2001-C7,
Class S, 5.87%, 11/15/33**..................................... 1,696,505
968,400 Morgan Stanley Capital I Inc., Series 1999-WF1,
Class M, 5.91%, 11/15/31**..................................... 603,747
------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES....................... 23,881,717
(Cost $23,829,586) ------------
CORPORATE BONDS AND NOTES - 17.5%
1,500,000 Alliance One International, Inc., Company Guarantee,
11.00%, 5/15/12................................................ 1,432,500
1,000,000 Alliance One International, Inc., Senior Subordinated Note,
12.75%, 11/15/12............................................... 915,000
2,000,000 Banctec Inc., Senior Note, 7.50%, 6/01/08......................... 1,452,500
3,500,000 Citisteel USA, Inc., Senior Secured Note, 11.55%, 9/01/10**+...... 3,631,250
1,000,000 Doe Run Resources Corp., Series AI,
Company Guarantee, 11.75%, 11/01/08**.......................... 865,000
1,500,000 Elgin National Industries, Inc., Series B, Company Guarantee,
11.00%, 11/01/07............................................... 1,477,500
2,000,000 GSI Group Inc., Company Guarantee, 12.00%, 5/15/13................ 2,065,000
2,300,000 Interactive Health, LLC, Senior Note, 7.25%, 4/01/11**............ 1,851,500
1,000,000 Metallurg Holdings, Inc., Secured Senior Note,
10.50%, 10/01/10**............................................. 955,000
2,000,000 Milacron Escrow Corp., Secured Senior Note, 11.50%, 5/15/11....... 1,915,000
2,000,000 Motors and Gears Holdings Inc., Series D, Senior Note,
10.75%, 11/15/06............................................... 2,002,500
1,000,000 Mrs. Fields Famous Brands, LLC, Company Guarantee,
9.00%, 3/15/11................................................. 815,000
1,000,000 PCA Finance Corp., LLC, Secured Senior Note,
14.00%, 6/01/09**.............................................. 1,018,700
2,000,000 Pipe Acquisition Finance, Secured Senior Note,
10.91%, 12/15/10**+............................................ 1,990,000
2,000,000 Spansion LLC, Senior Note, 11.25%, 1/15/16**...................... 2,070,000
1,000,000 Transmeridian Exploration, Company Guarantee,
12.00%, 12/15/10**............................................. 1,025,000
1,000,000 TriMas Corp., Company Guarantee, 9.88%, 6/15/12................... 942,500
Page 6 See Notes to Financial Statements.
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2006 (UNAUDITED)
PRINCIPAL MARKET
VALUE DESCRIPTION VALUE
------------- ------------------------------------------------------------------ ------------
CORPORATE BONDS AND NOTES - CONTINUED
$ 2,000,000 Uno Restaurant Holdings Corp., Senior Note,
10.00%, 2/15/11**.............................................. 1,610,000
2,000,000 Wolverine Tube, Inc., Senior Note, 7.38%, 8/01/08**............... 1,610,000
------------
TOTAL CORPORATE BONDS AND NOTES................................... 29,643,950
(Cost $29,587,736) ------------
SHARES
-------------
PREFERRED SECURITIES - 4.3%
1,450,000 Ajax Ltd., Series 2A,**........................................... 841,000
2,000,000 Ajax Ltd., Series 2X,**........................................... 1,160,000
4,000,000 Pro Rata Funding Ltd. Inc.,**..................................... 3,240,000
2,000,000 Soloso CDO Ltd., Series 2005-1,**................................. 1,990,000
------------
TOTAL PREFERRED SECURITIES........................................ 7,231,000
(Cost $7,351,580) ------------
TOTAL INVESTMENTS - 98.8%......................................... 167,089,759
(Cost $168,241,601)*
NET OTHER ASSETS AND LIABILITIES - 1.2%........................... 2,011,449
-------------
NET ASSETS - 100.0%............................................... $ 169,101,208
=============
----------
* Aggregate cost for federal income tax and financial reporting purposes.
** Securities are 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. At April 30, 2006, these securities amounted to
$113,844,843, or 67.32% of net assets (Note 2C).
+ Variable rate security. The interest rate shown reflects the rate in
effect at April 30, 2006.
IO Interest only
See Notes to Financial Statements. Page 7
FIRST TRUST STRATEGIC HIGH INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2006 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $168,241,601) .......................................................................... $ 167,089,759
Prepaid expenses ................................................................................ 21,487
Receivables:
Interest ................................................................................... 2,317,246
-------------
Total Assets ............................................................................... 169,428,492
-------------
LIABILITIES:
Due to custodian ................................................................................ 115,117
Payables:
Investment advisory fees ................................................................... 124,271
Printing fees .............................................................................. 37,929
Audit and legal fees ....................................................................... 26,033
Administrative fees ........................................................................ 13,808
Custodian fees ............................................................................. 3,402
Trustees' fees and expenses ................................................................ 3,333
Transfer agent fees ........................................................................ 2,500
Accrued expenses ................................................................................ 891
-------------
Total Liabilities .......................................................................... 327,284
-------------
NET ASSETS ...................................................................................... $ 169,101,208
=============
NET ASSETS CONSIST OF:
Undistributed net investment income ............................................................. $ 1,085,991
Accumulated net realized gain on investments sold ............................................... 711,802
Net unrealized depreciation of investments ...................................................... (1,151,842)
Par value ....................................................................................... 88,384
Paid-in capital ................................................................................. 168,366,873
-------------
Total Net Assets ............................................................................. $ 169,101,208
=============
NET ASSET VALUE, per Common Share
(par value $0.01 per Common Share) ........................................................... $ 19.13
=============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) ..... 8,838,367
=============
Page 8 See Notes to Financial Statements.
FIRST TRUST STRATEGIC HIGH INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2006 (UNAUDITED)
INVESTMENT INCOME:
Interest .................................................................................... $10,474,833
-----------
Total investment income ................................................................... 10,474,833
-----------
EXPENSES:
Investment advisory fees .................................................................... 745,844
Administration fees ......................................................................... 82,872
Audit and legal fees ........................................................................ 42,420
Printing fees ............................................................................... 20,778
Trustees' fees and expenses ................................................................. 20,302
Transfer agent fees ......................................................................... 17,235
Custodian fees .............................................................................. 9,447
Other ....................................................................................... 53,541
-----------
Total expenses ............................................................................ 992,439
-----------
NET INVESTMENT INCOME ....................................................................... 9,482,394
-----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain on investments during the period .......................................... 864,132
Net change in unrealized appreciation/(depreciation) of investments during the period ....... 154,281
-----------
Net realized and unrealized gain on investments ............................................. 1,018,413
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................................ $10,500,807
===========
See Notes to Financial Statements. Page 9
FIRST TRUST STRATEGIC HIGH INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED PERIOD
4/30/2006 ENDED
(UNAUDITED) 10/31/2005*
------------- -------------
OPERATIONS:
Net investment income ...................................................................... $ 9,482,394 $ 3,401,101
Net realized gain/(loss) on investments during the period .................................. 864,132 (152,330)
Net change in unrealized appreciation/(depreciation) of investments during the period ...... 154,281 (1,306,123)
------------- -------------
Net increase in net assets resulting from operations ....................................... 10,500,807 1,942,648
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ...................................................................... (10,439,736) (1,357,768)
------------- -------------
Total distributions to shareholders ........................................................ (10,439,736) (1,357,768)
CAPITAL TRANSACTIONS:
Net proceeds from sale of 8,805,236 Common Shares .......................................... -- 168,180,008
Proceeds from 33,131 shares reinvested ..................................................... 627,458 --
Offering costs ............................................................................. -- (352,209)
------------- -------------
Total capital transactions ................................................................. 627,458 167,827,799
------------- -------------
Net increase in net assets ................................................................. 688,529 168,412,679
NET ASSETS:
Beginning of period ........................................................................ 168,412,679 --
------------- -------------
End of period .............................................................................. $ 169,101,208 $ 168,412,679
============= =============
Undistributed net investment income at end of period ....................................... $ 1,085,991 $ 2,043,333
============= =============
----------
* The Fund commenced operations on July 19, 2005.
Page 10 See Notes to Financial Statements.
FIRST TRUST STRATEGIC HIGH INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED PERIOD
4/30/2006 ENDED
(UNAUDITED) 10/31/2005*
----------- -----------
Net asset value, beginning of period ................................. $ 19.13 $ 19.10
----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................................................ 1.08 0.39
Net realized and unrealized gain/(loss) on investments ............... 0.11 (0.17)
----------- -----------
Total from investment operations ..................................... 1.19 0.22
----------- -----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ................................................ (1.19) (0.15)
----------- -----------
Total from distributions ............................................. (1.19) (0.15)
----------- -----------
Common Shares offering costs charged to paid-in capital .............. -- (0.04)
----------- -----------
Net asset value, end of period ....................................... $ 19.13 $ 19.13
=========== ===========
Market value, end of period .......................................... $ 19.37 $ 18.79
=========== ===========
TOTAL RETURN BASED ON NET ASSET VALUE (a)+ ........................... 6.43% 1.03%
=========== ===========
TOTAL RETURN BASED ON MARKET VALUE (b)+ .............................. 9.77% (5.28)%
=========== ===========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ................................. $ 169,101 $ 168,413
Ratio of total expenses to average net assets ........................ 1.20%** 1.33%**
Ratio of net investment income to average net assets ................. 11.44%** 7.82%**
Portfolio turnover rate .............................................. 48.59% 19.32%
----------
* The Fund commenced operations on July 19, 2005.
** Annualized.
(a) 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.
(b) 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 market price per share, all based on Common Share market price per
share.
+ Total return is not annualized for periods less than one year.
See Notes to Financial Statements. Page 11
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2006 (UNAUDITED)
1. FUND DESCRIPTION
First Trust Strategic High Income Fund (the "Fund") is a diversified closed-end
management investment company organized as a Massachusetts business trust on
April 15, 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 FHI on the New York Stock Exchange
("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. The Fund seeks capital growth as a secondary objective. The Fund intends
to achieve its investment objective by investing at least 80% of its managed
assets in a diversified portfolio of high income producing securities that
Valhalla Capital Partners LLC ("Valhalla" or the "Sub-Advisor") believes offer
attractive yield and capital appreciation potential. There can be no assurance
that the Fund will achieve its investment objectives. 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 computed based
upon the value of the Fund's portfolio securities and other assets less any
accrued liabilities. The NAV is determined 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 Fund calculates NAV per Common Share by subtracting the Fund's liabilities
(including accrued expenses, dividends payable and any borrowings of the Fund)
from the Fund's Total Assets (the value of the securities and other investments
the Fund holds plus cash or other assets, including interest accrued but not yet
received) and dividing the result by the total number of Common Shares
outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. 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, or if events occurring after the close of the principal markets for
particular securities (e.g., domestic debt and foreign securities), but before
the Fund values its assets, would materially affect NAV, First Trust Advisors
L.P. ("First Trust") may use a fair value method to value the Fund's securities
and 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.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued at the last sale price on the business day as of
which such value is being determined. If there has been no sale on such day, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as
of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities traded on the
NASDAQ, are valued at the closing bid prices. Short-term investments that mature
within 60 days are valued at amortized cost.
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, including amortization of premiums and accretion of
discounts.
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 instructs the custodian to
segregate assets of the Fund with a current value at least equal to the amount
of its when-issued purchase commitments.
Page 12
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2006 (UNAUDITED)
C. RESTRICTED SECURITIES:
The Fund may invest in restricted securities, which are defined as securities
that may not 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. As of April 30,
2006, the Fund held restricted securities as shown in the following table. The
Fund does not have the right to demand that such securities be registered. These
securities are valued according to the valuation procedures as stated in the
Portfolio Valuation footnote (Note 2A) and are not expressed as a discount to
the carrying value of a comparable unrestricted security.
ACQUISITION CARRYING VALUE
SECURITY DATE PER UNIT COST
-------- ---- -------- ----
ACE Securities. Corp., Home Equity Loan Trust,
Series 2005-HE5, Class M10 8/5/05 $ 91.95 $ 1,785,352
ACLC Business Loan Receivables Trust, Series 1999-1, Class A3 10/13/05 91.52 4,651,616
Ajax Ltd., Series 2A 11/30/05 0.58 851,136
Ajax Ltd., Series 2X 11/30/05 0.58 1,210,024
Banc of America Commercial Mortgage Inc., Series 2000-1, Class M 8/2/05 77.11 892,421
Banc of America Structured Securities Trust, Series 2002-X1, Class O 8/4/05 86.14 2,558,155
Banc of America Structured Securities Trust, Series 2002-X1, Class P 8/4/05 70.67 2,079,414
Citisteel USA, Inc., Senior Secured Note 8/19/05 103.75 3,493,967
CWALT, Inc., Pass-Through Certificates, Series 2005-56, Class B4 3/23/06 59.01 2,338,789
CWALT, Inc., Pass-Through Certificates, Series 2005-56, Class B5 3/23/06 19.88 1,753,183
Doe Run Resources Corp., Company Guarantee 2/28/06 86.50 867,208
EMAC Owner Trust, LLC, Series 1999-1, Class A1 3/24/06 62.06 390,683
Equinox Funding, Series 1A, Class D 8/3/05 47.94 1,362,600
Falcon Franchise Loan Trust, Series 2000-1, Class E 8/9/05 76.99 3,942,636
Falcon Franchise Loan Trust, Series 2003-1, Class E 8/18/05 65.43 3,006,090
FFCA Secured Lending Corp., Series 1998-1, Class D1 8/25/05 88.31 4,446,196
FFCA Secured Lending Corp., Series 1999-2, Class B1 8/2/05 56.74 2,867,972
FMAC Loan Receivables Trust, Series 1997-B, Class A 8/4/05 94.92 2,928,158
Forte CDO (Cayman) Ltd., Series B, Senior Secured Note 8/4/05 91.39 972,268
GMAC Commercial Mortgage Securities, Inc., Series 1999-C3, Class G 8/24/05 89.01 912,857
GS Mortgage Securities Corp. II, Series 1998-C1, Class H 8/2/05 51.13 3,410,134
GSAMP Trust, Series 2004-AR2, Class B4 8/17/05 83.85 4,482,392
Halyard CBO I, Multi Asset CBO I, Ltd., Series 1A, Class B 3/27/06 68.06 2,525,416
Helios Series I, Multi Asset CBO I, Ltd., Series 1A, Class B 2/28/06 81.50 3,250,041
Interactive Health, LLC, Senior Note 12/13/05 80.50 1,972,268
LB-UBS Commercial Mortgage Trust, Series 2001-C7, Class Q 9/19/05 71.06 2,309,396
LB-UBS Commercial Mortgage Trust, Series 2001-C7, Class S 9/29/05 57.49 1,545,033
Longorn CDO Ltd., Series 1, Class C 3/24/06 94.00 2,644,927
Metallurg Holdings, Inc., Senior Secured Note 9/16/05 95.50 979,819
Morgan Stanley Capital I Inc., Series 1999-WF1, Class M 8/3/05 62.34 595,034
North Street Referenced Linked Notes, Series 2000-1A, Class C 3/27/06 66.13 2,984,594
North Street Referenced Linked Notes, Series 2000-2A, Class B 8/3/05 88.06 5,854,020
Park Place Securities, Inc., Series 2004-WCW2, Class M10 3/24/06 92.65 2,752,285
Park Place Securities, Inc., Series 2005-WHQ4, Class M10 8/26/05 84.62 2,365,108
PCA Finance Corp., LLC, Senior Secured Note 4/6/06 101.87 1,020,000
Pegasus Aviation Lease Securitization III, Series 2001-1A, Class A3 8/4/05 86.56 2,432,521
Pipe Acquisition Finance, Senior Secured Note 3/21/06 99.50 2,000,000
Pro Rata Funding Ltd. Inc. 4/11/06 0.81 3,257,901
Soloso CDO Ltd., Series 2005-1 8/12/05 1.00 2,032,520
Soundview Home Equity Loan Trust, Series 2005-A, Class B2 8/4/05 89.66 5,388,895
Spansion LLC, Senior Note 4/3/06 103.50 1,929,643
Structured Asset Securities Corp., Series 2003-BC3, ClassB 2/28/06 92.74 1,507,652
Structured Asset Securities Corp., Series 2005-SI3, ClassB4 3/23/06 85.32 3,793,082
Summit CBO I, Ltd., Series 1A, Class B 8/3/05 26.06 1,329,889
Transmeridian Exploration, Company Guarantee 3/22/06 102.50 1,012,500
Uno Restaurant Holdings Corp., Senior Note 9/15/05 80.50 1,794,808
Wilbraham CBO Ltd., Series 1A, Class A2 2/28/06 79.00 3,917,875
Wolverine Tube, Inc., Senior Note 8/3/05 80.50 1,779,144
Page 13
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2006 (UNAUDITED)
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage. Distributions will automatically be reinvested into
additional Common Shares pursuant to the Fund's Dividend Reinvestment Plan
unless cash distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund.
The tax character of distributions paid during the fiscal period ended October
31, 2005 was as follows:
Distributions paid from:
2005
----
Ordinary Income................................ $ 1,357,768
As of October 31, 2005, the components of distributable earnings on a tax basis
were as follows:
Undistributed Ordinary Income.................. $ 2,072,716
Net Unrealized Depreciation.................... $ (1,335,506)
E. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, and by 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.
As of October 31, 2005, the Fund had a capital loss carryforward for federal
income tax purposes of $152,330 expiring on October 31, 2013.
F. EXPENSES:
The Fund pays all expenses directly related to its operations.
G. ORGANIZATION AND OFFERING COSTS:
Organization costs consist of costs incurred to establish the Fund and enable it
to legally do business. These costs include filing fees, listing fees, legal
services pertaining to the organization of the business and audit fees relating
to the initial registration and auditing the initial statement of assets and
liabilities, among other fees. Offering costs consist of legal fees pertaining
to the Fund's Common Shares offered for sale, registration fees, underwriting
fees, and printing of the initial prospectus, among other fees. First Trust and
Hilliard Lyons Asset Management ("HLAM") have paid all organization expenses and
all offering costs of the Fund (other than sales load) that exceeded $0.04 per
Common Share. The Fund's estimated share of Common Share offering costs,
$352,209, was recorded as a reduction of the proceeds from the sale of Common
Shares during the period ended October 31, 2005.
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and 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 0.90% of the Fund's Managed Assets (the value of
the securities and other investments the Fund holds plus cash or other assets,
including interest accrued but not yet received minus accrued liabilities other
than the principal amount of borrowings).
Prior to April 28, 2006, HLAM, a division of J.J.B Hilliard, W.L. Lyons, Inc. a
wholly owned subsidiary of PNC HL Holding Corp., which is a wholly owned
subsidiary of The PNC Financial Services Group, Inc., served as the Fund's
sub-advisor. Effective April 28, 2006, Valhalla serves as the Fund's sub-advisor
and manages the Fund's portfolio subject to First Trust's supervision. There
were no changes in persons primarily responsible for the day-to-day management
of the Fund. The Sub-Advisor receives a portfolio management fee of 0.40% of
Managed Assets that is paid monthly by First Trust from its investment advisory
fee.
PFPC Inc. ("PFPC"), an indirect, majority-owned subsidiary of The PNC Financial
Services Group, Inc., serves as the Fund's Administrator and Transfer Agent in
accordance with certain fee arrangements. PFPC Trust Company, 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.
Page 14
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2006 (UNAUDITED)
The Fund pays each Trustee who is not an officer or employee of First Trust or
any of its affiliates an annual retainer of $10,000, which includes compensation
for all board and committee meetings. Until January 1, 2006 additional fees of
$1,000 and $500 were paid to non-interested Trustees for special board meetings
and non-regular committee meetings, respectively. These additional fees were
shared by the funds in the First Trust fund complex that participated in the
particular meeting and are not per fund fees. Trustees are also reimbursed for
travel and out-of-pocket expenses in connection with all meetings. Effective
January 1, 2006, the non-interested Trustees are no longer paid additional fees
for special board meetings and non-regular committee meetings.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investment securities, excluding
U.S. government and short-term investments, for the six months ended April 30,
2006, aggregated amounts were $78,492,657 and $79,305,418, respectively.
As of April 30, 2006, the aggregate gross unrealized appreciation for all
securities in which there as an excess of value over tax cost was $2,562,925 and
the aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $3,714,767.
5. COMMON SHARES
As of April 30, 2006, 8,838,367 of $0.01 par value Common Shares were issued. An
unlimited number of Common Shares has been authorized under the Fund's Dividend
Reinvestment Plan.
COMMON SHARE TRANSACTIONS WERE AS FOLLOWS:
SIX MONTHS ENDED PERIOD ENDED
APRIL 30, 2006 OCTOBER 31, 2005
-------------- ----------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Proceeds from Common Shares sold ............................... -- $ -- 8,805,236 $ 168,180,008
Issued as reinvestment of dividends under the Dividend
Reinvestment Plan ............................................ 33,131 627,458
Offering costs ................................................. -- -- -- (352,209)
-------- ---------- ------------ -------------
33,131 $ 627,458 8,805,236 $ 167,827,799
======== ========== ============ =============
6. PREFERRED SHARES OF BENEFICIAL INTEREST
The Fund's Declaration of Trust authorizes the issuance of an unlimited number
of preferred shares of beneficial interest, par value $0.01 per share (the
"Preferred Shares"), in one or more classes or series, with rights as determined
by the Board of Trustees without the approval of Common Shareholders. As of
April 30, 2006, no Preferred Shares had been issued.
7. CONCENTRATION OF 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 bond
market, or when political or economic events affecting the issuers occur.
Non-Investment Grade Securities Risk: The Fund may invest up to 80% of its
Managed Assets in non-investment grade securities. Non-investment grade
securities are rated below "Baa3" by Moody's Investors Services, Inc., below
"BBB-" by Standard & Poor's, or comparably rated by another nationally
recognized statistical rating organization or, if unrated, determined by the
Sub-Advisor to be of comparable credit quality. Below-investment grade debt
instruments are commonly referred to as "high yield" or "junk" bonds, are
considered speculative with respect to the issuer's capacity to pay interest and
repay principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for high yield
securities tend to be very volatile, and these securities are less liquid than
investment grade debt securities.
8. SUBSEQUENT EVENTS
On May 22, 2006, the Fund declared a dividend of $0.160 per share, which
represents a dividend from net investment income to Common Shareholders of
record June 5, 2006, payable June 15, 2006.
Effective June 12, 2006, the Board of Trustees of the Fund unanimously appointed
Robert F. Keith to the Board of Trustees and as a member to the Fund's Audit
Committtee, Valuation Committee and Nominating and Governance Committee.
Page 15
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2006 (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 PFPC
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 PFPC Inc., as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If 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) 334-1710, in
accordance with such reasonable requirements as the Plan Agent and Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole 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 PFPC 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 will
be 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 16
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2006 (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 1-800-SEC-0330.
BY-LAW AMENDMENT
On June 12, 2006, the Board of Trustees of the Fund approved certain changes to
the By-Laws of the Fund that may have the effect of delaying or preventing a
change of control of the Fund. To receive a copy of the revised By-Laws,
investors may call the Fund at (800) 988-5891.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of First Trust Strategic High Income
Fund, First Trust Value Line(R) 100 Fund, Energy Income and Growth Fund, First
Trust/Fiduciary Asset Management Covered Call Fund, First Trust/Aberdeen Global
Opportunity Income Fund and First Trust/FIDAC Mortgage Income Fund was held on
April 17, 2006. At the Annual Meeting, the Fund's Board of Trustees, consisting
of James A. Bowen, Niel B. Nielson, Thomas R. Kadlec and Richard E. Erickson,
was elected to serve an additional one-year term. The number of votes cast for
James A. Bowen was 4,580,468, the number of votes withheld was 227,795 and the
number of abstentions was 3,996,973. The number of votes cast for Niel B.
Nielson was 4,578,668, the number of votes withheld was 229,595 and the number
of abstentions was 3,996,973. The number of votes cast for Richard E. Erickson
was 4,582,887, the number of votes withheld was 225,376 and the number of
abstentions was 3,996,973. The number of votes cast for Thomas R. Kadlec was
4,581,637, the number of votes withheld was 226,626 and the number of
abstentions was 3,996,973.
Also at the Annual Meeting of Shareholders of the Fund, the Shareholders
approved a sub-advisory agreement with Valhalla. The number of votes cast was
3,378,452, the number of votes withheld was 295,703 and the number of
abstentions was 5,131,081.
BOARD APPROVAL OF ADVISORY AND SUB-ADVISORY AGREEMENTS
The Board of Trustees considered and approved the New Sub-Advisory Agreement
with Valhalla Capital Partners, LLC ("Valhalla") at a meeting held on January
23, 2006 and recommended its approval to shareholders. In reviewing the New
Sub-Advisory Agreement, the Board of Trustees received and reviewed data from
First Trust Advisors L.P. ("First Trust" or the "Advisor") and Valhalla which
was provided in response to a request from counsel to the Independent Trustees
made in advance of the meeting. The Independent Trustees discussed these
responses in a conference call prior to the meeting. At the meeting, the
Trustees discussed the materials with representatives of First Trust, Valhalla,
Fund counsel and independent counsel. The Trustees met with independent counsel
to review their duties and responsibilities in connection with their
consideration of the New Sub-Advisory Agreement. The Board concluded that the
terms of the New Sub-Advisory Agreement are fair and reasonable and that the New
Sub-Advisory Agreement is in the best interests of the Fund.
The Trustees considered the nature, extent and quality of services to be
provided by Valhalla, and noted that the portfolio managers currently managing
the Fund's portfolio would remain as the Fund's portfolio managers after the
transaction in which Hilliard Lyons Asset Management, a division of J. J. B.
Hilliard, W. L. Lyons, Inc. ("HL"), the initial sub-advisor to the Fund, agreed
to transfer certain assets and liabilities to Valhalla, including HL's rights
with respect to the original sub-advisory agreement for the Fund, in return for
certain consideration, subject to Valhalla being named sub-advisor to the Fund.
At the meeting, the Trustees received a presentation from the three managing
members of Valhalla, who described Valhalla's experience and investment style.
These representatives of Valhalla described the recent formation of Valhalla,
including proposed trading systems, office space and personnel, and the
compliance program that had been developed. These factors were important to the
Independent Trustees in their determinations. The Trustees also considered the
background of the other employees and officers of Valhalla, including the
resumes of its current and prospective Chief Compliance Officers. The
Independent Trustees noted that First Trust or an affiliate would have a
minority ownership interest in Valhalla and they concluded that this investment
would enable more informed oversight of Valhalla. The Trustees also considered
that Valhalla would not use any portion of Fund commissions to pay for research.
The Trustees concluded that Valhalla had the capability to provide the necessary
investment advisory services to the Fund.
Page 17
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ADDITIONAL INFORMATION - (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2006 (UNAUDITED)
The Trustees considered the fees to be paid under the New Sub-Advisory Agreement
and noted that the fees would be paid by First Trust from its advisory fee.
Valhalla provided information on fees charged to clients for which it provides
discretionary, investment supervisory services, and the Trustees noted that
those fees generally were the same as or higher than the fees to be paid under
the New Sub-Advisory Agreement. The Trustees reviewed an estimated budget
prepared by Valhalla based on the fees projected to be received for services to
be provided under the New Sub-Advisory Agreement. The Trustees reviewed the
Fund's performance information, but determined that because of the limited
operating history of the Fund, the information was not determinative. The
Trustees concluded that the fees to be paid under the New Sub-Advisory Agreement
were reasonable.
The Trustees considered First Trust's representation that the Fund's overall fee
structure is not structured to pass the benefits of economies of scale on to
shareholders as assets grow, but noted that assets are not expected to grow
significantly since additional shares are issued only through the Fund's
dividend reinvestment plan. The Trustees noted that both First Trust and
Valhalla intended to continue to make investments in infrastructure and
personnel. The Board did not consider an estimated level of profit to Valhalla
under the New Sub-Advisory Agreement, although the Trustees did consider the
budget prepared by Valhalla. The Board considered that the sub-advisory fee rate
was negotiated at arm's length between First Trust and Valhalla, and that
Valhalla would be paid by First Trust.
After discussion, the Board of Trustees, including the Independent Trustees,
concluded that Valhalla had the capabilities, resources and personnel necessary
to manage the investments of the Fund. Based upon such information as they
considered necessary to the exercise of their reasonable business judgment, the
Trustees concluded unanimously that it was in the best interests of the Fund to
approve the New Sub-Advisory Agreement.
Page 18
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ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
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.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
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.
On December 12, 2005, the Registrant's Board of Trustees adopted an
Amended Nominating and Governance Committee Charter which included some material
changes to the procedures by which shareholders may recommend nominees to the
Registrant's board of trustees as described below:
Any proposal to elect any person nominated by shareholders for election
as trustee may only be brought before an annual meeting of the Registrant if
timely written notice (the "Shareholder Notice") is provided to the secretary of
the Registrant. Unless a greater or lesser period is required under applicable
law, to be timely, the Shareholder Notice must be delivered to or mailed and
received at Registrant's address, 1001 Warrenville Road, Suite 300, Lisle,
Illinois 60532, Attn: W. Scott Jardine, not less than forty-five (45) days nor
more than sixty (60) days prior to the first anniversary date of the date of the
Registrant's proxy statement released to shareholders for the prior year's
annual meeting; provided, however, if and only if the annual meeting is not
scheduled to be held within a period that commences thirty (30) days before the
first anniversary date of the annual meeting for the preceding year and ends
thirty (30) days after such anniversary date (an annual meeting date outside
such period being referred to herein as an "Other Annual Meeting Date"), such
Shareholder Notice must be given in the manner provided herein by the later of
the close of business on (i) the date forty-five (45) days prior to such Other
Annual Meeting Date or (ii) the tenth (10th) business day following the date
such Other Annual Meeting Date is first publicly announced or disclosed.
Any shareholder submitting a nomination of any person or persons (as
the case may be) for election as a trustee or trustees of the Registrant shall
deliver, as part of such Shareholder Notice: (i) a statement in writing setting
forth (A) the name, age, date of birth, business address, residence address and
nationality of the person or persons to be nominated; (B) the class or series
and number of all shares of the Registrant owned of record or beneficially by
each such person or persons, as reported to such shareholder by such nominee(s);
(C) any other information regarding each such person required by paragraphs (a),
(d), (e) and (f) of Item 401 of Regulation S-K or paragraph (b) of Item 22 of
Rule 14a-101 (Schedule 14A) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (or any successor provision thereto); (D) any other
information regarding the person or persons to be nominated that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitation of proxies for election of trustees or
directors pursuant to Section 14 of the Exchange Act and the rules and
regulations promulgated thereunder; and (E) whether such shareholder believes
any nominee is or will be an "interested person" of the Registrant (as defined
in the Investment Company Act of 1940) and, if not an "interested person,"
information regarding each nominee that will be sufficient for the Registrant to
make such determination; and (ii) the written and signed consent of any person
to be nominated to be named as a nominee and to serve as a trustee if elected.
In addition, the trustees may require any proposed nominee to furnish such other
information as they may reasonably require or deem necessary to determine the
eligibility of such proposed nominee to serve as a trustee.
Without limiting the foregoing, any shareholder who gives a Shareholder
Notice of any matter proposed to be brought before a shareholder meeting
(whether or not involving nominees for trustees) shall deliver, as part of such
Shareholder Notice: (i) the description of and text of the proposal to be
presented; (ii) a brief written statement of the reasons why such shareholder
favors the proposal; (iii) such shareholder's name and address as they appear on
the Registrant's books; (iv) any other information relating to the shareholder
that would be required to be disclosed in a proxy statement or other filings
required to be made in connection with the solicitation of proxies with respect
to the matter(s) proposed pursuant to Section 14 of the Exchange Act; (v) the
class or series and number of all shares of the Registrant owned beneficially
and of record by such shareholder; (vi) any material interest of such
shareholder in the matter proposed (other than as a shareholder); (vii) a
representation that the shareholder intends to appear in person or by proxy at
the shareholder meeting to act on the matter(s) proposed; (viii) if the proposal
involves nominee(s) for trustees, a description of all arrangements or
understandings between the shareholder and each proposed nominee and any other
person or persons (including their names) pursuant to which the nomination(s)
are to be made by the shareholder; and (ix) in the case of a shareholder (a
"Beneficial Owner") that holds shares entitled to vote at the meeting through a
nominee or "street name" holder of record, evidence establishing such Beneficial
Owner's indirect ownership of, and entitlement to vote, shares at the meeting of
shareholders. As used herein, shares "beneficially owned" shall mean all shares
which such person is deemed to beneficially own pursuant to Rules 13d-3 and
13d-5 under the Exchange Act.
A copy of the amended Nominating and Governance Committee Charter is available
on the Registrant's website at www.ftportfolios.com.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
Registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these controls
and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the Registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d)) that occurred during the Registrant's second fiscal
quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) FIRST TRUST STRATEGIC HIGH INCOME FUND
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date JUNE 27, 2006
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date JUNE 27, 2006
----------------------------------------------------------------------------
By (Signature and Title)* /S/ MARK R. BRADLEY
-------------------------------------------------------
Mark R. Bradley, Treasurer, Controller, Chief
Financial Officer and Chief Accounting Officer
(principal financial officer)
Date JUNE 27, 2006
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.