UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------
FORM N-CSR
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CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
INVESTMENT COMPANY ACT FILE NUMBER 811-2981
FIRST INVESTORS SPECIAL BOND FUND, INC.
(Exact name of registrant as specified in charter)
95 Wall Street
New York, NY 10005
(Address of principal executive offices) (Zip code)
Joseph I. Benedek
First Investors Management Company, Inc.
Raritan Plaza I
Edison, NJ 08837-3620
1-732-855-2712
(Name and address of agent for service)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
1-212-858-8000
DATE OF FISCAL YEAR END: DECEMBER 31, 2005
DATE OF REPORTING PERIOD: DECEMBER 31, 2005
Item 1. Reports to Stockholders
The Annual Report to Stockholders follows
[Logo: "FIRST INVESTORS"]
First Investors
Special Bond Fund, Inc.
Annual Report
December 31, 2005
[Logo: "FIRST INVESTORS FINANCIAL NETWORK"]
Portfolio Managers' Letter
FIRST INVESTORS SPECIAL BOND FUND, INC.
Dear Investor:
This is the annual report for the First Investors Special Bond Fund for the
year ended December 31, 2005. During the year, the Fund's return on a net
asset value basis was 1.7%, including dividends of 69.6 cents per share.
The two most important factors driving the Fund's performance during the year
were the overall performance of the high yield market and the bankruptcy of
auto parts supplier Collins & Aikman, a large position in the Fund.
After posting strong returns for the two years before 2005, the tide turned
for the high yield bond sector. High yield valuations reached a point at
which they were due for a correction, which took place during the past year.
Compounding the correction was the poor performance of the Treasury market.
Economic and credit trends generally remain favorable, but investors are
worried about the credit cycle following the credit-rating downgrades of GM
and Ford to high yield status and the high profile bankruptcies of Delta Air
Lines, Northwest Airlines and Delphi Corporation.
The most significant negative contributor to the Fund's performance was its
investment in auto parts supplier Collins & Aikman, which filed for
bankruptcy. A strong performer in 2004, Collins & Aikman faced a liquidity
crisis after its primary customers, GM and Ford, were downgraded to high
yield. Investments in two other auto parts suppliers, Dana Corporation and
Special Devices, also slipped due to general weakness in the auto sector. Also
hurting performance were those companies who failed to meet expectations.
Adelphia Communications traded down due to concerns that telecommunication
providers might provide increased competition to the cable sector.
Aiding the Fund's performance were investments that benefited from "special
situations," and the Fund's overweight allocation in the chemical and
energy sectors in anticipation of continued strong cyclical results.
Special situations investments included Day International, which called 25%
of its preferred stock and paid nearly three years of dividends in arrears,
and Media News, whose stock rose due to mergers and acquisition activity in
the sector. Chemical supplier Resolution Performance Products posted strong
results as the chemical cycle moved toward a peak.
Portfolio Managers' Letter (continued)
FIRST INVESTORS SPECIAL BOND FUND, INC.
Thank you for placing your trust in First Investors. As always, we
appreciate the opportunity to serve your investment needs.
Sincerely,
/s/ Richard T. Bourke
Richard T. Bourke
Co-Portfolio Manager
/s/ Greg Miller
Greg Miller
Co-Portfolio Manager
January 31, 2006
Understanding Your Fund's Expenses
FIRST INVESTORS SPECIAL BOND FUND, INC.
As a mutual fund shareholder, you incur two types of costs: (1) transaction
costs, and (2) ongoing costs, including advisory fees and other expenses.
This example is intended to help you understand your ongoing costs (in
dollars) of investing in the Fund and to compare these costs with the
ongoing costs of investing in other mutual funds.
The examples are based on an investment of $1,000 in the Fund at the
beginning of the period, July 1, 2005, and held for the entire six-month
period ended December 31, 2005. The calculations assume that no shares were
bought or sold during the period. Your actual costs may have been higher or
lower, depending on the amount of your investment and the timing of any
purchases or redemptions.
Actual Expenses Example:
These amounts help you to estimate the actual expenses that you paid over
the period. The "Ending Account Value" shown is derived from the Fund's
actual return, and the "Expenses Paid During Period" shows the dollar amount
that would have been paid by an investor who started with $1,000 in the
Fund. You may use the information here, together with the amount you
invested, to estimate the expenses that you paid during the period. To
estimate the expenses you paid on your account during this period simply
divide your ending account value by $1,000 (for example, an $8,600 account
value divided by $1,000 = 8.60), then multiply the result by the number
given for the Fund under the heading "Expenses Paid During Period."
Hypothetical Expenses Example:
These amounts provide information about hypothetical account values and
hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses, which is not the
Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs
of investing in the Fund and other funds. To do so, compare this 5%
hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight and
help you compare your ongoing costs only and do not reflect any transaction
costs. Therefore, the hypothetical expense example is useful in comparing
ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transaction costs
were included, your costs would have been higher.
Fund Expenses
FIRST INVESTORS SPECIAL BOND FUND, INC.
The examples below show the ongoing costs (in dollars) of investing in your
Fund and will help you in comparing these costs with costs of other mutual
funds. Please refer to page 3 for a detailed explanation of the information
presented in these examples.
- -------------------------------------------------------------------------------------
Beginning Ending
Account Account Expenses Paid
Value Value During Period
Expense Examples (7/1/05) (12/31/05) (7/1/05-12/31/05)*
- -------------------------------------------------------------------------------------
Expense Examples
Actual $1,000.00 $1,030.90 $5.02
Hypothetical
(5% annual return before expenses) $1,000.00 $1,020.27 $4.99
- -------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio of .98%, multiplied by
the average account value over the period, multiplied by 184/365 (to
reflect the one-half year period).
Portfolio Composition
TOP SECTORS
[BAR CHART DATA]
Consumer Staples 21.1%
Consumer Discretionary 17.5%
Materials 15.8%
Energy 14.5%
Health Care 10.9%
Industrials 7.5%
U.S. Government Obligations 5.5%
Financials 2.3%
Telecommunication Services 2.1%
Portfolio holdings and allocations are subject to change. Percentages are as
of December 31, 2005, and are based on the total value on investments.
Cumulative Performance Information
FIRST INVESTORS SPECIAL BOND FUND, INC.
Comparison of change in value of $10,000 investment in the First Investors
Special Bond Fund, Inc. and the Credit Suisse High Yield Index II.
First Investors Special Bond Fund
Graph Plot Points
for the periods Ended 12/31/05
Special Credit Suisse
Bond High Yield
Fund Index II
Dec-95 $10,000 $10,000
Dec-96 11,310 11,303
Dec-97 12,547 12,683
Dec-98 12,710 12,753
Dec-99 13,503 13,211
Dec-00 12,616 12,463
Dec-01 12,614 13,231
Dec-02 12,891 13,641
Dec-03 16,541 17,452
Dec-04 18,258 19,538
Dec-05 18,568 19,980
(INSET BOX IN CHART READS:)
Average Annual Total Returns*
One Year 1.69%
Five Years 8.04%
Ten Years 6.38%
S.E.C. 30-Day Yield 6.23%
The graph compares a $10,000 investment in the First Investors Special
Bond Fund, Inc. beginning 12/31/95 with a theoretical investment in the
Credit Suisse High Yield Index II (the "Index"). The Index is designed to
measure the performance of the high yield bond market. As of 12/31/05,
the Index consisted of 1,434 different issues, most of which are
cash-pay, also included in the Index are zero-coupon bonds, step bonds,
payment-in-kind bonds and bonds which are in default. As of 12/31/05,
approximately .48% of the market value of the Index was in default. The
bonds included in the Index have an average maturity of 7.39 years, an
average duration of 4.24 years and an average coupon of 8.49%. It is not
possible to invest directly in this Index. In addition, the Index does
not take into account fees and expenses that an investor would incur in
purchasing securities in the Index. For purposes of the graph and
accompanying table it is assumed that all dividends and distributions
were reinvested.
* The Average Annual Total Return figures are for the periods ended
12/31/05.
The returns shown do not reflect any sales charges, since the Fund sells
it shares solely to First Investors Life Variable Annuity Fund A at net
asset value. The returns do not reflect the fees and charges that an
individual would pay in connection with an investment in a variable
annuity contract. Results represent past performance and do not indicate
future results. The graph and the returns shown do not reflect the
deduction of taxes that an investor would pay on distributions or the
redemption of fund shares. Investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than the original cost. The issuers of the high
yield bonds in which the Fund primarily invests pay higher interest rates
because they have a greater likelihood of financial difficulty, which
could result in their inability to repay the bonds fully when due. Prices
of high yield bonds are also subject to greater fluctuations. Credit
Suisse High Yield Index II figures are from Credit Suisse Corporation and
all other figures are from First Investors Management Company, Inc.
Portfolio of Investments
FIRST INVESTORS SPECIAL BOND FUND, INC.
December 31, 2005
- -------------------------------------------------------------------------------------------------------
Amount
Invested
For Each
Principal $10,000 of
Amount Security Value Net Assets
- -------------------------------------------------------------------------------------------------------
CORPORATE BONDS--83.5%
Aerospace/Defense--2.1%
$ 150M Alliant Techsystems, Inc., 8.5%, 2011 $ 158,250 $ 82
150M DRS Technologies, Inc., 6.875%, 2013 144,187 75
100M DynCorp International, 9.5%, 2013 104,500 55
- -------------------------------------------------------------------------------------------------------
406,937 212
- -------------------------------------------------------------------------------------------------------
Automotive--6.7%
100M Accuride Corp., 8.5%, 2015 99,000 52
75M Asbury Automotive Group, Inc., 9%, 2012 75,375 39
594M Cambridge Industries Liquidating Trust, 2007++** 5,938 3
250M Cooper Standard Automotive, Inc., 8.375%, 2014 191,250 100
175M Dana Corp., 9%, 2011 142,625 74
150M Navistar International Corp., 6.25%, 2012 135,000 70
500M Special Devices, Inc., 11.375%, 2008 384,375 200
228M TRW Automotive, Inc., 9.375%, 2013 247,950 129
- -------------------------------------------------------------------------------------------------------
1,281,513 667
- -------------------------------------------------------------------------------------------------------
Chemicals--12.8%
15M BCP Crystal US Holdings Corp., 9.625%, 2014 16,763 9
150M Equistar Chemicals LP, 10.625%, 2011 165,750 86
250M Huntsman International, LLC, 7.375%, 2015+ 242,500 126
67M Huntsman, LLC, 11.625%, 2010 76,631 40
100M IMC Global, Inc., 10.875%, 2013 115,375 60
300M Innophos, Inc., 8.875%, 2014 + 303,750 158
Lyondell Chemical Co.:
350M 9.625%, 2007 367,063 191
91M 9.5%, 2008 95,777 50
200M Millennium America, Inc., 9.25%, 2008 216,750 113
100M Nell AF Sarl, 8.375%, 2015 + 99,500 52
675M Resolution Performance Products, LLC, 13.5%, 2010 717,187 373
50M Tronox Worldwide, LLC, 9.5%, 2012 + 51,250 27
- -------------------------------------------------------------------------------------------------------
2,468,296 1,285
- -------------------------------------------------------------------------------------------------------
Consumer Non-Durables--1.8%
100M Broder Brothers Co., 11.25%, 2010 95,750 50
Levi Strauss & Co.:
150M 8.804%, 2012*** 151,875 79
100M 9.75%, 2015 104,500 54
- -------------------------------------------------------------------------------------------------------
352,125 183
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Amount
Invested
For Each
Principal $10,000 of
Amount Security Value Net Assets
- -------------------------------------------------------------------------------------------------------
Energy--13.9%
$ 250M Belden & Blake Corp., 8.75%, 2012 $ 256,250 $ 133
300M Bluewater Finance, Ltd., 10.25%, 2012 324,000 169
Chesapeake Energy Corp.:
500M 6.375%, 2015 502,500 262
150M 6.625%, 2016 152,625 79
100M Compagnie Generale de Geophysique, 7.5%, 2015 104,000 54
125M Dresser, Inc., 9.375%, 2011 132,187 69
250M El Paso Production Holding Co., 7.75%, 2013 260,625 136
644M Giant Industries, Inc., 11%, 2012 719,670 375
100M POGO Producing Co., 6.875%, 2017+ 98,000 51
110M Tesoro Corp., 6.25%, 2012+ 111,100 58
- -------------------------------------------------------------------------------------------------------
2,660,957 1,386
- -------------------------------------------------------------------------------------------------------
Financial--2.0%
294M Dow Jones CDX, High Yield, Trust 1,
Series 4, 8.25%, 2010+ 297,675 155
88M Targeted Return Index Securities Trust,
7.651%, 2015+*** 90,368 47
- -------------------------------------------------------------------------------------------------------
388,043 202
- -------------------------------------------------------------------------------------------------------
Food/Beverage/Tobacco--.9%
9M Land O'Lakes, Inc., 8.75%, 2011 9,495 5
150M Pilgrim's Pride Corp., 9.625%, 2011 160,500 84
- -------------------------------------------------------------------------------------------------------
169,995 89
- -------------------------------------------------------------------------------------------------------
Forest Products/Containers--1.7%
200M Stone Container Corp., 9.75%, 2011 203,000 106
130M Tekni-Plex, Inc., 8.75%, 2013+ 115,050 60
- -------------------------------------------------------------------------------------------------------
318,050 166
- -------------------------------------------------------------------------------------------------------
Gaming/Leisure--6.6%
250M Circus & Eldorado/Silver Legacy, 10.125%, 2012 265,625 138
180M Mandalay Resort Group, 6.375%, 2011 179,775 94
240M MGM Mirage, Inc., 6.625%, 2015 240,600 125
300M Park Place Entertainment Corp., 9.375%, 2007 313,125 163
255M Speedway Motorsports, Inc., 6.75%, 2013 259,463 135
- -------------------------------------------------------------------------------------------------------
1,258,588 655
- -------------------------------------------------------------------------------------------------------
Portfolio of Investments (continued)
FIRST INVESTORS SPECIAL BOND FUND, INC.
December 31, 2005
- -------------------------------------------------------------------------------------------------------
Amount
Invested
For Each
Principal $10,000 of
Amount Security Value Net Assets
- -------------------------------------------------------------------------------------------------------
Health Care--10.5%
$ 250M DaVita, Inc., 7.25%, 2015 $ 254,375 $ 132
120M Fisher Scientific International, Inc., 6.125%, 2015+ 120,600 63
HCA, Inc.:
165M 5.25%, 2008 163,651 85
200M 6.75%, 2013 207,217 108
150M Insight Health Services Corp., 9.875%, 2011 114,000 59
150M MedQuest, Inc., 11.875%, 2012 145,500 76
75M Quintiles Transnational Corp., 10%, 2013 84,000 44
250M Sybron Dental Specialties, Inc., 8.125%, 2012 263,750 137
550M Tenet Healthcare Corp., 6.375%, 2011 504,625 263
150M Triad Hospitals, Inc., 7%, 2013 151,125 79
- -------------------------------------------------------------------------------------------------------
2,008,843 1,046
- -------------------------------------------------------------------------------------------------------
Housing--1.5%
140M Beazer Homes USA, Inc., 6.875%, 2015 134,925 70
150M Builders FirstSource, Inc., 8.59%, 2012*** 153,375 80
- -------------------------------------------------------------------------------------------------------
288,300 150
- -------------------------------------------------------------------------------------------------------
Information Technology--.0%
150M Exodus Communications, Inc., 10.75%, 2009++** 94 --
- -------------------------------------------------------------------------------------------------------
Investment/Finance Companies--.1%
71M Finova Group, Inc., 7.5%, 2009 25,294 13
- -------------------------------------------------------------------------------------------------------
Manufacturing--.8%
200M Wolverine Tube, Inc., 7.375%, 2008+ 150,500 78
- -------------------------------------------------------------------------------------------------------
Media-Broadcasting--3.3%
280M Clear Channel Communications, Inc., 5.5%, 2014 268,383 140
150M Sinclair Broadcasting Group, Inc., 8.75%, 2011 158,625 82
Young Broadcasting, Inc.:
136M 10%, 2011 128,010 67
100M 8.75%, 2014 88,625 46
- -------------------------------------------------------------------------------------------------------
643,643 335
- -------------------------------------------------------------------------------------------------------
Media-Cable TV--8.0%
355M Adelphia Communications Corp., 10.25%, 2011++ 214,775 112
135M Atlantic Broadband Finance, LLC, 9.375%, 2014 121,163 63
200M Cablevision Systems Corp., 8%, 2012 188,000 98
500M Charter Communications Holdings, LLC, 10%, 2009 375,000 196
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Amount
Invested
For Each
Principal $10,000 of
Amount Security Value Net Assets
- -------------------------------------------------------------------------------------------------------
Media-Cable TV (continued)
$ 125M CSC Holdings, Inc., 8.125%, 2009 $ 126,875 $ 66
310M Echostar DBS Corp., 6.375%, 2011 299,925 156
200M Quebecor Media, Inc., 11.125%, 2011 217,500 113
- -------------------------------------------------------------------------------------------------------
1,543,238 804
- -------------------------------------------------------------------------------------------------------
Media-Diversified--4.3%
300M Cenveo, Inc., 7.875%, 2013 291,000 152
MediaNews Group, Inc.:
75M 6.875%, 2013 72,094 38
50M 6.375%, 2014 46,375 24
Six Flags, Inc.:
150M 8.875%, 2010 147,000 77
50M 9.625%, 2014 48,875 25
200M Universal City Development Partners, Ltd.,
11.75%, 2010 225,250 117
- -------------------------------------------------------------------------------------------------------
830,594 433
- -------------------------------------------------------------------------------------------------------
Metals/Mining--.6%
50M Metals USA, Inc., 11.125%, 2015+ 51,500 27
60M Russell Metals, Inc., 6.375%, 2014 58,500 30
- -------------------------------------------------------------------------------------------------------
110,000 57
- -------------------------------------------------------------------------------------------------------
Retail-General Merchandise--1.5%
100M GSC Holdings Corp., 8%, 2012+ 94,500 49
200M Neiman Marcus Group, Inc., 10.375%, 2015+ 204,250 107
- -------------------------------------------------------------------------------------------------------
298,750 156
- -------------------------------------------------------------------------------------------------------
Services--2.8%
Allied Waste NA, Inc.:
150M 5.75%, 2011 142,875 74
300M 7.375%, 2014 293,250 153
100M Hydrochem Industrial Services, Inc., 9.25%, 2013+ 96,500 50
- -------------------------------------------------------------------------------------------------------
532,625 277
- -------------------------------------------------------------------------------------------------------
Telecommunications--.0%
600M ICG Services, Inc., 10%, 2008++** 375 --
400M XO Communications, Inc., 9%, 2008++** 250 --
- -------------------------------------------------------------------------------------------------------
625 --
- -------------------------------------------------------------------------------------------------------
Portfolio of Investments (continued)
FIRST INVESTORS SPECIAL BOND FUND, INC.
December 31, 2005
- -------------------------------------------------------------------------------------------------------
Amount
Invested
Principal For Each
Amount $10,000 of
or Shares Security Value Net Assets
- -------------------------------------------------------------------------------------------------------
Transportation--.2%
$ 29M American Commercial Lines, 9.5%, 2015 $ 31,465 $ 16
- -------------------------------------------------------------------------------------------------------
Utilities--.0%
125M AES Drax Energy, Ltd., 11.5%, 2010 ++ 281 --
1M NRG Energy, Inc., 8%, 2013 1,120 1
- -------------------------------------------------------------------------------------------------------
1,401 1
- -------------------------------------------------------------------------------------------------------
Wireless Communications--1.4%
100M Rogers Wireless, Inc., 6.375%, 2014 100,750 53
230M Triton Communications, LLC, 9.375%, 2011 169,050 88
- -------------------------------------------------------------------------------------------------------
269,800 141
- -------------------------------------------------------------------------------------------------------
Total Value of Corporate Bonds (cost $17,396,643) 16,039,676 8,352
- -------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--5.3%
1,000M U.S. Treasury Notes, 7%, 2006 (cost $1,007,037) 1,013,555 528
- -------------------------------------------------------------------------------------------------------
COMMON STOCKS--2.9%
Food/Drug--.5%
5,500 Ingles Markets, Inc. 86,075 45
- -------------------------------------------------------------------------------------------------------
Media-Diversified--1.8%
1,500 * MediaNews Group, Inc. - Class "A"** 337,500 176
- -------------------------------------------------------------------------------------------------------
Telecommunications--.6%
5,188 * RCN Corporation 121,659 63
500 * RCN Corporation** 5 --
230 * Viatel Holding (Bermuda), Ltd.** 7 --
1,571 * World Access, Inc. 1 --
- -------------------------------------------------------------------------------------------------------
121,672 63
- -------------------------------------------------------------------------------------------------------
Total Value of Common Stocks (cost $305,505) 545,247 284
- -------------------------------------------------------------------------------------------------------
PREFERRED STOCKS--1.3%
Manufacturing
278 Day International Group, Inc., 12.25%,
2010, PIK (cost $264,265) 253,721 132
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Amount
Invested
Warrants or For Each
Principal $10,000 of
Amount Security Value Net Assets
- -------------------------------------------------------------------------------------------------------
WARRANTS--.0%
Telecommunications
250 GT Group Telecom, Inc. (expiring 2/1/10)**
(cost $22,587) $ -- $ --
- -------------------------------------------------------------------------------------------------------
SHORT-TERM CORPORATE NOTES--2.6%
$ 500M General Electric Capital Corp., 4.26%, 1/19/06
(cost $498,875) 498,875 260
- -------------------------------------------------------------------------------------------------------
Total Value of Investments (cost $19,494,912) 95.6% 18,351,074 9,556
Other Assets, Less Liabilities 4.4 851,756 444
- -------------------------------------------------------------------------------------------------------
Net Assets 100.0% $19,202,830 $10,000
=======================================================================================================
+ Security exempt from registration under Rule 144A of the
Securities Act of 1933 (see Note 5).
++ In default as to principal and/or interest payment
* Non-income producing
** Security valued at fair value (see Note 1A)
*** Interest Rates on adjustable rate bonds are determined and reset
quarterly by the indentures. The interest rates shown are the rates
in effect on December 31, 2005.
# Denotes a step bond (a zero coupon bond that converts to a fixed
interest rate at a designated future date).
See notes to financial statements
Statement of Assets and Liabilities
FIRST INVESTORS SPECIAL BOND FUND, INC.
December 31, 2005
- ----------------------------------------------------------------------------------------
Assets
Investments in securities, at value
(identified cost $19,494,912) (Note 1A) $18,351,074
Cash 557,535
Interest receivable 360,159
Other assets 4,728
-----------
Total Assets 19,273,496
-----------
Liabilities
Payable for shares redeemed 37,736
Accrued advisory fee 11,700
Accrued expenses 21,230
-----------
Total Liabilities 70,666
-----------
Net Assets $19,202,830
===========
Net Assets Consist of:
Capital paid in $27,435,978
Accumulated net investment income 41,827
Accumulated net realized loss on investment transactions (7,131,137)
Net unrealized depreciation in value of investments (1,143,838)
-----------
Total $19,202,830
===========
Net Asset Value, Offering Price and Redemption Price Per Share
($19,202,830 divided by 2,145,598 shares outstanding),
25,000,000 shares authorized, $1.00 par value (Note 2) $8.95
=====
See notes to financial statements
Statement of Operations
FIRST INVESTORS SPECIAL BOND FUND, INC.
Year Ended December 31, 2005
- -----------------------------------------------------------------------------------------------------
Investment Income
Income:
Interest $1,661,330
Dividend 143,894
-----------
Total income $1,805,224
Expenses (Notes 1 and 4):
Advisory fee 149,744
Professional fees 24,793
Reports to shareholders 4,710
Custodian fees 3,827
Directors' fees 790
Registration fees 775
Other expenses 9,634
-----------
Total expenses 194,273
Less - Expenses paid indirectly (3,823)
-----------
Net expenses 190,450
-----------
Net investment income 1,614,774
Realized and Unrealized Gain (Loss)
on Investments (Note 3):
Net realized loss on investments (209,198)
Net unrealized depreciation of investments (1,104,523)
-----------
Net loss on investments (1,313,721)
-----------
Net Increase in Net Assets Resulting
from Operations $301,053
===========
See notes to financial statements
Statement of Changes in Net Assets
FIRST INVESTORS SPECIAL BOND FUND, INC.
- -----------------------------------------------------------------------------------------------------
Year Ended December 31 2005 2004
- -----------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets from Operations
Net investment income $ 1,614,774 $ 1,666,646
Net realized loss on investments (209,198) (177,959)
Net unrealized appreciation (depreciation)
of investments (1,104,523) 640,583
----------- -----------
Net increase in net assets resulting from operations 301,053 2,129,270
----------- -----------
Dividends to Shareholders
Net investment income (1,534,143) (1,654,866)
----------- -----------
Capital Share Transactions *
Proceeds from shares sold 505,525 36,063
Reinvestment of dividends 1,534,143 1,654,866
Cost of shares redeemed (3,088,225) (2,868,518)
----------- -----------
Net decrease in net assets resulting
from share transactions (1,048,557) (1,177,589)
----------- -----------
Net decrease in net assets (2,281,647) (703,185)
Net Assets
Beginning of year 21,484,477 22,187,662
----------- -----------
End of the year (including accumulated
net investment income (deficit)
of $41,827 and ($38,804), respectively) $19,202,830 $21,484,477
=========== ===========
*Capital Shares Issued and Redeemed
Sold 54,058 3,877
Issued for dividends reinvested 170,080 177,306
Redeemed (340,301) (307,493)
----------- -----------
Net decrease in capital shares (116,163) (126,310)
=========== ===========
See notes to financial statements
Notes to Financial Statements
FIRST INVESTORS SPECIAL BOND FUND, INC.
December 31, 2005
1. Significant Accounting Policies--The Fund is registered under the
Investment Company Act of 1940 (the "1940 Act") as a diversified, open end
management investment company. The investment objective of the Fund is to
seek high current income without undue risk to principal and secondarily to
seek growth of capital.
A. Security Valuation--Except as provided below, a security listed or traded
on an exchange or the Nasdaq Stock Market is valued at its last sale price
on the exchange or market where the security is principally traded, and
lacking any sales, the security is valued at the mean between the closing
bid and asked prices. Securities traded in the over-the-counter market
(including securities listed on exchanges whose primary market is believed
to be over the counter) are valued at the mean between the last bid and
asked prices based upon quotes furnished by a market maker for such
securities. Securities may also be priced by a pricing service approved by
the Fund's Board of Directors (the "Board"). The pricing service considers
security type, rating, market condition and yield data as well as market
quotations, prices provided by market makers and other available information
in determining value. Short-term debt securities that mature in 60 days or
less are valued at amortized cost. If market quotations or prices are not
readily available or determined to be unreliable, the securities will be
valued at fair value as determined in good faith pursuant to procedures
adopted by the Board. At December 31, 2005, the Fund held eight securities
that were fair valued by its Valuation Committee with an aggregate value of
$344,169 representing 1.8% of the Fund's net assets.
B. Federal Income Taxes--No provision has been made for federal income taxes
on net income or capital gains, since it is the policy of the Fund to
continue to comply with the special provisions of the Internal Revenue Code
applicable to investment companies and to make sufficient distributions of
income and capital gains (in excess of any available capital loss
carryovers) to relieve it from all, or substantially all, federal income
taxes. As of December 31, 2005, the Fund had capital loss carryovers of
$7,075,630 of which, $636,995 expires in 2007, $365,853 expires in 2008,
$1,284,606 expires in 2009, $2,764,915 expires in 2010, $1,656,953 expires
in 2011, $212,617 expires in 2012 and $153,691 expires in 2013.
C. Distributions to Shareholders--Dividends from net investment income are
declared daily and paid quarterly and distributions from net realized
capital gains, if any, are normally declared and paid annually. Income
dividends and capital gain distributions 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 for capital loss carryforwards and
post-October capital losses.
Notes to Financial Statements (continued)
FIRST INVESTORS SPECIAL BOND FUND, INC.
June 30, 2005
D. Use of Estimates--The preparation of the financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expense
during the reporting period. Actual results could differ from those
estimates.
E. Other--Security transactions are accounted for on the date the securities
are purchased or sold. Cost is determined, and gains and losses are based,
on the identified cost basis for both financial statement and federal income
tax purposes. Dividend income is recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily. Bond discounts and premiums
are accreted or amortized using the interest method. Interest income on zero
coupon bonds and step bonds is accrued daily at the effective interest rate.
For the year ended December 31, 2005, The Bank of New York, the custodian of
the Fund, has provided total credits in the amount of $3,743 against
custodian charges based on the uninvested cash balances of the Fund. The
Fund also reduced expenses through brokerage service arrangements. For the
year ended December 31, 2005, the Fund expenses were reduced by $80 under
these arrangements.
2. Capital--Shares of the Fund are sold only through the purchase of First
Investors Life Variable Annuity Fund A contracts issued by First Investors
Life Insurance Company.
3. Security Transactions--For the year ended December 31, 2005, purchases
and sales of securities, other than short-term U.S. Government obligations
and short-term corporate notes, aggregated $5,353,897 and $7,500,736,
respectively.
At December 31, 2005, the aggregate cost of securities for federal income
tax purposes was $19,594,472. Accumulated net unrealized depreciation on
investments was $1,243,398, consisting of $632,281 gross unrealized
appreciation and $1,875,679 gross unrealized depreciation.
4. Advisory Fee and Other Transactions With Affiliates--Certain officers and
directors of the Fund are officers and directors of its investment adviser,
First Investors Management Company, Inc. ("FIMCO") and its transfer agent,
Administrative Data Management Corp. (ADM). Directors of the Fund who are
not "interested persons" of the Fund as defined in the 1940 Act are
remunerated by the Fund. For the year ended December 31, 2005, total
directors fees accrued by the Fund amounted to $790.
The Investment Advisory Agreement provides as compensation to FIMCO an
annual fee, payable monthly, at the rate of .75% on the first $250 million
of the Fund's
Notes to Financial Statements (continued)
FIRST INVESTORS SPECIAL BOND FUND, INC.
June 30, 2005
average daily net assets, declining by .03% on each $250 million
thereafter, down to .66% on average daily net assets over $750 million.
5. Restricted Securities--Certain restricted securities are exempt from the
registration requirements under Rule 144A of the Securities Act of 1933 and
may only be sold to qualified institutional investors. At December 31,
2005, the Fund held fifteen 144A securities with an aggregate value of
$2,127,043 representing 11.1% of the Fund's net assets. These securities
are valued as set forth in Note 1A.
6. High Yield Credit Risk--The Fund's investment in high yield securities,
whether rated or unrated, may be considered speculative and subject to
greater market fluctuations and risk of loss of income and principal than
lower-yielding, higher-rated, fixed-income securities. The risk of loss due
to default by the issuer may be significantly greater for the holders of
high-yielding securities, because such securities are generally unsecured
and are often subordinated to other creditors of the issuer.
7. Tax Components of Capital and Distribution to Shareholders--Distributions
to shareholders on a tax basis during the years ended December 31, 2005 and
December 31, 2004, were $1,534,143 and $1,654,866, respectively, and consisted
entirely of ordinary income.
As of December 31, 2005, the components of distributable earnings (deficit)
on a tax basis were as follows:
Accumulated Total
Undistributed Capital Distributable
Ordinary Loss Unrealized Earnings
Income Carryover Depreciation (Deficit)
-------- ----------- ------------ -------------
$154,231 ($7,075,630) ($1,243,398) ($8,164,797)
Differences between book distributable earnings and tax distributable
earnings consist primarily of post-October losses and amortization of bond
premiums and discounts.
8. Fund Reorganization--The shareholders of the Fund approved an Agreement
and Plan of Conversion and Termination pursuant to which the Fund would
be reorganized into a series of the First Investors Life Series Funds, a
newly-established Delaware statutory trust (the "Reorganization"). As
part of the Reorganization, the investment objective of the Fund will be
classified as non-fundamental, which means the Board of Trustees may change
the objective of the Fund without shareholder approval. It is expected that
the Reorganization will take effect after the close of business on or about
April 28, 2006, although the date may be adjusted in accordance with the
Agreement and Plan of Conversion and Termination.
Financial Highlights
FIRST INVESTORS SPECIAL BOND FUND, INC.
The following table sets forth the operating performance data for a share
of capital stock outstanding, total return, ratios to average net assets
and other supplemental data for each year indicated.
- ---------------------------------------------------------------------------------------------------------------
Year Ended December 31
----------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Per Share Data
- --------------
Net Asset Value,
Beginning of Year $ 9.50 $ 9.29 $ 7.90 $ 8.53 $ 9.47
------------ ------------ ------------ ------------ ------------
Investment Operations:
Net investment income .73 .73 .76 .80 .90
Net realized and
unrealized gain (loss)
on investments (.58) .20 1.41 (.62) (.90)
------------ ------------ ------------ ------------ ------------
Total from Investment
Operations .15 .93 2.17 .18 --
------------ ------------ ------------ ------------ ------------
Less Dividends from
Net Investment Income .70 .72 .78 .81 .94
------------ ------------ ------------ ------------ ------------
Net Asset Value, End of Year $ 8.95 $ 9.50 $ 9.29 $ 7.90 $ 8.53
============ ============ ============ ============ ============
Total Return + 1.69% 10.38% 28.31% 2.20% (.01%)
- ------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Year
(in thousands) $19,203 $21,484 $22,188 $19,457 $22,058
Ratio to Average Net Assets:
Expenses .97% .93% .93% .93% .90%
Net Investment Income 8.05% 7.79% 8.84% 9.77% 9.80%
Portfolio Turnover Rate 28% 31% 23% 18% 35%
+ The effect of fees and charges incurred at the separate account level
are not reflected in these performance figures.
See notes to financial statements
Report of Independent Registered Public
Accounting Firm
To the Shareholders and Board of Directors of
First Investors Special Bond Fund, Inc.
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of First Investors Special Bond
Fund, Inc. as of December 31, 2005, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of
the two years in the period then ended and the financial highlights for
each of the five years in the period then ended. 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 audit to obtain reasonable assurance about
whether the financial statements and financial highlights are free of
material misstatement. We were not engaged to perform an audit of the
Fund's internal control over financial reporting. Our audit 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 includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31,
2005, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our 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 Investors Special Bond Fund, Inc. as of December 31, 2005, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and its
financial highlights for each of the five years in the period then ended,
in conformity with accounting principles generally accepted in the United
States of America.
Tait, Weller & Baker LLP
Philadelphia, Pennsylvania
February 2, 2006
FIRST INVESTORS SPECIAL BOND FUND, INC.
Directors and Officers*
Position(s)
Held with Principal Number of Other
Funds and Occupation(s) Portfolios in Trusteeships
Name, Year of Birth Length of During Past Fund Complex Directorships
and Address Service 5 Years Overseen Held
- ------------------- ----------- ------------- ------------- -------------
DISINTERESTED DIRECTORS
Robert M. Grohol 1932 Director None/Retired 49 None
c/o First Investors since 6/30/00
Management Company, Inc.
95 Wall Street
New York, NY 10005
Rex R. Reed 1922 Director None/Retired 49 None
c/o First Investors since 3/31/84+
Management Company, Inc.
95 Wall Street
New York, NY 10005
Herbert Rubinstein 1921 Director None/Retired 49 None
c/o First Investors since 9/20/79+
Management Company, Inc.
95 Wall Street
New York, NY 10005
James M. Srygley 1932 Director Owner 49 None
c/o First Investors since 1/19/95 Hampton
Management Company, Inc. Properties
95 Wall Street
New York, NY 10005
Robert F. Wentworth 1929 Director None/Retired 49 None
c/o First Investors since 10/15/92
Management Company, Inc.
95 Wall Street
New York, NY 10005
* Each Director serves for an indefinite term with the Funds, until his/her
successor is elected.
** Ms. Head is an interested director because (a) she indirectly owns more
than 5% of the voting stock of the adviser and principal underwriter of
the Funds, (b) she is an officer, director and employee of the adviser
and principal underwriter of the Funds, and (c) she is an officer of the
Funds. Mr. Sullivan is an interested director because he is a director
and he indirectly owns securities issued by the adviser and principal
underwriter of the Funds.
*** Other affiliated companies consist of: First Investors Realty
Company, Inc., First Investors Life Insurance Company, First Investors
Leverage Corporation, Route 33 Realty Corporation, First Investors
Credit Funding Corporation, N.A.K. Realty Corporation, Real Property
Development Corporation, First Investors Credit Corporation and First
Investors Resources, Inc.
+ Mr. Reed and Mr. Rubinstein retired effective December 31, 2005.
Charles R. Barton, III, Stefan L. Geiringer, and Arthur M. Scutro, Jr.,
were elected by shareholders as Directors effective January 1, 2006.
Position(s)
Held with Principal Number of Other
Funds and Occupation(s) Portfolios in Trusteeships
Name, Year of Birth Length of During Past Fund Complex Directorships
and Address Service 5 Years Overseen Held
- ------------------- ----------- ------------- ------------- -------------
INTERESTED DIRECTORS**
Kathryn S. Head 1955 Director Chairman, President 49 None
c/o First Investors since 3/17/94 and Director of
Management Company, Inc. First Investors
Raritan Plaza I President Consolidated
Edison, NJ 08837 since 11/15/01 Corporation;
First Investors
Chairman Management
since 1/1/05 Company, Inc.;
Administrative Data
Management Corp.;
Chairman and
Director of
First Investors
Corporation;
First Investors
Federal Savings
Bank; School
Financial
Management
Services, Inc.;
and other affiliated
companies***
John T. Sullivan 1932 Director Director of 49 None
c/o First Investors since 9/20/79 First Investors
Management Company, Inc. Corporation,
95 Wall Street First Investors
Consolidated
Corporation,
First Investors
Management
Company, Inc.,
Administrative Data
Management Corp.,
and other affiliated
companies***
FIRST INVESTORS SPECIAL BOND FUND, INC.
Directors and Officers* (continued)
Position(s)
Held with Principal Number of Other
Funds and Occupation(s) Portfolios in Trusteeships
Name, Year of Birth Length of During Past Fund Complex Directorships
and Address Service 5 Years Overseen Held
- ------------------- ----------- ------------- ------------- -------------
OFFICER(S) WHO ARE NOT DIRECTORS
Joseph I. Benedek 1957 Treasurer Treasurer 49 None
c/o First Investors since 1988 and Principal
Management Company, Inc. Accounting Officer
Raritan Plaza I
Edison, NJ 08837
Larry R. Lavoie 1947 Chief Compliance General Counsel 49 None
c/o First Investors Officer since of First Investors
Management Company, Inc. 8/19/04 Corporation
95 Wall Street and its affiliates
New York, NY 10005
Director
from 9/17/98
to 8/18/04
FIRST INVESTORS SPECIAL BOND FUND, INC.
Shareholder Information
- -----------------------
Investment Adviser
First Investors Management Company, Inc.
95 Wall Street
New York, NY 10005
Custodian
The Bank of New York
One Wall Street
New York, NY 10286
Transfer Agent
Administrative Data Management Corp.
Raritan Plaza I - 8th Floor
Edison, NJ 08837-3620
Independent Registered
Public Accounting Firm
Tait, Weller & Baker LLP
1818 Market Street
Philadelphia, PA 19103
Legal Counsel
Kirkpatrick & Lockhart
Nicholson Graham LLP
1601 K Street, N.W.
Washington, DC 20006
It is the Fund's practice to mail only one copy of its annual and
semi-annual reports to all family members who reside in the same household.
Additional copies of the reports will be mailed if requested by any
shareholder in writing or by calling 800-423-4026. The Fund will ensure
that separate reports are sent to any shareholder who subsequently changes
his or her mailing address.
This report is authorized for distribution only to existing shareholders,
and, if given to prospective shareholders, must be accompanied or preceded
by the Fund's prospectus.
The Statement of Additional Information includes additional information
about the Fund's directors and is available, without charge, upon request
in writing or by calling 800-423-4026.
A description of the policies and procedures that the Fund uses to vote
proxies relating to its portfolio securities is available, without charge,
upon request by calling toll free 800-423-4026 or can be viewed online or
downloaded from the EDGAR database on the Securities and Exchange
Commission's ("SEC") internet website at http://www.sec.gov. In addition,
information regarding how the Fund voted proxies relating to its portfolio
securities during the most recent 12-month period ended June 30, is
available, without charge, upon request in writing or by calling
800-423-4026 and on the SEC's internet website at http://www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the SEC on
Form N-Q for the first and third quarters of each fiscal year. The Fund's
Form N-Q is available on the SEC's website at http://www.sec.gov; and may
also be reviewed and copied at the SEC's Public Reference Room in
Washington D.C. Information on the operation of the Public Reference Room
may be obtained by calling 800-SEC-0330. The schedule of portfolio holdings
is available, without charge, upon request in writing or by calling
800-423-4026.
NOTES
Item 2. Code of Ethics
As of December 31, 2005, the Registrant has adopted a code of ethics
that applies to the Registrant's President/Principal Executive Officer
and Treasurer/Principal Financial Officer. For the year ended
December 31, 2005, there were no amendments to a provision of its
code of ethics, nor were there any waivers granted from any provision
of the code of ethics. A copy of the Registrant's code of ethics is
filed under Item 12(a)(1).
Item 3. Audit Committee Financial Expert
The Registrant's Board has determined that it has at least one "audit
committee financial expert" serving on its audit committee. Robert F.
Wentworth is the "audit committee financial expert" and is considered
to be "independent" as defined in Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services
Fiscal Year Ended
December 31,
-----------------
2005 2004
---- ----
(a) Audit Fees $15,500 $14,900
(b) Audit-Related Fees $ 0 $ 0
(c) Tax Fees $ 2,600 $ 2,500
Nature of fees: tax returns preparation and tax compliance
(d) All Other Fees $ 0 $ 0
(e)(1) Audit committee's pre-approval policies
The Charter of the Audit Committee requires the Audit Committee:
(a) to pre-approve, and to recommend to the full Board, the
selection, retention or termination of the independent auditors to provide
audit, review or attest services to the Funds and, in connection therewith,
evaluate the independence of the auditors and to obtain the auditors'
specific representations as to their independence;
(b) to pre-approve all non-audit services to be provided to
the Funds by the independent auditor;
(c) to pre-approve all non-audit services to be provided by
the Funds' independent auditor to the Funds' investment adviser or to any
entity that controls, is controlled by or is under common control with the
Funds investment adviser ("adviser affiliate") and that provides ongoing
services to the Funds, if the engagement relates directly to the operations
and financial reporting of the Funds;
(d) to establish, if deemed necessary or appropriate as an
alternative to Audit Committee pre-approval of services to be provided by
the independent auditor as required by paragraphs (b) and (c) above,
policies and procedures to permit such services to be pre-approved by other
means, such as by action of a designated member and members of the Audit
Committee, subject to subsequent Committee review and oversight;
(e) to consider whether the non-audit services provided by the
Funds' independent auditors to the Funds' investment adviser or any adviser
affiliate that provides ongoing services to the Funds, which services were
not pre-approved by the Audit Committee, are compatible with maintaining the
auditors' independence;
(f) to review and approve the fees proposed to be charged to the
Funds by the auditors for each audit and non-audit service;
(e)(2) None, or 0%, of the services relating to the Audit-Related Fees,
Tax Fees and All Other Fees paid by the Registrant and Related Entities
disclosed above were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X (which permits audit committee
approval after the start of the engagement with respect to services other
than audit review or attest services, if certain conditions are satisfied).
(f) Not Applicable
(g) Aggregate non-audit fees billed by the Registrant's accountant
for services rendered to the Registrant and the Registrant's investment
adviser or any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the
Registrant for the two fiscal years ended December 31, 2005 and 2004
were $68,000 and $66,500, respectively.
(h) Not Applicable
Item 5. Audit Committee of Listed Registrant
Not applicable
Item 6. Schedule of Investments
Schedule is included as part of the report to
stockholders filed under Item 1 of this Form.
Item 7. Disclosure of Proxy Voting Policies & 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 Companies and Affiliated Purchasers
Not applicable
Item 10. Submission of Matters to a Vote of Security Holders
There were no material changes to the procedure by which shareholders
may recommend nominees to the Registrant's Board of Directors.
Item 11. Controls and Procedures
(a) The Registrant's Principal Executive Officer and Principal
Financial Officer 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) are effective, based on their evaluation of these
disclosure controls and procedures as of a date within 90 days of the
filing date of this report.
(b) There were no changes in the Registrant's internal controls over
financial reporting that occurred during the 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 - Filed herewith
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 - Filed herewith
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Filed herewith
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.
First Investors Special Bond Fund, Inc.
(Registrant)
By /S/ KATHRYN S. HEAD
Kathryn S. Head
President and Principal Executive Officer
Date: March 10, 2006
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.
First Investors Special Bond Fund, Inc.
(Registrant)
By /S/ JOSEPH I. BENEDEK
Joseph I. Benedek
Treasurer and Principal Financial Officer
Date: March 10, 2006