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: 811-02201
Name of Registrant: 1838 Bond-Debenture Trading Fund
Address of Registrant: 2701 Renaissance Blvd., 4th Fl.,
King of Prussia, PA 19406
Name and address of agent for service: John J. Kelley,
2701 Renaissance Blvd., 4th Fl.,
King of Prussia, PA 19406
Copies to: Panayiotis (Peter) S. Andreou
MBIA Asset Management
113 King Street,
Armonk, NY 10504
Registrant's telephone number, including area code: (484) 322-4300
Date of fiscal year end: March 31, 2005
Date of reporting period: April 1, 2004 - September 30, 2004
ITEM 1: Reports to Shareholders
October 15, 2004
TO THE SHAREHOLDER:
For the quarter ended September 30, 2004, the Fund had a Net Asset Value of
$20.65 per share. This represents a 3.1% decrease from $21.31 per share at the
end of the March 31, 2004 Fiscal Year. On September 30, 2004 the Fund's
closing stock price on the New York Stock Exchange was $18.49 per share,
representing a 10.5% discount to Net Asset Value per share. For comparison
purposes, the exercise price of the Fund's rights offering was $18.77 and the
Net Asset Value per share following the offering was $20.84.
The table below compares the performance of the Fund to the average of the 14
other closed-end bond funds with which we have historically compared
ourselves:
TOTAL RETURN-PERCENTAGE CHANGE (ANNUALIZED FOR PERIODS LONGER THAN 1 YEAR)
IN NET ASSET VALUE PER SHARE WITH ALL DISTRIBUTIONS REINVESTED(1)
- -----------------------------------------------------------------------------------------------------------
10 YEARS 5 YEARS 2 YEARS 1 YEAR QUARTER
TO 9/30/04 TO 9/30/04 TO 9/30/04 TO 9/30/04 TO 9/30/04
- -----------------------------------------------------------------------------------------------------------
1838 Bond Fund (2) 7.78% 7.07% 6.48% 1.27% 5.27%
Average of 14 Other
Closed-End Bond Funds (2) 7.87% 7.46% 9.26% 5.81% 4.19%
Salomon Bros. Bond Index (3) 9.41% 10.03% 6.55% 6.15% 7.16%
(1) - This is historical information and should not be construed as indicative
of any likely future performance. Current performance may be lower or
higher than the performance data quoted.
(2) - Source: Lipper Inc.
(3) - Comprised of long-term AAA and AA corporate bonds; series has been changed
to include mortgage-backed securities.
The Fund's performance for the historical periods was impacted by the 4.5%
dilution of net asset value resulting from the rights offering during the
December 2003 quarter.
Recent economic news has been dominated by the sharp rise in oil prices to
above $50 per barrel. While conventional expectations would be for higher
prices to put pressure on yields, the magnitude of the rise has been
sufficient to lower expectations for overall economic growth, causing yields
to fall instead of rise. The yield on the benchmark 10-year Treasury note
ended the quarter at 4.13%, down from a recent peak of 4.87% on June 14, 2004,
but still well above the cyclical low yield of 3.11% on June 13, 2003.
The Federal Reserve Board raised the Fed Funds rate from 1.25% to 1.75% in two
steps during the quarter. From an historical perspective, the 1.75% rate
remains extremely accommodative. Fiscal policy continues to exert upward
pressure on interest rates. The Congressional Budget Office estimated the
deficit for the September 2004 US fiscal year at a record $415 billion. Their
forecast for the 2005 fiscal year is a deficit of $348 billion.
The Fund's performance will continue to be subject to the impacts of trends in
longer term interest rates. In the recent quarter, this impact has been
positive. The portfolio has also benefited from continuing improvement in
yield spreads on corporate bonds relative to benchmark US Treasury yields.
Certain measures of yield spreads are now as narrow as they have been since
before the Asian financial crisis in 1997. Although portfolio actions taken
since the rights offering have lessened the concentration in
1
corporate bonds, the Fund's performance does remain sensitive to trends in
relative yield spreads on corporate bonds. Subsequent to the end of the
quarter, we sold the portfolio holding of Coastal Corp. bonds, further
reducing exposure to lower rated corporate bonds. As discussed above, the 4.5%
dilution resulting from the rights offering adversely impacted performance
during the year and will continue to be reflected in longer term periods that
include the offering date.
The table below updates the portfolio quality of the Fund's long-term invested
assets compared to the end of the two prior fiscal years:
- --------------------------------------------------------------------------------
PERCENT OF TOTAL INVESTMENT (STANDARD & POOR'S RATINGS)
- --------------------------------------------------------------------------------
U.S. TREASURIES,
AGENCIES & B AND NOT
PERIOD ENDED AAA RATED AA A BBB BB LOWER RATED
- --------------------------------------------------------------------------------
September 30, 2004 24.4% 6.4% 26.4% 33.8% 6.7% 0.5% 1.8%
March 31, 2004 25.4% 3.7% 28.4% 35.1% 6.8% 0.5% 0.1%
March 31, 2003 17.3% 5.3% 28.7% 39.5% 7.6% 1.4% 0.1%
Please refer to the Schedule of Investments in the financial statements for
details concerning portfolio holdings.
On September 15, 2004, the Board of Directors declared a dividend payment of
$0.3125 per share payable November 2, 2004 to shareholders of record on
September 23, 2004.
We would like to remind shareholders of the opportunities presented by the
Fund's dividend reinvestment plan as detailed in the Fund's prospectus and
referred to inside the back cover of this report. The dividend reinvestment
plan affords shareholders a price advantage by allowing the purchase of shares
at the lower of NAV or market price. This means that the reinvestment is at
market price when the Fund is trading at a discount to Net Asset Value or at
Net Asset Value per share when market trading is at a premium to that value.
To participate in the plan, please contact EquiServe First Chicago, the Fund's
Transfer Agent and Dividend Paying Agent, at 781-575-2723. The Fund's
Investment Advisor, 1838 Investment Advisors, LP, may be reached at
800-232-1838.
Sincerely,
John H. Donaldson
-----------------------
John H. Donaldson, CFA
President
2
SCHEDULE OF INVESTMENTS (UNAUDITED) SEPTEMBER 30, 2004
MOODY'S/
STANDARD &
POOR'S PRINCIPAL AMORTIZED COST VALUE
RATING* AMOUNT (000'S) (NOTE 1) (NOTE 1)
---------- -------------- -------------- -----------
LONG TERM DEBT SECURITIES (98.48%)
AUTOMOBILES & RELATED (7.51%)
Auburn Hills Trust, Gtd. Ctfs., 12.375%, 05/01/20 .................. A3/BBB $1,000 $ 1,000,000 $ 1,536,879
Ford Holdings, Inc., Gtd., 9.30%, 03/01/30 ......................... WR/BBB- 1,000 1,109,378 1,140,210
Ford Motor Co., Debs., 8.90%, 01/15/32 ............................. Baa1/BBB- 1,560 1,544,361 1,750,458
Ford Motor Credit Co., 7.00%, 10/01/13 ............................. Baa1/BBB- 2,000 2,058,556 2,114,576
General Motors Acceptance Corp., Notes, 7.25%, 03/02/11 ............ A3/BBB 1,000 1,007,622 1,067,705
----------- -----------
6,719,917 7,609,828
----------- -----------
ELECTRIC UTILITIES (7.69%)
Arizona Public Service Co., 5.625%, 05/15/33 ....................... Baa1/BBB 1,000 988,777 943,610
Dominion Resources Inc., Sr. Notes, 6.75%, 12/15/32 ................ Baa1/BBB+ 1,000 997,625 1,068,403
Hydro-Quebec, Gtd. Debs., 8.25%, 04/15/26 .......................... A1/A+ 1,550 1,484,406 2,117,806
Midamerican Funding LLC, 6.927%, 03/01/29 .......................... Baa1/BBB+ 500 500,000 556,202
National Rural Utilities, Notes, 4.75%, 03/01/14 ................... A1/A+ 500 510,277 501,899
NSTAR, Notes, 8.00%, 02/15/10 ...................................... A2/A- 500 498,711 591,165
Old Dominion Electric Corp., 6.25%, 06/01/11 ....................... Aaa/AAA 500 500,431 553,745
PSEG Power, Notes, 5.00%, 04/01/14 ................................. Baa1/BBB 1,500 1,498,085 1,462,516
----------- -----------
6,978,312 7,795,346
----------- -----------
FINANCIAL (18.29%)
Bank of America, Sub. Notes, 7.40%, 01/15/11 ....................... Aa3/A 1,000 1,051,944 1,165,445
BB&T Corp., Sub. Notes, 6.50%, 08/01/11 ............................ A2/A- 500 498,043 558,607
Citicorp Capital II, Gtd., 8.015%, 02/15/27 ........................ Aa2/A 2,000 2,011,067 2,222,356
FBS Capital I, Gtd., 8.09%, 11/15/26 ............................... A1/A- 2,000 1,994,271 2,245,358
General Electric Capital Corp., Notes, 6.75%, 03/15/32 ............. Aaa/AAA 1,500 1,548,169 1,726,360
Goldman Sachs Group Inc., Gtd., 6.345%, 02/15/34 ................... A1/A- 1,500 1,509,720 1,504,728
Household Finance Corp., Notes, 6.75%, 05/15/11 .................... A1/A 1,500 1,499,720 1,688,335
HSBC America Capital II, Gtd., 8.38%, 05/15/27, 144A ............... A-/AA- 2,500 2,565,278 2,888,217
Landesbank Baden-Wurtt NY, Sub. Notes, 6.35%, 04/01/12 ............. Aaa/AAA 500 498,882 567,911
Penn Central Corp., Sub. Notes, 10.875%, 05/01/11 .................. NR/NR 1,500 1,573,390 1,642,126
Sanwa Bank Ltd., Sub. Notes, 7.40%, 06/15/11 ....................... Baa1/BBB- 500 487,532 575,579
UBS PFD Funding Trust I, Gtd., 8.622%, 10/29/49 .................... A1/AA- 1,000 1,008,756 1,207,294
XL Capital Europe PLC, Gtd., 6.50%, 01/15/12 ....................... A2/A 500 497,912 548,921
----------- -----------
16,744,684 18,541,237
----------- -----------
INDUSTRIAL, MATERIALS & MISC. (16.72%)
Abitibi-Consolidated Inc., Debs., 8.85%, 08/01/30 .................. Ba2/BB 2,000 1,999,787 1,980,000
Darden Restaurants Inc., Debs., 7.125%, 02/01/16 ................... Baa1/BBB+ 500 439,431 578,281
EOP Operating LP, Sr. Notes, 7.25%, 02/15/18 ....................... Baa1/BBB+ 1,000 993,505 1,136,919
Harcourt General Inc., Sr. Debs., 8.875%, 06/01/22 ................. NR/A- 2,000 2,136,058 2,636,358
Liberty Property Trust, Sr. Notes, 7.50%, 01/15/18 ................. Baa2/BBB 1,000 999,140 1,155,156
Pharmacia Corp. (Pfizer), 6.5%,12/1/2018 ........................... Aaa/AAA 500 583,506 577,050
Quebecor World Inc., Gtd., 6.125%, 11/15/13 ........................ Baa3/BBB- 1,500 1,510,803 1,485,055
Royal Caribbean Cruises, Sr. Notes, 6.75%, 03/15/08 ................ Ba2/BB+ 1,000 921,471 1,063,750
Smurfit Capital Funding, Debs., 7.50%, 11/20/25 .................... B1/BB- 2,000 1,991,789 1,990,000
Starwood Hotels & Resorts, Gtd., 7.875%, 05/01/12 .................. Ba1/BB+ 1,000 995,964 1,131,250
Tupperware Finance Co. BV, Gtd., 7.25%, 10/01/06 ................... Baa3/BB+ 500 510,035 519,407
Tyco Int'l. Group SA, Gtd., 6.875%, 01/15/29 ....................... Baa3/BBB 750 657,273 840,500
Union Camp Corp., Debs., 9.25%, 02/01/11 ........................... Baa2/BBB 1,500 1,492,938 1,849,266
----------- -----------
15,231,700 16,942,992
----------- -----------
3
SCHEDULE OF INVESTMENTS (UNAUDITED)--CONTINUED SEPTEMBER 30, 2004
MOODY'S/
STANDARD &
POOR'S PRINCIPAL AMORTIZED COST VALUE
RATING* AMOUNT (000'S) (NOTE 1) (NOTE 1)
---------- -------------- -------------- ------------
OIL & GAS (9.52%)
Apache Corp., Notes, 7.70%, 03/15/26 .............................. A3/A- $ 500 $ 523,072 $ 622,847
Coastal Corp., Debs., 6.70%, 2/15/27 .............................. Caa1/CCC+ 500 504,769 500,000
ConocoPhillips, Gtd., 5.90%, 10/15/32 ............................. A3/A- 1,000 1,023,725 1,024,969
K N Energy Inc., Debs., 8.75%, 10/15/24 ........................... Baa2/BBB 1,150 1,196,393 1,200,319
Texaco Capital Inc., Gtd. Debs., 7.50%, 03/01/43 .................. Aa3/AA 2,000 1,978,585 2,334,066
Transocean Inc., Notes, 7.50%, 04/15/31 ........................... Baa2/A- 500 497,777 593,667
Western Atlas Inc., Debs., 8.55%, 06/15/24 ........................ A2/A- 2,539 2,639,088 3,370,174
----------- ------------
8,363,409 9,646,042
----------- ------------
TELECOMMUNICATIONS & MULTIMEDIA (18.04%)
Comcast Corp., Gtd., 7.05%, 3/15/33 ............................... Baa3/BBB 2,000 2,193,668 2,194,092
Continental Cablevision, Sr. Debs., 9.50%, 08/01/13 ............... Baa3/BBB 1,000 1,057,025 1,095,091
Deutsche Telekom International, Gtd., 8.25%, 06/15/30 ............. Baa2/BBB+ 2,000 2,512,279 2,585,156
GTE Corp. Deb., 6.94%, 04/15/28 ................................... A3/A+ 2,000 2,109,824 2,153,072
News America Holdings Inc., Gtd., 7.90%, 12/01/95 ................. Baa3/BBB- 1,400 1,298,781 1,659,802
SBC Communications Inc., Notes, 5.875%, 08/15/12 .................. A1/A+ 500 493,634 534,515
Sprint Capital Corp., 5.25%, 05/01/19 ............................. Baa3/BBB- 1,750 1,760,850 1,915,964
Time Warner Inc., Debs., 9.15%, 02/01/23 .......................... Baa1/BBB+ 3,000 3,140,848 3,866,322
Verizon Global Funding Corp., Notes, 7.75%, 12/01/30 .............. A2/A+ 1,646 1,675,188 1,971,285
Viacom Inc., Sr. Debs., 7.875%, 07/30/30 .......................... A3/A- 250 246,341 305,410
----------- ------------
16,488,438 18,280,709
----------- ------------
MORTGAGE BACKED SECURITIES (11.68%)
FHLMC Pool # A15675, 6.00%, 11/01/33 .............................. NR/NR 2,512 2,599,686 2,598,489
FNMA Pool # B11892, 4.50%, 01/01/19 .............................. NR/NR 2,310 2,332,136 2,307,346
FNMA Pool # 763852, 5.50%, 02/01/34 ............................... NR/NR 3,997 4,087,930 4,054,648
FNMA Pool # 754791, 6.50%, 12/01/33 ............................... NR/NR 2,539 2,669,470 2,664,751
GNMA Pool # 780374, 7.50%, 12/15/23 ............................... NR/NR 60 59,810 65,202
GNMA Pool # 417239, 7.00%, 02/15/26 ............................... NR/NR 139 140,717 148,902
----------- ------------
11,889,749 11,839,338
----------- ------------
U.S. GOVERNMENT & AGENCIES (9.03%)
U.S. Treasury Bonds, 10.75%, 08/15/05 ............................. NR/NR 1,600 1,651,325 1,718,062
U.S. Treasury Bonds, 7.875%, 02/15/21 ............................. NR/NR 3,900 4,027,423 5,277,339
U.S. Treasury Bonds, 8.125%, 08/15/21 ............................. NR/NR 1,000 1,013,387 1,386,875
U.S. Treasury Bonds, 6.25%, 05/15/30 .............................. NR/NR 650 725,370 771,486
----------- ------------
7,417,505 9,153,762
----------- ------------
TOTAL LONG TERM DEBT SECURITIES ................................... 89,833,714 99,809,254
----------- ------------
SHARES
INVESTMENT COMPANIES (1.43%) ---------
High Yield Plus Fund .............................................. 33,333 223,875 152,665
Evergreen Select Money Market Fund-I Shares ....................... 1,300,458 1,300,458 1,300,458
----------- ------------
1,524,333 1,453,123
----------- ------------
TOTAL INVESTMENTS (99.91%) ........................................ $91,358,047 101,262,377
===========
OTHER ASSETS AND LIABILITIES (0.09%) .............................. 89,636
------------
NET ASSETS (100.00%) .............................................. $101,352,013
============
144A-- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, this security amounted
to 2.85% of net assets.
Legend
- ------
Ctfs. - Certificates
Debs. - Debentures
Gtd. - Guaranteed
Sr. - Senior
Sub. - Subordinated
4
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
SEPTEMBER 30, 2004
Assets:
Investment in securities, at value (amortized cost $91,358,047) (Note 1)..... $101,262,377
Interest receivable ......................................................... 1,641,373
Dividends receivable ........................................................ 1,166
Other assets ................................................................ 21,875
------------
TOTAL ASSETS ............................................................... 102,926,791
------------
Liabilities:
Dividends payable ........................................................... 1,533,649
Due to Advisor .............................................................. 40,930
Accrued expenses payable .................................................... 199
------------
TOTAL LIABILITIES .......................................................... 1,574,778
------------
Net assets: (equivalent to $20.65 per share based on 4,907,678
shares
of capital stock outstanding)................................................. $101,352,013
============
NET ASSETS consisted of:
Par value ................................................................... $ 4,907,678
Capital paid-in ............................................................. 92,529,052
Accumulated net investment income (loss) .................................... (2,447,033)
Accumulated net realized loss on investments ................................ (3,542,014)
Net unrealized appreciation on investments .................................. 9,904,330
------------
$101,352,013
============
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004
Investment Income:
Interest....................................................... $ 3,205,953
Dividends...................................................... 7,000
-----------
Total Investment Income ...................................... 3,212,953
-----------
Expenses:
Investment advisory fees (Note 4).............................. $ 273,750
Transfer agent fees............................................ 21,157
Directors' fees................................................ 20,088
NYSE fee....................................................... 12,500
Audit fees..................................................... 7,305
State and local taxes.......................................... 15,088
Legal fees and expenses........................................ 21,031
Reports to shareholders........................................ 13,103
Custodian fees................................................. 3,742
Miscellaneous.................................................. 27,812
-----------
Total Expenses ............................................... 415,576
-----------
Net Investment Income ....................................... 2,797,377
-----------
Realized and unrealized gain on investments (Note 1):
Net realized gain from security transactions................... 26,827
-----------
Unrealized appreciation of investments:
Beginning of the period ...................................... 11,400,890
End of the period ............................................ 9,904,330
-----------
Change in unrealized appreciation of investments............. (1,496,560)
-----------
Net realized and unrealized loss on investments............ (1,469,733)
-----------
Net increase in net assets resulting from operations.............. $ 1,327,644
===========
The accompanying notes are an integral part of these financial statements.
5
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
SEPTEMBER 30, 2004 YEAR ENDED
(UNAUDITED) MARCH 31, 2004
------------------ --------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income................. $ 2,797,377 $ 4,854,232
Net realized gain (loss) from security transactions (Note 2)................ 26,827 544,219
Change in unrealized appreciation of investments............................ (1,496,560) 3,653,484
------------ ------------
Net increase in net assets resulting from operations....................... 1,327,644 9,051,935
------------ ------------
Distributions:
Dividends to shareholders from net investment income...................... (4,600,948) (4,981,455)
Distributions to shareholders from tax return of capital.................... -- (298,918)
------------ ------------
Total distributions to shareholders ....................................... (4,600,948) (5,280,373)
------------ ------------
Capital Share Transactions:
Proceeds from common share offering......................................... -- 23,170,063
Dealer manager fee charged to paid-in capital in excess of par.............. (2,249) (868,877)
Common share offering costs charged to paid-in capital in excess of par..... -- (417,993)
------------ ------------
Net proceeds from common share offering.................................... (2,249) 21,883,193
------------ ------------
Increase (decrease) in net assets........................................... (3,275,553) 25,654,755
Net Assets:
Beginning of period......................................................... 104,627,566 78,972,811
------------ ------------
End of period............................................................... $101,352,013 $104,627,566
============ ============
The accompanying notes are an integral part of these financial statements.
+-----------------------------------------------------------------------------+
| |
| HOW TO ENROLL IN THE DIVIDEND REINVESTMENT PLAN |
| |
| 1838 Bond-Debenture Trading Fund (the "Fund") has established a |
| plan for the automatic investment of dividends and distributions |
| which all shareholders of record are eligible to join. The |
| method by which shares are obtained is explained on page 11. The |
| Fund has appointed Equiserve to act as the Agent of each |
| shareholder electing to participate in the plan. Information and |
| application forms are available from Equiserve, P.O. Box 43069, |
| Providence, RI 02940-3069. |
| |
+-----------------------------------------------------------------------------+
6
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
SIX MONTHS
ENDED YEAR ENDED MARCH 31,
SEPTEMBER 30, 2004 ----------------------------------------------------
(UNAUDITED) 2004 2003 2002 2001 2000
------------------ -------- ------- ------- ------- ---------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period ................. $ 21.32 $ 21.50 $ 20.13 $ 20.95 $ 20.39 $ 22.20
-------- -------- ------- ------- ------- ---------
Net investment income(1) ............................ 0.57 1.29 1.31 1.24 1.45 1.47
Net realized and unrealized gain
(loss) on investments(1)........................... (0.30) 0.83 1.45 (0.62) 0.56 (1.81)
-------- -------- ------- ------- ------- ---------
Total from investment operations ..................... 0.27 2.12 2.76 0.62 2.01 (0.34)
-------- -------- ------- ------- ------- ---------
Capital share transaction:
Dilution of the net asset value from
rights offering (Note 6)........................... -- (0.97) -- -- -- --
-------- -------- ------- ------- ------- ---------
Less distributions:
Dividends from net investment
income............................................. (0.94) (1.27) (1.34) (1.43) (1.45) (1.47)
Distributions from tax return of
capital............................................ -- (0.06) (0.05) (0.01) -- --
-------- -------- ------- ------- ------- ---------
Total distributions .................................. (0.94) (1.33) (1.39) (1.44) (1.45) (1.47)
-------- -------- ------- ------- ------- ---------
Net asset value, end of period ....................... $ 20.65 $ 21.32 $ 21.50 $ 20.13 $ 20.95 $ 20.39
======== ======== ======= ======= ======= =========
Per share market price, end of period ................ $ 18.49 $ 19.51 $ 20.65 $ 19.34 $ 19.27 $ 16.88
======== ======== ======= ======= ======= =========
TOTAL INVESTMENT RETURN(2)
Based on market value ............................... (0.24)% 1.13% 14.55% 7.96% 23.91% (11.67)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) ................. $101,352 $104,628 $78,973 $73,955 $76,970 $ 74,892
Ratio of expenses to average
net assets......................................... 0.83%* 0.86% 0.91% 0.86% 0.91% 0.88%
Ratio of net investment income to average net
assets(1)........................................... 5.60%* 5.57% 6.39% 6.73% 7.20% 7.09%
Portfolio turnover rate .............................. 2.18% 11.99% 12.27% 10.87% 12.39% 10.21%
Number of shares outstanding at the end of the period
(in 000's).......................................... 4,908 4,908 3,673 3,673 3,673 3,673
* Annualized
(1) As required, effective April 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies. The
effect of this change for the year ended March 31, 2002 for all securities
was to decrease net investment income per share by $0.02, increase net
realized and unrealized gains and losses per share by $0.02 and decrease
the ratio of net investment income to average net assets by 0.11%. Per
share ratios and supplemental data for periods prior to April 1, 2001 have
not been restated to reflect this change in presentation.
(2) Total investment return is calculated assuming a purchase of common shares
at the market price on the first day and a sale at the market price on the
last day of the period reported. Dividends and distributions, if any, are
assumed for purposes of this calculation to be reinvested at prices
obtained under the Fund's dividend reinvestment plan. Total investment
return does not reflect brokerage commissions. The total investment return,
if for less than a full year, is not annualized. Past performance is not a
guarantee of future results.
The accompanying notes are an integral part of these financial statements.
7
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES -- The 1838 Bond-Debenture Trading
Fund ("the Fund"), a Delaware Corporation, is registered under the Investment
Company Act of 1940, as amended, as a diversified closed-end management
investment company. The following is a summary of significant accounting
policies consistently followed by the Fund in preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles within the United States of America ("GAAP").
A. SECURITY VALUATION -- In valuing the Fund's net assets, all securities
for which representative market quotations are available will be valued
at the last quoted sales price on the security's principal exchange on
the day of valuation. If there are no sales of the relevant security on
such day, the security will be valued at the bid price at the time of
computation. Prices for securities traded in the over-the-counter market,
including listed debt and preferred securities, whose primary market is
believed to be over-the-counter, normally are supplied by independent
pricing services. Securities for which market quotations are not readily
available will be valued at their respective fair values as determined in
good faith by, or under procedures established by the Board of Directors.
At September 30, 2004, there were no securities valued by the Board of
Directors.
B. DETERMINATION OF GAINS OR LOSSES ON SALE OF SECURITIES -- Gains or losses
on the sale of securities are calculated for financial reporting purposes
and for federal tax purposes using the identified cost basis. The
identified cost basis for financial reporting purposes differs from that
used for federal tax purposes in that the amortized cost of the
securities sold is used for financial reporting purposes and the original
cost of the securities sold is used for federal tax purposes, except for
those instances where tax regulations require the use of amortized cost.
C. FEDERAL INCOME TAXES -- It is the Fund's policy to continue to comply
with the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its taxable
income to its shareholders. Therefore, no federal income tax provision is
required.
D. OTHER -- Security transactions are accounted for on the date the
securities are purchased or sold. The Fund records interest income on the
accrual basis. Dividend income and distributions to shareholders are
recorded on the ex-dividend date.
E. DISTRIBUTIONS TO SHAREHOLDERS AND BOOK/TAX DIFFERENCES -- Distributions
of net investment income will be made quarterly. Distributions of net
capital gains realized will be made annually. Income and capital gain
distributions are determined in accordance with federal income tax
regulations, which may differ from GAAP. These differences are primarily
due to differing treatments for amortization of market premium and
accretion of market discount.
The distribution of $4,600,948 during the six months ended September 30,
2004 was characterized as ordinary income for tax purposes. Distributions
during the fiscal years ended March 31, 2004 and 2003 were characterized
as follows for tax purposes:
ORDINARY INCOME RETURN OF CAPITAL CAPITAL GAIN TOTAL DISTRIBUTION
--------------- ----------------- ------------ ------------------
FY 2004 $4,981,455 $298,918 -- $5,280,373
FY 2003 $4,913,023 $192,805 -- $5,105,828
At March 31, 2004, the components of distributable earnings on a tax
basis were as follows:
ACCUMULATED ACCUMULATED
ORDINARY INCOME (LOSS) CAPITAL GAIN (LOSS)
---------------------- -------------------
$ -- $(3,568,841)
8
As of March 31, 2004, the capital loss carryovers available to offset
possible future capital gains were as follows:
AMOUNT EXPIRATION DATE
-------- ---------------
$1,201,050 3/31/2009
974,596 3/31/2010
1,393,195 3/31/2011
At September 30, 2004, the following table shows for federal tax purposes
the aggregate cost of investments, the net unrealized appreciation of
those investments, the aggregate gross unrealized appreciation of all
securities with an excess of market value over tax cost and the aggregate
gross unrealized depreciation of all securities with an excess of tax
cost over market value:
AGGREGATE NET UNREALIZED GROSS UNREALIZED GROSS UNREALIZED
TAX COST APPRECIATION APPRECIATION DEPRECIATION
----------- -------------- ---------------- ----------------
$91,358,047 $9,904,330 $10,218,202 $(313,872)
F. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The
preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that may affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2 -- PORTFOLIO TRANSACTIONS -- The following is a summary of the security
transactions, other than short-term investments, for the six months ended
September 30, 2004:
PROCEEDS
COST OF FROM SALES
PURCHASES OR MATURITIES
---------- -------------
U.S. Government Securities $ -- $ 214,172
Other Investment Securities 3,854,120 1,916,157
NOTE 3 -- CAPITAL STOCK -- At September 30, 2004, there were 10,000,000 shares
of capital stock ($1.00 par value) authorized, with 4,907,678 shares issued
and outstanding.
NOTE 4 -- INVESTMENT ADVISORY CONTRACT AND PAYMENTS TO AFFILIATED PERSONS --
Under the terms of the current contract with 1838 Investment Advisors, LP (the
"Advisor"), advisory fees are calculated at an annual rate of 0.625% on the
first $40 million of the Fund's month end net assets and 0.50% on the excess.
MBIA Municipal Investors Services Corporation provides accounting services to
the Fund and is compensated for these services by the Advisor.
Certain directors and officers of the Fund are also directors, officers and/or
employees of the Advisor. None of the directors so affiliated receives
compensation for services as a director of the Fund. Similarly, none of the
Fund's officers receive compensation from the Fund.
NOTE 5 -- DIVIDEND AND DISTRIBUTION REINVESTMENT -- In accordance with the
terms of the Automatic Dividend Investment Plan, for shareholders who so
elect, dividends and distributions are made in the form of previously unissued
Fund shares at the net asset value if on the Friday preceding the payment date
(the "Valuation Date") the closing New York Stock Exchange price per share,
plus the brokerage commissions applicable to one such share equals or exceeds
the net asset value per share. However, if the net asset value is less than
95% of the market price on the Valuation Date, the shares issued will be
valued at 95% of the market price. If the net asset value per share exceeds
market price plus commissions, the dividend or distribution proceeds are used
to purchase Fund shares on the open market for participants in the Plan.
During the six months ended September 30, 2004, the Fund issued no shares
under this Plan.
9
NOTE 6 -- RIGHTS OFFERING -- On December 3, 2003 the Fund completed its
transferable rights offering. In accordance with the terms of the rights
offering described in the Fund's prospectus an additional 1,234,420 shares were
issued at a subscription price of $18.77 per share, making the gross proceeds
raised by the offering $23,170,063, before offering-related expenses.
Dealer/managers fees of $868,877 and offering costs of approximately $417,993
were deducted from the gross proceeds making the net proceeds available for
investment by the Fund $21,883,193. The dilution impact of the offering was
$0.97 per share or 4.49% of the $21.58 net asset value per share on December 3,
2003, the expiration and pricing date of the offering.
+-----------------------------------------------------------------------------+
| |
| HOW TO GET INFORMATION REGARDING PROXIES |
| |
| The Fund has adopted the Advisor's proxy voting policies and |
| procedures to govern the voting of proxies relating to the |
| voting securities of the Fund. You may obtain a copy of these |
| proxy voting procedures, without charge, by calling (800) |
| 232-1838 or on the Securities and Exchange Commission website at |
| http://www.sec.gov. |
| |
| Information regarding how the Fund voted proxies relating to |
| portfolio securities during the most recent 12 month period |
| ended June 30 is available, without charge, by calling (800) |
| 232-1838 or on the SEC's website at http://www.sec.gov. |
| |
+-----------------------------------------------------------------------------+
10
DIVIDEND REINVESTMENT PLAN (UNAUDITED)
1838 Bond-Debenture Trading Fund (the "Fund") has established a plan for the
automatic investment of dividends and distributions (the "Plan") pursuant to
which dividends and capital gain distributions to shareholders will be paid in
or reinvested in additional shares of the Fund. All shareholders of record are
eligible to join the Plan. Equiserve, acts as the agent (the "Agent") for
participants under the Plan.
Shareholders whose shares are registered in their own names may elect to
participate in the Plan by completing an authorization form and returning it
to the Agent. Shareholders whose shares are held in the name of a broker or
nominee should contact such broker or nominee to determine whether or how they
may participate in the Plan.
Dividends and distributions are reinvested under the Plan as follows. If the
market price per share on the Friday before the payment date for the dividend
or distribution (the "Valuation Date"), plus the brokerage commissions
applicable to one such share, equals or exceeds the net asset value per share
on that date, the Fund will issue new shares to participants valued at the net
asset value or, if the net asset value is less than 95% of the market price on
the Valuation Date, then valued at 95% of the market price. If net asset value
per share on the Valuation Date exceeds the market price per share on that
date, plus the brokerage commissions applicable to one such share, the Agent
will buy shares on the open market, on the New York Stock Exchange, for the
participants' accounts. If before the Agent has completed its purchases, the
market price exceeds the net asset value of shares, the average per share
purchase price paid by the Agent may exceed the net asset value of shares,
resulting in the acquisition of fewer shares than if the dividend or
distribution has been paid in shares issued by the Fund at net asset value.
There is no charge to participants for reinvesting dividends or distributions
payable in either shares or cash. The Agent's fees for handling of
reinvestment of such dividends and distributions will be paid by the Fund.
There will be no brokerage charges with respect to shares issued directly by
the Fund as a result of dividends or distributions payable either in shares or
cash. However, each participant will be charged by the Agent a pro rata share
of brokerage commissions incurred with respect to Agent's open market
purchases in connection with the reinvestment of dividends or distributions
payable only in cash.
For purposes of determining the number of shares to be distributed under the
Plan, the net asset value is computed on the Valuation Date and compared to
the market value of such shares on such date. The Plan may be terminated by a
participant by delivery of written notice of termination to the Agent at the
address shown below. Upon termination, the Agent will cause a certificate or
certificates for the full shares held for a participant under the Plan and a
check for any fractional shares to be delivered to the former participant.
Distributions of investment company taxable income that are invested in
additional shares generally are taxable to shareholders as ordinary income. A
capital gain distribution that is reinvested in shares is taxable to
shareholders as long-term capital gain, regardless of the length of time a
shareholder has held the shares or whether such gain was realized by the Fund
before the shareholder acquired such shares and was reflected in the price
paid for the shares.
Plan information and authorization forms are available from Equiserve, P.O.
Box 43069, Providence, RI 02940-3069.
+-----------------------------------------------------------------------------+
| |
| HOW TO GET ASSISTANCE WITH SHARE TRANSFER OR DIVIDENDS |
| |
| Contact Your Transfer Agent, Equiserve, |
| P.O. Box 43069, Providence, RI 02940-3069, or call 781-575-2723 |
| |
| |
+-----------------------------------------------------------------------------+
11
DIRECTORS |
------------------------- |
W. THACHER BROWN |
JOHN GILRAY CHRISTY |
MORRIS LLOYD, JR. |
J. LAWRENCE SHANE |
|
OFFICERS |
------------------------- |
JOHN H. DONALDSON |
President |
JOHN J. KELLEY |
Vice President |
and Secretary |
|
INVESTMENT ADVISOR |
------------------------- | 1838
1838 INVESTMENT ADVISORS, LP | BOND--DEBENTURE TRADING FUND
2701 RENAISSANCE BOULEVARD | ------------
FOURTH FLOOR | 2701 RENAISSANCE BOULEVARD
KING OF PRUSSIA, PA 19406 | FOURTH FLOOR
| KING OF PRUSSIA, PA 19406
CUSTODIAN |
------------------------- | [LOGO]
WACHOVIA NATIONAL BANK |
123 S. BROAD STREET | SEMI-ANNUAL REPORT
PHILADELPHIA, PA 19109 | SEPTEMBER 30, 2004
|
TRANSFER AGENT |
------------------------- |
EQUISERVE |
P.O. BOX 43069 |
PROVIDENCE, RI 02940-3069 |
781-575-2723 |
|
COUNSEL |
------------------------- |
PEPPER HAMILTON LLP |
3000 TWO LOGAN SQUARE |
EIGHTEENTH & ARCH STREETS |
PHILADELPHIA, PA 19103 |
|
AUDITORS |
------------------------- |
TAIT, WELLER & BAKER |
1818 MARKET STREET |
SUITE 2400 |
PHILADELPHIA, PA 19103 |
|
ITEM 2: Code of Ethics
A code of ethics, as defined in Item 2 of Form N-CSR, applicable to
its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions is
filed as an exhibit to the registrant's annual Form N-CSR. No substantive
amendments were approved or waivers were granted to this code of ethics during
the registrant's most recent fiscal half-year.
ITEM 3: Audit Committee Financial Expert
Not applicable at this time.
ITEM 4: Principal Accountant Fees and Services
Not applicable at this time.
ITEM 5: Audit Committee of Listed Registrant.
Not applicable at this time.
ITEM 6: Schedule of Investments.
Not applicable, as schedule 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 at this time.
ITEM 8: Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers
Not applicable.
ITEM 9: Submission of Matters to a Vote of Security Holders
The Registrant has adopted a nominating committee charter that sets
forth procedures by which shareholders may recommend nominees to the
Registrant's Board of Directors. There have been no material changes to these
procedures during the period covered by this report.
ITEM 10: CONTROLS AND PROCEDURES.
(a) The Registrant's principal executive officer and principal financial
officer have evaluated the Registrant's disclosure controls and procedures
within 90 days of this filing and have concluded that the Registrant's
disclosure controls and procedures are effective, as of that date, in ensuring
that information required to be disclosed by the registrant in this Form N-CSR
was recorded, processed, summarized, and reported timely.
(b) The Registrant's principal executive officer and principal financial
officer are aware of no changes in the Registrant's internal control over
financial reporting that occurred during the Registrant's most recent fiscal
half-year that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting.
ITEM 11: EXHIBITS.
(a)(1) The Registrant's code of ethics pursuant to Item 2 of Form N-CSR
is filed with the registrant's annual Form N-CSR.
(a)(2) Separate certifications by the registrant's principal executive
officer and principal financial officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment
Company Act of 1940, are attached.
(b) A certification by the registrant's principal executive officer and
principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940,
is attached.
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.
1838 Bond-Debenture Trading Fund
By /s/ John H. Donaldson
-----------------------------------
John H. Donaldson
President
(Principal Executive Officer)
Date November 22, 2004
-----------------------------------
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 /s/ John H. Donaldson
-----------------------------------
John H. Donaldson
President
(Principal Executive Officer)
Date November 22, 2004
-----------------------------------
By /s/ John J. Kelley
-----------------------------------
John J. Kelley
Vice President and Secretary
(Principal Financial Officer)
Date November 22, 2004
-----------------------------------