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
----------------------------
1838 Bond-Debenture Trading Fund
--------------------------------------------------
(Exact name of registrant as specified in charter)
113 King Street
Armonk, NY 10504
---------------------------------------------------
(Address of principal executive offices) (Zip code)
Clifford D. Corso
113 King Street
Armonk, NY 10504
---------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 914-273-4545
------------
Date of fiscal year end: March 31
--------
Date of reporting period: March 31, 2006
--------------
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
April 5, 2006
TO THE SHAREHOLDER:
As we expected, the upward bias of interest rates continued in the March
quarter. The Federal Reserve Board (the "Fed") raised the Fed Funds rate twice
again this quarter, ending the quarter at 4.75%, continuing its measured pace
of rate increases. The Fed stated in its March 28th statement that "some
further policy firming may be needed to keep the risks to the attainment of
both sustainable economic growth and price stability roughly in balance." The
increase in Fed Funds rate resulted in a sharp, 0.46%, increase in the ten-
year treasury yield to 4.85%. This was unlike the third quarter when the ten-
year treasury had a modest sell off from 4.32% on September 30, 2005 to 4.39%
on December 31, 2005. The ten-year treasury ended the quarter well above the
cyclical low yield of 3.11% on June 13, 2003 and ranged between 4.33% and
4.86%. Both short-term and long-term rates rose during the quarter and
treasury yield curve remained very flat at March 31, 2006, with the two-year
treasury yield at 4.82% and the thirty-year treasury yield at 4.89%. The
meaningfully higher rates resulted in negative returns for most fixed income
indices during the quarter.
For the quarter ended March 31, 2006, the Fund had a Net Asset Value of $19.72
per share. This represents a 0.3% decrease from $19.78 per share at December
31, 2005. On March 31, 2006, the Fund's closing price on the New York Stock
Exchange was $17.75 per share, representing a 9.99% discount to Net Asset Value
per share, compared with 12.48% discount as of December 31, 2005.
One of the primary objectives of the Fund is to maintain its high level of
income. On March 16, 2006 the Board of Directors declared a dividend payment of
$0.2875 per share payable May 2, 2006 to shareholders of record on April 6,
2006. The dividend was unchanged from the prior quarter. On an annualized
basis, including the pending dividend, the Fund has paid a total of $1.15 per
share in dividends, representing a 6.56% Dividend Yield based on the market
price on April 5, 2006 of $17.54 per share.
Another primary objective of the Fund is to deliver a competitive total return.
The table below compares the performance of the Fund to the average of 11 other
closed-end bond funds with which we have historically compared the Fund:
TOTAL RETURN-PERCENTAGE CHANGE (ANNUALIZED FOR PERIODS LONGER THAN 1 YEAR)
IN NET ASSET VALUE PER SHARE WITH ALL DISTRIBUTIONS REINVESTED1
QUARTER TO 1 YEAR TO 2 YEARS TO 5 YEARS TO 10 YEARS TO
03/31/06 03/31/06 03/31/06 03/31/06 03/31/06
- ---------------------------------------------------------------------------------------
1838 Bond Fund2 -0.30% 1.19% 1.96% 5.25% 6.24%
Average of 11 Other
Closed -- End Bond Funds2 -0.49% 2.54% 2.43% 5.87% 6.55%
Lehman Investment Grade
Credit Index3 -1.17% 1.84% 3.70% 5.97% 6.61%
Salomon Bros. Bond Index4 -3.61% 1.50% 2.75% 7.49% 7.65%
1 -- This is historical information and should not be construed as indicative
of any likely future performance
2 -- Source: Lipper Inc.
3 -- Comprised of US, investment grade corporate bonds
4 -- Comprised of long-term AAA and AA corporate bonds
1
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. The returns for the quarter ended March 31, 2006 were
negative, driven almost entirely by higher interest rates. The Fund's
performance does not include the dividend of $0.2875 per share declared on
March 16, 2006. The dividend income is included in the performance only if the
Ex-Date falls during the quarter; the Ex-Date happens to be April 4, 2006 for
the most recent dividend. On a positive note, the negative impact on the Fund's
Net Asset Value from higher interest rates was almost entirely offset by
positive price performance of many of the higher yielding positions in the
investment portfolio.
Event risk was a growing concern in the market throughout 2005 and remains a
concern in 2006. We continue to add diversity to the portfolio to reduce the
impact from name specific event risk. Corporate spreads have widened from their
historically tight levels while spreads in specific industries such as
automotive, paper, media, and telecom have been more volatile than the broader
market. Our strategy to incrementally reduce the duration of the portfolio,
toward its lower targeted level, contributed significantly towards lessening the
impact on the Fund's Net Asset Value from higher interest rates in the March
2006 quarter. The Fund's duration is 6.21 years as of March 31, 2006, down from
6.44 years as of December 31, 2005. We continue to look for opportunities to
reduce the duration while balancing the income objectives of the Fund. As we
shared with you in the last shareholder letter, the board decided to change the
benchmark of the Fund from the Salomon Brothers AAA and AA Corporate Bond Index
to the Lehman Brothers Investment Grade Credit Index. This change was instituted
because the universe of corporate bonds in which the Fund can invest is better
represented by the Lehman Brothers Investment Grade Credit Index. We will
continue to show the performance against both indices for the next three
quarters. The Fund had an expense ratio of 0.90% of net assets for the twelve
months ended March 31, 2006, an improvement from 0.92% (annualized) for nine
months ended December 31, 2005. The improvement in the expense ratio was driven
by the reduction in the management fee.
Oil prices remained high during the quarter, ending the quarter at $66.63 per
barrel. The quarter-end price was down from the record high of $69.81 reached
on August 30, 2005, but well above the quarter's low point of $57.65 per barrel
reached on February 16, 2006. Demand for oil continues to remain strong
resulting in the steady increase in price over the last twelve months from the
lows of $40 per barrel in December 2004. Employment growth in the US continued
in the quarter and for the last twelve months approximately 2.1 million new
non-farm jobs were added. The unemployment rate at quarter end was 4.7% down
from 4.9% as of December 2005, and down from the current cyclical high of 6.3%
as of June 2003. As was the case in the December quarter, most of the job
growth continued to be concentrated in the service area with only modest growth
in manufacturing jobs. The US economy is now primarily a service economy
representing 83% of non-farm employment; therefore the disproportionate growth
in service jobs is not unexpected.
2
The Fund's performance will continue to be subject to the impact of trends in
longer term interest rates as was the case in the March quarter and to a lesser
degree in the December quarter. The Fund's performance also remains sensitive
to trends in relative yield spreads on corporate bonds due to the concentration
in corporate bonds. The pie chart below summarizes the portfolio quality of the
Fund's long-term invested assets as of March 31, 2006:
PERCENT OF TOTAL INVESTMENT (STANDARD & POOR'S RATINGS)
AAA 16.6%
AA 4.0%
A 28.9%
BBB 32.1%
BB 12.7%
B & Lower 5.5%
Please refer to the Schedule of Investments in the financial statements for
details concerning portfolio holdings.
In light of the information publicly available and filed with the SEC,
including the quarterly statement of investments, and in a continuing effort to
reduce the expenses of the Fund, the Board of Directors of the Fund has decided
to eliminate the production of quarterly financial statements on the adviser's
recommendation. The Fund will produce and mail to all shareholders the audited
annual report and unaudited semi-annual report. For additional information on
the quarterly statement of investments filed with the SEC and how to obtain a
copy, please see "Quarterly Statement of Investments" on page 15 in the
Shareholder Information section of this annual report.
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 in the Shareholder Information section 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 PFPC Inc., the Fund's
Transfer Agent and Dividend Paying Agent, at 1-800-331-1710. The Fund's
investment adviser, MBIA Capital Management Corp., may be reached at 914-765-
3272.
Sincerely,
/s/ Clifford D. Corso
---------------------
Clifford D. Corso
President
3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND
BOARD OF DIRECTORS OF THE
1838 BOND-DEBENTURE TRADING FUND
We have audited the accompanying statement of assets and liabilities of 1838
Bond-Debenture Trading Fund, including the schedule of investments, as of March
31, 2006, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period
then ended and the financial highlights for each of the four 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. The financial highlights for the period ended March 31, 2002 were
audited by other auditors whose report dated April 30, 2002 expressed an
unqualified opinion on such financial highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. We were not engaged to perform an audit of the Fund's internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Fund's internal control over financial
reporting. Accordingly, we express no such opinion. An audit 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 March 31, 2006 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 1838
Bond-Debenture Trading Fund as of March 31, 2006, 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 the financial highlights for each of the
four 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
APRIL 14, 2006
4
SCHEDULE OF INVESTMENTS MARCH 31, 2006
MOODY'S/
STANDARD &
POOR'S PRINCIPAL AMORTIZED COST VALUE
RATING(A) AMOUNT (000'S) (NOTE 1) (NOTE 1)
---------- -------------- -------------- ----------
LONG TERM DEBT SECURITIES (97.17%)
AUTOMOTIVE (7.57%)
Auburn Hills Trust, Gtd. Ctfs., 12.375%, 05/01/20........... A3/BBB 1,000 $ 1,000,000 $1,452,979
Ford Holdings, LLC, Gtd., 9.30%, 03/01/30................... Ba3/BB- 1,000 1,107,514 830,000
Ford Motor Co., Debs., 8.90%, 01/15/32...................... Ba3/BB- 1,560 1,544,630 1,224,600
Ford Motor Credit Co., 7.00%, 10/01/13...................... Ba2/BB- 2,000 2,051,283 1,788,812
General Motors Acceptance Corp., Notes, 6.125%, 09/15/06.... Ba1/BB 1,000 998,547 995,387
General Motors Acceptance Corp., Notes, 7.25%, 03/02/11..... Ba1/BB 1,000 1,006,269 947,644
Meritor Automotive, Notes, 6.80%, 02/15/09.................. Ba2/BB 87 88,650 87,000
-------------- ----------
7,796,893 7,326,422
============== ==========
CHEMICALS (0.52%)
IMC Global, Debs., 6.875%, 07/15/07......................... B1/B+ 500 512,689 503,750
============== ==========
COMMERCIAL SERVICES (0.57%)
Cendant Corp., Sr. Notes, 7.375%, 01/15/13.................. Baa1/BBB+ 500 555,474 549,190
============== ==========
CONSUMER PRODUCTS (1.35%)
Kraft Foods, Inc., 4.125%, 11/12/09......................... A3/BBB+ 575 556,844 549,630
Newell Rubbermaid, Inc., 6.00%, 03/15/07.................... Baa2/BBB+ 750 756,289 755,762
-------------- ----------
1,313,133 1,305,392
============== ==========
DIVERSIFIED FINANCIAL SERVICES (17.21%)
Bank of America, Sub. Notes, 7.40%, 01/15/11................ Aa3/A+ 1,000 1,041,374 1,080,825
CIT Group, Inc., Sr. Notes, 7.375%, 04/02/07................ A2/A 1,800 1,843,646 1,834,592
Citicorp Capital II, Gtd., 8.015%, 02/15/27................. Aa2/A 2,000 2,010,921 2,116,520
Credit Suisse FB USA, Inc., Notes, 4.875%, 08/15/10......... Aa3/A+ 500 499,966 488,184
General Electric Capital Corp., Notes, 6.125%, 02/22/11..... Aaa/AAA 1,000 1,061,749 1,030,299
General Electric Capital Corp., Notes, 6.75%, 03/15/32...... Aaa/AAA 1,500 1,547,314 1,670,369
Household Finance Corp., Notes, 6.75%, 05/15/11............. Aa3/A 1,500 1,500,050 1,579,161
HSBC America Capital II, Gtd., 8.38%, 05/15/27, 144A........ NR/A- 2,500 2,564,458 2,672,530
Landesbank Baden-Wurtt NY, Sub. Notes, 6.35%, 04/01/12...... Aaa/AA+ 500 499,132 531,882
Residential Capital Corp., 6.375%, 06/30/10................. Baa3/BBB- 1,000 997,468 1,007,420
Sanwa Bank Ltd., Sub. Notes, 7.40%, 06/15/11................ A2/A- 500 489,834 538,936
UBS PFD Funding Trust I, Gtd., 8.622%, 10/10/49(b).......... A1/AA- 1,000 1,007,726 1,115,715
Wachovia Capital Trust III, Bank Gtd., 5.80%, 03/15/42(b)... A2/A- 1,000 1,000,000 982,479
-------------- ----------
16,063,638 16,648,912
============== ==========
ENERGY (6.91%)
Apache Corp., Notes, 7.70%, 03/15/26........................ A3/A- 500 522,436 606,016
ChevronTexaco, Debs., 7.50%, 03/01/43....................... Aa2/AA 2,000 1,979,040 2,218,350
Transocean, Inc., Notes, 7.50%, 04/15/31.................... Baa1/A- 500 497,911 592,859
Western Atlas, Inc., Debs., 8.55%, 06/15/24................. A2/A- 2,539 2,635,810 3,266,309
-------------- ----------
5,635,197 6,683,534
============== ==========
GAMING, LODGING & LEISURE (4.80%)
Caesars Entertainment, Sr. Notes, 7.50%, 09/01/09........... Baa3/BBB- 1,000 1,059,366 1,053,015
MGM Mirage, Co. Gty, 6.00%, 10/01/09........................ Ba2/BB 1,000 993,971 985,000
Mohegan Tribal Gaming Authority, Sr. Notes, 6.375%, 07/15/09 Ba3/B+ 500 512,687 497,500
Royal Caribbean Cruises, Sr. Notes, 6.75%, 03/15/08......... Ba1/BBB- 1,000 952,807 1,017,627
Starwood Hotels & Resorts, Gtd., 7.875%, 05/01/12........... Ba1/BB+ 1,000 996,779 1,087,500
-------------- ----------
4,515,610 4,640,642
============== ==========
HOME BUILDERS (1.00%)
Centex Corp., Notes, 5.45%, 08/15/12........................ Baa2/BBB 1,000 995,240 968,944
============== ==========
INDUSTRIAL (1.31%)
Case New Holland, Inc., Sr. Notes, 6.00%, 06/01/09.......... Ba3/BB- 500 498,150 487,500
Tyco International Group SA, Co. Gty, 6.75%, 02/15/11....... Baa3/BBB+ 750 783,430 780,058
-------------- ----------
1,281,580 1,267,558
============== ==========
INSURANCE (4.46%)
AIG Sunamer Global Finance VI, 6.30%, 05/10/11, 144A........ Aa2/AA+ 1,000 1,082,314 1,037,723
Berkshire Hathaway Finance, 5.10%, 07/15/14................. Aaa/AAA 1,000 1,001,746 970,827
Penn Central Corp., Sub. Notes, 10.875%, 05/01/11(c)........ WR/NR 1,500 1,559,923 1,793,160
XL Capital Europe PLC, Gtd., 6.50%, 01/15/12................ A3/A- 500 498,275 514,748
-------------- ----------
4,142,258 4,316,458
============== ==========
5
SCHEDULE OF INVESTMENTS --- CONTINUED
MOODY'S/
STANDARD &
POOR'S PRINCIPAL AMORTIZED COST VALUE
RATING(A) AMOUNT (000'S) (NOTE 1) (NOTE 1)
---------- -------------- -------------- ----------
MEDIA (14.32%)
Clear Channel Communication, Co. Gty, 8.00%, 11/01/08 Baa3/BBB- 1,000 $ 1,056,162 $1,049,738
Comcast Corp., Gtd., 7.05%, 03/15/33................. Baa2/BBB+ 2,000 2,190,034 2,058,266
CSC Holdings, Sr. Notes, 7.25%, 07/15/08............. B2/B+ 500 522,863 505,000
Dex Media West LLC, Sr. Notes, 8.50%, 08/15/10....... B1/B 500 533,362 528,750
Echostar DBS Corp., Sr. Notes, 5.75%, 10/01/08....... Ba3/BB- 500 497,741 495,000
Harcourt General, Inc., Sr. Debs., 8.875%, 06/01/22.. WR/A- 2,000 2,130,760 2,528,912
News America Holdings, Inc., Gtd., 7.90%, 12/01/95... Baa2/BBB 1,400 1,298,987 1,514,670
Quebecor World, Inc.,Gtd., 6.125%, 11/15/13.......... Ba3/BB- 1,500 1,509,558 1,299,198
Time Warner, Inc., Debs., 9.15%, 02/01/23............ Baa2/BBB+ 3,000 3,135,911 3,607,128
Viacom, Inc., Sr. Debs., 7.875%, 07/30/30............ Baa3/BBB 250 246,432 272,248
-------------- ----------
13,121,810 13,858,910
============== ==========
PAPER (5.06%)
Abitibi-Consolidated, Inc., Debs., 8.85%, 08/01/30... B1/B+ 1,500 1,500,008 1,346,250
Smurfit Capital Funding, Debs., 7.50%, 11/20/25...... B1/B+ 2,000 1,992,332 1,860,000
Union Camp Corp., Debs., 9.25%, 02/01/11............. Baa3/BBB 1,500 1,494,441 1,687,959
-------------- ----------
4,986,781 4,894,209
============== ==========
PHARMACEUTICALS (1.60%)
Bristol-Myer Squibb, 5.75%, 10/01/11................. A1/A+ 1,000 1,031,220 1,010,990
Monsanto Co. (Pharmacia Corp), 6.50%, 12/01/18....... Aaa/AAA 500 577,170 540,364
-------------- ----------
1,608,390 1,551,354
============== ==========
REAL ESTATE INVESTMENT TRUST (5.34%)
CarrAmerica Realty Corp., 5.50%, 12/15/10............ Baa2/BBB 500 499,775 500,199
EOP Operating LP, Sr. Notes, 7.25%, 02/15/18......... Baa2/BBB 1,000 994,073 1,082,297
Host Marriott LP, Sr. Notes, 7.00%, 08/15/12......... Ba2/BB- 500 524,244 510,625
i Star Financial, 6.00%, 12/15/10.................... Baa2/BBB 1,000 1,017,584 1,006,385
Liberty Property Trust, Sr. Notes, 7.50%, 01/15/18... Baa2/BBB 1,000 999,382 1,086,604
Nationwide Health Properties, Notes, 6.00%, 05/20/15. Baa3/BBB- 500 499,510 488,267
Prologis, Sr. Notes, 5.50%, 04/01/12................. Baa/BBB+ 500 497,253 494,192
-------------- ----------
5,031,821 5,168,569
============== ==========
RETAIL & RESTAURANT (0.55%)
Darden Restaurants, Inc., Debs., 7.125%, 02/01/16.... Baa1/BBB+ 500 444,507 527,936
============== ==========
TELECOMMUNICATIONS (8.88%)
Deutsche Telekom International, Gtd., 8.25%, 06/15/30 A3/A- 2,000 2,491,438 2,392,462
GTE Corp., Debs., 6.94%, 04/15/28.................... Baa1/A 2,000 2,106,930 2,008,480
SBC Communications, Inc., Notes, 5.875%, 08/15/12.... A2/A 500 494,664 502,140
Sprint Capital Corp., Co. Gty, 6.90%, 05/01/19....... Baa2/A- 1,750 1,760,442 1,869,548
Verizon Global Funding Corp., Notes, 7.75%, 12/01/30. A3/A 1,646 1,674,824 1,818,415
-------------- ----------
8,528,298 8,591,045
============== ==========
UTILITIES (5.30%)
Dominion Resources, Inc., Sr. Notes, 6.75%, 12/15/32. Baa2/BBB 1,000 997,738 1,022,135
Hydro-Quebec, Gtd. Debs., 8.25%, 04/15/26............ A1/A+ 1,550 1,486,445 2,029,093
Midamerican Funding LLC, 6.927%, 03/01/29............ A3/BBB+ 500 500,000 547,356
NSTAR, Notes, 8.00%, 02/15/10........................ A2/A- 500 499,085 542,251
Old Dominion Electric Corp., 6.25%, 06/01/11......... Aaa/AAA 500 500,391 517,913
PSEG Power, Notes, 5.00%, 04/01/14................... Baa1/BBB 500 499,484 472,509
-------------- ----------
4,483,143 5,131,257
============== ==========
MORTGAGE BACKED SECURITIES (8.21%)
FHLMC Pool #B11892, 4.50%, 01/01/19.................. Aaa/AAA 1,860 1,875,093 1,778,889
FHLMC Pool #A15675, 6.00%, 11/01/33.................. Aaa/AAA 1,286 1,323,376 1,287,924
FNMA Pool #763852, 5.50%, 02/01/34................... Aaa/AAA 2,882 2,939,885 2,817,428
FNMA Pool #754791, 6.50%, 12/01/33................... Aaa/AAA 1,897 1,966,178 1,937,859
GNSF Pool #417239, 7.00%, 02/15/26................... Aaa/AAA 79 80,178 82,789
GNSF Pool #780374, 7.50%, 12/15/23................... Aaa/AAA 37 36,302 38,437
-------------- ----------
8,221,012 7,943,326
============== ==========
6
SCHEDULE OF INVESTMENTS --- CONTINUED
MOODY'S/
STANDARD &
POOR'S PRINCIPAL AMORTIZED COST VALUE
RATING(A) AMOUNT (000'S) (NOTE 1) (NOTE 1)
---------- -------------- -------------- -----------
U.S. GOVERNMENT AGENCY (2.21%)
FNMA, Notes, 7.125%, 03/15/07....... Aaa/AAA 2,100 $ 2,148,184 $ 2,138,088
-------------- -----------
TOTAL LONG TERM DEBT SECURITIES..... 91,385,658 94,015,496
-------------- -----------
INVESTMENT COMPANIES (1.23%) SHARES
--------
High Yield Plus Fund................ 33 223,875 116,332
PNC Bank Money Market Account....... 1,076 1,076,443 1,076,443
-------------- -----------
1,300,318 1,192,775
-------------- -----------
TOTAL INVESTMENTS (98.40%) $ 92,685,976 95,208,271
==============
OTHER ASSETS AND LIABILITIES (1.60%) 1,551,170
-----------
NET ASSETS (100.00%) $96,759,441
===========
- ----------
(a) Ratings for debt securities are unaudited. All ratings are as of March 31,
2006 and may have changed subsequently.
(b) Variable rate security. Rate disclosed is as of March 31, 2006.
(c) Security was valued using fair value procedures as of March 31, 2006 (See
Note 1).
144A -- Securities were 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, these
securities amounted to 3.83% of net assets.
LEGEND
Co. Gty -- Company Guaranty
Ctfs. -- Certificates
Debs. -- Debentures
GNSF -- Government National Mortgage Association
Gtd. -- Guranteed
FHLMC -- Federal Home Loan Mortgage Corp.
FNMA -- Federal National Mortgage Association (Single Family)
NR -- Not Rated
Sr. -- Senior
Sub. -- Subordinated
WR -- Withdrawn Rating
The accompanying notes are an integral part of these financial statements.
7
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2006
Assets:
Investment in securities, at value (amortized cost $92,685,976) (Note 1) $95,208,271
Interest receivable..................................................... 1,635,709
Dividends receivable.................................................... 916
-----------
TOTAL ASSETS............................................................ 96,844,896
-----------
Liabilities:
Payable to investment adviser........................................... 41,289
Accrued expenses payable................................................ 44,166
-----------
TOTAL LIABILITIES....................................................... 85,455
-----------
Net assets: (equivalent to $19.72 per share based on 4,907,678 shares
of capital stock outstanding)........................................... $96,759,441
===========
NET ASSETS consisted of:
Par value............................................................... $ 4,907,678
Capital paid-in......................................................... 91,975,447
Accumulated net investment loss......................................... (249,443)
Accumulated net realized loss on investments............................ (2,396,536)
Net unrealized appreciation on investments.............................. 2,522,295
-----------
$96,759,441
===========
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2006
Investment Income:
Interest ......................................................... $6,280,431
Dividends ........................................................ 12,000
----------
Total Investment Income .......................................... 6,292,431
----------
Expenses:
Investment advisory fees (Note 4) ................................ $ 506,578
Transfer agent fees .............................................. 60,000
Directors' fees .................................................. 64,001
NYSE fee ......................................................... 25,000
Audit fees ....................................................... 17,851
Legal fees and expenses .......................................... 84,000
Reports to shareholders .......................................... 34,999
Custodian fees ................................................... 7,500
Insurance ........................................................ 26,001
Miscellaneous .................................................... 69,378
---------
Total Expenses.................................................. 895,308
----------
Net Investment Income.......................................... 5,397,123
----------
Realized and unrealized gain (loss) on investments (Note 1):
Net realized gain from security transactions ..................... 1,885,004
----------
Unrealized appreciation of investments:
Beginning of the period......................................... 8,582,251
End of the period............................................... 2,522,295
---------
Change in unrealized appreciation (depreciation) of investments (6,059,956)
----------
Net realized and unrealized gain (loss) on investments ....... (4,174,952)
----------
Net increase in net assets resulting from operations............... $1,222,171
==========
The accompanying notes are an integral part of these financial statements.
8
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
MARCH 31, 2006 MARCH 31, 2005
-------------- --------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income.......................................... $ 5,397,123 $ 5,486,432
Net realized gain from security transactions (Note 2).......... 1,885,004 22,587
Change in unrealized appreciation (depreciation) of investments (6,059,956) (2,818,639)
-------------- --------------
Net increase in net assets resulting from operations......... 1,222,171 2,690,380
-------------- --------------
Distributions:
Dividends to shareholders from net investment income........... (5,643,830) (5,588,396)
Distributions to shareholders from tax return of capital....... --- (546,202)
-------------- --------------
Total distributions to shareholders.......................... (5,643,830) (6,134,598)
-------------- --------------
Capital Share Transactions:
Dealer manager fee charged to paid-in capital in excess of par. --- (2,248)
-------------- --------------
Net proceeds from common share offering...................... --- (2,248)
-------------- --------------
Increase (decrease) in net assets.............................. (4,421,659) (3,446,466)
Net Assets:
Beginning of period............................................ 101,181,100 104,627,566
-------------- --------------
End of period.................................................. $ 96,759,441 $ 101,181,100
============== ==============
The accompanying notes are an integral part of these financial statements.
9
FINANCIAL HIGHLIGHTS
The table below sets forth audited financial data for a share of capital
stock outstanding throughout each period presented.
YEAR ENDED MARCH 31,
---------------------------------------------
2006(3) 2005 2004 2003 2002
------- -------- -------- ------- -------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period ........................... $ 20.62 $ 21.32 $ 21.50 $ 20.13 $ 20.95
------- -------- -------- ------- -------
Net investment income 1.10 1.14 1.29 1.31 1.24(1)
Net realized and unrealized gain (loss) on
investments.................................................. (0.85) (0.59) 0.83 1.45 (0.62)(1)
------- -------- -------- ------- -------
Total from investment operations................................ 0.25 0.55 2.12 2.76 0.62
------- -------- -------- ------- -------
Capital share transaction:
Dilution of the net asset value from rights
offering (Note 6)............................................ --- --- (0.97) --- ---
------- -------- -------- ------- -------
Less distributions:
Dividends from net investment income .......................... (1.15) (1.14) (1.27) (1.34) (1.43)
Distributions from tax return of capital ...................... --- (0.11) (0.06) (0.05) (0.01)
------- -------- -------- ------- -------
Total distributions............................................. (1.15) (1.25) (1.33) (1.39) (1.44)
------- -------- -------- ------- -------
Net asset value, end of period.................................. $ 19.72 $ 20.62 $ 21.32 $ 21.50 $ 20.13
======= ======== ======== ======= =======
Per share market price, end of period........................... $ 17.75 $ 18.26 $ 19.51 $ 20.65 $ 19.34
======= ======== ======== ======= =======
TOTAL INVESTMENT RETURN(2)
Based on market value ......................................... 3.52% 0.22% 1.13% 14.55% 7.96%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)............................ $96,759 $101,181 $104,628 $78,973 $73,955
Ratio of expenses to average net assets......................... 0.90% 0.89% 0.86% 0.91% 0.86%
Ratio of net investment income to average net assets .......... 5.42% 5.43% 5.57% 6.39% 6.73%(1)
Portfolio turnover rate......................................... 24.33% 6.78% 11.99% 12.27% 10.87%
Number of shares outstanding at the end of the period (in 000's) 4,908 4,908 4,908 3,673 3,673
- ----------
(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%.
(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.
(3) Effective June 2, 2005, the Fund's Investment Adviser was changed to MBIA
Capital Management Corp. See Note 4 of Notes to Financial Statements for
further information.
The accompanying notes are an integral part of these financial statements.
10
NOTES TO FINANCIAL STATEMENTS
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 March 31, 2006, Penn Central Corp. was valued using fair value
procedures and represented 1.85% of net assets.
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
realized capital gains 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. In order to reflect permanent book/tax
difference that occurred during the fiscal year ended March 31, 2006, the
following capital accounts were adjusted for the following amounts:
UNDISTRIBUTED ACCUMULATED
(OVERDISTRIBUTED) NET REALIZED PAID-IN
NET INVESTMENT INCOME GAIN/(LOSS) CAPITAL
--------------------- ------------ -------
$ 662,161 $ (654,757) $(7,404)
11
Distributions during the fiscal years ended March 31, 2006 and 2005 were
characterized as follows for tax purposes:
ORDINARY INCOME RETURN OF CAPITAL CAPITAL GAIN TOTAL DISTRIBUTION
--------------- ----------------- ------------ ------------------
FY 2006 $ 5,643,830 $ --- $ --- $ 5,643,830
FY 2005 $ 5,588,396 $ 546,202 $ --- $ 6,134,598
At March 31, 2006, the components of distributable earnings on a tax
basis were as follows:
ACCUMULATED CAPITAL LOSS POST-OCTOBER NET UNREALIZED
TOTAL* ORDINARY INCOME CARRYFORWARD LOSS APPRECIATION
---------- --------------- ------------ ------------ --------------
$(123,684) $ --- $ (2,396,536) $ --- $ 2,272,852
========= =============== ============ ============ ==============
* Temporary differences include book amortization and deferral of post-
October losses, if any, which will be recognized for the tax year ending
March 31, 2007.
As of March 31, 2006, the capital loss carryovers available to offset
possible future capital gains were as follows:
AMOUNT EXPIRATION DATE
---------- ---------------
$ 956,105 2010
1,393,195 2011
47,236 2013
At March 31, 2006, 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
----------- -------------- ---------------- ----------------
$92,935,419 $2,272,852 $4,815,901 $(2,543,049)
The difference between book basis and tax-basis unrealized appreciation
is attributable primarily to the differing treatments for amortization of
market premium and accretion of market discount.
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 year ended March 31,
2006:
COST OF PROCEEDS FROM SALES
PURCHASES OR MATURITIES
----------- -------------------
U.S. Government Securities $ 2,162,811 $ 8,958,549
Other Investment Securities $21,475,788 $ 14,881,052
NOTE 3 --- CAPITAL STOCK --- At March 31, 2006, there were 10,000,000 shares of
capital stock ($1.00 par value) authorized, with 4,907,678 shares issued and
outstanding.
12
NOTE 4 --- INVESTMENT ADVISORY CONTRACT AND PAYMENTS TO AFFILIATED PERSONS ---
MBIA Capital Management Corp. ("MBIA-CMC") currently serves as investment
adviser to the Fund. During the period June 2, 2005 to October 31, 2005, MBIA-
CMC provided advisory services under an interim investment advisory agreement
(the "Interim Agreement"). The shareholders of the Fund approved a new
investment advisory agreement between the Fund and MBIA-CMC at the annual
meeting of shareholders held on October 31, 2005 (the "New Agreement"). Under
both the Interim Agreement and New Agreement, MBIA-CMC is entitled to a fee at
the annual rate of 0.50% on the first $100 million of the Fund's month end net
assets and 0.40% on the Fund's month-end net assets in excess of $100 million.
MBIA Municipal Investors Services Corporation provides accounting services to
the Fund and is compensated for these services by the Adviser. Effective August
17, 2005, PFPC Inc., a member of PNC Financial Services Group, provides
accounting and administrative services to the Fund and is compensated for these
services by the Adviser.
Certain officers of the Fund are also directors, officers and/or employees of
the Adviser. 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 year ended
March 31, 2006, the Fund issued no shares under this Plan.
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.
13
SHAREHOLDER INFORMATION (UNAUDITED)
ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND OFFICERS
PRINCIPAL OCCUPATION DURING THE POSITION WITH
POSITION(S) HELD PAST FIVE YEARS AND OTHER PREVIOUS FUND SINCE AND
NAME AND ADDRESS (AGE) WITH FUND EXPERIENCE TERM
- --------------------------- ---------------- --------------------------------------- ----------------
W. Thacher Brown* Director Chartered Financial Analyst; former 1988; current
113 King Street President of MBIA Asset term ends at the
Armonk, NY 10504 Management LLC from July 1998 to 2006 Annual
Born: December 1947 September 2004; and former President Meeting
of 1838 Investment Advisors, LLC
from July 1988 to May 2004.
John Gilray Christy Director Chairman, Chestnut Capital 1983; current
Chestnut Capital Corp. Fund Corporation (venture capital firm) term ends at the
P.O. Box 22 from June 1988 to present. 2006 Annual
Flourtown, PA 19031 Meeting
Born: August 1932
Morris Lloyd, Jr. Director Retired; former Development Officer, 1989; current
113 King Street Trinity College, from April 1996 to term ends at the
Armonk, NY 10504 June 2002. 2006 Annual
Born: September 1937 Meeting
J. Lawrence Shane Director Retired; former Vice Chairman and 1974; current
113 King Street CFO of Scott Paper Company until term ends at the
Armonk, NY 10504 1992. 2006 Annual
Born: January 1935 Meeting
Clifford D. Corso* President and President and Chief Investment Officer, 2005; indefinite
MBIA CMC Chief Executive MBIA Capital Management Corp.;
113 King Street Officer Managing Director and Chief
Armonk, NY 10504 Investment Officer, MBIA
Born: October 1961 Insurance Corporation.
Marc D. Morris* Vice President, Director of MBIA Capital Management 2005; indefinite
MBIA CMC Treasurer and Corp.; Director and officer of
113 King Street Chief Financial other affiliated entities within
Armonk, NY 10504 Officer the MBIA Asset Management
Born: March 1959 Group.
Leonard I. Chubinsky* Secretary Deputy General Counsel of MBIA 2005; indefinite
MBIA CMC Insurance Corporation; officer of other
113 King Street affiliated entities within the MBIA
Armonk, NY 10504 Asset Management Group.
Born: December 1948
Richard J. Walz* Vice President, Managing Director of several affiliated 2005; indefinite
MBIA CMC Chief Compliance entities within the MBIA Asset
113 King Street Officer Management Group.
Armonk, NY 10504
Born: April 1959
* Denotes a director/officer who is an "interested person" of the Fund as
defined under the provisions of the Investment Company Act of 1940. Mr. Brown
is an "interested person" because he was an officer of the Fund's investment
adviser. Messrs. Corso, Morris, Walz and Chubinsky are "interested persons"
by virtue of being employees of the Fund's investment adviser.
14
RESULTS OF SHAREHOLDER VOTES
The Annual Meeting of Shareholders of the Fund was held on September 28, 2005
and reconvened on October 31, 2005. At the meeting, shareholders voted on the
election of directors and the approval of a new investment advisory agreement
with MBIA CMC.
With regard to the election of the following directors of the Fund:
# OF SHARES # OF SHARES
IN FAVOR WITHHELD
- ------------------- ----------- -----------
W. Thacher Brown... 4,414,953 34,568
John Gilray Christy 4,410,002 39,519
Morris Lloyd, Jr... 4,414,160 35,361
J. Lawrence Shane.. 4,410,582 38,939
With regard to the approval of the new investment advisory agreement:
# OF SHARES # OF SHARES # OF SHARES # OF BROKER
IN FAVOR ABSTAINED AGAINST NON-VOTES
- ----------------------------- ----------- ----------- ----------- -----------
Investment advisory agreement 2,566,560 54,611 56,496 1,358,601
HOW TO GET INFORMATION REGARDING PROXIES
The Fund has adopted the Adviser'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) 765-6242 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) 765-6242 or on the SEC's website at http://
www.sec.gov.
QUARTERLY STATEMENT OF INVESTMENTS
Each Fund files a complete statement of investments with the Security and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at www.sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, D.C. Information regarding
the operations of the Public Reference Room may be obtained by calling 1-800/
SEC-0330.
DIVIDEND REINVESTMENT PLAN
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. PFPC Inc., 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
15
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 PFPC Inc., P.O. Box
43027, Providence, RI
02940-3027.
PRIVACY POLICY
The privacy of your personal financial information is extremely important to
us. When you open an account with us, we collect a significant amount of
information from you in order to properly invest and administer your account.
We take very seriously the obligation to keep that information private and
confidential, and we want you to know how we protect that important
information.
We collect nonpublic personal information about you from applications or other
forms you complete and from your transactions with us or our affiliates. We do
not disclose information about you, or our former clients, to our affiliates or
to service providers or other third parties, except as permitted by law. We
share only the minimum information required to properly administer your
accounts, which enables us to send transaction confirmations, monthly or
quarterly statements, financials and tax forms. Even within MBIA and its
affiliated entities, only a limited number of people who actually service
accounts will ever have access to your personal financial information. Further,
we do not share information about our current or former clients with any
outside marketing groups or sales entities.
To ensure the highest degree of security and confidentiality, MBIA and its
affiliates maintain various physical, electronic and procedural safeguards to
protect your personal information. We also apply special measures for
authentication of information you request or submit to us on our Web site-
www.MBIA.com.
MBIA CAPITAL MANAGEMENT CORP.
16
NOTICE
The Fund's Audit Committee adopted an audit committee charter on September 10,
2003. A copy of the audit committee charter was included as Appendix A to the
Fund's proxy statement filed with the U.S. Securities and Exchange Commission
in May, 2004, which is available on the SEC website: www.sec.gov. A copy of the
Fund's audit committee charter is also available to shareholders, free of
charge, upon request by calling the Fund at 800-331-1710.
ANNUAL CERTIFICATION
The Fund's CEO has submitted to the NYSE the required annual certification and,
the Fund also has included the certifications of the Fund's CEO and CFO
required by Section 302 of the Sarbanes-Oxley Act of 2002 in the Fund's Forms
N-CSR filed with the Securities and Exchange Commission for the period of this
report.
HOW TO GET ASSISTANCE WITH SHARE TRANSFER OR DIVIDENDS
Contact Your Transfer Agent, PFPC Inc.,
P.O. Box 43027, Providence, RI 02940-3027, or call 1-800-331-1710
17
DIRECTORS
-------------------
W. THACHER BROWN
JOHN GILRAY CHRISTY
MORRIS LLOYD. JR.
J. LAWRENCE SHANE
OFFICERS
-------------------
CLIFFORD D. CORSO
PRESIDENT
MARC D. MORRIS
TREASURER
LEONARD CHUBINSKY
SECRETARY
RICHARD WALZ
CHIEF COMPLIANCE OFFICER
INVESTMENT ADVISER
-------------------
MBIA CAPITAL MANAGEMENT CORP.
113 KING STREET
ARMONK, NY 10504
CUSTODIAN
-------------------
PFPC TRUST COMPANY
8800 TINICUM BOULEVARD
PHILADELPHIA, PA 19153
TRANSFER AGENT
-------------------
PFPC INC.
P.O. BOX 43027
PROVIDENCE, RI 02940-3027
1-800-331-1710
COUNSEL
-------------------
PEPPER HAMILTON LLP
3000 TWO LOGAN SQUARE
EIGHTEENTH & ARCH STREETS
PHILADELPHIA, PA 19103
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
-------------------
TAIT, WELLER & BAKER LLP
1818 MARKET STREET
SUITE 2400
PHILADELPHIA, PA 19103
[GRAPHICS OMITTED]
BOND-DEBENTURE TRADING FUND
-------------------
113 KING STREET
ARMONK, NY 10504
[GRAPHICS OMITTED]
ANNUAL REPORT
MARCH 31, 2006
ITEM 2. CODE OF ETHICS.
The Registrant has adopted a code of ethics (the "Code of Ethics") that applies
to its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. A
copy of the Registrant's Code of Ethics can be obtained without charge, upon
request, by calling the Registrant at 1-800-331-1710.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Directors of the registrant has determined that J. Lawrence Shane,
the Chairman of the Board's Audit Committee, possesses the technical attributes
identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an "audit
committee financial expert," and has designated Mr. Shane as the Audit
Committee's financial expert. Mr. Shane is an "independent" Director pursuant to
paragraph (a)(2)of Item 3 to Form N-CSR. Under applicable securities laws, a
person who is determined to be an audit committee financial expert will not be
deemed an "expert" for any purpose, including without limitation for the
purposes of Section 11 of the Securities Act of 1933, as a result of being
designated or identified as an audit committee financial expert. The designation
or identification of a person as an audit committee financial expert does not
impose on such person any duties, obligations, or liabilities that are greater
than the duties, obligations, and liabilities imposed on such person as a member
of the audit committee and Board of Directors in the absence of such designation
or identification.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
- ----------
(a) The aggregate fees billed for each of the last two fiscal years for
professional services rendered by the principal accountant for the
audit of the registrant's annual financial statements or services that
are normally provided by the accountant in connection with statutory
and regulatory filings or engagements for those fiscal years are
$15,500 and $14,500 for the fiscal years ended March 31, 2006 and March
31, 2005, respectively.
Audit-Related Fees
- ------------------
(b) There were no fees billed in each of the last two fiscal years for
assurance and related services by the principal accountant that are
reasonably related to the performance of the audit of the registrant's
financial statements and are not reported above in Item 4(a).
Tax Fees
- --------
(c) The aggregate fees billed in each of the last two fiscal years for
professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning are $2,500 and $2,000 for the
fiscal years ended March 31, 2006 and March 31, 2005, respectively.
All Other Fees
- --------------
(d) There were no fees billed in each of the last two fiscal years for
products and services provided by the principal accountant, other than
the services reported in paragraphs (a) through (c) of this Item.
(e)(1) The registrant's audit committee has adopted policies and procedures
relating to the pre-approval of services provided by the registrant's
principal accountant (the "Pre-Approval Policies"). The Pre-Approval
Policies establish a framework intended to assist the audit committee
in the proper discharge of its pre-approval responsibilities. As a
general matter, the Pre-Approval Policies (i) specify certain types of
audit, audit-related, tax, and other services determined to be
pre-approved by the audit committee; and (ii) delineate specific
procedures governing the mechanics of the pre-approval process,
including the approval and monitoring of audit and non-audit service
fees. Unless a service is specifically pre-approved under the
Pre-Approval Policies, it must be separately pre-approved by the audit
committee.
(e)(2) The percentage of services described in each of paragraphs (b) through
(d) of this Item that were approved by the audit committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows:
(b) Not applicable.
(c) 0%
(d) Not applicable.
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees
was less than fifty percent.
(g) There were no non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by,
or under common control with the adviser that provides ongoing services
to the registrant for each of the last two fiscal years of the
registrant.
(h) Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant has a separately designated audit committee consisting of all the
independent directors of the registrant. The members of the audit committee are:
John Gilray Christy, Morris Lloyd, Jr. and J. Lawrence Shane.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments in securities of unaffiliated issuers as of the close of
the reporting period is included as part of the report to shareholders filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Registrant has delegated the voting of proxies relating to its voting
securities to its investment adviser, MBIA Capital Management Corp. (the
"Adviser"). The Proxy Voting Policies and Procedures of the Adviser (the "Proxy
Voting Policies") are included hereto.
PROXY VOTING POLICY
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For
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MBIA Capital Management Corp.
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and Its Affiliated Registered Investment Advisers
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Introduction
- ------------
This Proxy Voting Policy ("Policy") for MBIA Capital Management Corp.
and its affiliated registered investment advisers ("MBIA-CMC") reflects our duty
as a fiduciary under the Investment Advisers Act of 1940 (the "Advisers Act") to
vote proxies in the best interests of our clients. In addition, the Department
of Labor views the fiduciary act of managing ERISA plan assets to include the
voting of proxies. Proxy voting decisions must be made solely in the best
interests of the pension plan's participants and beneficiaries. The Department
of Labor has interpreted this requirement as prohibiting a fiduciary from
subordinating the retirement income interests of participants and beneficiaries
to unrelated objectives. The guidelines in this Policy have been formulated to
ensure decision-making consistent with these fiduciary responsibilities.
Any general or specific proxy voting guidelines provided by an advisory
client or its designated agent in writing will supercede the specific guidelines
in this Policy. MBIA-CMC will disclose to our advisory clients information about
this Policy as well as disclose to our clients how they may obtain information
on how we voted their proxies. Additionally, MBIA will maintain proxy voting
records for our advisory clients consistent with the Advisers Act. For those of
our clients that are registered investment companies, MBIA-CMC will disclose
this Policy to the shareholders of such funds and make filings with the
Securities and Exchange Commission and make available to fund shareholders the
specific proxy votes that we cast in shareholder meetings of issuers of
portfolio securities in accordance with the rules and regulations under the
Investment Company Act of 1940.
Registered investment companies that are advised by MBIA-CMC as well as
certain of our advisory clients: may participate in securities lending programs,
which may reduce or eliminate the amount of shares eligible for voting by
MBIA-CMC in accordance with this Policy if such shares are out on loan and
cannot be recalled in time for the vote.
Implicit in the initial decision to retain or invest in the security of
a corporation is approval of its existing corporate ownership structure, its
management, and its operations. Accordingly, proxy proposals that would change
the existing status of a corporation will be reviewed carefully and supported
only when it seems clear that the proposed changes are likely to benefit the
corporation and its shareholders. Notwithstanding this favorable predisposition,
management will be assessed on an ongoing basis both in terms of its business
capability and its dedication to the shareholders to ensure that our continued
confidence remains warranted. If it is determined that management is acting on
its own behalf instead of for the well being of the corporation, we will vote to
support shareholder proposals, unless other mitigating circumstances are
present.
Additionally, situations may arise that involve an actual or-perceived
conflict of interest. For example, we may manage- assets of a pension plan of a
company whose management is soliciting proxies, or a MBIA-CMC employee may have
a close relative who serves as a director or executive of a company that is
soliciting proxies. In all cases, the manner in which we vote proxies must be
based on our clients' best interests and not the product of the conflict.
This Policy and its attendant recommendations attempt to generalize a
complex subject. It should be clearly understood that specific fact situations,
including differing voting practices in jurisdictions outside the United States,
might warrant departure from these guidelines. In such instances, the relevant
facts will be considered, and if a vote contrary to these guidelines is
indicated it will be cast and the reasons therefore recorded in writing.
Section I of the Policy describes proxy proposals that may be
characterized as routine and lists examples of the types of proposals we would
typically support. Section II of the Policy describes various types of
non-routine proposals and provides general voting guidelines. These non-routine
proposals are categorized as those involving:
A Social Issues,
B. Financial/Corporate Issues, and
C. Shareholder Rights.
Finally, Section III of the Policy describes the procedures to be
followed casting: a vote pursuant to these guidelines.
SECTION I
ROUTINE MATTERS
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Routine proxy proposals, amendments, or resolutions are typically
proposed by management and meet the following criteria:
1. They do not measurably change the structure, management control, or
operation of the corporation.
2. They are consistent with industry standards as well as the corporate
laws of the state of incorporation.
Voting Recommendation
---------------------
MBIA-CMC will normally support the following routine proposals:
1. To increase authorized common shares.
2. To increase authorized preferred shares as long as there are not
disproportionate voting rights per preferred share.
3. To elect or re-elect directors.
4 To appoint or elect auditors.
5. To approve indemnification of directors and limitation of directors'
liability.
6. To establish compensation levels.
7. To establish employee stock purchase or ownership plans.
8. To set time and location of annual meeting.
SECTION II
NON-ROUTINE PROPOSALS
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A. Social Issues
-------------
Proposals in this category involve issues of social conscience. They are
typically proposed by shareholders who believe that the corporation's internally
adopted policies are ill advised or misguided.
Voting Recommendation
---------------------
If we have determined that management is generally socially responsible, we will
generally vote against the following shareholder proposals:
1. To enforce restrictive energy policies.
2. To place arbitrary restrictions on military contracting.
3. To bar or place arbitrary restrictions on trade with other countries.
4. To restrict the marketing of controversial products.
5. To limit corporate political activities.
6. To bar or restrict charitable contributions.
7. To enforce a general policy regarding human rights based on arbitrary
parameters.
8. To enforce a general policy regarding employment practices based on
arbitrary parameters.
9. To enforce a general policy regarding animal rights based on arbitrary
parameters.
10. To place arbitrary restrictions on environmental practices.
B. Financial/Corporate Issues
--------------------------
Proposals in this category are usually offered by management and seek
to change a corporation's legal, business or financial structure.
Voting, Recommendation
----------------------
We will generally vote in favor of the following management proposals provided
the position of current shareholders is preserved or enhanced:
1. To change the state of incorporation.
2. To approve mergers, acquisitions or dissolution.
3. To institute indenture changes.
4. To change capitalization.
C. Shareholder Rights
------------------
Proposals in this category are made regularly both by management and
shareholders. They can be generalized as involving issues that transfer or
realign board or shareholder voting power.
We typically would oppose any proposal aimed solely at thwarting
potential takeover offers by requiring, for example, super-majority approval. At
the same time, we believe stability and continuity promote profitability. The
guidelines in this area seek to find a middle road, and they are no more than
guidelines. Individual proposals may have to be carefully assessed in the
context of their particular circumstances.
Voting Recommendation
---------------------
We will generally vote for the following management proposals:
1. To require majority approval of shareholders in acquisitions of a
controlling share in the corporation.
2. To institute staggered board of directors.
3. To require shareholder approval of not more than 66 70% for a proposed
amendment to the corporation's by-laws.
4. To eliminate cumulative voting.
5. To adopt anti-greenmail charter or by-law amendments or to otherwise
restrict a company's ability to make greenmail payments.
6. To create a dividend reinvestment program.
7. To eliminate preemptive rights.
8. To eliminate any other plan or procedure designed primarily to
discourage a takeover or other similar action (commonly known as a
"poison pill").
We will generally vote against the following management proposals:
-------
1. To require greater than 66 2/3% shareholder approval for a proposed
amendment to the corporation's by-laws ("super-majority provisions").
2. To require that an arbitrary fair price be offered to all shareholders
that is derived from a fixed formula ("fair price amendments").
3. To authorize a new class of common stock or preferred stock which may
have more votes per share than the existing common stock.
4. To prohibit replacement of existing members of the board of directors.
5. To eliminate shareholder action by written consent without a
shareholder meeting.
6. To allow only the board of directors to call a shareholder meeting or
to propose amendments to the articles of incorporation.
7. To implement any other action or procedure designed primarily to
discourage a takeover or other similar action (commonly known as a
"poison pill").
8. To limit the ability of shareholders to nominate directors.
We will generally vote for the following shareholder proposals:
1. To rescind share purchases rights or require that they be submitted for
shareholder approval, but only if the vote required for approval is not
more than 66 2/3%.
2. To opt out of state anti-takeover laws deemed to be detrimental to the
shareholder.
3. To change the state of incorporation for companies operating under the
umbrella of anti-shareholder state corporation laws if another state is
chosen with favorable laws in this and other areas.
4. To eliminate any other plan or procedure designed primarily to
discourage a takeover or other similar action.
5. To permit shareholders to participate in formulating management's proxy
and the opportunity to discuss and evaluate management's director
nominees, and/or to nominate shareholder nominees to the board.
6. To require that the board's audit, compensation, and/or nominating
committees be comprised exclusively of independent directors.
7. To adopt anti-greenmail charter or by-law amendments or otherwise
restrict a company's ability to make greenmail payments.
8. To create a dividend reinvestment program.
9. To recommend that votes to "abstain" not be considered votes "cast" at
an annual meeting or special meeting, unless required by state, law.
10. To require that "golden parachutes" be submitted for shareholder
ratification.
We will generally vote against the following shareholder proposals:
1. To restore preemptive rights.
2. To restore cumulative voting.
3. To require annual election of directors or to specify tenure.
4. To eliminate a staggered board of directors.
5. To require confidential voting.
6. To require directors to own a minimum amount of company stock in order
to qualify as a director or to remain on the board.
7. To dock director pay for failing to attend board meetings.
SECTION III
VOTING PROCESS
--------------
MBIA-CMC has engaged Institutional Shareholder Services ("ISS") to
assist us in the voting of proxies. These guidelines have been provided to ISS,
who then analyzes all proxy solicitations we receive for our clients and advises
us how, based upon our guidelines, the relevant votes should be cast. The ISS
recommendations are set out in a report that is provided to the relevant
Portfolio Management Group team, who must approve the proxy vote in writing and
return such written approval to the Operations Group. If any authorized member
of a Portfolio Manager Group team desires to vote in a manner that differs than
what these general guidelines would recommend (an "Override Vote"), the reason
for such Override Vote shall be noted .in the written approval form A copy of
the written approval form is attached as an exhibit. The head of each relevant
Portfolio Management Group team is responsible for linking sure that proxies are
voted in a timely manner. The Brokerage Allocation Committee shall receive
regular reports of all proxy votes cast to review how proxies have been voted,
including reviewing Override Votes and votes that may have involved a potential
conflict of interest. The Committee shall also review these guidelines from time
to time to determine their continued appropriateness and whether any changes to
the guidelines or the proxy voting process should be made.
IF THERE IS ANY POSSIBILITY THAT THE VOTE MAY INVOLVE A POTENTIAL
CONFLICT OF INTEREST BECAUSE, FOR EXAMPLE, THE ISSUER SOLICITING THE VOTE IS A
MBIA-CMC CLIENT OR THE MATTER BEING VOTED ON INVOLVES MBIA-CMC OR ANY OF ITS
AFFILIATES (INCLUDING AN EMPLOYEE OR REPRESENTATIVE), PRIOR TO APPROVING SUCH
VOTE, THE BROKERAGE ALLOCATION COMMITTEE MUST BE CONSULTED AND THE MATTER
DISCUSSED. The Committee, in consultation with the Legal and Compliance
Department, shall determine whether the potential conflict is material and if
so, the appropriate method to resolve such conflict, based on the particular
facts and circumstances, the importance of the proxy issue, whether the
Portfolio Management Group team is proposing an Override Vote with respect to
the issue and the nature of the conflict, so as to ensure that the voting of the
proxy is not affected by the potential conflict. If the conflict is
determined-not to be material, the relevant Portfolio Management Group team
shall vote the proxy in accordance with this Policy. Determinations of the
Committee with respect to votes involving material conflicts of interest shall
be documented in writing and maintained for a period of at least six years.
With respect to votes in connection with securities held on a
particular record date but sold from a client account prior to the holding of
the related meeting, MBIA-CMC will take no action on all proposals to be voted
on in such meeting.
With respect to voting proxies of non-U.S. companies, a number of
logistical problems may arise that may have 'a detrimental effect on MBIA-CMC's
ability to vote such proxies in the best interests of our clients. These
problems include, but are not limited to, proxy statements and ballots being
written in a language other than English, (ii) untimely and/or inadequate notice
of shareholder meetings, (iii) restrictions on the ability of holders outside
the issuer's jurisdiction of organization to exercise votes, (iv) requirements
to vote proxies in person, (v) the imposition of restrictions on the sale of the
securities for a period of time in proximity to the shareholder meeting, and
(vi) requirements to provide local agents with power of attorney to facilitate
the voting instructions. Accordingly, MBIA-CMC may conduct a cost-benefit
analysis in determining whether to attempt to vote its clients' shares at a
non-U.S. company's meeting, whereby if it is determined that the cost or other
restrictions associated with the attempt to exercise its vote outweighs the
benefit MBIA-CMC believes its clients will derive by voting on the company's
proposal, MBIA-CMC may decide not to attempt to vote at the meeting.
Any questions regarding this Policy may be directed to the General Counsel of
MBIA-CMC.
****
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1) Portfolio Manager:
Robert T. Claiborne, CFA,
Director, MBIA Capital Management Corp.
January 2000 - Present
Responsible for day-to-day management of portfolio
Portfolio Manager:
Gautam Khanna, CPA, CFA
Director, MBIA Capital Management Corp.
May 2003 - Present
Responsible for day-to-day management of portfolio
Prior to joining MBIA, Mr. Khanna was an analyst with TimesSquare
Capital in NY, NY.
(a)(2)(i) Robert T. Claiborne, CFA
(ii) (A) Registered investment companies - 0
(B) Other pooled investment vehicles - 0
(C) Other Accounts - CDOs -5. Approximately $2.7 billion in total
assets. The five CDO portfolios are co-managed with another
Portfolio Manager who has no investment responsibilities for
the 1838 Bond Debenture Fund.
(iii) See (ii)
(iv) No material conflicts of interests are expected to arise with the
management of the 1838 Bond Debenture Fund and the CDO portfolios as
the CDO portfolios have very specific requirements under the
respective Indentures for purchases. Three of the CDO portfolios are
cash portfolios and all are in their amortization period. Two CDOs
are synthetic and invest only in credit default swaps. The two
synthetic CDOs mature in June 2007 and October 2007, respectively.
Gautam Khanna - N/A
(a)(3) The Portfolio Managers each receive compensation that is composed of
a annual cash fixed salary, a variable cash bonus, and long-term
incentive compensation comprised of common stock options and
restricted stock of MBIA Inc. The cash salary level is adjusted
annually. The cash bonus and long term incentive compensation is
determined annually and is based on a combination of the overall
performance of MBIA Inc., the overall performance of MBIA Asset
Management and the individual Portfolio Managers' contribution to
that performance. Compensation is not based on any specific
performance criteria of any of the portfolios managed.
(a)(4) The Portfolio Managers do not own any equity securities of the
registrant as of March 31, 2006.
(b) N/A. Filing is an annual report.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR
240.14a-101), or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these controls
and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d)) that occurred during the registrant's second fiscal
quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) 1838 Bond-Debenture Trading Fund
--------------------------------------------------------------------
By (Signature and Title)* /s/ Clifford D. Corso
----------------------------------------------------
Clifford D. Corso, President
(principal executive officer)
Date May 15, 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.
By (Signature and Title)* /s/ Clifford D. Corso
----------------------------------------------------
Clifford D. Corso, President
(principal executive officer)
Date May, 15, 2006
____________________________________________________________________________
By (Signature and Title)* /s/ Marc D. Morris
----------------------------------------------------
Marc D. Morris, Treasurer
(principal financial officer)
Date May 15, 2006
____________________________________________________________________________
* Print the name and title of each signing officer under his or her signature.