<Page>
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 811-02145
Lord Abbett Bond Debenture Fund, Inc.
-------------------------------------
(Exact name of Registrant as specified in charter)
90 Hudson Street, Jersey City, NJ 07302
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(Address of principal executive offices) (zip code)
Christina T. Simmons, Vice President & Assistant Secretary
90 Hudson Street, Jersey City, NJ 07302
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(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 201-6984
--------------
Date of fiscal year end: 12/31/2003
Date of reporting period: 12/31/2003
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ITEM 1. Report to Shareholders.
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[LORD ABBETT LOGO]
2003
ANNUAL
REPORT
LORD ABBETT
BOND-DEBENTURE FUND
FOR THE YEAR ENDED DECEMBER 31, 2003
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LORD ABBETT BOND-DEBENTURE FUND
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
DEAR SHAREHOLDER: We are pleased to provide you with this twelve-month overview
of the Lord Abbett Bond-Debenture Fund's (the Fund) strategies and performance
for the fiscal year ended December 31, 2003. On this and the following pages, we
discuss the major factors that influenced performance.
Thank you for investing in Lord Abbett Mutual Funds. We value the trust that
you place in us and look forward to serving your investment needs in the years
to come.
BEST REGARDS,
/s/ Robert S. Dow
ROBERT S. DOW
CHAIRMAN
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Q. WHAT WERE THE OVERALL MARKET CONDITIONS DURING THE REPORTING PERIOD?
A. War and general geopolitical concerns had a largely negative effect on the
sentiment of businesses and consumers during the first part of the year.
Corporations began the period cautiously and remained wary, selling existing
inventories and implementing layoffs, as the economy continued to decelerate.
But, as the coalition's war effort made clear progress in the early spring, the
fog of global uncertainty lifted, and broad equity indices experienced
meaningful advances.
In June, the Federal Reserve Board (the Fed) cut interest rates 25 basis
points to 1%, bringing interest rates to levels not seen in over 40 years. Also
during the second quarter of 2003, President Bush signed into law a tax
reform/economic stimulus package with accelerated tax cuts and dividend
exclusions. Both measures were intended to strengthen the nascent economic
recovery. Unemployment remained stubbornly high, however, reaching 6.4% by June.
The U.S. economy showed signs of improvement in the third quarter of 2003.
Gross domestic product, a measure of economic strength, expanded at a reported
8.2% rate, annualized--the fastest growth rate in 20 years. The U.S. dollar
weakened against the euro throughout the period, making U.S. products more
competitive in world markets. Corporate profits also grew, sparking the equity
markets and adding to the market gains experienced in the second quarter. As the
economy entered the final months of 2003, unemployment numbers improved, falling
to 5.7% in December. Productivity data remained strong.
In the fixed-income markets, equity-sensitive bonds--such as corporate bonds
and convertible securities--also responded positively, reflecting improvements
in reported profits, greater cash flow and continued balance sheet repair in the
corporate sector.
One of the driving forces behind positive performance in the corporate bond
sector was investors' continued
1
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search for yield in a low interest-rate environment. Willingness to take on risk
to achieve additional yield was most evident in the high-yield bond market,
where mutual funds experienced record inflows in 2003. Lower credit-quality
sectors outperformed investment-grade over much of the year. Emerging market
bonds also attracted investors for the same reason.
For government bonds, however, the fiscal year was a more tumultuous one,
framed not only by geopolitical events and economic reports, but also by
uncertainty about the Fed's monetary policy. Despite a high level of volatility
in the summer, yields on the benchmark 10-year Treasury bond ended the year at
levels not far from where they had been 12 months earlier, about 4.25%.
Q. HOW DID THE FUND PERFORM FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003?
A. The Fund returned 20.3%, reflecting the performance for the year ended
December 31, 2003 at the Net Asset Value (NAV) of Class A shares with all
distributions reinvested for the period. The Fund's benchmark, the Lehman
Aggregate Bond Index,(1) returned 4.1% for the same period. STANDARDIZED AVERAGE
ANNUAL TOTAL RETURNS, which reflect performance at the maximum 4.75% sales
charge applicable to Class A share investments and include the reinvestment of
all distributions, as of December 31, 2003 are: 1 Year: 14.55%, 5 Years: 4.13%
and 10 Years: 6.14%.
Q. WHAT WERE THE MOST SIGNIFICANT FACTORS AFFECTING PERFORMANCE?
A. The Fund's flexible investment strategy allows its investment managers to
adjust allocations among asset classes as market conditions change. The primary
asset classes in which the Fund may participate are high-yield bonds and
convertible securities. In addition, the Fund must hold 20% of its net assets in
investment-grade corporate bonds, government bonds and/or agencies. The Fund may
also invest up to 20% of its net assets in stocks.
Relative to its benchmark, the Lehman Aggregate Bond Index, the Fund was
significantly underweight in U.S. Treasury bonds and other government securities
during the period--a fact that contributed to performance, as investment-grade
bonds in general significantly underperformed lower-rated credits over the same
period. The Fund also invested in stocks, an asset class not represented in its
benchmark. This also contributed to performance, as equity markets rose over
much of the year.
Reflecting an expectation of a strengthening economy, rising equity markets,
and increased pressure to raise
(1) Lehman Aggregate Bond Index represents securities that are U.S. domestic,
taxable, non-convertible and dollar denominated. The Index covers the
investment-grade, fixed-rate bond market, with index components for government
and corporate securities, mortgage pass-through securities, and asset-backed
securities. Indices are unmanaged, do not reflect the deduction of fees or
expenses and are not available for direct investment.
2
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interest rates, the Fund's strategy throughout the period was three-fold: 1)
enhance the equity-sensitive portion of the portfolio, including high-yield
bonds and convertible securities; 2) de-emphasize interest-rate sensitive
investments, such as government bonds, while adding more credit-sensitive
securities, i.e. bonds of companies where positive catalysts offered the
potential for improved credit quality; and 3) reduce or eliminate lower-yielding
Treasury bonds while selectively adding higher-yielding, lower-quality credits,
particularly CCC rated credits. All three strategies contributed to performance
for the period.
The Fund's participation in the CCC credits, the lower-quality end of the
high-yield bond asset class, has never been significant, given its volatility.
Nor would a significant position be consistent with the Fund's focus, which is
not purely high yield and requires that at least 20% of its asset allocation be
in investment-grade securities. Nonetheless, given the extraordinary performance
of this sector throughout 2003, a number of select CCC rated bonds that met Lord
Abbett's rigorous credit analysis were added to the portfolio. The portfolio's
weighting in CCC rated bonds was 7.5% at the end of 2003, up from 2.8% at the
beginning of the year.
High-yield bonds are equity-sensitive, tending to improve in price as
corporate profits grow, balance sheets strengthen and credit quality improves.
Contributing to performance in the period were the Fund's positions in the
high-yield bonds of companies in the cable, telecommunications, airlines and
auto parts industries. Detracting from performance in the high-yield sector were
select credits in chemicals, metals and mining, textile and health services.
A rising equity market drove returns to attractive levels in another
equity-sensitive market, convertible securities, where positive performance was
broad based, including securities in the metals and mining, electric generation,
leisure and telecommunication industries. Detracting from performance were
select credits of companies in energy exploration and production, computer
hardware and non-electric utilities.
The Fund's flexible investment strategy also included an allocation to stocks
in the fiscal year. The Fund's portfolio managers worked with Lord Abbett's
equity specialists to identify value companies, particularly in the U.S.
large-cap sector. Companies in the large-cap sector typically have an
international presence and may find their competitive position improving as the
U.S. dollar weakens. Positive performance was broad-based here as well and
included the stocks of select companies in wireless telecommunications, software
services, banking, metals and mining and machinery industries. Detracting from
performance in the equity portion were positions in electronics, diversified
capital
3
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goods and pharmaceuticals, especially a single pharmaceutical firm where
expiring patents depressed returns; these were not industry stories, as stocks
in these same categories also added to performance in the period.
Performance in the high-grade investment sector was positive overall with
particular strength in financial services, media services, cable, beverage and
telecommunications sectors. The Fund had minimal to no exposure to the
low-yielding government bond market during the fiscal year. The Fund's portfolio
is actively managed and, therefore, its holdings are subject to change. Sectors
may include many industries.
IMPORTANT PERFORMANCE AND OTHER INFORMATION
The views of the Fund's management and the portfolio holdings described in this
report are as of December 31, 2003; these views and portfolio holdings may have
changed subsequent to this date and they do not guarantee the future performance
of the markets or the Fund. Information provided in this report should not be
considered a recommendation to purchase or sell securities.
A NOTE ABOUT RISK: See Notes to Financial Statements for a discussion of
investment risks. For a more detailed discussion of the risks associated with
the Fund, please see the Fund's Prospectus.
PERFORMANCE: PERFORMANCE DATA QUOTED ABOVE IS HISTORICAL. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN
THE PERFORMANCE DATA QUOTED. BECAUSE OF ONGOING MARKET VOLATILITY, FUND
PERFORMANCE MAY BE SUBJECT TO SUBSTANTIAL FLUCTUATION. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT IN THE FUND WILL FLUCTUATE SO THAT SHARES, ON
ANY GIVEN DAY OR WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Except where noted, comparative Fund performance does not account for the
deduction of sales charges and would be different if sales charges were
included. The Fund offers additional classes of shares with distinct pricing
options. For a full description of the differences in pricing alternatives,
please see the Fund's Prospectus.
YOU CAN OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH END (AVAILABLE
WITHIN SEVEN BUSINESS DAYS OF THE MOST RECENT MONTH END) BY CALLING LORD ABBETT
AT 800-821-5129 OR REFERRING TO OUR WEBSITE AT www.LordAbbett.com.
THE PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE FUND INCLUDING THE
FUND'S INVESTMENT OBJECTIVES, RISKS, CHARGES AND ONGOING EXPENSES THAT YOU
SHOULD CAREFULLY CONSIDER BEFORE INVESTING. TO OBTAIN A PROSPECTUS ON THIS FUND
OR ANY LORD ABBETT MUTUAL FUND, PLEASE CALL YOUR INVESTMENT PROFESSIONAL OR LORD
ABBETT DISTRIBUTOR LLC AT 800-874-3733 OR VISIT www.LordAbbett.com. READ THE
PROSPECTUS CAREFULLY BEFORE INVESTING.
MUTUAL FUNDS ARE NOT INSURED BY THE FDIC, ARE NOT DEPOSITS OR OTHER OBLIGATIONS
OF, OR GUARANTEED BY BANKS, AND ARE SUBJECT TO INVESTMENT RISKS INCLUDING
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
4
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INVESTMENT COMPARISON
Below is a comparison of a $10,000 investment in Class A shares with the same
investment in the Lehman Aggregate Bond Index and Credit Suisse First Boston
High Yield Index, assuming reinvestment of all dividends and distributions. The
performance of other classes will be greater than or less than the performance
shown in the graph below due to different sales loads and expenses applicable to
such classes. The graph and performance table below do not reflect the deduction
of taxes that a shareholder would pay on fund distributions or the redemption of
fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
[CHART]
<Table>
THE FUND (CLASS A SHARES) THE FUND (CLASS A SHARES) LEHMAN AGGREGATE CREDIT SUISSE FIRST
AT NET ASSET VALUE AT MAXIMUM OFFERING PRICE(1) BOND INDEX(2) BOSTON HIGH YIELD INDEX(2)
12/31/93 $ 10,000 $ 9,525 $ 10,000 $ 10,000
12/31/94 $ 9,613 $ 9,156 $ 9,708 $ 9,903
12/31/95 $ 11,295 $ 10,759 $ 11,501 $ 11,624
12/31/96 $ 12,556 $ 11,959 $ 11,919 $ 13,068
12/31/97 $ 14,149 $ 13,477 $ 13,069 $ 14,718
12/31/98 $ 14,823 $ 14,119 $ 14,204 $ 14,803
12/31/99 $ 15,401 $ 14,669 $ 14,088 $ 15,289
12/31/2000 $ 15,268 $ 14,543 $ 15,726 $ 14,492
12/31/2001 $ 16,010 $ 15,250 $ 17,054 $ 15,330
12/31/2002 $ 15,837 $ 15,085 $ 18,802 $ 15,806
12/31/2003 $ 19,049 $ 18,144 $ 19,572 $ 20,223
</Table>
FISCAL YEAR-END 12/31
AVERAGE ANNUAL TOTAL RETURN AT MAXIMUM APPLICABLE
SALES CHARGE FOR THE PERIODS ENDED DECEMBER 31, 2003
<Table>
<Caption>
1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS
CLASS A(3) 14.55% 4.13% 6.14% --
CLASS B(4) 15.43% 4.35% -- 6.03%
CLASS C(5) 19.43% 4.49% -- 6.18%
CLASS P(6) 20.10% 5.29% -- 5.26%
CLASS Y(7) 20.58% 5.53% -- 4.88%
</Table>
(1) Reflects the deduction of the maximum initial sales charge of 4.75%.
(2) Performance for each unmanaged index does not reflect transaction costs,
management fees or sales charges. The performance of the indices is not
necessarily representative of the Fund's performance.
(3) Total return, which is the percentage change in net asset value, after
deduction of the maximum sales charge of 4.75% applicable to Class A shares,
with all dividends and distributions reinvested for the periods shown ended
December 31, 2003 using the SEC-required uniform method to compute such
return.
(4) Class B shares were first offered on August 1, 1996. Performance reflects
the deduction of a CDSC of 4% for 1 year, 0% for 5 years and for the life of
the class.
(5) Class C shares were first offered on July 15, 1996. The 1% CDSC for Class C
shares normally applies before the first anniversary of the purchase date.
Performance is at net asset value.
(6) Class P shares commenced operations on August 21, 1998. Performance is at
net asset value.
(7) Class Y shares commenced operations on March 27, 1998. Performance is at net
asset value.
5
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SCHEDULE OF INVESTMENTS
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 94.44%
ASSET-BACKED SECURITIES 0.14%
AIRLINES 0.14%
Continental Airlines 1997-1 B
(Cost $10,553,192) 7.461% 4/1/2013 $ 13,093 $ 11,450,708
---------------
<Caption>
SHARES
(000)
------
COMMON STOCKS 6.27%
AGRICULTURE 0.04%
Archer-Daniels-Midland Co. 200 3,044,000
---------------
BANKING 0.43%
Bank of New York Co., Inc. 375 12,420,000
Wachovia Corp.^ 500 23,295,000
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TOTAL 35,715,000
---------------
BEVERAGE 0.26%
PepsiCo, Inc.^ 450 20,979,000
---------------
CHEMICALS 0.69%
E.I. du Pont de Nemours & Co.^ 500 22,945,000
Eastman Chemical Co. 275 10,870,750
Praxair, Inc. 600 22,920,000
---------------
TOTAL 56,735,750
---------------
COMPUTER HARDWARE 0.13%
Apple Computer, Inc.* 500 10,685,000
---------------
DIVERSIFIED CAPITAL GOODS 0.26%
3M Co.^ 250 21,257,500
---------------
ELECTRIC-INTEGRATED 0.25%
Northeast Utilities^ 1,000 20,170,000
---------------
ELECTRONICS 0.53%
Emerson Electric Co. 375 24,281,250
Hubbell, Inc.^ 350 15,435,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
SHARES
INVESTMENTS (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
Mentor Graphics Corp.*^ 250 $ 3,635,000
---------------
TOTAL 43,351,250
---------------
ENERGY - EXPLORATION & PRODUCTION 0.14%
Exxon Mobil Corp.^ 275 11,275,000
---------------
FOOD - WHOLESALE 0.49%
Conagra Foods, Inc.^ 250 6,597,500
General Mills, Inc.^ 200 9,060,000
Kellogg Co.^ 650 24,752,000
---------------
TOTAL 40,409,500
---------------
FORESTRY/PAPER 0.22%
International Paper Co.^ 350 15,088,500
Plum Creek Timber Co., Inc. 100 3,045,000
---------------
TOTAL 18,133,500
---------------
HEALTH SERVICES 0.06%
Pharm Product Development, Inc.*^ 200 5,394,000
---------------
INTEGRATED ENERGY 0.32%
ChevronTexaco Corp.^ 300 25,917,000
---------------
METALS/MINING 0.29%
Alcoa, Inc.^ 500 19,000,000
Placer Dome, Inc.(a) 250 4,477,500
---------------
TOTAL 23,477,500
---------------
MULTI-LINE INSURANCE 0.23%
MetLife, Inc.^ 450 15,151,500
SAFECO Corp. 100 3,893,000
---------------
TOTAL 19,044,500
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NON-ELECTRIC UTILITIES 0.12%
National Fuel Gas Co.^ 300 7,332,000
Semco Energy, Inc. 489 2,395,027
---------------
TOTAL 9,727,027
---------------
OIL REFINING & MARKETING 0.12%
Anadarko Petroleum Corp.^ 200 10,202,000
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</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
SHARES
INVESTMENTS (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 0.30%
Merck & Co., Inc. 350 $ 16,170,000
Mylan Laboratories, Inc. 350 8,841,000
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TOTAL 25,011,000
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PRINTING & PUBLISHING 0.19%
Tribune Co.^ 300 15,480,000
---------------
RAILROADS 0.18%
Union Pacific Corp. 210 14,590,800
---------------
REAL ESTATE INVESTMENT TRUSTS 0.36%
Healthcare Realty Trust, Inc. 150 5,362,500
Simon Property Group, Inc. 517 23,967,511
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TOTAL 29,330,011
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RESTAURANTS 0.08%
McDonald's Corp. 250 6,207,500
---------------
SOFTWARE/SERVICES 0.30%
Automatic Data Processing, Inc. 375 14,853,750
BEA Systems, Inc.*^ 300 3,690,000
EMC Corp.*^ 450 5,814,000
---------------
TOTAL 24,357,750
---------------
TELECOM - INTEGRATED/SERVICES 0.27%
Amdocs Ltd.*(a) 200 4,496,000
Verizon Communications, Inc.^ 500 17,540,000
---------------
TOTAL 22,036,000
---------------
TELECOM - WIRELESS 0.01%
Nextel Communications, Inc.*^ 40 1,130,257
---------------
TOTAL COMMON STOCKS (Cost $443,763,969) 513,660,845
===============
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000)
-------------------------------------
CONVERTIBLE BONDS 10.57%
AEROSPACE/DEFENSE 0.54%
EDO Corp. 5.25% 4/15/2007 $ 15,000 16,818,750
L-3 Comm Hldgs. Corp.^ 4.00% 9/15/2011 25,000 27,468,750
---------------
TOTAL 44,287,500
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</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
AUTO PARTS & EQUIPMENT 0.10%
Deutsche Bank Financial 2.75% 2/8/2008 $ 8,500 $ 8,457,500
---------------
COMPUTER HARDWARE 0.35%
ASML Holding N.V.(a) 5.75% 10/15/2006 15,000 19,725,000
Maxtor Corp. 6.80% 4/30/2010 6,000 8,602,500
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TOTAL 28,327,500
---------------
DIVERSIFIED CAPITAL GOODS 0.27%
Tyco Int'l. Group(a) 2.75% 1/15/2018 17,500 22,421,875
---------------
ELECTRONICS 1.25%
Artesyn Tech, Inc. 5.50% 8/15/2010 4,750 6,471,875
Flir Systems, Inc.+ 3.00% 6/1/2023 10,000 11,050,000
LSI Logic Corp. 4.00% 11/1/2006 5,000 4,912,500
Micron Technology, Inc. 2.50% 2/1/2010 16,000 21,240,000
RF Micro Devices, Inc. 1.50% 7/1/2010 11,250 17,071,875
St Microelectronics N.V.(a)(d) Zero Coupon 7/5/2013 17,500 18,742,797
Teradyne, Inc. 3.75% 10/15/2006 20,000 23,100,000
---------------
TOTAL 102,589,047
---------------
ENERGY - EXPLORATION & PRODUCTION 0.23%
Kerr-McGee Corp. 5.25% 2/15/2010 18,005 19,062,794
---------------
FOOD - WHOLESALE 0.32%
Nestle Hldgs., Inc. 3.00% 5/9/2005 23,000 26,622,500
---------------
HEALTH SERVICES 0.96%
Abgenix, Inc. 3.50% 3/15/2007 5,000 4,668,750
Lehman Brothers Holdings, Inc. 0.25% 5/27/2008 10,000 10,000,000
Lifepoint Hospitals Holdings 4.50% 6/1/2009 30,000 30,262,500
Medtronic, Inc. 1.25% 9/15/2021 500 514,375
Universal Hlth Services, Inc. 0.426% 6/23/2020 50,000 33,187,500
---------------
TOTAL 78,633,125
---------------
HOUSEHOLD & LEISURE PRODUCTS 0.23%
Costco Cos., Inc. Zero Coupon 8/19/2017 22,000 18,727,500
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
INVESTMENTS & MISCELLANEOUS
FINANCIAL SERVICES 0.23%
Lehman Brothers Holdings 0.25% 6/24/2008 $ 18,000 $ 18,450,000
---------------
MEDIA - BROADCAST 0.07%
Sinclair Broadcast Group, Inc. 4.875%# 7/15/2018 5,000 5,518,750
---------------
MEDIA - DIVERSIFIED 0.98%
Interpublic Group of Cos., Inc. 1.87% 6/1/2006 19,025 17,645,688
Liberty Media Corp. Class A 3.25% 3/15/2031 27,000 28,215,000
Mediacom Communications Corp. 5.25% 7/1/2006 10,600 10,308,500
The Walt Disney Co. 2.125% 4/15/2023 23,000 24,466,250
---------------
TOTAL 80,635,438
---------------
MEDIA - SERVICES 0.38%
Lamar Advertising Co. 2.875% 12/31/2010 30,000 30,900,000
---------------
OIL FIELD EQUIPMENT & SERVICES 0.25%
Parker Drilling Co. 5.50% 8/1/2004 20,000 20,075,000
---------------
PHARMACEUTICALS 0.98%
Amgen, Inc. Zero Coupon 3/1/2032 10,000 7,587,500
Cell Therapeutics, Inc. 5.75% 6/15/2008 2,998 3,095,435
Cephalon, Inc. 2.50% 12/15/2006 12,500 11,984,375
Enzon Pharmaceuticals, Inc.^ 4.50% 7/1/2008 15,000 13,237,500
Gilead Sciences, Inc. 2.00% 12/15/2007 8,500 11,645,000
Teva Pharmaceutical Industries(a) 0.375% 11/15/2022 19,100 26,596,750
Vertex Pharmaceuticals, Inc. 5.00% 9/19/2007 7,000 6,247,500
---------------
TOTAL 80,394,060
---------------
PROPERTY & CASUALTY 0.13%
First American Corp. 4.50% 4/15/2008 9,500 10,663,750
---------------
REAL ESTATE INVESTMENT TRUSTS 0.16%
EOP Operating LP 7.25%# 11/15/2008 12,000 12,750,000
---------------
SOFTWARE/SERVICES 1.93%
Affiliated Computers Services, Inc. 3.50% 2/15/2006 12,500 15,875,000
BEA Systems, Inc.^ 4.00% 12/15/2006 14,000 14,122,500
Documentum, Inc. 4.50% 4/1/2007 14,000 16,747,500
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
First Data Corp.^ 2.00% 3/1/2008 $ 25,000 $ 27,187,500
Manugistics Group, Inc. 5.00% 11/1/2007 25,000 23,156,250
Mentor Graphics Corp. 6.875% 6/15/2007 21,000 22,443,750
Mercury Interactive Corp. 4.75% 7/1/2007 20,000 19,925,000
Wind River Systems, Inc. 3.75% 12/15/2006 20,000 18,750,000
---------------
TOTAL 158,207,500
---------------
SUPPORT-SERVICES 0.04%
Kroll, Inc.+(c) 1.75% 1/15/2014 3,000 3,097,500
---------------
TELECOM - WIRELESS 0.20%
Nextel Communications, Inc. 5.25% 1/15/2010 15,700 16,014,000
---------------
TELECOMMUNICATIONS EQUIPMENT 0.86%
Corning, Inc. 3.50% 11/1/2008 34,500 42,909,375
LSI Logic Corp. 4.00% 5/15/2010 25,000 27,906,250
---------------
TOTAL 70,815,625
---------------
THEATERS & ENTERTAINMENT 0.11%
Alloy, Inc.+ 5.375% 8/1/2023 9,450 9,261,000
---------------
TOTAL CONVERTIBLE BONDS (Cost $802,513,094) 865,911,964
===============
<Caption>
SHARES
(000)
------
CONVERTIBLE PREFERRED STOCKS 3.85%
AEROSPACE/DEFENSE 0.23%
Raytheon Co.^ 8.25% 350 18,998,000
---------------
AUTOMOTIVE 0.09%
Ford Motor Co. Cap. Tr. 6.50% 129 7,226,990
---------------
ELECTRIC-DISTR/TRANS 0.41%
FPL Group, Inc.^ 8.00% 600 33,894,000
---------------
ELECTRIC-INTEGRATED 0.35%
Dominion Resources, Inc.^ 9.50% 500 28,625,000
---------------
ENERGY - EXPLORATION & PRODUCTION 0.24%
Kerr-McGee Corp. 5.50% 400 19,960,000
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
INTEREST SHARES
INVESTMENTS RATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
FORESTRY/PAPER 0.25%
Temple-Inland, Inc.^ 7.50% 350 $ 20,342,000
---------------
HEALTH SERVICES 0.63%
Anthem, Inc. 6.00% 225 19,851,750
Baxter Int'l., Inc.^ 7.00% 350 19,337,500
Omnicare, Inc.^ 4.00% 200 12,750,000
---------------
TOTAL 51,939,250
---------------
HOUSEHOLD & LEISURE PRODUCTS 0.04%
Six Flags, Inc.^ 7.25% 151 3,457,900
---------------
INVESTMENTS & MISCELLANEOUS
FINANCIAL SERVICES 0.22%
Alamosa Holdings 7.50% 35 12,118,750
Doral Financial Corp.+ 4.75% 24 6,217,500
---------------
TOTAL 18,336,250
---------------
MEDIA - BROADCAST 0.21%
Sinclair Broadcast Group, Inc.^ 6.00% 340 16,779,000
---------------
METALS/MINING 0.41%
Phelps Dodge Corp.^ 6.75% 200 33,840,000
---------------
MULTI-LINE INSURANCE 0.40%
Prudential Financial, Inc.^ 6.75% 500 32,550,000
---------------
PRINTING & PUBLISHING 0.08%
Interpublic Group of Cos., Inc. 5.375% 117 6,687,010
---------------
SOFTWARE/SERVICES 0.10%
Electronic Data Systems Corp. 7.625% 350 8,025,500
---------------
TELECOM - WIRELESS 0.08%
Sprint Corp. 7.125% 856 6,079,375
---------------
TELECOMMUNICATIONS EQUIPMENT 0.11%
Motorola, Inc.^ 7.00% 200 8,686,000
---------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $288,901,354) 315,426,275
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
FOREIGN BONDS 0.27%
FOREIGN SOVEREIGN 0.27%
Republic of Panama(a) 9.375% 7/23/2012 $ 5,000 $ 5,725,000
United Mexican States^(a) 10.375% 2/17/2009 13,000 16,510,000
---------------
TOTAL FOREIGN BONDS (Cost $19,011,080) 22,235,000
===============
GOVERNMENT SPONSORED ENTERPRISES BONDS 1.05%
Federal Home Loan Mortgage Corp. 7.00% 7/15/2005 80,000 86,466,160
(Cost $82,001,509) ===============
GOVERNMENT SPONSORED ENTERPRISES PASS-THROUGHS 2.13%
Federal National Mortgage Assoc. 253114 8.00% 3/1/2030 6 6,804
Federal National Mortgage Assoc. 253346 7.50% 6/1/2030 4,230 4,521,894
Federal National Mortgage Assoc. 254008 7.00% 10/1/2031 6,206 6,572,675
Federal National Mortgage Assoc. 254240 7.00% 3/1/2032 15,197 16,096,804
Federal National Mortgage Assoc. 254312 7.00% 5/1/2032 7,081 7,499,905
Federal National Mortgage Assoc. 254904 5.50% 10/1/2033 24,713 25,055,516
Federal National Mortgage Assoc. 513651 7.00% 9/1/2029 1,611 1,707,363
Federal National Mortgage Assoc. 535145 8.00% 2/1/2030 5,248 5,681,370
Federal National Mortgage Assoc. 535281 8.00% 4/1/2030 7,861 8,510,044
Federal National Mortgage Assoc. 535669 7.00% 1/1/2031 2,275 2,409,279
Federal National Mortgage Assoc. 545278 7.50% 11/1/2031 2,573 2,750,957
Federal National Mortgage Assoc. 555592 5.50% 7/1/2033 82,326 83,465,294
Federal National Mortgage Assoc. 591467 7.00% 9/1/2031 6,405 6,783,767
Federal National Mortgage Assoc. 597060 7.00% 9/1/2031 3,252 3,443,978
---------------
TOTAL GOVERNMENT SPONSORED ENTERPRISES PASS-THROUGHS
(Cost $171,434,545) 174,505,650
===============
HIGH YIELD CORPORATE BONDS 69.26%
AEROSPACE/DEFENSE 1.22%
Alliant Techsystems, Inc. 8.50% 5/15/2011 15,000 16,575,000
DRS Tech, Inc.+ 6.875% 11/1/2013 20,000 20,650,000
Esterline Tech Corp.+ 7.75% 6/15/2013 15,000 16,200,000
L-3 Comm Hldgs Corp.+ 6.125% 1/15/2014 5,500 5,541,250
L-3 Comm Hldgs Corp. 7.625% 6/15/2012 12,500 13,609,375
Titan Corp.+^ 8.00% 5/15/2011 24,250 27,645,000
---------------
TOTAL 100,220,625
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
AIRLINES 0.39%
America West Airlines, Inc.^ 10.75% 9/1/2005 $ 10,000 $ 9,750,000
American Airlines^ 8.608% 4/1/2011 9,500 8,657,103
Delta Air Lines, Inc.^ 10.375% 2/1/2011 6,000 5,002,500
Delta Air Lines, Inc. 7.711% 9/18/2011 10,000 8,866,580
---------------
TOTAL 32,276,183
---------------
APPAREL/TEXTILES 0.33%
Dan River, Inc.+ 12.75% 4/15/2009 5,000 1,825,000
Levi Strauss & Co. 11.625% 1/15/2008 5,000 3,287,500
Oxford Industries, Inc.+ 8.875% 6/1/2011 6,000 6,592,500
Phillips-Van Heusen Corp. 8.125% 5/1/2013 5,000 5,337,500
Tommy Hilfiger USA, Inc.^ 6.85% 6/1/2008 10,000 10,075,000
---------------
TOTAL 27,117,500
---------------
AUTO LOANS 0.46%
Ford Motor Credit Corp. 7.25% 10/25/2011 35,000 38,016,720
---------------
AUTO PARTS & EQUIPMENT 2.55%
Advanced Accessory Systems 10.75% 6/15/2011 6,000 6,637,500
Arvin Meritor, Inc.^ 8.75% 3/1/2012 15,000 17,250,000
Collins & Aikman Products Co. 10.75% 12/31/2011 13,300 13,133,750
Collins & Aikman Products Co.^ 11.50% 4/15/2006 5,000 4,625,000
Cummins, Inc.+ 9.50% 12/1/2010 16,650 19,230,750
Dana Corp.^ 10.125% 3/15/2010 15,000 17,550,000
Delco Remy Int'l., Inc.^ 8.625% 12/15/2007 7,000 7,192,500
Delco Remy Int'l., Inc.^ 11.00% 5/1/2009 26,600 27,664,000
Dura Operating Corp.^ 9.00% 5/1/2009 20,000 20,100,000
Goodyear Tire & Rubber Co.^ 7.857% 8/15/2011 17,000 14,917,500
Tenneco Automotive, Inc.^ 10.25% 7/15/2013 5,000 5,712,500
Tenneco Automotive, Inc.^ 11.625% 10/15/2009 23,500 25,497,500
TRW Automotive, Inc.^ 11.00% 2/15/2013 25,000 29,562,500
---------------
TOTAL 209,073,500
---------------
AUTOMOTIVE 0.48%
General Motors Corp.^ 7.20% 1/15/2011 30,000 33,030,450
Navistar Int'l. Corp.^ 9.375% 6/1/2006 5,000 5,543,750
Venture Holding Trust(b) 9.50% 7/1/2005 10,000 300,000
---------------
TOTAL 38,874,200
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
BANKING 0.44%
Regions Financial Corp. 7.00% 3/1/2011 $ 14,000 $ 15,805,118
Wells Fargo & Co. 5.1%# 5/6/2018 20,000 20,399,120
---------------
TOTAL 36,204,238
---------------
BEVERAGE 0.15%
Le-Natures, Inc.+ 9.00% 6/15/2013 11,500 12,190,000
---------------
BUILDING & CONSTRUCTION 0.92%
Beazer Homes USA, Inc.+ 6.50% 11/15/2013 15,000 15,056,250
Beazer Homes USA, Inc.^ 8.375% 4/15/2012 8,250 9,136,875
D. R. Horton, Inc.^ 6.875% 5/1/2013 5,100 5,457,000
Lennar Corp. 7.625% 3/1/2009 15,000 17,326,965
Schuler Homes, Inc. 9.375% 7/15/2009 15,000 16,950,000
William Lyon Homes 10.75% 4/1/2013 10,000 11,425,000
---------------
TOTAL 75,352,090
---------------
BUILDING MATERIALS 1.56%
American Builders & Contractors 10.625% 5/15/2007 9,200 9,568,000
American Standard Cos., Inc. 8.25% 6/1/2009 30,000 34,800,000
American Standard Cos., Inc.^ 7.625% 2/15/2010 5,000 5,700,000
Interface, Inc.^ 9.50% 11/15/2005 16,000 15,600,000
Jacuzzi Brands, Inc.+ 9.625% 7/1/2010 27,500 30,387,500
National Waterworks, Inc. 10.50% 12/1/2012 2,250 2,525,625
Nortek, Inc.**+ 0.00%/10.00% 11/15/2007 &
5/15/2011 9,000 6,547,500
Nortek, Inc. 8.875% 8/1/2008 7,500 7,884,375
Nortek, Inc.^ 9.875% 6/15/2011 5,000 5,537,500
Texas Industries, Inc. 10.25% 6/15/2011 8,000 9,080,000
---------------
TOTAL 127,630,500
---------------
CHEMICALS 2.18%
Airgas, Inc. 7.75% 9/15/2006 5,000 5,275,000
Airgas, Inc. 9.125% 10/1/2011 4,000 4,510,000
Ferro Corp. 9.125% 1/1/2009 12,000 14,192,100
Huntsman ICI Chemicals LLC^ 10.125% 7/1/2009 10,000 10,350,000
IMC Global, Inc. 11.25% 6/1/2011 3,000 3,315,000
IMC Global, Inc.^ 11.25% 6/1/2011 36,000 39,780,000
Koppers Industry, Inc.+ 9.875% 10/15/2013 3,000 3,322,500
Kraton Polymers LLC+^ 8.125% 1/15/2014 1,500 1,567,500
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
Lyondell Chemical Co.^ 9.625% 5/1/2007 $ 21,450 $ 22,844,250
Methanex Corp.(a) 8.75% 8/15/2012 3,250 3,640,000
Rhodia S.A.+^(a) 8.875% 6/1/2011 40,000 37,000,000
Rockwood Specialties Corp.+ 10.625% 5/15/2011 4,000 4,480,000
Terra Capital, Inc. 11.50% 6/1/2010 15,000 15,750,000
Texas Petrochemical Corp.^(b) 11.125% 7/1/2006 18,500 6,012,500
United Industries Corp. 9.875% 4/1/2009 6,000 6,315,000
---------------
TOTAL 178,353,850
---------------
COMPUTER HARDWARE 0.33%
Corning, Inc. 8.30% 4/4/2025 15,000 15,487,500
Seagate Technology HDD Hldgs., Inc.^(a) 8.00% 5/15/2009 10,500 11,366,250
---------------
TOTAL 26,853,750
---------------
CONSUMER-PRODUCTS 1.02%
American Greetings Corp.^ 11.75% 7/15/2008 12,500 14,500,000
Chattem, Inc.^ 8.875% 4/1/2008 10,000 10,350,000
Int'l. Flavors & Fragrances, Inc.^ 6.45% 5/15/2006 15,000 16,300,020
Johnsondiversey, Inc. 9.625% 5/15/2012 9,000 10,080,000
Rayovac Corp. 8.50% 10/1/2013 30,000 31,950,000
---------------
TOTAL 83,180,020
---------------
DIVERSIFIED CAPITAL GOODS 0.81%
Blount, Inc. 13.00% 8/1/2009 20,000 21,650,000
Eagle-Picher, Inc.+ 9.75% 9/1/2013 8,000 8,680,000
Tyco Int'l. Group+(a) 6.00% 11/15/2013 5,000 5,175,000
Tyco Int'l. Group^(a) 6.375% 6/15/2005 20,000 21,150,000
Vicap S.A.^(a) 11.375% 5/15/2007 10,000 9,850,000
---------------
TOTAL 66,505,000
---------------
ELECTRIC-GENERATION 1.73%
AES Corp.+ 8.75% 5/15/2013 15,000 16,837,500
AES Corp. 9.50% 6/1/2009 15,000 16,706,250
Calpine Corp.^ 7.875% 4/1/2008 20,000 15,700,000
Calpine Corp.+^ 8.50% 7/15/2010 10,000 9,800,000
Calpine Corp. 8.50% 2/15/2011 35,000 27,868,750
NRG Energy, Inc.+ 8.00% 12/15/2013 15,000 15,843,750
Reliant Resources, Inc.+ 9.50% 7/15/2013 36,000 38,700,000
---------------
TOTAL 141,456,250
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
ELECTRIC-INTEGRATED 1.31%
Duke Energy Corp. 5.375% 1/1/2009 $ 10,000 $ 10,558,100
PPL Energy Supply LLC^ 6.40% 11/1/2011 12,000 13,129,668
PSEG Energy Holdings, Inc.^ 8.50% 6/15/2011 10,000 11,137,500
PSEG Energy Holdings, Inc.^ 8.625% 2/15/2008 15,000 16,443,750
TECO Energy, Inc. 7.50% 6/15/2010 40,000 43,000,000
Texas Utilities Corp.^ 6.375% 6/15/2006 12,500 13,281,250
---------------
TOTAL 107,550,268
---------------
ELECTRONICS 0.31%
Amkor Technology, Inc.^ 7.75% 5/15/2013 7,500 8,081,250
Sanmina Corp. 10.375% 1/15/2010 15,000 17,625,000
---------------
TOTAL 25,706,250
---------------
ENERGY - EXPLORATION & PRODUCTION 2.43%
Chesapeake Energy Corp.+ 6.875% 1/15/2016 5,000 5,175,000
Chesapeake Energy Corp.^ 7.75% 1/15/2015 10,000 10,900,000
Chesapeake Energy Corp. 8.375% 11/1/2008 10,000 11,050,000
El Paso Production, Co.+ 7.75% 6/1/2013 50,000 49,500,000
Energy Partners Ltd. 8.75% 8/1/2010 10,000 10,450,000
Forest Oil Corp.^ 7.75% 5/1/2014 10,000 10,625,000
Forest Oil Corp. 8.00% 6/15/2008 15,000 16,425,000
Houston Exploration Co.+ 7.00% 6/15/2013 7,000 7,262,500
KCS Energy Services, Inc. 8.875% 1/15/2006 10,000 10,250,000
Magnum Hunter Resources Corp.^ 9.60% 3/15/2012 8,000 9,120,000
Pogo Producing Co. 10.375% 2/15/2009 15,000 15,975,000
Range Resources Corp. 7.375% 7/15/2013 20,000 20,100,000
Stone Energy Corp. 8.25% 12/15/2011 5,000 5,475,000
Swift Energy Co. 9.375% 5/1/2012 15,000 16,575,000
---------------
TOTAL 198,882,500
---------------
ENVIRONMENTAL 1.47%
Allied Waste North America, Inc.+ 6.50% 11/15/2010 5,000 5,150,000
Allied Waste North America, Inc. 10.00% 8/1/2009 65,000 70,525,000
Allied Waste North America, Inc., Series B 7.875% 1/1/2009 25,000 26,187,500
Nalco Co.+ 8.875% 11/15/2013 7,500 7,987,500
Waste Management, Inc. 7.10% 8/1/2026 10,000 10,851,850
---------------
TOTAL 120,701,850
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
FOOD & DRUG RETAILERS 1.47%
Ahold Finance USA, Inc. 8.25% 7/15/2010 $ 17,750 $ 19,436,250
Couche-Tard+ 7.50% 12/15/2013 7,000 7,367,500
Ingles Markets, Inc.^ 8.875% 12/1/2011 21,500 21,715,000
Rite Aid Corp. 8.125% 5/1/2010 32,150 34,722,000
Roundy's, Inc. 8.875% 6/15/2012 10,000 10,725,000
Stater Brothers Holdings, Inc.^ 10.75% 8/15/2006 25,000 26,468,750
---------------
TOTAL 120,434,500
---------------
FOOD - WHOLESALE 2.37%
American Seafood Group LLC 10.125% 4/15/2010 11,500 13,728,125
Corn Products Int'l., Inc. 8.25% 7/15/2007 20,000 22,000,000
Corn Products Int'l., Inc. 8.45% 8/15/2009 6,000 6,735,000
Dean Foods Co. 6.625% 5/15/2009 10,000 10,550,000
Dean Foods Co. 8.15% 8/1/2007 15,000 16,650,000
Del Monte Corp. 8.625% 12/15/2012 10,000 11,000,000
Del Monte Corp. 9.25% 5/15/2011 15,000 16,650,000
Dole Food Co. 8.75%# 7/15/2013 20,000 22,150,000
Dole Food Co. 8.875% 3/15/2011 7,000 7,717,500
Gruma S.A. de CV(a) 7.625% 10/15/2007 8,000 8,640,000
Land O' Lakes, Inc. 8.75% 11/15/2011 12,150 10,692,000
Land O' Lakes, Inc.+ 9.00% 12/15/2010 14,400 14,580,000
Michael Foods, Inc.+ 8.00% 11/15/2013 13,750 14,403,125
Pinnacle Foods Corp.+ 8.25% 12/1/2013 9,375 9,750,000
Smithfield Foods, Inc. 7.75% 5/15/2013 8,450 8,830,250
---------------
TOTAL 194,076,000
---------------
FORESTRY/PAPER 3.76%
Abitibi-Consolidated, Inc.(a) 8.55% 8/1/2010 27,500 30,670,750
Boise Cascade Corp 7.00% 11/1/2013 15,000 15,616,560
Bowater, Inc.^ 6.50% 6/15/2013 30,000 29,165,640
Buckeye Technologies, Inc.^ 8.00% 10/15/2010 20,000 19,700,000
Corp. Durango S.A. de CV+^(a)(b) 13.75% 7/15/2009 10,000 6,050,000
Fonda Group, Inc. 9.50% 3/1/2007 11,500 11,471,250
Georgia-Pacific Corp. 8.125% 6/15/2023 16,000 16,240,000
Georgia-Pacific Corp. 8.25% 3/1/2023 36,000 36,720,000
Jefferson Smurfit Corp.^ 7.50% 6/1/2013 20,000 21,000,000
Jefferson Smurfit Corp.^ 8.25% 10/1/2012 10,000 10,900,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
MDP Acquisitions(a) 9.625% 10/1/2012 $ 14,500 $ 16,312,500
Longview Fibre Co. 10.00% 1/15/2009 11,500 12,678,750
Millar Western, Ltd.+(a) 7.75% 11/15/2013 2,750 2,866,875
Stone Container Corp.^ 8.375% 7/1/2012 4,000 4,360,000
Stone Container Corp. 9.75% 2/1/2011 17,000 18,870,000
Tembec Industries, Inc.^(a) 7.75% 3/15/2012 15,000 15,000,000
Tembec Industries, Inc.^(a) 8.625% 6/30/2009 23,000 23,805,000
Temple-Inland, Inc.^ 7.875% 5/1/2012 10,000 11,614,520
Weyerhaeuser Co.^ 6.125% 3/15/2007 5,000 5,423,065
---------------
TOTAL 308,464,910
---------------
GAMING 3.83%
Aztar Corp. 8.875% 5/15/2007 25,000 26,218,750
Aztar Corp.^ 9.00% 8/15/2011 10,000 11,025,000
Boyd Gaming Corp.^ 8.75% 4/15/2012 17,000 18,742,500
Chumash Casino & Resort+^ 9.00%# 7/15/2010 2,250 2,497,500
Hard Rock Hotel+ 8.875% 6/1/2013 27,000 28,890,000
Harrah's Operating Co., Inc.^ 7.50% 1/15/2009 25,000 28,505,025
Isle of Capri Casinos, Inc.^ 9.00% 3/15/2012 21,650 24,193,875
Mandalay Resorts Group^ 9.375% 2/15/2010 20,000 23,400,000
Mohegan Tribal Gaming 6.375% 7/15/2009 21,000 21,787,500
Mohegan Tribal Gaming^ 8.00% 4/1/2012 10,000 10,875,000
Caesars Entertainment, Inc.^ 8.125% 5/15/2011 15,000 16,893,750
Caesars Entertainment, Inc.^ 9.375% 2/15/2007 23,500 26,672,500
Penn National Gaming, Inc.+ 6.875% 12/1/2011 25,875 25,745,625
River Rock Entertainment+ 9.75% 11/1/2011 6,000 6,480,000
Turning Stone Casino Resort+ 9.125% 12/15/2010 12,000 13,110,000
Venetian Casino Resort LLC^ 11.00% 6/15/2010 25,000 29,125,000
---------------
TOTAL 314,162,025
---------------
GAS DISTRIBUTION 1.57%
Dynegy, Inc.+ 9.875% 7/15/2010 3,000 3,390,000
Dynegy, Inc.+ 10.125% 7/15/2013 37,500 43,312,500
Sonat, Inc.^ 6.875% 6/1/2005 15,000 14,850,000
Sonat, Inc.^ 7.625% 7/15/2011 18,000 16,762,500
Suburban Propane Partners+ 6.875% 12/15/2013 12,500 12,687,500
The Williams Co., Inc.^ 7.875% 9/1/2021 30,000 31,800,000
The Williams Co., Inc. 8.625% 6/1/2010 5,000 5,637,500
---------------
TOTAL 128,440,000
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
HEALTH SERVICES 4.96%
Advance PCS 8.50% 4/1/2008 $ 15,000 $ 16,350,000
Alliance Imaging^ 10.375% 4/15/2011 18,000 19,170,000
Ameripath, Inc.^ 10.50% 4/1/2013 12,000 12,840,000
Ardent Health Services+ 10.00% 8/15/2013 12,500 13,687,500
Coventry Healthcare, Inc. 8.125% 2/15/2012 15,000 16,725,000
Extendicare Health Services, Inc.^ 9.50% 7/1/2010 12,000 13,380,000
Fisher Scientific Int'l., Inc. 8.00% 9/1/2013 10,000 10,775,000
Fresenius Medical Capital Tr.^ 7.875% 2/1/2008 20,000 21,450,000
Hanger Orthopedic Group, Inc.^ 10.375% 2/15/2009 10,000 11,400,000
Healthsouth Corp. 8.375% 10/1/2011 20,000 19,000,000
Healthsouth Corp. 10.75% 10/1/2008 15,000 14,250,000
Iasis Healthcare Corp.^ 8.50% 10/15/2009 20,000 20,950,000
Mariner Health Care, Inc.+ 8.25% 12/15/2013 13,125 13,321,875
Medex, Inc.+ 8.875% 5/15/2013 34,250 36,990,000
National Nephrology Assoc.+ 9.00% 11/1/2011 9,000 9,472,500
PacifiCare Health System, Inc. 10.75% 6/1/2009 22,750 26,958,750
Prime Medical Services, Inc.^ 8.75% 4/1/2008 18,000 17,460,000
Rotech Healthcare, Inc. 9.50% 4/1/2012 17,250 18,112,500
Senior Housing Trust 8.625% 1/15/2012 10,000 10,950,000
Tenet Healthcare Corp.^ 7.375% 2/1/2013 35,000 35,350,000
Triad Hospitals, Inc.+ 7.00% 11/15/2013 20,000 20,250,000
Triad Hospitals, Inc. 8.75% 5/1/2009 16,500 17,964,375
Ventas Realty LP Capital Corp. 8.75% 5/1/2009 8,750 9,646,875
---------------
TOTAL 406,454,375
---------------
HOTELS 1.32%
FelCor Lodging LP^ 9.00% 6/1/2011 20,000 21,800,000
Hilton Hotels Corp.^ 8.25% 2/15/2011 20,000 23,150,000
HMH Properties, Inc. 7.875% 8/1/2008 20,000 20,900,000
Host Marriott LP^ 9.25% 10/1/2007 25,000 28,062,500
John Q. Hammons Hotels, Inc.^ 8.875% 5/15/2012 12,500 13,843,750
---------------
TOTAL 107,756,250
---------------
HOUSEHOLD & LEISURE PRODUCTS 0.73%
Bombardier Recreational Products, Inc.+(a) 8.375% 12/15/2013 3,000 3,150,000
Briggs & Stratton Corp. 8.875% 3/15/2011 15,000 17,700,000
Fedders North America 9.375% 8/15/2007 6,500 6,565,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
Remington Arms Co.^ 10.50% 2/1/2011 $ 12,000 $ 12,840,000
Sealy Mattress Co.^ 9.875% 12/15/2007 11,000 11,440,000
Sealy Mattress Co.^ 10.875% 12/15/2007 7,500 7,818,750
---------------
TOTAL 59,513,750
---------------
INTEGRATED ENERGY 0.17%
Conoco Phillips 8.75% 5/25/2010 7,000 8,755,530
Pecom Energia S.A.+(a) 9.00% 1/30/2007 5,000 5,225,000
---------------
TOTAL 13,980,530
---------------
INVESTMENTS & MISCELLANEOUS
FINANCIAL SERVICES 0.34%
GATX Financial Corp.^ 8.875% 6/1/2009 25,000 28,077,700
---------------
LEISURE 0.72%
Gaylord Entertainment Co.+ 8.00% 11/15/2013 27,250 28,885,000
Six Flags, Inc.^ 9.50% 2/1/2009 20,000 21,050,000
Universal City Development+ 11.75% 4/1/2010 8,000 9,400,000
---------------
TOTAL 59,335,000
---------------
MACHINERY 1.35%
Agco Corp.^ 9.50% 5/1/2008 10,000 11,000,000
Case Corp. 7.25% 8/1/2005 4,550 4,766,125
Case New Holland, Inc.+ 9.25% 8/1/2011 12,300 13,837,500
Dresser, Inc.^ 9.375% 4/15/2011 20,000 21,850,000
Great Lakes Dredge & Dock+ 7.75% 12/15/2013 11,650 12,043,187
JLG Industries, Inc.^ 8.25% 5/1/2008 15,000 16,368,750
Manitowoc Co., Inc.^ 7.125% 11/1/2013 10,000 10,387,500
Sensus Metering Systems+ 8.625% 12/15/2013 15,000 15,468,750
Westinghouse Air Brake Co.+ 6.875% 7/31/2013 4,500 4,685,625
---------------
TOTAL 110,407,437
---------------
MEDIA - BROADCAST 2.57%
Allbritton Communications Co. 7.75% 12/15/2012 60,000 62,550,000
Chancellor Radio Bcst, Inc. 8.00% 11/1/2008 3,750 4,359,375
Clear Channel Communications, Inc. 4.625% 1/15/2008 20,000 20,651,760
Clear Channel Communications, Inc. 7.65% 9/15/2010 18,500 21,689,825
Granite Broadcasting Corp.^ 10.375% 5/15/2005 11,435 11,477,881
Lin Television Corp.+^ 6.50% 5/15/2013 10,075 10,137,969
Paxson Communications^ 10.75% 7/15/2008 33,500 36,724,375
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
Sinclair Broadcast Group, Inc. 8.75% 12/15/2011 $ 10,000 $ 11,150,000
Susquehanna Media Co. 7.375% 4/15/2013 3,000 3,142,500
TV Azteca, S.A. de C.V.^(a) 10.50% 2/15/2007 28,000 28,770,000
---------------
TOTAL 210,653,685
---------------
MEDIA - CABLE 5.10%
Century Communications Corp.^(b) 8.375% 12/15/2007 10,000 9,775,000
Century Communications Corp.(b) 9.50% 3/1/2005 39,000 37,830,000
Charter Communications Holdings+ 10.25% 9/15/2010 20,000 21,100,000
Charter Communications Holdings^ 10.00% 4/1/2009 58,150 52,044,250
Comcast Corp.^ 5.85% 1/15/2010 15,000 16,040,145
Comcast Corp. 10.625% 7/15/2012 1,500 1,906,525
CSC Holdings, Inc.^ 8.125% 8/15/2009 20,000 21,600,000
Direct TV Holdings 8.375% 3/15/2013 26,000 30,290,000
Echostar DBS Corp.+ 6.375% 10/1/2011 15,000 15,450,000
Echostar DBS Corp.^ 9.125% 1/15/2009 6,500 7,304,375
Echostar DBS Corp. 9.375% 2/1/2009 15,000 15,768,750
Echostar DBS Corp. 10.375% 10/1/2007 7,500 8,259,375
Frontiervision Holdings LP(b) 11.875%# 9/15/2007 20,000 21,300,000
Frontiervision Holdings LP(b) 11.875%# 9/15/2007 10,000 10,650,000
Globo Communicacoes e
Participacoes S.A.+(a)(b) 10.625% 12/5/2008 20,000 9,000,000
Insight Communications Co., Inc.** 0.00%/12.25% 2/15/2006 &
2011 55,000 47,300,000
Mediacom LLC^ 8.50% 4/15/2008 53,000 54,325,000
NTL, Inc.^(a) 11.20% 11/15/2007 22,200 22,533,000
Renaissance Media Group LLC 10.00% 4/15/2008 15,000 15,581,250
---------------
TOTAL 418,057,670
---------------
MEDIA - DIVERSIFIED 0.64%
AOL Time Warner, Inc.^ 6.125% 4/15/2006 20,000 21,544,340
Block Communications, Inc. 9.25% 4/15/2009 15,000 16,200,000
Vivendi Universal+(a) 9.25% 4/15/2010 12,000 14,280,000
---------------
TOTAL 52,024,340
---------------
MEDIA - SERVICES 0.13%
Interpublic Group of Cos., Inc.^ 7.25% 8/15/2011 10,000 10,950,000
METALS/MINING 0.48%
Century Aluminum Co.^ 11.75% 4/15/2008 12,500 14,000,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
Peabody Energy Corp.^ 6.875% 3/15/2013 $ 7,500 $ 7,950,000
The Timken Co. 5.75% 2/15/2010 10,000 9,897,770
Trimas Corp. 9.875% 6/15/2012 7,000 7,332,500
---------------
TOTAL 39,180,270
---------------
MORTGAGE BANKS & THRIFTS 0.26%
B.F. Saul REIT 9.75% 4/1/2008 20,000 20,975,000
---------------
MULTI-LINE INSURANCE 0.14%
Willis Corroon Corp. 9.00% 2/1/2009 11,000 11,605,000
---------------
NON-ELECTRIC UTILITIES 0.12%
Semco Energy, Inc. 7.75% 5/15/2013 9,500 10,034,375
---------------
NON-FOOD & DRUG RETAILERS 1.63%
Cole National Group 8.875% 5/15/2012 15,000 16,125,000
Dillards, Inc.^ 7.85% 10/1/2012 12,750 13,451,250
Dollar General Corp.^ 8.625% 6/15/2010 3,000 3,386,250
J.C. Penney Co., Inc.^ 7.95% 4/1/2017 20,750 23,680,938
J.C. Penney Co., Inc.^ 8.00% 3/1/2010 17,000 19,571,250
Office Depot, Inc.^ 10.00% 7/15/2008 5,000 5,975,000
Saks, Inc.^ 7.375% 2/15/2019 21,000 21,472,500
Saks, Inc.^ 9.875% 10/1/2011 25,000 29,875,000
---------------
TOTAL 133,537,188
---------------
OFFICE EQUIPMENT 0.14%
Xerox Corp. 9.75% 1/15/2009 10,000 11,750,000
---------------
OIL FIELD EQUIPMENT & SERVICES 0.60%
Hanover Compressor Co. 8.625% 12/15/2010 12,075 12,618,375
J Ray McDermott S.A.+^(a) 11.00% 12/15/2013 7,000 7,385,000
Key Energy Services, Inc.^ 8.375% 3/1/2008 13,500 14,512,500
Parker Drilling Co.+ 9.625% 10/1/2013 1,500 1,567,500
Parker Drilling Co.^ 10.125% 11/15/2009 12,500 13,312,500
---------------
TOTAL 49,395,875
---------------
PACKAGING 2.00%
AEP Industries, Inc.^ 9.875% 11/15/2007 7,500 7,575,000
Anchor Glass Container^ 11.00% 2/15/2013 15,000 17,475,000
BWAY Corp. 10.00% 10/15/2010 25,000 27,375,000
Crown Cork & Seal, Inc.^ 7.375% 12/15/2026 22,000 19,992,500
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
Graham Packaging^ 10.75% 1/15/2009 $ 2,500 $ 2,593,750
Owens-Brockway Glass Co.^ 7.75% 5/15/2011 10,000 10,787,500
Owens-Brockway Glass Co. 8.875% 2/15/2009 50,000 55,062,500
Plastipak Holdings, Inc. 10.75% 9/1/2011 6,500 7,263,750
Portola Packaging, Inc. 10.75% 10/1/2005 12,500 12,593,750
Tekni-Plex, Inc.+ 8.75% 11/15/2013 3,000 3,142,500
---------------
TOTAL 163,861,250
---------------
PHARMACEUTICALS 0.83%
Alpharma, Inc.+ 8.625% 5/1/2011 22,200 22,588,500
Biovail Corp.^(a) 7.875% 4/1/2010 15,000 15,375,000
PerkinElmer, Inc.^ 8.875% 1/15/2013 25,750 29,612,500
---------------
TOTAL 67,576,000
---------------
PRINTING & PUBLISHING 1.70%
American Color Graphics+ 10.00% 6/15/2010 15,000 15,450,000
American Media, Inc. 10.25% 5/1/2009 5,000 5,356,250
Dex Media West+ 9.875% 8/15/2013 10,500 12,258,750
Dex Media, Inc.+ 8.00% 11/15/2013 14,000 14,770,000
Houghton Mifflin Co.**+^ 0.00%/11.50% 10/15/2008 &
2013 12,000 7,650,000
Houghton Mifflin Co.^ 9.875% 2/1/2013 30,000 33,150,000
Primedia, Inc.^ 8.875% 5/15/2011 35,000 37,100,000
RH Donnelley Finance Corp.+ 10.875% 12/15/2012 10,000 11,912,500
Von Hoffman Corp.+ 10.25% 3/15/2009 1,800 1,926,000
---------------
TOTAL 139,573,500
---------------
RAILROADS 0.29%
Union Pacific Corp. 3.625% 6/1/2010 25,000 23,984,125
---------------
RESTAURANTS 0.19%
Domino's, Inc.+ 8.25% 7/1/2011 5,000 5,381,250
O'Charleys, Inc.+ 9.00% 11/1/2013 10,000 10,100,000
---------------
TOTAL 15,481,250
---------------
SOFTWARE/SERVICES 0.66%
Activant Solutions, Inc. 10.50% 6/15/2011 3,450 3,730,313
Electronic Data Systems Corp. 6.00% 8/1/2013 15,000 14,771,280
Unisys Corp.^ 6.875% 3/15/2010 8,000 8,700,000
Unisys Corp. 8.125% 6/1/2006 25,000 27,125,000
---------------
TOTAL 54,326,593
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
STEEL PRODUCERS/PRODUCTS 0.44%
AK Steel Corp. 7.75% 6/15/2012 $ 15,000 $ 12,900,000
Armco, Inc. 9.00% 9/15/2007 20,000 17,850,000
WCI Steel, Inc.(b) 10.00% 12/1/2004 15,000 4,950,000
---------------
TOTAL 35,700,000
---------------
SUPPORT-SERVICES 1.24%
Armor Holdings, Inc.+ 8.25% 8/15/2013 9,475 10,185,625
Iron Mountain, Inc. 6.625% 1/1/2016 20,000 19,550,000
Iron Mountain, Inc. 7.75% 1/15/2015 32,100 33,785,250
Iron Mountain, Inc. 8.625% 4/1/2013 20,000 21,700,000
Johnsondiversey, Inc.**+ 0.00%/10.67% 5/15/2007 &
2013 8,250 6,352,500
Williams Scotsman, Inc.^ 9.875% 6/1/2007 10,000 10,175,000
---------------
TOTAL 101,748,375
---------------
TELECOM - FIXED LINE 0.74%
Level 3 Communications, Inc. 11.25% 3/15/2010 15,000 14,475,000
MCI Communications Corp.^(b) 6.50% 4/15/2010 48,000 38,880,000
Time-Warner Telecom, Inc. 10.125% 2/1/2011 7,000 7,490,000
---------------
TOTAL 60,845,000
---------------
TELECOM - INTEGRATED/SERVICES 1.61%
Cincinnati Bell, Inc.+ 8.375% 1/15/2014 17,000 18,360,000
Eircom Funding^(a) 8.25% 8/15/2013 4,770 5,306,625
Level 3 Financing, Inc.+ 10.75% 10/15/2011 20,000 21,250,000
Qwest Capital Funding 5.875% 8/3/2004 35,000 35,262,500
Qwest Services Corp.+ 13.50% 12/15/2010 31,800 38,796,000
Telefonica De Argentina(a) 9.125% 11/7/2010 13,500 13,230,000
---------------
TOTAL 132,205,125
---------------
TELECOM - WIRELESS 4.00%
ACC Escrow Corp.+^ 10.00% 8/1/2011 6,500 7,280,000
Alamosa Delaware, Inc.^ 11.00% 7/31/2010 22,750 24,797,500
Centennial Cell Communications 10.125% 6/15/2013 35,000 38,587,500
Crown Castle Int'l. Corp. 10.75% 8/1/2011 20,000 22,600,000
Dobson Communications Corp.+ 8.875% 10/1/2013 15,000 15,262,500
Dobson Communications Corp. 10.875% 7/1/2010 15,000 16,425,000
Nextel Communications, Inc. 9.50% 2/1/2011 47,000 53,345,000
Nextel Partners, Inc.^ 8.125% 7/1/2011 20,000 21,400,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
Rogers Cantel, Inc.^(a) 8.30% 10/1/2007 $ 35,000 $ 36,225,000
Rogers Wireless, Inc.(a) 9.625% 5/1/2011 5,000 6,000,000
Rural Cellular Corp.^ 9.75% 1/15/2010 24,650 24,218,625
SBA Communications Corp. 10.25% 2/1/2009 8,000 7,900,000
SBA Telecomm**+ 0.00%/9.75% 12/15/2007 &
2011 5,000 3,550,000
TeleCorp PCS, Inc. 10.625% 7/15/2010 16,000 18,710,928
Tritel PCS, Inc. 10.375% 1/15/2011 9,301 11,134,422
Voicestream Wireless Corp.^ 10.375% 11/15/2009 6,586 7,368,088
Western Wireless Corp. 9.25% 7/15/2013 12,500 13,250,000
---------------
TOTAL 328,054,563
---------------
TELECOMMUNICATIONS EQUIPMENT 0.44%
Motorola, Inc.^ 5.80% 10/15/2008 10,000 10,620,600
Nortel Network(a) 6.125% 2/15/2006 25,000 25,437,500
---------------
TOTAL 36,058,100
---------------
THEATERS & ENTERTAINMENT 0.29%
AMC Entertainment, Inc.^ 9.50% 3/15/2009 12,000 12,420,000
Cinemark USA, Inc.^ 9.00% 2/1/2013 10,000 11,300,000
---------------
TOTAL 23,720,000
---------------
TRANSPORTATION EXCLUDING AIR/RAIL 0.34%
Avis Group Holdings, Inc. 11.00% 5/1/2009 14,000 15,156,540
Offshore Logistics, Inc. 6.125% 6/15/2013 5,000 4,925,000
Stena AB+(a) 7.50% 11/1/2013 7,500 7,762,500
---------------
TOTAL 27,844,040
---------------
TOTAL HIGH YIELD CORPORATE BONDS (Cost $5,334,131,809) 5,676,389,095
===============
NON-AGENCY COMMERCIAL MORTGAGE-BACKED SECURITIES 0.27%
MORTGAGE BACKED 0.27%
Credit Suisse First Boston
1998-C2 A2 (Cost $19,508,414) 6.30% 11/11/2030 20,000 22,184,160
===============
<Caption>
SHARES
(000)
------
NON-CONVERTIBLE PREFERRED STOCKS 0.26%
MEDIA - CABLE 0.26%
CSC Holdings, Inc. 150 15,787,500
CSC Holdings, Inc.^ 50 5,212,500
---------------
TOTAL NON-CONVERTIBLE PREFERRED STOCKS
(Cost $21,270,000) 21,000,000
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<Page>
SCHEDULE OF INVESTMENTS (CONCLUDED)
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------
PASS-THROUGH AGENCIES 0.11%
AGENCY 0.11%
Government National Mortgage Assoc. 781417
(Cost $8,859,330) 8.00% 3/15/2032 $ 8,385 $ 9,124,842
===============
U.S. TREASURY OBLIGATIONS 0.26%
GOVERNMENT GUARANTEED 0.26%
U.S. Treasury Note (Cost $20,781,103) 6.75% 5/15/2005 20,000 21,446,880
===============
<Caption>
SHARES
(000)
------
WARRANTS 0.00%
FOOD & DRUG RETAILERS 0.00% Leiner Health Products, Inc.
Series C Pfd*~ (Cost $16,917,438) 1 1,441
---------------
TOTAL LONG-TERM INVESTMENTS (Cost $7,239,646,837) 7,739,803,020
===============
SHORT-TERM INVESTMENTS 16.32%
COLLATERAL FOR SECURITIES ON LOAN 12.26%
State Street Navigator Securities
Lending Prime Portfolio, 1.70%(e) 1,004,709 1,004,709,239
===============
<Caption>
PRINCIPAL
AMOUNT
(000)
REPURCHASE AGREEMENT 4.06%
Repurchase Agreement dated 12/31/2003,
0.80% due 1/2/2004 with State Street
Bank & Trust Co. collateralized by
$339,510,000 of Federal National Mortgage
Assoc. from 1.04% to 3.50% due from
7/26/2004 to 1/15/2006; value: $339,290,957;
proceeds: $332,609,417 $ 332,595 332,594,635
---------------
TOTAL SHORT-TERM INVESTMENTS (Cost $1,337,303,874) 1,337,303,874
===============
TOTAL INVESTMENTS 110.76% (Cost $8,576,950,711) $ 9,077,106,894
===============
</Table>
* Non-income producing security.
** Deferred-interest debentures pay no interest for a stipulated number of
years, after which they pay a predetermined interest rate.
+ Restricted security under Rule 144A.
^ All (or a portion of security) on loan. See Note 5.
~ Fair valued security - See Note 2a.
# Variable rate security. The interest rate represents the rate at December
31, 2003.
(a) Foreign security traded/denominated in U.S. dollars.
(b) Defaulted security.
(c) Securities purchased on a when-issued basis.
(d) Private placement.
(e) Rate shown reflects seven day yield as of December 31, 2003.
REIT- Real Estate Investment Trust
SEE NOTES TO FINANCIAL STATEMENTS.
27
<Page>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2003
<Table>
<Caption>
ASSETS:
Investment in securities, at value (cost $8,576,950,711) $ 9,077,106,894
Receivables:
Interest and dividends 122,644,575
Investment securities sold 21,366,190
Capital shares sold 24,965,558
Prepaid expenses and other assets 553,245
- ---------------------------------------------------------------------------------------
TOTAL ASSETS 9,246,636,462
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payable upon return of securities on loan 1,004,709,239
Payables:
Investment securities purchased 27,544,703
Capital shares reacquired 9,118,778
Management fee 3,077,882
12b-1 distribution fees 4,636,177
Fund administration 273,829
Directors' fees 736,994
To bank 193,940
To affiliate (see note 3) 19,779
Accrued expenses and other liabilities 1,070,826
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,051,382,147
=======================================================================================
NET ASSETS $ 8,195,254,315
=======================================================================================
COMPOSITION OF NET ASSETS:
Paid-in capital $ 8,504,948,353
Distributions in excess of net investment income (738,130)
Accumulated net realized loss on investments and foreign currency
related transactions (809,112,091)
Net unrealized appreciation on investments 500,156,183
- ---------------------------------------------------------------------------------------
NET ASSETS $ 8,195,254,315
=======================================================================================
NET ASSETS BY CLASS:
Class A Shares $ 4,497,232,836
Class B Shares $ 1,861,920,267
Class C Shares $ 1,593,650,616
Class P Shares $ 60,847,871
Class Y Shares $ 181,602,725
OUTSTANDING SHARES BY CLASS:
Class A Shares 557,851,783
Class B Shares 230,886,191
Class C Shares 197,464,000
Class P Shares 7,446,872
Class Y Shares 22,582,818
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
(NET ASSETS DIVIDED BY OUTSTANDING SHARES):
Class A Shares-Net asset value $ 8.06
Class A Shares-Maximum offering price
(Net asset value plus sales charge of 4.75%) $ 8.46
Class B Shares-Net asset value $ 8.06
Class C Shares-Net asset value $ 8.07
Class P Shares-Net asset value $ 8.17
Class Y Shares-Net asset value $ 8.04
=======================================================================================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<Page>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 2003
<Table>
INVESTMENT INCOME:
Dividends $ 32,807,329
Interest 466,563,004
Securities lending-net 1,381,820
- ---------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 500,752,153
- ---------------------------------------------------------------------------------------
EXPENSES:
Management fee 31,022,356
12b-1 distribution plan-Class A 13,598,929
12b-1 distribution plan-Class B 16,265,877
12b-1 distribution plan-Class C 12,834,257
12b-1 distribution plan-Class P 171,367
Shareholder servicing 8,100,610
Market data 2,656
Professional 136,968
Reports to shareholders 626,819
Fund administration 2,886,325
Custody 268,942
Directors' fees 120,614
Registration 325,271
Subsidy (see Note 3) 234,697
Other 173,451
- ---------------------------------------------------------------------------------------
Gross expenses 86,769,139
Expense reductions (67,592)
- ---------------------------------------------------------------------------------------
NET EXPENSES 86,701,547
- ---------------------------------------------------------------------------------------
NET INVESTMENT INCOME 414,050,606
- ---------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN:
Net realized gain on investments and foreign currency related
transactions 4,578,180
Net change in unrealized appreciation/depreciation on investments 825,381,023
=======================================================================================
NET REALIZED AND UNREALIZED GAIN 829,959,203
=======================================================================================
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,244,009,809
=======================================================================================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
INCREASE IN NET ASSETS DECEMBER 31, 2003 DECEMBER 31, 2002
OPERATIONS:
Net investment income $ 414,050,606 $ 341,967,818
Net realized gain (loss) on investments
and foreign currency related transactions 4,578,180 (289,095,114)
Net change in unrealized appreciation/depreciation on
investments and foreign currency related transactions 825,381,023 (101,154,988)
- -----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 1,244,009,809 (48,282,284)
=====================================================================================================
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (249,078,467) (208,196,540)
Class B (98,396,445) (84,835,122)
Class C (77,331,697) (55,494,565)
Class P (2,399,636) (955,236)
Class Y (7,291,188) (4,446,077)
Paid-in capital
Class A (13,796,655) (17,515,233)
Class B (5,450,258) (7,137,040)
Class C (4,283,465) (4,668,667)
Class P (132,918) (80,362)
Class Y (403,865) (374,041)
- -----------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (458,564,594) (383,702,883)
=====================================================================================================
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares 3,087,844,333 2,089,601,650
Reinvestment of distributions 321,057,719 256,930,881
Cost of shares reacquired (1,335,405,201) (899,076,019)
- -----------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM CAPITAL SHARE TRANSACTIONS 2,073,496,851 1,447,456,512
=====================================================================================================
NET INCREASE IN NET ASSETS 2,858,942,066 1,015,471,345
=====================================================================================================
NET ASSETS:
Beginning of year 5,336,312,249 4,320,840,904
- -----------------------------------------------------------------------------------------------------
END OF YEAR $ 8,195,254,315 $ 5,336,312,249
=====================================================================================================
DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME $ (738,130) $ (2,681,573)
=====================================================================================================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED 12/31
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
PER SHARE OPERATING PERFORMANCE (CLASS A SHARES)
NET ASSET VALUE, BEGINNING OF YEAR $ 7.19 $ 7.91 $ 8.23 $ 9.05 $ 9.45
=========== =========== =========== =========== ===========
Investment operations
Net investment income(a) .48 .55 .65 .68 .75
Net realized and unrealized gain (loss) .92 (.64) (.26) (.75) (.40)
----------- ----------- ----------- ----------- -----------
Total from investment operations 1.40 (.09) .39 (.07) .35
----------- ----------- ----------- ----------- -----------
Distributions to shareholders from:
Net investment income (.50) (.58) (.67) (.75) (.75)
Paid-in capital (.03) (.05) (.04) - -
----------- ----------- ----------- ----------- -----------
Total distributions (.53) (.63) (.71) (.75) (.75)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF YEAR $ 8.06 $ 7.19 $ 7.91 $ 8.23 $ 9.05
=========== =========== =========== =========== ===========
Total Return(b) 20.28% (1.08)% 4.86% (.86)% 3.91%
RATIOS TO AVERAGE NET ASSETS
Expenses, including expense
reductions 1.00% 1.00% 1.02% 1.00% .92%
Expenses, excluding expense
reductions 1.00% 1.00% 1.02% 1.01% .92%
Net investment income 6.31% 7.51% 7.96% 7.88% 8.17%
<Caption>
YEAR ENDED 12/31
---------------------------------------------------------------------------
SUPPLEMENTAL DATA: 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $ 4,497,233 $ 3,048,301 $ 2,500,544 $ 2,065,319 $ 2,328,531
Portfolio turnover rate 40.96% 37.03% 55.44% 66.03% 67.93%
================================================================================================================================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
31
<Page>
FINANCIAL HIGHLIGHTS (CONTINUED)
<Table>
<Caption>
YEAR ENDED 12/31
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
PER SHARE OPERATING PERFORMANCE (CLASS B SHARES)
NET ASSET VALUE, BEGINNING OF YEAR $ 7.20 $ 7.92 $ 8.23 $ 9.05 $ 9.44
=========== =========== =========== =========== ===========
Investment operations
Net investment income(a) .43 .51 .60 .63 .69
Net realized and unrealized gain (loss) .92 (.65) (.25) (.76) (.39)
----------- ----------- ----------- ----------- -----------
Total from investment operations 1.35 (.14) .35 (.13) .30
----------- ----------- ----------- ----------- -----------
Distributions to shareholders from:
Net investment income (.46) (.53) (.63) (.69) (.69)
Paid-in capital (.03) (.05) (.03) - -
----------- ----------- ----------- ----------- -----------
Total distributions (.49) (.58) (.66) (.69) (.69)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF YEAR $ 8.06 $ 7.20 $ 7.92 $ 8.23 $ 9.05
=========== =========== =========== =========== ===========
Total Return(b) 19.43% (1.67)% 4.29% (1.52)% 3.29%
RATIOS TO AVERAGE NET ASSETS
Expenses, including expense
reductions 1.64% 1.65% 1.63% 1.61% 1.60%
Expenses, excluding expense
reductions 1.64% 1.65% 1.63% 1.62% 1.60%
Net investment income 5.67% 6.86% 7.35% 7.26% 7.49%
<Caption>
YEAR ENDED 12/31
---------------------------------------------------------------------------
SUPPLEMENTAL DATA: 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $ 1,861,920 $ 1,294,955 $ 1,105,501 $ 786,786 $ 840,533
Portfolio turnover rate 40.96% 37.03% 55.44% 66.03% 67.93%
================================================================================================================================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
32
<Page>
FINANCIAL HIGHLIGHTS (CONTINUED)
<Table>
<Caption>
YEAR ENDED 12/31
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
PER SHARE OPERATING PERFORMANCE (CLASS C SHARES)
NET ASSET VALUE, BEGINNING OF YEAR $ 7.21 $ 7.93 $ 8.24 $ 9.06 $ 9.46
=========== =========== =========== =========== ===========
Investment operations
Net investment income(a) .43 .51 .60 .63 .69
Net realized and unrealized gain (loss) .92 (.64) (.25) (.76) (.40)
----------- ----------- ----------- ----------- -----------
Total from investment operations 1.35 (.13) .35 (.13) .29
----------- ----------- ----------- ----------- -----------
Distributions to shareholders from:
Net investment income (.46) (.54) (.63) (.69) (.69)
Paid-in capital (.03) (.05) (.03) - -
----------- ----------- ----------- ----------- -----------
Total distributions (.49) (.59) (.66) (.69) (.69)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF YEAR $ 8.07 $ 7.21 $ 7.93 $ 8.24 $ 9.06
=========== =========== =========== =========== ===========
Total Return(b) 19.43% (1.58)% 4.29% (1.52)% 3.17%
RATIOS TO AVERAGE NET ASSETS
Expenses, including expense
reductions 1.64% 1.59% 1.62% 1.65% 1.60%
Expenses, excluding expense
reductions 1.64% 1.59% 1.62% 1.66% 1.60%
Net investment income 5.67% 6.92% 7.36% 7.26% 7.49%
<Caption>
YEAR ENDED 12/31
---------------------------------------------------------------------------
SUPPLEMENTAL DATA: 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $ 1,593,650 $ 905,629 $ 662,848 $ 483,885 $ 557,149
Portfolio turnover rate 40.96% 37.03% 55.44% 66.03% 67.93%
================================================================================================================================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
33
<Page>
FINANCIAL HIGHLIGHTS (CONTINUED)
<Table>
<Caption>
YEAR ENDED 12/31
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
PER SHARE OPERATING PERFORMANCE (CLASS P SHARES)
NET ASSET VALUE, BEGINNING OF YEAR $ 7.29 $ 8.02 $ 8.33 $ 9.05 $ 9.45
=========== =========== =========== =========== ===========
Investment operations
Net investment income(a) .48 .55 .64 .67 .73
Net realized and unrealized gain (loss) .93 (.65) (.24) (.65) (.39)
----------- ----------- ----------- ----------- -----------
Total from investment operations 1.41 (.10) .40 .02 .34
----------- ----------- ----------- ----------- -----------
Distributions to shareholders from:
Net investment income (.50) (.58) (.67) (.74) (.74)
Paid-in capital (.03) (.05) (.04) - -
----------- ----------- ----------- ----------- -----------
Total distributions (.53) (.63) (.71) (.74) (.74)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF YEAR $ 8.17 $ 7.29 $ 8.02 $ 8.33 $ 9.05
=========== =========== =========== =========== ===========
Total Return(b) 20.10% (1.19)% 4.90% .06% 3.86%
RATIOS TO AVERAGE NET ASSETS
Expenses, including expense
reductions 1.09% 1.10% 1.08% 1.06% 1.05%
Expenses, excluding expense
reductions 1.09% 1.10% 1.08% 1.07% 1.05%
Net investment income 6.22% 7.41% 7.88% 7.83% 8.10%
<Caption>
YEAR ENDED 12/31
---------------------------------------------------------------------------
SUPPLEMENTAL DATA: 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $ 60,848 $ 18,736 $ 7,017 $ 1,385 $ 229
Portfolio turnover rate 40.96% 37.03% 55.44% 66.03% 67.93%
================================================================================================================================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
34
<Page>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<Table>
<Caption>
YEAR ENDED 12/31
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
PER SHARE OPERATING PERFORMANCE (CLASS Y SHARES)
NET ASSET VALUE, BEGINNING OF YEAR $ 7.18 $ 7.90 $ 8.21 $ 9.04 $ 9.44
=========== =========== =========== =========== ===========
Investment operations
Net investment income(a) .51 .58 .68 .71 .78
Net realized and unrealized gain (loss) .91 (.64) (.24) (.76) (.40)
----------- ----------- ----------- ----------- -----------
Total from investment operations 1.42 (.06) .44 (.05) .38
----------- ----------- ----------- ----------- -----------
Distributions to shareholders from:
Net investment income (.53) (.61) (.71) (.78) (.78)
Paid-in capital (.03) (.05) (.04) - -
----------- ----------- ----------- ----------- -----------
Total distributions (.56) (.66) (.75) (.78) (.78)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF YEAR $ 8.04 $ 7.18 $ 7.90 $ 8.21 $ 9.04
=========== =========== =========== =========== ===========
Total Return(b) 20.58% (.66)% 5.44% (.61)% 4.27%
RATIOS TO AVERAGE NET ASSETS
Expenses, including expense
reductions .64% .65% .63% .61% .60%
Expenses, excluding expense
reductions .64% .65% .63% .62% .60%
Net investment income 6.67% 7.86% 8.36% 8.26% 8.52%
<Caption>
YEAR ENDED 12/31
---------------------------------------------------------------------------
SUPPLEMENTAL DATA: 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $ 181,603 $ 68,691 $ 44,931 $ 43,884 $ 51,181
Portfolio turnover rate 40.96% 37.03% 55.44% 66.03% 67.93%
================================================================================================================================
</Table>
(a) Calculated using average shares outstanding during the year.
(b) Total return does not consider the effects of sales loads and assumes the
reinvestment of all distributions.
SEE NOTES TO FINANCIAL STATEMENTS.
35
<Page>
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Lord Abbett Bond-Debenture Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 (the "Act") as a diversified open-end management
investment company. The Fund was incorporated under Maryland law on January 23,
1976.
The Fund's investment objective is to seek high current income and the
opportunity for capital appreciation to produce a high total return. The Fund
offers five classes of shares: Classes A, B, C, P and Y, each with different
expenses and dividends. A front-end sales charge is normally added to the Net
Asset Value ("NAV") for Class A shares. There is no front-end sales charge in
the case of the Class B, C, P and Y shares, although there may be a contingent
deferred sales charge ("CDSC") as follows: certain redemptions of Class A shares
made within 24 months following any purchase made without a sales charge; Class
B shares redeemed before the sixth anniversary of purchase; and Class C shares
redeemed before the first anniversary of purchase. Class B shares will convert
to Class A shares on the eighth anniversary of the original purchase of Class B
shares.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results could
differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) INVESTMENT VALUATION-Securities traded on any recognized U.S. or non-U.S.
exchange or on NASDAQ, Inc. are valued at the last sale price or official
closing price on the exchange or system on which they are principally
traded. Unlisted equity securities are valued at last quoted sales price
or, if no sales price is available, at the mean between the most recently
quoted bid and asked prices. Fixed income securities are valued at the mean
between the bid and asked prices on the basis of prices supplied by
independent pricing services, which reflect broker/dealer supplied
valuations and electronic data processing techniques. Exchange-traded
options and futures contracts are valued at the last sale price in the
market where they are principally traded. If no sale has occurred, the mean
between the most recently quoted bid and asked prices is used. Securities
for which market quotations are not readily available are valued at fair
value as determined by management and approved in good faith by the Board
of Directors. Short-term securities with 60 days or less remaining to
maturity are valued using the amortized cost method, which approximates
current market value.
(b) SECURITY TRANSACTIONS-Security transactions are recorded as of the date
that the securities are purchased or sold (trade date). Realized gains and
losses on sales of portfolio securities are calculated using the
identified-cost method. Realized and unrealized gains or losses are
allocated to each class of shares based upon the relative proportion of net
assets at the beginning of the day.
(c) INVESTMENT INCOME-Dividend income is recorded on the ex-dividend date.
Interest income is recorded on the accrual basis. Discounts are accreted
and premiums are amortized using the effective interest method. Investment
income is allocated to each class of shares based upon the relative
proportion of net assets at the beginning of the day.
36
<Page>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(d) FEDERAL TAXES-It is the policy of the Fund to meet the requirements of
Subchapter M of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its taxable
investment income and capital gains to its shareholders. Therefore, no
federal income tax provision is required.
(e) EXPENSES-Expenses, excluding class specific expenses, are allocated to each
class of shares based upon the relative proportion of net assets at the
beginning of the day. Class A, Class B, Class C and Class P shares bear all
expenses and fees relating to their respective 12b-1 Distribution Plans.
(f) FOREIGN TRANSACTIONS-The books and records of the Fund are maintained in
U.S. dollars and transactions denominated in foreign currencies are
recorded in the Fund's records at the rate prevailing when earned or
recorded. Asset and liability accounts that are denominated in foreign
currencies are adjusted to reflect current exchange rates. The resultant
exchange gains and losses are included as net realized gain on investments
and foreign currency related transactions on the Statement of Operations.
The Fund does not isolate that portion of the results of operations arising
as a result of changes in the foreign exchange rates from the changes in
market prices of the securities.
(g) FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS-The Fund may enter into forward
foreign currency exchange contracts in order to reduce its exposure to
changes in foreign currency exchange rates on its foreign portfolio
holdings and to lock in the U.S. dollar cost of firm purchase and sale
commitments for securities denominated in foreign currencies. A forward
currency exchange contract is a commitment to purchase or sell a foreign
currency at a future date at a negotiated rate. The contracts are valued
daily at forward exchange rates and any unrealized gain or loss is included
in net unrealized appreciation/depreciation on investments and translation
of assets and liabilities denominated in foreign currencies on the
Statement of Operations. The gain or loss arising from the difference
between the U.S. dollar cost of the original contract and the value of the
foreign currency in U.S. dollars upon closing of such contracts is included
in net realized gain or loss on investments and foreign currency related
transactions on Statement of Operations. At December 31, 2003, there are no
open forward foreign currency exchange contracts.
(h) SECURITIES LENDING-The Fund may lend its securities to member banks of the
Federal Reserve System and to registered broker/dealers approved by the
Fund. The loans are collateralized at all times by cash and/or U.S.
Treasury securities in an amount at least equal to 102% of the market value
of domestic securities loaned (105% in the case of foreign securities
loaned) as determined at the close of business on the preceding business
day. The dividend and interest income earned on the securities loaned is
accounted for in the same manner as other dividend and interest income.
Lending portfolio securities could result in a loss or delay in recovering
the Fund's securities if the borrower defaults.
(i) REPURCHASE AGREEMENTS-The Fund may enter into repurchase agreements with
respect to securities. A repurchase agreement is a transaction in which the
Fund acquires a security and simultaneously commits to resell that security
to the seller (a bank or securities dealer) at an agreed-upon price on an
agreed-upon date. The Fund requires at all times that the repurchase
agreement be collateralized by cash, U.S. government securities or U.S.
government sponsored enterprise securities having a value equal to, or in
excess of, the value of the repurchase agreement. If the seller of the
agreement defaults on its obligation to repurchase the underlying
securities at a time when the value of those securities has declined, the
Fund may incur a loss upon disposition of the securities.
37
<Page>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
MANAGEMENT FEE
The Fund has a management agreement with Lord, Abbett & Co. LLC ("Lord Abbett")
pursuant to which Lord Abbett supplies the Fund with investment management
services and executive and other personnel, pays the remuneration of officers,
provides office space and pays for ordinary and necessary office and clerical
expenses relating to research and statistical work and supervision of the Fund's
investment portfolio. The management fee is based on average daily net assets at
the following annual rates:
<Table>
- ----------------------------------
First $500 million .50%
Over $500 million .45%
</Table>
Lord Abbett provides certain administrative services to the Fund pursuant to an
Administrative Services Agreement at an annual rate of .04% of the Fund's
average daily net assets.
12b-1 DISTRIBUTION PLAN
The Fund has adopted a distribution plan (the "Plan") with respect to one or
more classes of shares pursuant to Rule 12b-1 of the Act, which provides for the
payment of distribution and service fees to Lord Abbett Distributor LLC
("Distributor"), an affiliate of Lord Abbett. The fees are accrued daily at
annual rates based upon average daily net assets as follows:
<Table>
<Caption>
FEE CLASS A CLASS B CLASS C CLASS P
- -----------------------------------------------------------
Service .25%(1) .25% .25% .20%
Distribution .10%(2) .75% .75% .25%
</Table>
(1) Annual service fee on shares sold prior to June 1, 1990 is .15% of the
average daily net asset value attributable to Class A Shares.
(2) In addition, the Fund pays a one-time distribution fee of up to 1% on
certain qualifying purchases, which is generally amortized over a two-year
period. The Fund collected $549,338 of CDSCs during the year.
Class Y does not have a distribution plan.
COMMISSIONS
Distributor received the following commissions on sales of Class A shares of the
Fund after concessions were paid to authorized dealers for the year ended
December 31, 2003:
<Table>
<Caption>
DISTRIBUTOR DEALERS'
COMMISSIONS CONCESSIONS
- ----------------------------
$ 6,760,692 $ 34,839,720
</Table>
One Director and certain of the Fund's officers have an interest in Lord Abbett.
The Fund, and certain other funds managed by Lord Abbett (the "Underlying
Funds"), has entered into a Servicing Arrangement with Balanced Series of Lord
Abbett Investment Trust ("Balanced Series") pursuant to which each Underlying
Fund pays a portion of the expenses of Balanced Series in proportion to the
average daily value of Underlying Fund shares owned by Balanced Series.
4. DISTRIBUTIONS AND CAPITAL LOSS CARRYFORWARD
Dividends from net investment income, if any, are declared and paid monthly.
Taxable net realized gains from investment transactions, reduced by capital loss
carryforwards, if any, are declared and distributed to shareholders at least
annually. The capital loss carryforward amount is available to offset future net
capital gains. Dividends and distributions to shareholders are
38
<Page>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
recorded on the ex-dividend date. The amount of dividends and distributions from
net investment income and net realized capital gains are determined in
accordance with federal income tax regulations which may differ from accounting
principles generally accepted in the United States of America. These book/tax
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the components of net assets based on their federal tax basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in capital.
The tax character of distributions paid during the years ended December 31, 2003
and December 31, 2002 is as follows:
<Table>
<Caption>
12/31/2003 12/31/2002
- ----------------------------------------------------------------
Distributions paid from:
Ordinary income $ 434,497,433 $ 353,927,540
- ----------------------------------------------------------------
Total Distributions 434,497,433 353,927,540
Tax return of capital 24,067,161 29,775,343
- ----------------------------------------------------------------
Total distributions paid $ 458,564,594 $ 383,702,883
================================================================
</Table>
As of December 31, 2003, the components of accumulated gains on a tax basis are
as follows:
<Table>
Capital loss carryforwards* $ (770,505,037)
Temporary differences (738,130)
Unrealized gains - net 461,549,129
- ----------------------------------------------------------------
Total accumulated gains - net $ (309,694,038)
================================================================
</Table>
* As of December 31, 2003, the capital loss carryforwards along with the related
expiration dates are as follows:
<Table>
<Caption>
2007 2008 2009 2010 TOTAL
- -----------------------------------------------------------------------------
$ 90,010,893 $ 74,455,357 $ 302,852,975 $ 303,185,812 $ 770,505,037
</Table>
At December 31, 2003, the Fund's aggregate unrealized security gains and losses
based on cost for U.S. Federal income tax purposes are as follows:
<Table>
Tax cost $ 8,615,557,765
- ----------------------------------------------------------------
Gross unrealized gain 568,416,915
Gross unrealized loss (106,867,786)
- ----------------------------------------------------------------
Net unrealized security gain $ 461,549,129
================================================================
</Table>
The difference between book-basis and tax-basis unrealized gains (losses) is
primarily attributable to temporary tax adjustments.
Permanent items identified during the year ended December 31, 2003, have been
reclassified among the components of net assets based on their tax basis
treatment as follows:
<Table>
<Caption>
UNDISTRIBUTED
(DISTRIBUTIONS
IN EXCESS OF) ACCUMULATED
NET INVESTMENT NET REALIZED PAID-IN
INCOME GAIN (LOSS) CAPITAL
- ----------------------------------------------
$ 22,390,270 $ (11,059,253) $ (11,331,017)
</Table>
39
<Page>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PORTFOLIO SECURITIES TRANSACTIONS
As of December 31, 2003, the value of securities loaned is $983,936,374. These
loans are collateralized by cash of $1,004,709,239, which is invested in a
restricted money market account. In connection with the securities lending
program, State Street Bank and Trust Company ("SSB") received fees of $661,071
for the year ended December 31, 2003, which are netted against securities
lending income on the Statement of Operations.
Purchases and sales of investment securities (other than short-term investments)
for the year ended December 31, 2003 are as follows:
<Table>
<Caption>
U.S. GOVERNMENT NON-U.S. GOVERNMENT U.S. GOVERNMENT NON-U.S. GOVERNMENT
PURCHASES* PURCHASES SALES* SALES
- ------------------------------------- -------------------------------------
$ 364,561,354 $ 4,030,732,980 $ 422,805,431 $ 2,216,790,632
</Table>
* Includes U.S. Government sponsored enterprise securities.
6. DIRECTORS' REMUNERATION
The Fund's officers and the one Director who are associated with Lord Abbett do
not receive any compensation from the Fund for serving in such capacities.
Outside Directors' fees are allocated among all Lord Abbett-sponsored funds
based on the net assets of each fund. There is an equity based plan available to
all outside Directors under which outside Directors must defer receipt of a
portion of, and may elect to defer receipt of an additional portion of
Directors' fees. The deferred amounts are treated as though equivalent dollar
amounts had been invested proportionately in the funds. Such amounts and
earnings accrued thereon are included in Directors' fees on the Statement of
Operations and in Directors' fees payable on the Statement of Assets and
Liabilities and are not deductible for U.S. federal income tax purposes until
such amounts are paid.
7. EXPENSE REDUCTIONS
The Fund has entered into arrangements with its transfer agent and custodian
whereby credits realized as a result of uninvested cash balances are used to
reduce a portion of the Fund's expenses.
8. LINE OF CREDIT
The Fund, along with certain other funds managed by Lord Abbett, has available a
$200,000,000 unsecured revolving credit facility ("Facility") from a consortium
of banks, to be used for temporary or emergency purposes as an additional source
of liquidity to fund redemptions of investor shares. Any borrowings under this
Facility will bear interest at current market rates as defined in the agreement.
The fee for this Facility is an annual rate of .09%. At December 31, 2003, there
were no loans outstanding pursuant to this Facility nor was the Facility
utilized at any time during the year ended December 31, 2003.
9. CUSTODIAN AND ACCOUNTING AGENT
SSB is the Fund's custodian and accounting agent. SSB performs custodian,
accounting and recordkeeping functions relating to portfolio transactions and
calculating the Fund's net asset value.
40
<Page>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. INVESTMENT RISKS
The Fund is subject to the general risks and considerations associated with
investing in fixed income securities. The value of an investment will change as
interest rates fluctuate and in response to market movements. When interest
rates rise, the prices of fixed income securities are likely to decline; when
rates fall, such prices tend to rise. Longer-term securities are usually more
sensitive to interest rate changes. There is also the risk that an issuer of a
fixed income security will fail to make timely payments of principal or interest
to the Fund, a risk that is greater with high yield securities (sometimes called
"lower-rated debt securities" or "junk bonds") in which the Fund may invest.
Some issuers, particularly of high yield bonds, may default as to principal
and/or interest payments after the Fund purchases its securities. A default, or
concerns in the market about an increase in risk of default, may result in
losses to the Fund. High yield securities are subject to greater price
fluctuations, as well as additional risks.
The mortgage-related securities in which the Fund may invest may be particularly
sensitive to changes in prevailing interest rates. When interest rates are
declining, the value of these securities with prepayment features may not
increase as much as other fixed income securities. Early principal repayment may
deprive the Fund of income payments above current market rates. The prepayment
rate also will affect the price and volatility of a mortgage-related security.
Some of these securities may be those of such government sponsored enterprises
as Federal Home Loan Mortgage Corporation and Federal National Mortgage
Association. Such securities are guaranteed with respect to the timely payment
of interest and principal by the particular government sponsored enterprise
involved, not by the U.S. Government.
The Fund may invest up to 20% of its net assets in equity securities which may
subject it to the general risks and considerations associated with investing in
equity securities. The value of an investment will fluctuate in response to
movements in the stock market in general and to the changing prospects of
individual companies in which the Fund invests.
The Fund may invest up to 20% of its net assets in foreign securities which may
present market liquidity, currency, political, information, and other risks.
These factors can affect Fund Performance.
11. SUMMARY OF CAPITAL TRANSACTIONS
The Fund has authorized 1.5 billion shares of $0.001 par value capital stock
designated as follows: 540 million Class A shares, 200 million Class B shares,
300 million Class C shares, 160 million Class P shares and 300 million Class Y
shares.
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
- -------------------------------------------------------------------------------------------------------------------
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------
Shares sold 223,314,498 $ 1,689,989,527 157,354,137 $ 1,155,022,546
Reinvestment of distributions 27,714,251 209,698,270 23,709,802 174,203,078
Shares reacquired (116,943,155) (887,585,222) (73,291,236) (537,438,772)
- -------------------------------------------------------------------------------------------------------------------
Increase 134,085,594 $ 1,012,102,575 107,772,703 $ 791,786,852
- -------------------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 72,430,972 $ 544,783,767 61,428,238 $ 454,981,810
Reinvestment of distributions 8,005,065 60,644,990 6,702,222 49,330,319
Shares reacquired (29,396,050) (223,787,955) (27,789,685) (203,547,440)
- -------------------------------------------------------------------------------------------------------------------
Increase 51,039,987 $ 381,640,802 40,340,775 $ 300,764,689
- -------------------------------------------------------------------------------------------------------------------
</Table>
41
<Page>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
- -------------------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 94,019,224 $ 711,800,299 58,627,811 $ 434,433,066
Reinvestment of distributions 5,446,530 41,378,345 3,805,259 28,005,949
Shares reacquired (27,653,284) (211,351,213) (20,344,362) (149,214,186)
- -------------------------------------------------------------------------------------------------------------------
Increase 71,812,470 $ 541,827,431 42,088,708 $ 313,224,829
- -------------------------------------------------------------------------------------------------------------------
CLASS P SHARES
Shares sold 5,912,734 $ 45,617,841 2,314,364 $ 17,319,960
Reinvestment of distributions 226,620 1,749,236 91,478 674,428
Shares reacquired (1,263,181) (9,783,156) (710,550) (5,216,805)
- -------------------------------------------------------------------------------------------------------------------
Increase 4,876,173 $ 37,583,921 1,695,292 $ 12,777,583
- -------------------------------------------------------------------------------------------------------------------
CLASS Y SHARES
Shares sold 12,393,435 $ 95,652,899 3,767,496 $ 27,844,268
Reinvestment of distributions 999,864 7,586,878 644,703 4,717,107
Shares reacquired (383,339) (2,897,655) (526,935) (3,658,816)
- -------------------------------------------------------------------------------------------------------------------
Increase 13,009,960 $ 100,342,122 3,885,264 $ 28,902,559
- -------------------------------------------------------------------------------------------------------------------
</Table>
42
<Page>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
LORD ABBETT BOND-DEBENTURE FUND, INC.:
We have audited the accompanying statement of assets and liabilities of Lord
Abbett Bond-Debenture Fund, Inc. (the "Fund"), including the schedule of
investments, as of December 31, 2003, 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
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2003 by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. 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 Lord
Abbett Bond-Debenture Fund, Inc. as of December 31, 2003, 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
five years in the period then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
New York, New York
February 20, 2004
43
<Page>
BASIC INFORMATION ABOUT MANAGEMENT
The Board of Directors, (the "Board") is responsible for the management of the
business and affairs of the Fund in accordance with the laws of the State of
Maryland. The Board appoints officers who are responsible for the day-to-day
operations of the Fund and who execute policies authorized by the Board. The
Board also approves an investment adviser to the Fund and continues to monitor
the cost and quality of the services provided by the investment adviser, and
annually considers whether to renew the contract with the adviser. Generally,
each Director holds office until his/her successor is elected and qualified or
until his/her earlier resignation or removal, as provided in the Fund's
organizational documents.
Lord, Abbett & Co. LLC ("Lord Abbett"), a Delaware limited liability company, is
the Fund's investment adviser.
INTERESTED DIRECTOR
The following Director is the Managing Partner of Lord Abbett and is an
"interested person" as defined in the Act. Mr. Dow is also an officer, director,
or trustee of each of the fourteen Lord Abbett-sponsored funds, which consist of
49 portfolios or series.
<Table>
<Caption>
CURRENT POSITION
NAME, ADDRESS AND LENGTH OF SERVICE PRINCIPAL OCCUPATION OTHER
DATE OF BIRTH WITH FUND DURING PAST FIVE YEARS DIRECTORSHIPS
- --------------------------------------------------------------------------------------------------------------
ROBERT S. DOW Director since Managing Partner and Chief N/A
Lord, Abbett & Co. LLC 1989; Investment Officer of Lord
90 Hudson Street Chairman since Abbett since 1996.
Jersey City, NJ 1996
Date of Birth: 3/8/1945
</Table>
----------
INDEPENDENT DIRECTORS
The following independent or outside Directors are also directors or trustees of
each of the fourteen Lord Abbett-sponsored funds, which consist of 49 portfolios
or series.
<Table>
<Caption>
CURRENT POSITION
NAME, ADDRESS AND LENGTH OF SERVICE PRINCIPAL OCCUPATION OTHER
DATE OF BIRTH WITH FUND DURING PAST FIVE YEARS DIRECTORSHIPS
- --------------------------------------------------------------------------------------------------------------
E. THAYER BIGELOW Director since Managing General Partner, Currently serves as director
Bigelow Media, LLC 1994 Bigelow Media, LLC (since of Adelphia Communications,
41 Madison Ave., 2000); Senior Adviser, Time Inc., Crane Co., and Huttig
Suite 3810 Warner Inc. (1998 - 2000); Building Products Inc.
New York, NY Acting Chief Executive Officer
Date of Birth: 10/22/1941 of Courtroom Television
Network (1997 - 1998);
President and Chief Executive
Officer of Time Warner Cable
Programming, Inc. (1991 -
1997).
WILLIAM H.T. BUSH Director 1998 Co-founder and Chairman of the Currently serves as director
Bush-O'Donnell & Co.,Inc. Board of the financial of Wellpoint Health Networks,
101 South Hanley Road advisory firm of Bush- Inc., DT Industries Inc., and
Suite 1250 O'Donnell & Company (since Engineered Support Systems,
St. Louis, MO 1986). Inc.
Date of Birth: 7/14/1938
</Table>
44
<Page>
BASIC INFORMATION ABOUT MANAGEMENT (CONTINUED)
<Table>
<Caption>
CURRENT POSITION
NAME, ADDRESS AND LENGTH OF SERVICE PRINCIPAL OCCUPATION OTHER
DATE OF BIRTH WITH FUND DURING PAST FIVE YEARS DIRECTORSHIPS
- --------------------------------------------------------------------------------------------------------------
ROBERT B. CALHOUN, JR. Director since Managing Director of Monitor Currently serves as director
Monitor Clipper Partners 1998 Clipper Partners (since 1997) of Avondale, Inc. and
650 Madison Ave., 9th Fl. and President of Clipper Asset Interstate Bakeries Corp.
New York, NY Management Corp. (since 1991),
Date of Birth: 10/25/1942 both private equity investment
funds.
JULIE A. HILL Director elected Owner and CEO of the Hillsdale Currently serves as director
20 Via Diamante February 2004 Companies (1997 - present), a of Wellpoint Health Networks,
Newport Coast, CA business consulting firm; Inc.; Resources Connection
Date of Birth: 7/16/1946 Founder, President and Owner Inc.; Holcim (US) Inc. (parent
of the Hiram-Hill and company Holcim Ltd).
Hillsdale Development
Companies from 1998 to 2001.
FRANKLIN W. HOBBS Director since Senior Advisor (since April Currently serves as director
Houlihan Lokey 2000 2003) and Former Chief of Adolph Coors Company.
Howard & Zukin Executive Officer of
685 Third Ave. Houlihan Lokey Howard & Zukin,
New York, NY an investment bank (January
Date of Birth: 7/30/1947 2002 - April 2003); Chairman
of Warburg Dillon Read (1999 -
2001); Global Head of
Corporate Finance of SBC
Warburg Dillon Read (1997 -
1999); Chief Executive Officer
of Dillon, Read & Co. (1994 -
1997).
C. ALAN MACDONALD Director since Retired - General Business and Currently serves as director
415 Round Hill Road 1988; and Lead Governance Consulting (since of Lincoln Snacks, H.J. Baker,
Greenwich, CT Independent 1992); formerly President and and Seix Fund, Inc.*
Date of Birth: 5/19/1933 Director CEO of Nestle Foods.
THOMAS J. NEFF Director since Chairman of Spencer Stuart, an Currently serves as director
Spencer Stuart 1982 executive search consulting of Ace, Ltd. and Exult, Inc.
277 Park Avenue firm (since 1996); President
New York, NY of Spencer Stuart (1979-1996).
Date of Birth: 10/2/1937
</Table>
45
<Page>
BASIC INFORMATION ABOUT MANAGEMENT (CONTINUED)
<Table>
<Caption>
CURRENT POSITION
NAME, ADDRESS AND LENGTH OF SERVICE PRINCIPAL OCCUPATION OTHER
DATE OF BIRTH WITH FUND DURING PAST FIVE YEARS DIRECTORSHIPS
- --------------------------------------------------------------------------------------------------------------
JAMES F. ORR, III Director since President and CEO of Currently serves as Chairman
80 Pinckney Street 2002; resigned LandingPoint Capital (since of Rockefeller Foundation,
Boston, MA 3/3/2003 2002); Chairman and CEO of Director of Nashua Corp. and
Date of Birth: 3/5/1943 United Asset Management SteelPoint Technologies.
Corporation (2000 to 2001);
Chairman and CEO of UNUM
Provident Corporation (1999 -
merger); Chairman and CEO of
UNUM Corporation (1988 -
1999).
</Table>
- ----------
* Seix Fund, Inc. is a registered investment company that is advised by Seix
Investment Advisors Inc. Seix Investment Advisors Inc.'s Chairman, CEO, and
Chief Investment Officer is married to Robert Dow, the Fund Chairman, CEO, and
President and the Managing Partner of Lord Abbett.
----------
OFFICERS
None of the officers listed below have received compensation from the Fund. All
the officers of the Fund may also be officers of the other Lord Abbett-sponsored
funds and maintain offices at 90 Hudson Street, Jersey City, NJ 07302.
<Table>
<Caption>
NAME AND CURRENT POSITION LENGTH OF SERVICE PRINCIPAL OCCUPATION
(DATE OF BIRTH) WITH FUND OF CURRENT POSITION DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------
ROBERT S. DOW Chairman, Chief Elected in 1996 Managing Partner and
(3/8/1945) Executive Officer Chief Investment
and President Officer of Lord Abbett
since 1996.
CHRISTOPHER J. TOWLE Executive Vice Elected in 1995 Partner and
(10/12/1957) President Investment Manager,
joined Lord Abbett in
1987.
TRACIE E. AHERN Vice President Elected in 1999 Partner and Director of
(1/12/1968) and Treasurer Portfolio Accounting and
Operations, joined Lord Abbett
in 1999, prior thereto Vice
President - Head of Fund
Administration of Morgan
Grenfell.
JOAN A. BINSTOCK Chief Financial Elected in 1999 Partner and Chief
(3/4/1954) Officer and Vice Operations Officer,
President joined Lord Abbett in
1999, prior thereto
Chief Operating
Officer of Morgan
Grenfell.
DANIEL E. CARPER Vice President Elected in 1987 Partner, joined Lord
(1/22/1952) Abbett in 1979.
</Table>
46
<Page>
BASIC INFORMATION ABOUT MANAGEMENT (CONTINUED)
<Table>
<Caption>
NAME AND CURRENT POSITION LENGTH OF SERVICE PRINCIPAL OCCUPATION
(DATE OF BIRTH) WITH FUND OF CURRENT POSITION DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------
MICHAEL S. GOLDSTEIN Vice President Elected in 1998 Partner and Fixed Income
(10/29/1968) Investment Manager, joined
Lord Abbett in 1997.
PAUL A. HILSTAD Vice President Elected in 1995 Partner and General
(12/13/1942) and Secretary Counsel, joined Lord
Abbett in 1995.
ELLEN G. ITSKOVITZ Vice President Elected in 2001 Partner and Senior
(10/30/1957) Research Analyst,
joined Lord Abbett in
1998.
LAWRENCE H. KAPLAN Vice President Elected in 1997 Partner and Deputy
(1/16/1957) and Assistant General Counsel,
Secretary joined Lord Abbett in
1997.
MAREN LINDSTROM Vice President Elected in 2000 Partner and Fixed Income
(9/17/1962) Investment Manager, joined
Lord Abbett in 2000, prior
thereto Director Convertible
Sales at UBS AG from 1999 to
2000, prior thereto Vice
President- Convertible Sales
at Deutsche Bank Securities
Inc. from 1998 to 1999.
ROBERT G. MORRIS Vice President Elected in 1995 Partner and Director
(11/6/1944) of Equity Investments,
joined Lord Abbett in
1991.
A. EDWARD OBERHAUS, III Vice President Elected in 1996 Partner and Manager
(12/21/1959) of Equity Trading,
joined Lord Abbett in
1983.
CHRISTINA T. SIMMONS Vice President Elected in 2001 Assistant General Counsel,
(11/12/1957) and Assistant joined Lord Abbett in 1999,
Secretary formerly Assistant General
Counsel of Prudential
Investments from 1998 to 1999,
prior thereto Counsel of
Drinker, Biddle & Reath LLP, a
law firm.
</Table>
47
<Page>
BASIC INFORMATION ABOUT MANAGEMENT (CONTINUED)
<Table>
<Caption>
NAME AND CURRENT POSITION LENGTH OF SERVICE PRINCIPAL OCCUPATION
(DATE OF BIRTH) WITH FUND OF CURRENT POSITION DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------
BERNARD J. GRZELAK Assistant Elected in 2003 Director of Fund
(6/12/1971) Treasurer Administration, joined Lord
Abbett in 2003, formerly Vice
President, Lazard Asset
Management from 2000 to 2003,
prior thereto Manager of
Deloitte & Touche LLP.
</Table>
Please call 888-522-2388 for a copy of the Statement of Additional Information
(SAI), which contains further information about the Company's Directors. It is
available free upon request.
48
<Page>
HOUSEHOLDING
The Fund has adopted a policy that allows it to send only one copy of the Fund's
Prospectus, proxy material, annual report and semi-annual report to certain
shareholders residing at the same "household." This reduces Fund expenses, which
benefits you and other shareholders. If you need additional copies or do not
want your mailings to be "householded," please call Lord Abbett at 800-821-5129
or send a written request with your name, the name of your fund or funds and
your account number or numbers to Lord Abbett Family of Funds, P.O. Box 219336,
Kansas City, MO 64121.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that Lord Abbett uses to vote
proxies related to the Fund's portfolio securities is available without charge,
upon request, by calling 888-522-2388 or on Lord Abbett's web site at
www.LordAbbett.com.
TAX INFORMATION
1.44% of the ordinary income distribution paid by the Fund during 2003 is
qualifying dividend income. For corporate shareholders, 1.44% of the Fund's
ordinary income distribution qualified for the dividends received deduction.
49
<Page>
[LORD ABBETT(R) LOGO]
<Table>
This report when not used for the general
information of shareholders of the Fund, is to be
distributed only if preceded or accompanied by a
current Fund prospectus. LORD ABBETT BOND-DEBENTURE FUND, INC.
Lord Abbett Mutual Fund shares are distributed by:
LORD ABBETT DISTRIBUTOR LLC
90 Hudson Street - Jersey City, New Jersey 07302-3973 LABD-2-1203
(2/04)
</Table>
<Page>
ITEM 2: Code of Ethics.
(a) In accordance with applicable requirements, the Registrant adopted a
Sarbanes-Oxley Code of Ethics on June 19, 2003 that applies to the
principal executive officer and senior financial officers of the
Registrant ("Code of Ethics"). The Code of Ethics was in effect from
June 19, 2003 through the end of the reporting period on December
31, 2003 (the "Period").
(b) Not applicable.
(c) The Registrant has not amended the Code of Ethics as described in
Form N-CSR during the Period.
(d) The Registrant has not granted any waiver, including an implicit
waiver, from a provision of the Code of Ethics as described in Form
N-CSR during the Period.
(e) Not applicable.
(f) See Item 10(a) concerning the filing of the Code of Ethics.
ITEM 3: Audit Committee Financial Expert.
The Registrant's Board of Directors has determined that each of the
independent Directors who comprise the audit committee are audit
committee financial experts. The members of the audit committee are
E. Thayer Bigelow, Robert B. Calhoun, and Franklin W. Hobbs.
Ms. Julie Hill is a newly elected member of the audit committee.
Each audit committee member is independent within the meaning of the
Form N-CSR.
ITEM 4: PRINCIPAL ACCOUNTANT FEES AND SERVICES.
In response to sections (a), (b), (c) and (d) of Item 4, the aggregate fees
billed to the Registrant for the fiscal years ended December 31, 2003 and 2002
by the Registrant's principal accounting firm, Deloitte & Touche LLP, the member
firms of Deloitte Touche Tohmatsu and their respective affiliates (collectively,
"Deloitte") were as follows:
<Table>
<Caption>
FISCAL YEAR ENDED:
2003 2002
Audit Fees {a} $ 55,000 $ 75,000
Audit-Related Fees {b} 1,369 1,492
-----------------------
Total audit and audit-related fees 56,369 76,492
-----------------------
Tax Fees {c} 8,919 7,250
All Other Fees {d} 2,076 -
-----------------------
Total Fees $ 67,364 $ 83,742
-----------------------
</Table>
<Page>
- ----------
{a} Consists of fees for audits of the Registrant's annual financial
statements.
{b} Consists of the Registrant's proportionate share of fees for
performing certain agreed-upon procedures regarding compliance with the
provisions of Rule 17a-7 of the Investment Company Act of 1940 and
related Board approved procedures.
{c} Fees for the fiscal year ended December 31, 2003 consist of fees of
$7,550 for preparing the U.S. Income Tax Return for Regulated Investment
Companies, New Jersey Corporation Business Tax Return, New Jersey Annual
Report Form, U.S. Return of Excise Tax on Undistributed Income of
Investment Companies and fees of $1,369 for preparing IRS Forms
1099-MISC and 1096 Annual Summary and Transmittal of U.S. Information
Returns.
Fees for the fiscal year ended December 31, 2002 consist of fees for
preparing the U.S. Income Tax Return for Regulated Investment Companies,
New Jersey Corporation Business Tax Return, New Jersey Annual Report
Form, U.S. Return of Excise Tax on Undistributed Income of Investment
Companies.
{d} Consists of the Registrant's proportionate share of fees for testing
of Anti-Money Laundering Compliance.
(e) (1) Pursuant to Rule 2-01(c) (7) of Regulation S-X, the Registrant's Audit
Committee has adopted pre-approval policies and procedures. Such policies and
procedures generally provide that the Audit Committee must pre-approve:
- any audit, audit-related, tax, and other services to be
provided to the Lord Abbett Funds, including the Registrant,
and
- any audit-related, tax, and other services to be provided to
the Registrant's investment adviser and any entity
controlling, controlled by or under common control with the
investment adviser that provides ongoing services to one or
more Funds comprising the Registrant if the engagement relates
directly to operations and financial reporting of a Fund,
by the independent auditor to assure that the provision of such services does
not impair the auditor's independence.
The Audit Committee has delegated pre-approval authority to its Chairman,
subject to a fee limit of $10,000 per event, and not to exceed $25,000 annually.
The Chairman will report any pre-approval decisions to the Audit Committee at
its next scheduled meeting. Unless a type of service to be provided by the
independent auditor has received general pre-approval, it
<Page>
must be pre-approved by the Audit Committee. Any proposed services exceeding
pre-approved cost levels will require specific pre-approval by the Audit
Committee.
(e) (2) The Registrant's Audit Committee has approved 100% of the services
described in this Item 4 (b) through (d).
(f) Not applicable.
(g) The aggregate non-audit fees billed by Deloitte for services rendered to the
Registrant are shown above in the response to Item 4 (a), (b), (c) and (d) as
"All Other Fees".
The aggregate non-audit fees billed by Deloitte for services rendered to the
Registrant's investment adviser, Lord, Abbett & Co. LLC ("Lord Abbett"), for the
fiscal years ended December 31, 2003 and 2002 were:
<Table>
<Caption>
FISCAL YEAR ENDED:
2003 2002
All Other Fees {a} $ 76,900 $ 171,456
</Table>
- ----------
{a} Fees for the fiscal year ended December 31, 2003 consist of fees for
Independent Services Auditors' Report on Controls Placed in Operation
and Tests of Operating Effectiveness related to Lord Abbett's operations
and general computer controls over equity securities processing for
institutional and mutual fund accounts ("SAS 70 Report").
Fees for the fiscal year ended December 31, 2002 consist of fees of
$146,456 for testing of Business Continuity Planning and $25,000 for the
SAS 70 Report.
The aggregate non-audit fees billed by Deloitte for services rendered to
entities under the common control of Lord Abbett (i.e., Lord Abbett Distributor
LLC, the Registrant's principal underwriter) for the fiscal years ended December
31, 2003 and 2002 were:
<Table>
<Caption>
FISCAL YEAR ENDED:
2003 2002
All Other Fees {b} $ 11,378 -0-
</Table>
- ----------
{b} Fees for the fiscal year ended December 31, 2003 represent fees for
testing of Anti-Money Laundering Compliance.
<Page>
(h) The Registrant's Audit Committee has considered the provision of non-audit
services that were rendered to the Registrant's investment adviser, and any
entity controlling, controlled by or under common control with the investment
adviser that provides ongoing services to the Registrant, that were not
pre-approved pursuant to Rule 2-01 (c)(7)(ii) of Regulation S-X and has
determined that the provision of such services is compatible with maintaining
Deloitte's independence.
ITEM 5: Audit Committee of Listed Registrants
Not applicable.
ITEM 6: [Reserved]
ITEM 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
ITEM 8: [Reserved]
ITEM 9: Controls and Procedures.
(a) Based on their evaluation of the Registrant's disclosure controls
and procedures (as defined in Rule 30a-3(c) under the Investment
Company Act of 1940) as of February 20, 2004 the Chief Executive
Officer and Chief Financial Officer of the Registrant have concluded
that such disclosure controls and procedures are reasonably designed
and effective to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known
to them by others within those entities.
(b) There were no changes in the Registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the
Investment Company Act of 1940) that occurred during the
Registrant's last fiscal half-year that have materially affected, or
are reasonably likely to materially affect, the Registrant's
internal control over financial reporting.
ITEM 10: Exhibits.
ITEM 10(a): Code of Ethics, as required by Item 2, is attached hereto as part of
EX-99.CODEETH.
<Page>
ITEM 10(b):
(i) Certification of each principal executive officer and principal
financial officer of the Registrant as required by Rule 30a-2(a)
under the Act (17 CFR 270.30a-2) is attached hereto as a part of
EX-99.CERT.
(ii) Certification of each principal executive officer and principal
financial officer of the Registrant as required by Section 906 of
the Sarbanes-Oxley Act of 2002 is attached hereto as a part of
EX-99.906CERT.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities and 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]
/s/ Robert S. Dow
-----------------
Robert S. Dow
Chief Executive Officer,
Chairman and President
/s/ Joan A. Binstock
--------------------
Joan A. Binstock
Chief Financial Officer and Vice President
Date February 20, 2004
<Page>
Pursuant to the requirements of the Securities and 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.
[REGISTRANT]
/s/Robert S. Dow
----------------
Robert S. Dow
Chief Executive Officer,
Chairman and President
/s/ Joan A. Binstock
--------------------
Joan A. Binstock
Chief Financial Officer and Vice President
Date February 20, 2004