<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
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Date of fiscal year end: 12/31
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Date of reporting period: 6/30/04
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<Page>
ITEM 1: REPORT TO SHAREHOLDERS.
<Page>
[LORD ABBETT LOGO]
2004
SEMI-
ANNUAL
REPORT
LORD ABBETT
BOND-DEBENTURE FUND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2004
<Page>
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LORD ABBETT BOND-DEBENTURE FUND
SEMI-ANNUAL REPORT
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2004
DEAR SHAREHOLDERS: We are pleased to provide you with this overview of the Lord
Abbett Bond-Debenture Fund's strategies and performance for the period ended
June 30, 2004. 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
- --------------------------------------------------------------------------------
Q. WHAT WERE THE OVERALL MARKET CONDITIONS OF THE REPORTING PERIOD?
A. During the period, data confirmed the U.S. economy's transition from a
jobless, low-inflation recovery to an expansion - the latter attended by healthy
job gains, diminishing excess capacity and rising prices. Despite the improving
fundamentals of the U.S. economy, investors in general grew more defensive over
the period as they focused instead on increasing geopolitical risks and election
uncertainty. The bond market saw evidence of gathering inflation and pressured
market rates higher, even before the Federal Reserve Board (the Fed) took action
on June 30, raising its fed funds rate to 1.25% from 1%. (The fed funds rate is
the rate at which banks lend to each other overnight.)
Interest-rate sensitive securities, such as investment-grade bonds, were
challenged in this environment, while securities of companies that may benefit
from economic expansion, including high-yield bonds and convertible securities,
managed to avoid some of the downside exposure and, in fact, rallied at period
end.
Q. HOW DID THE FUND PERFORM OVER THE SIX-MONTH PERIOD ENDED JUNE 30, 2004?
A. For the six-month period ended June 30, 2004, the Fund returned 1.1%,
reflecting performance at the Net Asset Value (NAV) of Class A shares with all
distributions reinvested, compared with its benchmark, the Lehman Aggregate Bond
Index,(1) which returned 0.2% over 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 are: 1 Year: 3.78%, 5 Years: 4.04% and 10 Years: 6.53%.
PERFORMANCE DATA QUOTED REFLECT PAST PERFORMANCE AND ARE NO GUARANTEE OF FUTURE
RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
1
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QUOTED. 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. YOU CAN OBTAIN PERFORMANCE DATA CURRENT
TO THE MOST RECENT MONTH END BY CALLING LORD ABBETT AT 800-821-5129 OR REFERRING
TO OUR WEBSITE AT www.LordAbbett.com.
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 participates are high-yield bonds and
convertible securities. In addition, the Fund must hold 20% of its portfolio in
investment-grade corporate bonds, government bonds and/or agencies.
Relative to its benchmark, the Lehman Aggregate Bond Index, the Fund's
portfolio was underweight U.S. Treasury and other government securities in the
first six months of 2004. The underweight position contributed to relative
performance, as investment-grade bonds in general underperformed lower-rated
credits over the period. Market fears about rising interest rates led to weak
performance in investment-grade bonds, which are, in general, more sensitive to
changes in interest rates than below-investment grade sectors, such as
high-yield bonds.
Among the portfolio's holdings in investment-grade corporate bonds, the Fund
benefited from performance of select securities in the cable and chemicals
industries, while bonds in the automotive and electric industries detracted from
performance. Airline bonds also detracted from performance as carriers continued
to suffer from increased energy costs and overcapacity issues.
High-yield bonds are equity-sensitive, tending to improve in price as
economic and business fundamentals strengthen. Contributing to Fund performance
within this sector were portfolio holdings in the cable, steel, chemicals and
fixed- line telecommunications industries. Detracting from performance within
the high-yield sector were select credits in wireless telecommunications,
packaging and airlines companies.
In another equity-sensitive area, convertible securities, the Fund benefited
from credits within the investment/financial services, telecommunications and
chemicals sectors. Software services, computer hardware and pharmaceutical
holdings detracted from performance. Performance in electronics credits was
mixed.
The Fund's flexible investment strategy also included an allocation to
stocks in the six-month period, an asset
2
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class which is not in the Fund's benchmark. The Fund's portfolio managers worked
with Lord Abbett's equity specialists to identify value companies. Contributing
to performance were holdings within food and drug retailers, computer hardware,
non-electric utilities and health services sectors. Detracting from performance
were portfolio holdings in railroad, pharmaceutical, software services and
wireless telecommunications companies.
THE FUND'S PORTFOLIO IS ACTIVELY MANAGED AND, THEREFORE, ITS HOLDINGS AND
WEIGHTINGS OF A PARTICULAR ISSUER OR PARTICULAR SECTOR AS A PERCENTAGE OF
PORTFOLIO ASSETS ARE SUBJECT TO CHANGE. SECTORS MAY INCLUDE MANY INDUSTRIES.
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 CONTACT YOUR INVESTMENT PROFESSIONAL OR
LORD ABBETT DISTRIBUTOR LLC AT 800-874-3733 OR VISIT www.LordAbbett.com. READ
THE PROSPECTUS CAREFULLY BEFORE INVESTING.
(1) The 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.
IMPORTANT PERFORMANCE AND OTHER INFORMATION
The views of the Fund's management and the portfolio holdings described in this
report are as of June 30, 2004; 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: BECAUSE OF ONGOING MARKET VOLATILITY, FUND PERFORMANCE MAY BE
SUBJECT TO SUBSTANTIAL FLUCTUATION. 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.
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.
3
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 95.83%
ASSET-BACKED SECURITIES 0.12%
AIRLINES 0.12%
Continental Airlines 1997-1 B
(Cost $9,982,324) 7.461% 4/1/2013 $ 12,139 $ 9,620,952
<Caption>
SHARES
(000)
----------
COMMON STOCKS 6.23%
AEROSPACE/DEFENSE 0.17%
Raytheon Co.^ 400 14,308,000
---------------
AGRICULTURE 0.11%
Archer-Daniels-Midland Co.^ 550 9,229,000
---------------
BANKING 0.34%
Bank of New York Co., Inc. 200 5,896,000
Wachovia Corp.^ 500 22,250,000
---------------
TOTAL 28,146,000
---------------
BEVERAGE 0.29%
PepsiCo, Inc.^ 450 24,246,000
---------------
CHEMICALS 0.57%
E.I. du Pont de Nemours & Co. 500 22,210,000
Praxair, Inc.^ 500 19,955,000
Texas Petrochemicals, Inc.*^ 444 4,494,548
---------------
TOTAL 46,659,548
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DIVERSIFIED CAPITAL GOODS 0.33%
3M Co.^ 300 27,003,000
---------------
ELECTRIC-INTEGRATED 0.24%
Northeast Utilities System^ 1,000 19,470,000
---------------
ELECTRONICS 0.55%
Emerson Electric Co. 400 25,420,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
SHARES
INVESTMENTS (000) VALUE
- -------------------------------------------------------------------------------------------------
Hubbell, Inc.^ 350 $ 16,348,500
Mentor Graphics Corp.*^ 250 3,867,500
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TOTAL 45,636,000
---------------
ENERGY - EXPLORATION & PRODUCTION 0.19%
Exxon Mobil Corp. 350 15,543,500
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FOOD - WHOLESALE 0.40%
Conagra Foods, Inc.^ 200 5,416,000
Kellogg Co.^ 650 27,202,500
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TOTAL 32,618,500
---------------
FORESTRY/PAPER 0.19%
International Paper Co.^ 350 15,645,000
---------------
HEALTH SERVICES 0.08%
Pharmaceutical Product Development, Inc.*^ 200 6,354,000
---------------
INTEGRATED ENERGY 0.29%
ChevronTexaco Corp. 250 23,527,500
---------------
INVESTMENTS & MISC FINANCIAL SERVICES 0.03%
First American Corp.^ 108 2,789,622
---------------
MEDIA - BROADCAST 0.11%
Clear Channel Communications, Inc.^ 250 9,237,500
---------------
METALS/MINING EXCLUDING STEEL 0.26%
Alcoa, Inc.^ 500 16,515,000
Placer Dome, Inc.(a) 300 4,992,000
---------------
TOTAL 21,507,000
---------------
MULTI-LINE INSURANCE 0.30%
MetLife, Inc.^ 450 16,132,500
Safeco Corp.^ 200 8,800,000
---------------
TOTAL 24,932,500
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NON-ELECTRIC UTILITIES 0.13%
National Fuel Gas Co.^ 300 7,500,000
Semco Energy, Inc.^ 489 2,844,705
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TOTAL 10,344,705
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</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
SHARES
INVESTMENTS (000) VALUE
- -------------------------------------------------------------------------------------------------
PHARMACEUTICALS 0.54%
Amgen, Inc.* 200 $ 10,914,000
Merck & Co., Inc.^ 350 16,625,000
Mylan Laboratories, Inc. 400 8,100,000
Pfizer, Inc. 250 8,570,000
---------------
TOTAL 44,209,000
---------------
PRINTING & PUBLISHING 0.11%
Tribune Co.^ 200 9,108,000
---------------
RAILROADS 0.22%
Union Pacific Corp.^ 300 17,835,000
---------------
REAL ESTATE INVESTMENT TRUSTS 0.13%
Healthcare Realty Trust, Inc.^ 150 5,622,000
Simon Property Group, Inc.^ 100 5,142,000
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TOTAL 10,764,000
---------------
RESTAURANTS 0.08%
McDonald's Corp. 250 6,500,000
---------------
SOFTWARE/SERVICES 0.33%
Affiliated Computers Services, Inc.*^ 150 7,941,000
BEA Systems, Inc.*^ 525 4,315,500
EMC Corp.* 500 5,700,000
Sungard Data Systems, Inc.* 350 9,100,000
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TOTAL 27,056,500
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TELECOM - INTEGRATED/SERVICES 0.20%
Verizon Communications, Inc. 450 16,285,500
---------------
TELECOM - WIRELESS 0.04%
Airgate PCS, Inc.*^ 116 2,116,303
Nextel Communications, Inc.*^ 40 1,073,865
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TOTAL 3,190,168
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TOTAL COMMON STOCKS (COST $455,551,228) 512,145,543
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 10.71%
AEROSPACE/DEFENSE 0.68%
Alliant Techsystems, Inc.+ 2.75% 2/15/2024 $ 12,500 $ 13,000,000
EDO Corp. 5.25% 4/15/2007 15,000 15,768,750
L-3 Comm Holdings Corp.^ 4.00% 9/15/2011 22,000 27,555,000
---------------
TOTAL 56,323,750
---------------
CHEMICALS 0.03%
Texas Petrochemical Corp. 7.25% 4/30/2009 1,866 2,248,530
---------------
COMPUTER HARDWARE 0.76%
ASML Holding N.V.(a) 5.75% 10/15/2006 15,000 17,587,500
Corning, Inc. 3.50% 11/1/2008 20,770 29,337,625
Maxtor Corp. 6.80% 4/30/2010 6,000 6,360,000
Solectron Corp.+ 0.50% 2/15/2034 10,000 9,262,500
---------------
TOTAL 62,547,625
---------------
DIVERSIFIED CAPITAL GOODS 0.37%
Tyco Int'l. Group(a) 2.75% 1/15/2018 20,000 30,150,000
---------------
ELECTRONICS 1.16%
Artesyn Technologies, Inc. 5.50% 8/15/2010 4,750 6,780,625
Flir Systems, Inc. 3.00% 6/1/2023 15,000 21,431,250
RF Micro Devices, Inc. 1.50% 7/1/2010 22,500 26,662,500
STMicroelectronics(a) Zero Coupon 7/5/2013 20,000 19,553,580
Teradyne, Inc. 3.75% 10/15/2006 20,000 21,200,000
---------------
TOTAL 95,627,955
---------------
ENERGY - EXPLORATION & PRODUCTION 0.16%
Kerr-McGee Corp. 5.25% 2/15/2010 12,500 13,187,500
---------------
FOOD - WHOLESALE 0.33%
Nestle Holdings, Inc.(a) 3.00% 5/9/2005 23,000 27,114,413
---------------
GAMING 0.16%
International Game Technology Zero Coupon 1/29/2033 15,000 12,806,250
---------------
HEALTH SERVICES 1.39%
Abgenix, Inc. 3.50% 3/15/2007 5,000 4,668,750
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
Advanced Medical Optics, Inc.+ 2.50% 7/15/2024 $ 6,000 $ 6,592,500
Fisher Scientific Int'l., Inc. 2.50% 10/1/2023 7,500 10,546,875
Fisher Scientific Int'l., Inc. 3.25% 3/1/2024 15,000 15,637,500
Invitrogen Corp.+ 1.50% 2/15/2024 25,000 23,593,750
Lifepoint Hospitals Holdings 4.50% 6/1/2009 27,810 28,887,637
Universal Health Services, Inc. 0.426% 6/23/2020 40,000 23,950,000
---------------
TOTAL 113,877,012
---------------
HOUSEHOLD & LEISURE PRODUCTS 0.25%
Costco Cos., Inc. Zero Coupon 8/19/2017 22,000 20,817,500
---------------
INVESTMENTS & MISC FINANCIAL SERVICES 0.35%
Lehman Brothers Holdings(c) 0.25% 7/7/2011 10,000 10,050,000
Lehman Brothers Holdings 0.25% 6/24/2008 18,000 18,360,000
---------------
TOTAL 28,410,000
---------------
MEDIA - BROADCAST 0.07%
Sinclair Broadcast Group, Inc. 4.875%# 7/15/2018 6,500 6,045,000
---------------
MEDIA - DIVERSIFIED 0.73%
Liberty Media Corp. Class A 3.25% 3/15/2031 28,000 25,200,000
Mediacom Communications Corp. 5.25% 7/1/2006 8,600 8,223,750
Walt Disney Co. (The) 2.125% 4/15/2023 25,000 26,937,500
---------------
TOTAL 60,361,250
---------------
MEDIA - SERVICES 0.39%
Lamar Advertising Co. 2.875% 12/31/2010 30,000 32,362,500
---------------
OIL FIELD EQUIPMENT & SERVICES 0.32%
Schlumberger Ltd.(a) 1.50% 6/1/2023 25,000 26,593,750
---------------
PHARMACEUTICALS 1.37%
Amylin Pharmaceuticals, Inc.+ 2.50% 4/15/2011 15,000 14,625,000
Cephalon, Inc. 2.50% 12/15/2006 15,000 14,493,750
Gilead Sciences, Inc. 2.00% 12/15/2007 10,000 14,937,500
Teva Pharmaceutical Finance II,
LLC(a) 0.50% 2/1/2024 15,500 16,081,250
Teva Pharmaceutical Finance
B.V.(a) 0.375% 11/15/2022 22,350 35,704,125
Watson Pharmaceutical, Inc. 1.75% 3/15/2023 17,500 16,603,125
---------------
TOTAL 112,444,750
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
SOFTWARE/SERVICES 1.53%
BEA Systems, Inc. 4.00% 12/15/2006 $ 10,000 $ 9,887,500
DST Systems, Inc. 4.125% 8/15/2023 23,000 28,865,000
EMC Corp. 4.50% 4/1/2007 20,000 22,025,000
Manugistics Group, Inc. 5.00% 11/1/2007 25,000 23,062,500
Mentor Graphics Corp. 6.875% 6/15/2007 21,000 22,207,500
Wind River Systems, Inc. 3.75% 12/15/2006 20,000 19,650,000
---------------
TOTAL 125,697,500
---------------
SUPPORT-SERVICES 0.23%
Kroll, Inc.+ 1.75% 1/15/2014 17,500 18,550,000
---------------
TELECOM - WIRELESS 0.12%
Nextel Communications, Inc. 5.25% 1/15/2010 10,000 9,775,000
---------------
TELECOMMUNICATIONS EQUIPMENT 0.31%
LSI Logic Corp. 4.00% 5/15/2010 25,000 25,125,000
---------------
TOTAL CONVERTIBLE BONDS
(COST $829,954,130) 880,065,285
===============
<Caption>
SHARES
(000)
------
CONVERTIBLE PREFERRED STOCKS 3.30%
BEVERAGE 0.06%
Constellation Brands, Inc.^ 5.75% 160 5,268,800
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ELECTRIC-DISTR/TRANS 0.40%
FPL Group, Inc.^ 8.00% 600 32,886,000
---------------
ELECTRIC-INTEGRATED 0.33%
Dominion Resources, Inc.^ 9.50% 500 27,200,000
---------------
ENERGY - EXPLORATION & PRODUCTION 0.27%
Kerr-McGee Corp. 5.50% 400 22,596,000
---------------
FOOD & DRUG RETAILERS 0.15%
Albertson's, Inc. 7.25% 450 12,460,500
---------------
FORESTRY/PAPER 0.25%
Temple-Inland, Inc.^ 7.50% 350 20,587,000
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
INTEREST SHARES
INVESTMENTS RATE (000) VALUE
- -------------------------------------------------------------------------------------------------
HEALTH SERVICES 0.56%
Anthem, Inc.^ 6.00% 130 $ 13,352,300
Baxter Int'l., Inc.^ 7.00% 350 19,936,000
Omnicare, Inc.^ 4.00% 200 12,406,000
---------------
TOTAL 45,694,300
---------------
HOUSEHOLD & LEISURE PRODUCTS 0.04%
Six Flags, Inc.^ 7.25% 151 3,382,400
---------------
INVESTMENTS & MISCELLANEOUS
FINANCIAL SERVICES 0.08%
Doral Financial Corp. 4.75% 24 6,337,500
---------------
MEDIA - BROADCAST 0.18%
Sinclair Broadcast Group, Inc.^ 6.00% 340 14,705,000
---------------
METALS/MINING EXCLUDING STEEL 0.21%
Phelps Dodge Corp.^ 6.75% 105 17,316,094
---------------
MULTI-LINE INSURANCE 0.49%
Prudential Financial, Inc.^ 6.75% 500 34,965,000
XL Capital Ltd.^(a) 6.50% 200 5,078,000
---------------
TOTAL 40,043,000
---------------
PRINTING & PUBLISHING 0.22%
Interpublic Group of Cos.^ 5.375% 350 17,860,500
---------------
TELECOMMUNICATIONS EQUIPMENT 0.06%
Motorola, Inc. 7.00% 100 4,938,000
---------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $239,742,028) 271,275,094
===============
<Caption>
PRINCIPAL
MATURITY AMOUNT
DATE (000)
----------------------
GOVERNMENT SPONSORED ENTERPRISES BONDS 1.02%
Federal Home Loan Mortgage Corp.
(Cost $81,363,929) 7.00% 7/15/2005 $ 80,000 83,873,840
===============
GOVERNMENT SPONSORED ENTERPRISES PASS-THROUGHS 2.52%
Federal National Mortgage Assoc. 5.50% 7/1/2033 70,614 70,502,594
Federal National Mortgage Assoc. 5.50% 10/1/2033 22,340 22,304,492
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
Federal National Mortgage Assoc. 5.50% 3/1/2034 $ 24,399 $ 24,321,210
Federal National Mortgage Assoc. 6.00% 9/1/2032 7,683 7,859,952
Federal National Mortgage Assoc. 6.00% 5/1/2033 7,817 7,996,976
Federal National Mortgage Assoc. 6.00% 10/1/2033 12,804 13,090,549
Federal National Mortgage Assoc. 6.00% 1/1/2034 12,925 13,214,564
Federal National Mortgage Assoc. 7.00% 9/1/2029 863 913,418
Federal National Mortgage Assoc. 7.00% 1/1/2031 1,554 1,645,616
Federal National Mortgage Assoc. 7.00% 9/1/2031 1,922 2,033,196
Federal National Mortgage Assoc. 7.00% 9/1/2031 5,004 5,293,784
Federal National Mortgage Assoc. 7.00% 10/1/2031 4,387 4,640,290
Federal National Mortgage Assoc. 7.00% 3/1/2032 11,123 11,743,015
Federal National Mortgage Assoc. 7.00% 5/1/2032 5,282 5,576,503
Federal National Mortgage Assoc. 7.50% 6/1/2030 2,930 3,141,422
Federal National Mortgage Assoc. 7.50% 11/1/2031 1,867 2,001,964
Federal National Mortgage Assoc. 8.00% 2/1/2030 3,896 4,242,314
Federal National Mortgage Assoc. 8.00% 3/1/2030 4 4,812
Federal National Mortgage Assoc. 8.00% 4/1/2030 5,844 6,363,264
---------------
TOTAL GOVERNMENT SPONSORED ENTERPRISES
PASS-THROUGHS (COST $206,678,584) 206,889,935
===============
HIGH YIELD CORPORATE BONDS 71.33%
AEROSPACE/DEFENSE 1.21%
Alliant Techsystems, Inc.^ 8.50% 5/15/2011 15,000 16,275,000
Armor Holdings, Inc.^ 8.25% 8/15/2013 10,000 10,750,000
DRS Technologies, Inc.^ 6.875% 11/1/2013 22,000 21,560,000
Esterline Technologies Corp. 7.75% 6/15/2013 16,000 16,560,000
L-3 Communications Holdings Corp. 6.125% 1/15/2014 7,500 7,200,000
L-3 Communications Holdings Corp.^ 7.625% 6/15/2012 12,500 13,250,000
Titan Corp.+ 8.00% 5/15/2011 13,350 13,550,250
---------------
TOTAL 99,145,250
---------------
AIRLINES 0.24%
American Airlines^ 8.608% 4/1/2011 9,500 8,645,509
Delta Air Lines, Inc.^ 10.375% 2/1/2011 2,500 1,350,000
Delta Airlines^ 7.711% 9/18/2011 15,000 9,695,870
---------------
TOTAL 19,691,379
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
APPAREL/TEXTILES 0.43%
Invista+(a) 9.25% 5/1/2012 $ 19,000 $ 19,190,000
Oxford Industries, Inc.+ 8.875% 6/1/2011 6,000 6,360,000
Tommy Hilfiger USA, Inc.^ 6.85% 6/1/2008 10,000 10,062,500
---------------
TOTAL 35,612,500
---------------
AUTO LOANS 0.44%
Ford Motor Credit Corp.^ 7.25% 10/25/2011 35,000 36,601,880
---------------
AUTO PARTS & EQUIPMENT 2.60%
Advanced Accessory System 10.75% 6/15/2011 7,000 6,825,000
Arvin Meritor, Inc.^ 8.75% 3/1/2012 15,000 16,350,000
Collins & Aikman Products Co. 10.75% 12/31/2011 18,500 18,685,000
Cummins, Inc.^ 9.50% 12/1/2010 16,650 18,939,375
Dana Corp. 10.125% 3/15/2010 15,000 17,062,500
Delco Remy Int'l., Inc.+ 5.169%# 4/15/2009 4,000 4,100,000
Delco Remy Int'l., Inc.^ 8.625% 12/15/2007 7,000 7,175,000
Delco Remy Int'l., Inc. 11.00% 5/1/2009 26,600 28,196,000
Dura Operating Corp.^ 9.00% 5/1/2009 20,000 19,700,000
Eagle-Picher, Inc. 9.75% 9/1/2013 8,000 8,640,000
Goodyear Tire & Rubber Co. 7.857% 8/15/2011 17,000 15,597,500
Tenneco Automotive, Inc.^ 10.25% 7/15/2013 5,000 5,675,000
Tenneco Automotive, Inc.^ 11.625% 10/15/2009 23,500 25,380,000
TRW Automotive, Inc.^ 11.00% 2/15/2013 18,254 21,630,990
---------------
TOTAL 213,956,365
---------------
AUTOMOTIVE 0.50%
General Motors Corp.^ 7.20% 1/15/2011 30,000 31,474,650
Navistar Int'l. Corp. 7.50% 6/15/2011 4,000 4,120,000
Navistar Int'l. Corp.^ 9.375% 6/1/2006 5,000 5,425,000
Venture Holding Trust(b) 9.50% 7/1/2005 10,000 300,000
---------------
TOTAL 41,319,650
---------------
BANKING 0.43%
Regions Financial Corp. 7.00% 3/1/2011 14,000 15,714,090
Wells Fargo & Co. 5.10%# 5/6/2018 20,000 19,912,380
---------------
TOTAL 35,626,470
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
BEVERAGE 0.15%
Le-Natures, Inc.+ 10.00% 6/15/2013 $ 11,500 $ 11,960,000
---------------
BUILDING & CONSTRUCTION 1.03%
Beazer Homes USA, Inc.^ 6.50% 11/15/2013 15,000 14,250,000
Beazer Homes USA, Inc. 8.375% 4/15/2012 8,250 8,745,000
D. R. Horton, Inc.^ 6.875% 5/1/2013 5,100 5,227,500
Lennar Corp. 7.625% 3/1/2009 15,000 16,625,655
Schuler Homes, Inc. 9.375% 7/15/2009 15,000 16,537,500
Shaw Group, Inc.^ 10.75% 3/15/2010 12,000 11,820,000
William Lyon Homes 10.75% 4/1/2013 10,000 11,100,000
---------------
TOTAL 84,305,655
---------------
BUILDING MATERIALS 1.10%
American Standard Cos., Inc. 8.25% 6/1/2009 30,000 33,750,000
American Standard Cos., Inc.^ 7.625% 2/15/2010 5,000 5,525,000
Jacuzzi Brands, Inc. 9.625% 7/1/2010 27,500 29,562,500
Nortek Holdings, Inc.**+ 0.00%/10.00% 11/15/2007 &
5/15/2011 9,000 7,245,000
Nortek, Inc. 9.875% 6/15/2011 5,000 5,725,000
Texas Industries, Inc. 10.25% 6/15/2011 8,000 8,960,000
---------------
TOTAL 90,767,500
---------------
CHEMICALS 2.65%
Airgas, Inc. 6.25% 7/15/2014 10,000 9,625,000
Airgas, Inc. 7.75% 9/15/2006 5,000 5,325,000
Ferro Corp.^ 9.125% 1/1/2009 12,000 13,793,220
Hercules, Inc.+ 6.75% 10/15/2029 20,450 19,734,250
Huntsman ICI Chemicals LLC^ 10.125% 7/1/2009 2,500 2,562,500
Huntsman Int'l Holdings^ Zero Coupon 12/31/2009 6,000 2,970,000
IMC Global, Inc.^ 11.25% 6/1/2011 35,000 40,512,500
Kraton Polymers LLC+ 8.125% 1/15/2014 11,500 11,672,500
Lyondell Chemical Co.^ 9.625% 5/1/2007 21,450 22,522,500
Methanex Corp.^(a) 8.75% 8/15/2012 3,250 3,672,500
Nalco Co.+^ 8.875% 11/15/2013 12,500 13,156,250
Nova Chemicals(a) 6.50% 1/15/2012 5,550 5,494,500
Rhodia SA+^(a) 8.875% 6/1/2011 40,000 34,000,000
Rockwood Specialties Corp.^ 10.625% 5/15/2011 4,000 4,280,000
Terra Capital, Inc. 11.50% 6/1/2010 20,000 22,000,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
United Industries Corp. 9.875% 4/1/2009 $ 6,000 $ 6,270,000
---------------
TOTAL 217,590,720
---------------
COMPUTER HARDWARE 0.13%
Seagate Tech Hldgs., Inc.^(a) 8.00% 5/15/2009 10,500 11,025,000
---------------
CONSUMER-PRODUCTS 0.91%
Aearo Co. I+ 8.25% 4/15/2012 7,000 7,175,000
Elizabeth Arden, Inc. 7.75% 1/15/2014 25,000 25,562,500
Int'l. Flavors & Frag., Inc. 6.45% 5/15/2006 10,000 10,570,000
Rayovac Corp.^ 8.50% 10/1/2013 30,000 31,650,000
---------------
TOTAL 74,957,500
---------------
DIVERSIFIED CAPITAL GOODS 1.14%
Blount, Inc. 13.00% 8/1/2009 20,000 21,525,000
JB Poindexter & Co.+ 8.75% 3/15/2014 11,125 11,347,500
Sensus Metering Systems, Inc.+ 8.625% 12/15/2013 20,000 19,300,000
Trimas Corp. 9.875% 6/15/2012 7,000 7,455,000
Trinity Industries, Inc.+ 6.50% 3/15/2014 20,000 18,400,000
Tyco Int'l. Group^(a) 6.00% 11/15/2013 15,000 15,447,705
---------------
TOTAL 93,475,205
---------------
ELECTRIC-GENERATION 3.14%
AES Corp.^ 7.75% 3/1/2014 19,000 18,358,750
AES Corp.+ 8.75% 5/15/2013 15,000 16,143,750
AES Corp. 9.50% 6/1/2009 15,000 16,106,250
AES Gener SA+(a) 7.50% 3/25/2014 6,750 6,412,500
Calpine Corp.^ 7.875% 4/1/2008 20,000 13,100,000
Calpine Corp.+^ 8.50% 7/15/2010 10,000 8,325,000
Calpine Corp. 8.50% 2/15/2011 20,000 13,150,000
Calpine Generating Co.+^ 11.50% 4/1/2011 10,000 8,850,000
Dynegy, Inc.+ 10.125% 7/15/2013 40,000 43,500,000
Midwest Generation LLC+ 8.75% 5/1/2034 25,000 25,375,000
NRG Energy, Inc.+ 8.00% 12/15/2013 45,000 45,675,000
Reliant Resources, Inc.^ 9.50% 7/15/2013 40,000 43,300,000
---------------
TOTAL 258,296,250
---------------
ELECTRIC-INTEGRATED 1.67%
Duke Energy Corp.^ 5.375% 1/1/2009 12,000 12,322,164
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
Mission Energy Holding Co. 13.50% 7/15/2008 $ 16,000 $ 17,980,000
PG&E Corp.^ 4.80% 3/1/2014 25,000 23,733,400
PPL Energy Supply LLC 6.40% 11/1/2011 12,000 12,737,328
PSEG Energy Holdings, Inc. 8.50% 6/15/2011 10,000 10,750,000
PSEG Energy Holdings, Inc.^ 8.625% 2/15/2008 15,000 16,200,000
TECO Energy, Inc.^ 7.50% 6/15/2010 42,500 43,137,500
---------------
TOTAL 136,860,392
---------------
ELECTRONICS 1.23%
Amkor Technology, Inc.+^ 7.125% 3/15/2011 9,895 9,326,038
Amkor Technology, Inc.^ 7.75% 5/15/2013 12,000 11,430,000
Communications & Power
Industries, Inc. 8.00% 2/1/2012 25,000 25,125,000
Corning, Inc.^ 5.90% 3/15/2014 12,000 11,280,000
Corning, Inc. 8.30% 4/4/2025 15,000 15,688,830
Sanmina Corp. 10.375% 1/15/2010 15,000 17,250,000
SBA Telecommunications Corp.**^ 0.00%/9.75% 12/15/2007 & 2011 15,000 11,175,000
---------------
TOTAL 101,274,868
---------------
ENERGY - EXPLORATION & PRODUCTION 2.79%
Chesapeake Energy Corp.^ 6.875% 1/15/2016 5,000 4,900,000
Chesapeake Energy Corp.+ 7.50% 6/15/2014 11,000 11,385,000
Chesapeake Energy Corp. 7.75% 1/15/2015 20,000 20,950,000
Chesapeake Energy Corp. 8.375% 11/1/2008 10,000 10,850,000
El Paso Production 7.75% 6/1/2013 46,000 42,435,000
Energy Partners Ltd. 8.75% 8/1/2010 12,000 12,600,000
EXCO Resources, Inc. 7.25% 1/15/2011 31,000 31,620,000
Forest Oil Corp.^ 7.75% 5/1/2014 10,000 10,250,000
Forest Oil Corp. 8.00% 6/15/2008 15,000 16,050,000
Houston Exploration Co.^ 7.00% 6/15/2013 15,500 15,655,000
KCS Energy Services, Inc.+ 7.125% 4/1/2012 11,000 11,000,000
Magnum Hunter Resources Corp.^ 9.60% 3/15/2012 8,000 8,840,000
Range Resources Corp.+ 7.375% 7/15/2013 2,925 2,925,000
Range Resources Corp. 7.375% 7/15/2013 20,000 20,000,000
Stone Energy Corp. 8.25% 12/15/2011 5,000 5,237,500
Swift Energy Co.^ 9.375% 5/1/2012 4,000 4,290,000
---------------
TOTAL 228,987,500
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
ENVIRONMENTAL 0.40%
Allied Waste North America, Inc.+ 5.75% 2/15/2011 $ 15,000 $ 14,287,500
Allied Waste North America, Inc.+ 6.125% 2/15/2014 12,500 11,500,000
Allied Waste North America, Inc.+^ 6.50% 11/15/2010 7,000 6,965,000
---------------
TOTAL 32,752,500
---------------
FOOD & DRUG RETAILERS 1.27%
Ahold Finance USA, Inc.^ 8.25% 7/15/2010 17,750 18,815,000
Ingles Markets, Inc.^ 8.875% 12/1/2011 21,500 22,198,750
Rite Aid Corp.^ 8.125% 5/1/2010 32,150 33,998,625
Roundy's, Inc. 8.875% 6/15/2012 10,000 10,650,000
Stater Brothers Holdings, Inc.+^ 8.125% 6/15/2012 18,250 18,409,687
---------------
TOTAL 104,072,062
---------------
FOOD - WHOLESALE 2.37%
American Seafood Group LLC 10.125% 4/15/2010 11,500 13,800,000
Corn Products Int'l., Inc. 8.25% 7/15/2007 20,000 21,875,000
Corn Products Int'l., Inc. 8.45% 8/15/2009 6,000 6,675,000
Dean Foods Co.^ 6.625% 5/15/2009 10,000 10,350,000
Dean Foods Co. 8.15% 8/1/2007 15,000 16,237,500
Del Monte Corp. 8.625% 12/15/2012 10,000 10,825,000
Del Monte Corp.^ 9.25% 5/15/2011 15,000 16,462,500
Dole Food Co. 8.75% 7/15/2013 20,000 21,000,000
Dole Food Co.^ 8.875% 3/15/2011 16,000 17,000,000
Land O'Lakes, Inc. 8.75% 11/15/2011 5,000 4,625,000
Land O'Lakes, Inc.+ 9.00% 12/15/2010 18,850 19,721,812
Michael Foods, Inc. 8.00% 11/15/2013 15,000 15,562,500
Pinnacle Foods+ 8.25% 12/1/2013 21,425 20,782,250
---------------
TOTAL 194,916,562
---------------
FORESTRY/PAPER 3.55%
Abitibi-Consolidated, Inc.^(a) 8.55% 8/1/2010 27,500 29,134,380
Boise Cascade Corp.^ 7.00% 11/1/2013 15,000 15,412,500
Bowater, Inc.^ 6.50% 6/15/2013 20,050 18,962,689
Buckeye Technologies, Inc.^ 8.00% 10/15/2010 21,000 19,372,500
Corp Durango S.A. de C.V.+^(a)(b) 13.75% 7/15/2009 10,000 5,050,000
Georgia-Pacific Corp. 8.125% 6/15/2023 16,000 16,520,000
Georgia-Pacific Corp. 8.25% 3/1/2023 36,000 37,170,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
Jefferson Smurfit Corp.^ 7.50% 6/1/2013 $ 20,000 $ 19,900,000
Jefferson Smurfit Corp.^ 8.25% 10/1/2012 10,000 10,450,000
JSG Funding plc^(a) 9.625% 10/1/2012 14,500 15,950,000
Longview Fibre Co.^ 10.00% 1/15/2009 11,500 12,477,500
Newark Group, Inc.+ 9.75% 3/15/2014 11,500 11,068,750
Norske Skog Canada Ltd.(a) 7.375% 3/1/2014 10,125 9,846,562
Stone Container Corp.^ 8.375% 7/1/2012 4,000 4,200,000
Stone Container Corp.^ 9.75% 2/1/2011 17,000 18,785,000
Tembec Industries, Inc.^(a) 7.75% 3/15/2012 15,000 14,550,000
Tembec Industries, Inc.^(a) 8.625% 6/30/2009 21,500 21,876,250
Temple-Inland, Inc. 7.875% 5/1/2012 10,000 11,332,450
---------------
TOTAL 292,058,581
---------------
GAMING 4.31%
Aztar Corp.+ 7.875% 6/15/2014 10,000 10,150,000
Aztar Corp.^ 9.00% 8/15/2011 4,000 4,450,000
Boyd Gaming Corp.^ 8.75% 4/15/2012 17,000 18,190,000
Hard Rock Hotel 8.875% 6/1/2013 33,000 33,495,000
Harrah's Operating Co., Inc.^ 7.50% 1/15/2009 25,000 27,412,700
Isle of Capri Casinos, Inc.+ 7.00% 3/1/2014 18,500 17,251,250
Isle of Capri Casinos, Inc. 9.00% 3/15/2012 19,650 21,271,125
Mandalay Resorts Group^ 9.375% 2/15/2010 20,000 21,900,000
Mohegan Tribal Gaming^ 6.375% 7/15/2009 26,000 26,195,000
Mohegan Tribal Gaming^ 8.00% 4/1/2012 12,000 12,840,000
Park Place Entertainment Corp.^ 8.125% 5/15/2011 15,000 15,993,750
Park Place Entertainment Corp. 9.375% 2/15/2007 23,500 25,585,625
Penn National Gaming, Inc.+ 6.875% 12/1/2011 25,875 25,519,219
Premier Entertainment Biloxi+ 10.75% 2/1/2012 1,900 2,004,500
River Rock Entertainment 9.75% 11/1/2011 15,000 16,425,000
Seneca Gaming Corp.+^ 7.25% 5/1/2012 4,500 4,516,875
Station Casinos, Inc.^ 6.50% 2/1/2014 30,500 29,508,750
Turning Stone Casino Resort+ 9.125% 12/15/2010 12,000 12,600,000
Venetian Casino Resort LLC 11.00% 6/15/2010 25,000 29,000,000
---------------
TOTAL 354,308,794
---------------
GAS DISTRIBUTION 1.26%
Ferrellgas Partners, L.P.+ 6.75% 5/1/2014 12,000 11,640,000
Ferrellgas Partners, L.P.^ 8.75% 6/15/2012 9,350 10,027,875
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
Sonat, Inc. 6.875% 6/1/2005 $ 15,000 $ 15,112,500
Sonat, Inc.^ 7.625% 7/15/2011 18,000 16,155,000
Suburban Propane Partners, L.P.^ 6.875% 12/15/2013 16,500 16,036,053
The Williams Co., Inc.^ 7.875% 9/1/2021 30,000 29,025,000
The Williams Co., Inc. 8.625% 6/1/2010 5,000 5,525,000
---------------
TOTAL 103,521,428
---------------
HEALTH SERVICES 4.42%
Alliance Imaging^ 10.375% 4/15/2011 10,000 10,525,000
Ameripath, Inc.^ 10.50% 4/1/2013 15,000 15,225,000
Ardent Health Services 10.00% 8/15/2013 12,500 13,437,500
Beverly Enterprises, Inc.+ 7.875% 6/15/2014 9,000 8,898,750
Coventry Healthcare, Inc. 8.125% 2/15/2012 15,000 16,500,000
Fisher Scientific Int'l., Inc. 8.00% 9/1/2013 10,000 10,750,000
Fresenius Medical Capital Tr.^ 7.875% 2/1/2008 20,000 21,150,000
Hanger Orthopedic Group, Inc.^ 10.375% 2/15/2009 10,000 10,275,000
Healthsouth Corp. 8.375% 10/1/2011 20,000 19,450,000
Healthsouth Corp. 10.75% 10/1/2008 15,000 15,525,000
Mariner Healthcare, Inc.+ 8.25% 12/15/2013 10,000 10,550,000
Medex, Inc.^ 8.875% 5/15/2013 34,850 36,941,000
National Nephrology Assoc.+ 9.00% 11/1/2011 9,000 10,350,000
Omega Healthcare Investors+ 7.00% 4/1/2014 2,500 2,375,000
PacifiCare Health System, Inc. 10.75% 6/1/2009 22,750 26,048,750
Perkinelmer, Inc. 8.875% 1/15/2013 25,750 28,260,625
Prime Medical Services, Inc. 8.75% 4/1/2008 9,150 9,195,750
Rotech Healthcare, Inc. 9.50% 4/1/2012 15,500 16,623,750
Senior Housing Trust 8.625% 1/15/2012 10,000 10,923,540
Tenet Healthcare Corp. 7.375% 2/1/2013 46,000 41,860,000
Triad Hospitals, Inc.^ 7.00% 11/15/2013 20,000 19,100,000
Ventas Realty L.P. Capital Corp. 8.75% 5/1/2009 8,750 9,493,750
---------------
TOTAL 363,458,415
---------------
HOTELS 1.06%
FelCor Lodging Trust, Inc.^ 9.00% 6/1/2011 20,000 20,750,000
Hilton Hotels Corp.^ 8.25% 2/15/2011 12,000 13,410,000
HMH Properties, Inc.^ 7.875% 8/1/2008 11,447 11,790,410
Host Marriott LP^ 9.25% 10/1/2007 25,000 27,687,500
John Q. Hammons Hotels, Inc.^ 8.875% 5/15/2012 12,500 13,625,000
---------------
TOTAL 87,262,910
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
HOUSEHOLD & LEISURE PRODUCTS 0.39%
Fedders North America, Inc.+ 9.875% 3/1/2014 $ 22,250 $ 20,470,000
Remington Arms Co. 10.50% 2/1/2011 12,000 11,700,000
---------------
TOTAL 32,170,000
---------------
INTEGRATED ENERGY 0.17%
Conoco Phillips 8.75% 5/25/2010 7,000 8,470,518
Pecom Energia S.A.+(a) 9.00% 1/30/2007 5,000 5,137,500
---------------
TOTAL 13,608,018
---------------
INVESTMENTS & MISC FINANCIAL SERVICES 0.99%
Dow Jones TRAC-X
North America High Yield Ser. 2
Tr. 1+^ 7.375% 3/25/2009 60,000 58,725,000
GATX Financial Corp.^ 8.875% 6/1/2009 20,000 22,461,700
---------------
TOTAL 81,186,700
---------------
LEISURE 0.77%
Gaylord Entertainment Co. 8.00% 11/15/2013 31,000 31,581,250
K2, Inc.+(c) 7.375% 7/1/2014 2,000 2,045,000
Six Flags, Inc.^ 9.50% 2/1/2009 20,000 20,650,000
Universal City Development 11.75% 4/1/2010 8,000 9,300,000
---------------
TOTAL 63,576,250
---------------
MACHINERY 1.14%
Agco Corp. 9.50% 5/1/2008 10,000 10,950,000
Briggs & Stratton Corp. 8.875% 3/15/2011 15,000 17,587,500
Case New Holland, Inc.+ 9.25% 8/1/2011 12,300 12,976,500
Dresser, Inc. 9.375% 4/15/2011 20,000 21,500,000
JLG Industries, Inc.^ 8.25% 5/1/2008 15,000 15,825,000
Manitowoc Co., Inc.^ 7.125% 11/1/2013 10,000 10,050,000
Westinghouse Air Brake Co. 6.875% 7/31/2013 4,500 4,477,500
---------------
TOTAL 93,366,500
---------------
MEDIA - BROADCAST 2.49%
Allbritton Communications Co. 7.75% 12/15/2012 65,000 64,350,000
Chancellor Radio Broadcast, Inc. 8.00% 11/1/2008 3,750 4,261,294
Clear Channel Communications, Inc.^ 4.625% 1/15/2008 20,000 20,227,240
Clear Channel Communications, Inc.^ 7.65% 9/15/2010 18,500 20,868,092
Lin Television Corp.^ 6.50% 5/15/2013 10,075 9,772,750
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
Paxson Communications Co.^ 10.75% 7/15/2008 $ 40,000 $ 40,800,000
Sinclair Broadcast Group, Inc. 8.00% 3/15/2012 5,000 5,137,500
Sinclair Broadcast Group, Inc. 8.75% 12/15/2011 10,000 10,750,000
TV Azteca, S.A. de C.V.^(a) 10.50% 2/15/2007 28,000 28,700,000
---------------
TOTAL 204,866,876
---------------
MEDIA - CABLE 4.98%
Century Communications Corp.^(b) 8.375% 12/15/2007 8,000 8,730,000
Century Communications Corp.^(b) 9.50% 3/1/2005 39,000 43,095,000
Charter Communications Hldgs. II 10.25% 9/15/2010 20,000 20,251,200
Charter Communications Hldgs.^ 10.00% 4/1/2009 50,000 42,000,000
Comcast Corp.^ 5.85% 1/15/2010 15,000 15,670,440
CSC Holdings, Inc.+ 6.75% 4/15/2012 11,250 10,856,250
CSC Holdings, Inc. 8.125% 8/15/2009 20,000 20,900,000
Direct TV Holdings^ 8.375% 3/15/2013 26,000 28,892,500
Echostar DBS Corp.^ 6.375% 10/1/2011 17,500 17,325,000
Echostar DBS Corp. 9.125% 1/15/2009 10,000 11,012,500
Frontiervision L.P.(b) 11.875% 9/15/2007 20,000 24,900,000
Frontiervision L.P.(b) 11.875% 9/15/2007 10,000 12,450,000
Globo Communicacoes e
Participacos Ltd.+(a)(b) 10.625% 12/5/2008 20,000 11,700,000
Insight Communications Co.,
Inc.** 0.00%/12.25% 2/15/2006 & 2011 57,500 52,037,500
Mediacom Communications Corp.^ 8.50% 4/15/2008 46,000 46,460,000
Mediacom Communications Corp.^ 9.50% 1/15/2013 28,000 27,160,000
Renaissance Media Group LLC 10.00% 4/15/2008 15,000 15,525,000
---------------
TOTAL 408,965,390
---------------
MEDIA - DIVERSIFIED 0.55%
Block Communications, Inc. 9.25% 4/15/2009 15,000 15,825,000
Emmis Operating Co.+ 6.875% 5/15/2012 30,000 29,550,000
---------------
TOTAL 45,375,000
---------------
MEDIA - SERVICES 0.39%
Interpublic Group of Cos. 7.25% 8/15/2011 10,000 10,747,790
Warner Music Group+^ 7.375% 4/15/2014 22,000 21,340,000
---------------
TOTAL 32,087,790
---------------
METALS/MINING EXCLUDING STEEL 0.56%
Century Aluminum Co.^ 11.75% 4/15/2008 12,500 14,000,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
Neenah Corp.+ 13.00% 9/30/2013 $ 5,000 $ 4,925,000
Peabody Energy Corp.^ 5.875% 4/15/2016 10,000 9,150,000
Peabody Energy Corp.^ 6.875% 3/15/2013 7,500 7,631,250
Timken Co. (The) 5.75% 2/15/2010 10,000 10,032,840
---------------
TOTAL 45,739,090
---------------
NON-ELECTRIC UTILITIES 0.14%
Semco Energy, Inc. 7.75% 5/15/2013 10,875 11,255,625
---------------
NON-FOOD & DRUG RETAILERS 1.62%
Cole National Group 8.875% 5/15/2012 15,000 16,087,500
Couche-Tard(a) 7.50% 12/15/2013 14,000 14,070,000
J Crew Intermediate LLC** 0.00%/16.00% 11/15/2005 &
5/15/2008 3,150 2,740,500
J.C. Penney Co., Inc.^ 7.95% 4/1/2017 20,750 23,162,188
J.C. Penney Co., Inc.^ 8.00% 3/1/2010 17,000 19,082,500
Office Depot, Inc.^ 10.00% 7/15/2008 5,000 5,775,000
Saks, Inc.^ 7.375% 2/15/2019 24,250 23,280,000
Saks, Inc.^ 9.875% 10/1/2011 25,000 29,187,500
---------------
TOTAL 133,385,188
---------------
OFFICE EQUIPMENT 0.14%
Xerox Corp. 9.75% 1/15/2009 10,000 11,425,000
---------------
OIL FIELD EQUIPMENT & SERVICES 0.76%
Hanover Compressor Co. 8.625% 12/15/2010 12,075 12,558,000
Hanover Compressor Co. 9.00% 6/1/2014 6,150 6,411,375
J. Ray McDermott, S.A.+(a) 11.00% 12/15/2013 7,000 6,790,000
Key Energy Services, Inc. 6.375% 5/1/2013 6,000 5,700,000
Key Energy Services, Inc.^ 8.375% 3/1/2008 13,500 14,040,000
Parker Drilling Co.^ 10.125% 11/15/2009 12,500 13,250,000
Pride Int'l., Inc.+(c) 7.375% 7/15/2014 4,000 4,060,000
---------------
TOTAL 62,809,375
---------------
PACKAGING 2.66%
AEP Industries, Inc.^ 9.875% 11/15/2007 7,500 7,725,000
Anchor Glass Container Corp. 11.00% 2/15/2013 15,000 17,231,250
BWAY Corp.^ 10.00% 10/15/2010 25,000 26,375,000
Constar Int'l., Inc.^ 11.00% 12/1/2012 5,000 4,700,000
Crown Cork & Seal, Inc.^ 7.375% 12/15/2026 32,000 26,720,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
Graham Packaging Co., Inc.^ 10.75% 1/15/2009 $ 10,000 $ 10,337,500
Owens-Brockway Glass Co.^ 7.75% 5/15/2011 34,700 36,261,500
Owens-Brockway Glass Co.^ 8.875% 2/15/2009 45,000 48,825,000
Plastipak Holdings, Inc. 10.75% 9/1/2011 6,500 7,020,000
Portola Packaging, Inc.+ 8.25% 2/1/2012 14,475 11,652,375
Solo Cup Co.+^ 8.50% 2/15/2014 10,000 9,350,000
Tekni-Plex, Inc.+ 8.75% 11/15/2013 3,000 2,880,000
Vicap S.A.^(a) 11.375% 5/15/2007 10,000 9,850,000
---------------
TOTAL 218,927,625
---------------
PHARMACEUTICALS 0.50%
Alpharma, Inc.+ 8.625% 5/1/2011 25,000 26,000,000
Biovail Corp.^(a) 7.875% 4/1/2010 15,000 14,887,500
---------------
TOTAL 40,887,500
---------------
PRINTING & PUBLISHING 2.03%
American Color Graphics^ 10.00% 6/15/2010 15,000 13,462,500
American Media, Inc.^ 10.25% 5/1/2009 5,000 5,212,500
Dex Media West^ 9.875% 8/15/2013 26,000 28,665,000
Dex Media, Inc.**+^ 0.00%/9.00% 11/15/2008 & 2013 24,000 15,600,000
Dex Media, Inc.+ 8.00% 11/15/2013 25,000 24,125,000
Houghton Mifflin Co.**^ 0.00%/11.50% 10/15/2008 & 2013 12,000 6,435,000
Houghton Mifflin Co.^ 9.875% 2/1/2013 35,000 35,175,000
Primedia, Inc.^ 8.875% 5/15/2011 26,325 26,193,375
RH Donnelley Financial Corp. 10.875% 12/15/2012 10,000 11,650,000
---------------
TOTAL 166,518,375
---------------
RAILROADS 0.35%
Union Pacific Corp.^ 3.625% 6/1/2010 30,500 28,719,959
---------------
RESTAURANTS 0.49%
Advantica Restaurant Group, Inc.^ 11.25% 1/15/2008 10,200 9,894,000
Domino's, Inc.^ 8.25% 7/1/2011 5,000 5,325,000
Friendly Ice Cream Corp.+^ 8.375% 6/15/2012 15,000 14,625,000
O'Charley's, Inc.^ 9.00% 11/1/2013 10,000 10,400,000
---------------
TOTAL 40,244,000
---------------
SOFTWARE/SERVICES 0.57%
Electronic Data Systems Corp.^ 6.00% 8/1/2013 15,000 14,350,860
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
Unisys Corp.^ 6.875% 3/15/2010 $ 8,000 $ 8,280,000
Unisys Corp. 8.125% 6/1/2006 22,500 24,018,750
---------------
TOTAL 46,649,610
---------------
STEEL PRODUCERS/PRODUCTS 0.69%
AK Steel Corp. 7.75% 6/15/2012 15,000 13,612,500
Armco, Inc. 9.00% 9/15/2007 19,000 18,762,500
International Steel Group+ 6.50% 4/15/2014 20,000 18,850,000
Valmont Industries, Inc.+ 6.875% 5/1/2014 5,600 5,530,000
---------------
TOTAL 56,755,000
---------------
SUPPORT-SERVICES 1.22%
Iron Mountain, Inc. 6.625% 1/1/2016 25,000 22,875,000
Iron Mountain, Inc.^ 7.75% 1/15/2015 42,000 41,895,000
Iron Mountain, Inc. 8.625% 4/1/2013 15,000 15,975,000
Johnsondiversey, Inc.**^ 0.00%/10.67% 5/15/2007 & 2013 12,000 9,300,000
Johnsondiversey, Inc.^ 9.625% 5/15/2012 9,000 9,855,000
---------------
TOTAL 99,900,000
---------------
TELECOM - FIXED LINE 0.44%
Level 3 Communications, Inc. 11.25% 3/15/2010 15,000 11,962,500
Level 3 Financing, Inc.+^ 10.75% 10/15/2011 20,000 17,750,000
Time-Warner Telecom, Inc.^ 10.125% 2/1/2011 7,000 6,405,000
---------------
TOTAL 36,117,500
---------------
TELECOM - INTEGRATED/SERVICES 2.59%
Cincinnati Bell, Inc. 8.375% 1/15/2014 25,000 22,375,000
Eircom Funding^(a) 8.25% 8/15/2013 4,770 4,984,650
MCI, Inc.^ 5.908% 5/1/2007 18,014 17,518,392
MCI, Inc.^ 6.688% 5/1/2009 18,014 16,707,773
MCI, Inc.^ 7.735% 5/1/2014 15,440 13,857,739
Qwest Capital Funding 7.90% 8/15/2010 63,000 56,070,000
Qwest Communications Int'l, Inc.+ 4.75%# 2/15/2009 17,000 15,980,000
Qwest Communications Int'l, Inc.+^ 7.25% 2/15/2011 16,500 15,468,750
Qwest Services Corp.+ 14.00% 12/15/2010 31,800 37,126,500
Telefonica De Argentina^(a) 9.125% 11/7/2010 13,500 13,061,250
---------------
TOTAL 213,150,054
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
TELECOM - WIRELESS 2.89%
Airgate PCS, Inc.+ 9.375% 9/1/2009 $ 4,000 $ 3,950,000
Airgate PCS, Inc.^ 9.375% 9/1/2009 6,000 5,924,901
Alamosa Delaware, Inc.^ 11.00% 7/31/2010 20,000 21,900,000
American Cellular Corp.^ 10.00% 8/1/2011 6,500 5,638,750
Centennial Cell Communications^ 10.125% 6/15/2013 35,000 36,312,500
Crown Castle Int'l. Corp. 10.75% 8/1/2011 20,000 22,500,000
Dobson Communications Corp. 8.875% 10/1/2013 20,000 15,300,000
Dobson Communications Corp. 10.875% 7/1/2010 15,000 12,975,000
Nextel Communications, Inc.^ 6.875% 10/31/2013 8,000 7,970,000
Nextel Partners, Inc.^ 8.125% 7/1/2011 27,200 27,880,000
Rogers Wireless, Inc.(a) 9.625% 5/1/2011 5,000 5,637,500
Rural Cellular Corp.^ 9.75% 1/15/2010 24,650 22,493,125
TeleCorp PCS, Inc. 10.625% 7/15/2010 16,000 18,067,168
Tritel PCS, Inc. 10.375% 1/15/2011 9,301 10,747,845
Voicestream Wireless Corp.^ 10.375% 11/15/2009 6,586 7,096,415
Western Wireless Corp.^ 9.25% 7/15/2013 12,500 12,937,500
---------------
TOTAL 237,330,704
---------------
TELECOMMUNICATIONS EQUIPMENT 0.37%
Motorola, Inc.^ 5.80% 10/15/2008 10,000 10,446,700
Nortel Network^(a) 6.125% 2/15/2006 20,000 20,200,000
---------------
TOTAL 30,646,700
---------------
THEATERS & ENTERTAINMENT 0.56%
AMC Entertainment, Inc.+ 8.00% 3/1/2014 25,000 24,000,000
Carmike Cinemas, Inc. Class A+^ 7.50% 2/15/2014 11,325 10,872,000
Cinemark USA, Inc. 9.00% 2/1/2013 10,000 10,962,500
---------------
TOTAL 45,834,500
---------------
TRANSPORTATION EXCLUDING AIR/RAIL 0.45%
CHC Helicopter+(a) 7.375% 5/1/2014 6,000 5,925,000
Great Lakes Dredge & Dock Co. 7.75% 12/15/2013 15,000 12,750,000
Horizon Lines LLC+(c) 9.00% 11/1/2012 4,200 4,200,000
Offshore Logistics, Inc.^ 6.125% 6/15/2013 5,000 4,775,000
Stena AB^(a) 7.50% 11/1/2013 9,000 8,943,750
---------------
TOTAL 36,593,750
---------------
TOTAL HIGH YIELD CORPORATE BONDS (COST $5,741,950,416) 5,861,897,415
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------
NON-AGENCY COMMERCIAL MORTGAGE-BACKED SECURITIES 0.26%
Credit Suisse First Boston
1998-C2 A2 (Cost $19,510,056) 6.30% 11/11/2030 $ 20,000 $ 21,505,285
===============
PASS-THROUGH AGENCIES 0.07%
Government National Mortgage Assoc.
(Cost $5,397,738) 8.00% 3/15/2032 5,110 5,604,333
===============
U.S. TREASURY OBLIGATIONS 0.25%
U.S. Treasury Note (Cost $20,501,388) 6.75% 5/15/2005 20,000 20,816,420
===============
<Caption>
SHARES
(000)
------
WARRANTS 0.02%
FOOD & DRUG RETAILERS 0.02%
Leiner Health Products, Inc.
Series C Pfd* (Cost $16,917,438) 1 1,441,000
===============
TOTAL LONG-TERM INVESTMENTS (COST $7,627,549,259) 7,875,135,102
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONCLUDED)
JUNE 30, 2004
<Table>
<Caption>
PRINCIPAL
AMOUNT
INVESTMENTS (000) VALUE
- -------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 18.44%
COLLATERAL FOR SECURITIES ON LOAN 15.65%
State Street Navigator Securities
Lending Prime Portfolio, 1.21%(d) $ 1,286,018 1,286,017,913
---------------
REPURCHASE AGREEMENT 2.79%
Repurchase Agreement dated 6/30/2004,
1.35% due 7/1/2004 with State Street
Bank & Trust Co. collateralized
by $840,000 of Student Loan Marketing
Assoc. at 3.375% due 7/15/2004 and
$44,740,000 of Federal Home Loan
Mortgage Corp. at 3.875% due 2/15/2005 and
$176,875,000 of Federal National
Mortgage Assoc. from 1.50% to
5.25% due from 8/15/2005 to
1/15/2006; value: $234,054,308;
proceeds: $229,467,072 229,458 $ 229,458,467
---------------
TOTAL SHORT-TERM INVESTMENTS (COST $1,515,476,380) 1,515,476,380
===============
TOTAL INVESTMENTS 114.27% (COST $9,143,025,639) $ 9,390,611,482
===============
</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.
+ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration normally to qualified institutional buyers.
# Variable rate security. The interest rate represents the rate at June 30,
2004.
^ All (or a portion of security) on loan. See Note 5.
(a) Foreign security traded in U.S. dollars.
(b) Defaulted security.
(c) Securities purchased on a when-issued basis.
(d) Rate shown reflects 7 day yield as of June 30, 2004.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<Page>
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 2004
<Table>
ASSETS:
Investment in securities, at value (cost $9,143,025,639) $ 9,390,611,482
Cash 291,465
Receivables:
Interest and dividends 128,982,998
Investment securities sold 60,662,281
Capital shares sold 23,675,335
Prepaid expenses and other assets 469,937
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 9,604,693,498
==============================================================================================================
LIABILITIES:
Payable upon return of securities on loan 1,286,017,913
Payables:
Investment securities purchased 73,360,315
Capital shares reacquired 18,623,066
Management fee 3,010,116
12b-1 distribution fees 4,471,910
Fund administration 267,871
Directors' fees 692,234
To affiliate (see note 3) 15,987
Accrued expenses and other liabilities 404,593
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,386,864,005
==============================================================================================================
NET ASSETS $ 8,217,829,493
==============================================================================================================
COMPOSITION OF NET ASSETS:
Paid-in capital $ 8,716,763,408
Distributions in excess of net investment income (29,627,903)
Accumulated net realized loss on investments and foreign currency related transactions (716,891,855)
Net unrealized appreciation on investments 247,585,843
- --------------------------------------------------------------------------------------------------------------
NET ASSETS $ 8,217,829,493
==============================================================================================================
NET ASSETS BY CLASS:
Class A Shares $ 4,567,233,256
Class B Shares $ 1,766,199,665
Class C Shares $ 1,565,158,359
Class P Shares $ 85,059,565
Class Y Shares $ 234,178,648
OUTSTANDING SHARES BY CLASS:
Class A Shares (540 million shares of common shares authorized, $.001 par value) 579,192,700
Class B Shares (200 million shares of common shares authorized, $.001 par value) 223,913,750
Class C Shares (300 million shares of common shares authorized, $.001 par value) 198,279,345
Class P Shares (160 million shares of common shares authorized, $.001 par value) 10,639,938
Class Y Shares (300 million shares of common shares authorized, $.001 par value) 29,773,490
Net asset value, offering and redemption price per share
(net assets divided by outstanding shares):
Class A Shares-Net asset value $ 7.89
Class A Shares-Maximum offering price
(Net asset value plus sales charge of 4.75%) $ 8.28
Class B Shares-Net asset value $ 7.89
Class C Shares-Net asset value $ 7.89
Class P Shares-Net asset value $ 7.99
Class Y Shares-Net asset value $ 7.87
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<Page>
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2004
<Table>
INVESTMENT INCOME:
Dividends $ 16,393,971
Interest 264,591,003
Securities lending-net 1,018,106
Foreign withholding tax (16,500)
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 281,986,580
- --------------------------------------------------------------------------------------------------------------
EXPENSES:
Management fee 18,768,178
12b-1 distribution plan-Class A 8,077,192
12b-1 distribution plan-Class B 9,144,934
12b-1 distribution plan-Class C 8,046,817
12b-1 distribution plan-Class P 167,158
Shareholder servicing 4,235,216
Professional 55,750
Reports to shareholders 350,000
Fund administration 1,657,232
Custody 158,710
Directors' fees 76,968
Registration 150,000
Subsidy (see Note 3) 241,119
Other 214,209
- --------------------------------------------------------------------------------------------------------------
Gross expenses 51,343,483
Expense reductions (34,426)
- --------------------------------------------------------------------------------------------------------------
NET EXPENSES 51,309,057
- --------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 230,677,523
==============================================================================================================
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on investments and foreign currency related transactions 92,220,236
Net change in unrealized depreciation on investments and foreign currency
related transactions (252,570,340)
==============================================================================================================
NET REALIZED AND UNREALIZED LOSS (160,350,104)
==============================================================================================================
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 70,327,419
==============================================================================================================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE SIX MONTHS
ENDED JUNE 30, 2004 FOR THE YEAR ENDED
INCREASE IN NET ASSETS (UNAUDITED) DECEMBER 31, 2003
OPERATIONS:
Net investment income $ 230,677,523 $ 414,050,606
Net realized gain on investments
and foreign currency related transactions 92,220,236 4,578,180
Net change in unrealized appreciation/depreciation on
investments and foreign currency related transactions (252,570,340) 825,381,023
- --------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 70,327,419 1,244,009,809
==============================================================================================================
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (148,923,345) (249,078,467)
Class B (53,868,579) (98,396,445)
Class C (47,446,978) (77,331,697)
Class P (2,345,638) (2,399,636)
Class Y (6,982,756) (7,291,188)
Net realized gain
Class A - (13,796,655)
Class B - (5,450,258)
Class C - (4,283,465)
Class P - (132,918)
Class Y - (403,865)
- --------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (259,567,296) (458,564,594)
==============================================================================================================
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares 1,010,654,300 3,087,844,333
Reinvestment of distributions 186,909,622 321,057,719
Cost of shares reacquired (985,748,867) (1,335,405,201)
- --------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM CAPITAL SHARE TRANSACTIONS 211,815,055 2,073,496,851
==============================================================================================================
NET INCREASE IN NET ASSETS 22,575,178 2,858,942,066
==============================================================================================================
NET ASSETS:
Beginning of period 8,195,254,315 5,336,312,249
- --------------------------------------------------------------------------------------------------------------
END OF PERIOD $ 8,217,829,493 $ 8,195,254,315
==============================================================================================================
DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME $ (29,627,903) $ (738,130)
==============================================================================================================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2004 -----------------------------------------------------------------------
(UNAUDITED) 2003 2002 2001 2000 1999
PER SHARE OPERATING PERFORMANCE (CLASS A SHARES)
NET ASSET VALUE,
BEGINNING OF PERIOD $ 8.06 $ 7.19 $ 7.91 $ 8.23 $ 9.05 $ 9.45
=========== =========== =========== =========== =========== ===========
Investment operations
Net investment income(a) .23 .48 .55 .65 .68 .75
Net realized and
unrealized gain (loss) (.14) .92 (.64) (.26) (.75) (.40)
----------- ----------- ----------- ----------- ----------- -----------
Total from investment
operations .09 1.40 (.09) .39 (.07) .35
----------- ----------- ----------- ----------- ----------- -----------
Distributions to shareholders
from:
Net investment income (.26) (.50) (.58) (.67) (.75) (.75)
Paid-in capital - (.03) (.05) (.04) - -
----------- ----------- ----------- ----------- ----------- -----------
Total distributions (.26) (.53) (.63) (.71) (.75) (.75)
----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 7.89 $ 8.06 $ 7.19 $ 7.91 $ 8.23 $ 9.05
=========== =========== =========== =========== =========== ===========
Total Return(b) 1.12%(c) 20.28% (1.08)% 4.86% (.86)% 3.91%
RATIOS TO AVERAGE NET ASSETS
Expenses, including expense
reductions .50%(c) 1.00% 1.00% 1.02% 1.00% .92%
Expenses, excluding expense
reductions .50%(c) 1.00% 1.00% 1.02% 1.01% .92%
Net investment income 2.90%(c) 6.31% 7.51% 7.96% 7.88% 8.17%
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2004 -----------------------------------------------------------------------
SUPPLEMENTAL DATA: (UNAUDITED) 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
Net assets,
end of period (000) $ 4,567,233 $ 4,497,233 $ 3,048,301 $ 2,500,544 $ 2,065,319 $ 2,328,531
Portfolio turnover rate 21.38% 40.96% 37.03% 55.44% 66.03% 67.93%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<Page>
FINANCIAL HIGHLIGHTS (CONTINUED)
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2004 -----------------------------------------------------------------------
(UNAUDITED) 2003 2002 2001 2000 1999
PER SHARE OPERATING PERFORMANCE (CLASS B SHARES)
NET ASSET VALUE,
BEGINNING OF PERIOD $ 8.06 $ 7.20 $ 7.92 $ 8.23 $ 9.05 $ 9.44
=========== =========== =========== =========== =========== ===========
Investment operations
Net investment income(a) .21 .43 .51 .60 .63 .69
Net realized and
unrealized gain (loss) (.15) .92 (.65) (.25) (.76) (.39)
----------- ----------- ----------- ----------- ----------- -----------
Total from investment
operations .06 1.35 (.14) .35 (.13) .30
----------- ----------- ----------- ----------- ----------- -----------
Distributions to shareholders
from:
Net investment income (.23) (.46) (.53) (.63) (.69) (.69)
Paid-in capital - (.03) (.05) (.03) - -
----------- ----------- ----------- ----------- ----------- -----------
Total distributions (.23) (.49) (.58) (.66) (.69) (.69)
----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 7.89 $ 8.06 $ 7.20 $ 7.92 $ 8.23 $ 9.05
=========== =========== =========== =========== =========== ===========
Total Return(b) .79%(c) 19.43% (1.67)% 4.29% (1.52)% 3.29%
RATIOS TO AVERAGE NET ASSETS
Expenses, including expense
reductions .82%(c) 1.64% 1.65% 1.63% 1.61% 1.60%
Expenses, excluding expense
reductions .82%(c) 1.64% 1.65% 1.63% 1.62% 1.60%
Net investment income 2.58%(c) 5.67% 6.86% 7.35% 7.26% 7.49%
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2004 -----------------------------------------------------------------------
SUPPLEMENTAL DATA: (UNAUDITED) 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
Net assets,
end of period (000) $ 1,766,200 $ 1,861,920 $ 1,294,955 $ 1,105,501 $ 786,786 $ 840,533
Portfolio turnover rate 21.38% 40.96% 37.03% 55.44% 66.03% 67.93%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
31
<Page>
FINANCIAL HIGHLIGHTS (CONTINUED)
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2004 -----------------------------------------------------------------------
(UNAUDITED) 2003 2002 2001 2000 1999
PER SHARE OPERATING PERFORMANCE (CLASS C SHARES)
NET ASSET VALUE,
BEGINNING OF PERIOD $ 8.07 $ 7.21 $ 7.93 $ 8.24 $ 9.06 $ 9.46
=========== =========== =========== =========== =========== ===========
Investment operations
Net investment income(a) .21 .43 .51 .60 .63 .69
Net realized and
unrealized gain (loss) (.16) .92 (.64) (.25) (.76) (.40)
----------- ----------- ----------- ----------- ----------- -----------
Total from investment
operations .05 1.35 (.13) .35 (.13) .29
----------- ----------- ----------- ----------- ----------- -----------
Distributions to shareholders
from:
Net investment income (.23) (.46) (.54) (.63) (.69) (.69)
Paid-in capital - (.03) (.05) (.03) - -
----------- ----------- ----------- ----------- ----------- -----------
Total distributions (.23) (.49) (.59) (.66) (.69) (.69)
----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 7.89 $ 8.07 $ 7.21 $ 7.93 $ 8.24 $ 9.06
=========== =========== =========== =========== =========== ===========
Total Return(b) .67%(c) 19.43% (1.58)% 4.29% (1.52)% 3.17%
RATIOS TO AVERAGE NET ASSETS
Expenses, including expense
reductions .82%(c) 1.64% 1.59% 1.62% 1.65% 1.60%
Expenses, excluding expense
reductions .82%(c) 1.64% 1.59% 1.62% 1.66% 1.60%
Net investment income 2.58%(c) 5.67% 6.92% 7.36% 7.26% 7.49%
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2004 -----------------------------------------------------------------------
SUPPLEMENTAL DATA: (UNAUDITED) 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
Net assets,
end of period (000) $ 1,565,158 $ 1,593,650 $ 905,629 $ 662,848 $ 483,885 $ 557,149
Portfolio turnover rate 21.38% 40.96% 37.03% 55.44% 66.03% 67.93%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
32
<Page>
FINANCIAL HIGHLIGHTS (CONTINUED)
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2004 -----------------------------------------------------------------------
(UNAUDITED) 2003 2002 2001 2000 1999
PER SHARE OPERATING PERFORMANCE (CLASS P SHARES)
NET ASSET VALUE,
BEGINNING OF PERIOD $ 8.17 $ 7.29 $ 8.02 $ 8.33 $ 9.05 $ 9.45
=========== =========== =========== =========== =========== ===========
Investment operations
Net investment income(a) .23 .48 .55 .64 .67 .73
Net realized and
unrealized gain (loss) (.15) .93 (.65) (.24) (.65) (.39)
----------- ----------- ----------- ----------- ----------- -----------
Total from investment
operations .08 1.41 (.10) .40 .02 .34
----------- ----------- ----------- ----------- ----------- -----------
Distributions to shareholders
from:
Net investment income (.26) (.50) (.58) (.67) (.74) (.74)
Paid-in capital - (.03) (.05) (.04) - -
----------- ----------- ----------- ----------- ----------- -----------
Total distributions (.26) (.53) (.63) (.71) (.74) (.74)
----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 7.99 $ 8.17 $ 7.29 $ 8.02 $ 8.33 $ 9.05
=========== =========== =========== =========== =========== ===========
Total Return(b) .95%(c) 20.10% (1.19)% 4.90% .06% 3.86%
RATIOS TO AVERAGE NET ASSETS
Expenses, including expense
reductions .54%(c) 1.09% 1.10% 1.08% 1.06% 1.05%
Expenses, excluding expense
reductions .54%(c) 1.09% 1.10% 1.08% 1.07% 1.05%
Net investment income 2.86%(c) 6.22% 7.41% 7.88% 7.83% 8.10%
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2004 -----------------------------------------------------------------------
SUPPLEMENTAL DATA: (UNAUDITED) 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
Net assets,
end of period (000) $ 85,059 $ 60,848 $ 18,736 $ 7,017 $ 1,385 $ 229
Portfolio turnover rate 21.38% 40.96% 37.03% 55.44% 66.03% 67.93%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
33
<Page>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2004 -----------------------------------------------------------------------
(UNAUDITED) 2003 2002 2001 2000 1999
PER SHARE OPERATING PERFORMANCE (CLASS Y SHARES)
NET ASSET VALUE,
BEGINNING OF PERIOD $ 8.04 $ 7.18 $ 7.90 $ 8.21 $ 9.04 $ 9.44
=========== =========== =========== =========== =========== ===========
Investment operations
Net investment income(a) .25 .51 .58 .68 .71 .78
Net realized and
unrealized gain (loss) (.15) .91 (.64) (.24) (.76) (.40)
----------- ----------- ----------- ----------- ----------- -----------
Total from investment
operations .10 1.42 (.06) .44 (.05) .38
----------- ----------- ----------- ----------- ----------- -----------
Distributions to shareholders
from:
Net investment income (.27) (.53) (.61) (.71) (.78) (.78)
Paid-in capital - (.03) (.05) (.04) - -
----------- ----------- ----------- ----------- ----------- -----------
Total distributions (.27) (.56) (.66) (.75) (.78) (.78)
----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 7.87 $ 8.04 $ 7.18 $ 7.90 $ 8.21 $ 9.04
=========== =========== =========== =========== =========== ===========
Total Return(b) 1.30%(c) 20.58% (.66)% 5.44% (.61)% 4.27%
RATIOS TO AVERAGE NET ASSETS
Expenses, including expense
reductions .32%(c) .64% .65% .63% .61% .60%
Expenses, excluding expense
reductions .32%(c) .64% .65% .63% .62% .60%
Net investment income 3.08%(c) 6.67% 7.86% 8.36% 8.26% 8.52%
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2004 -----------------------------------------------------------------------
SUPPLEMENTAL DATA: (UNAUDITED) 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
Net assets,
end of period (000) $ 234,179 $ 181,603 $ 68,691 $ 44,931 $ 43,884 $ 51,181
Portfolio turnover rate 21.38% 40.96% 37.03% 55.44% 66.03% 67.93%
</Table>
(a) Calculated using average shares outstanding during the period.
(b) Total return does not consider the effects of sales loads and assumes the
reinvestment of all distributions.
(c) Not annualized
SEE NOTES TO FINANCIAL STATEMENTS.
34
<Page>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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
certain 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 sale price or,
if no sale 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 sales 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.
35
<Page>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(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 net 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, B, C and 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 foreign 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 June 30, 2004, 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
36
<Page>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
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.
(j) STRUCTURED SECURITIES-The Fund may invest in structured securities.
Structured securities are a type of derivative security whose value is
determined by reference to changes in the value of specific underlying
securities, currencies, interest rates, commodities, indices, credit default
swaps, or other indicators (the "Reference"), or to relative changes in two
or more References. The interest rate or principal amount payable upon
maturity or redemption may be increased or decreased depending upon changes
in the applicable Reference or certain specified events. Structured
securities may be positively or negatively indexed with the result that the
appreciation of the reference may produce an increase or decrease in the
interest rate or the value of the security at maturity.
(k) WHEN-ISSUED OR FORWARD TRANSACTIONS-The Fund may purchase portfolio
securities on a when-issued or forward basis. When-issued or forward
transactions involve a commitment by the Fund to purchase securities, with
payment and delivery ("settlement") to take place in the future, in order to
secure what is considered to be an advantageous price or yield at the time
of entering into the transaction. The value of fixed income securities to be
delivered in the future will fluctuate as interest rates vary. During the
period between purchase and settlement, the value of the securities will
fluctuate and assets consisting of cash and/or marketable securities
(normally short-term U.S. Government securities) marked to market daily in
an amount sufficient to make payment at settlement will be segregated at the
Fund's custodian in order to pay for the commitment. There is a risk that
market yields available at settlement may be higher than yields obtained on
the purchase date which could result in depreciation of the value of fixed
income when-issued securities. At the time the Fund makes commitment to
purchase a security on a when-issued basis, it will record the transaction
and reflect the liability for the purchase and value of the security in
determining its net asset value. The Fund, generally, has the ability to
close out a purchase obligation on or before the settlement date rather than
take delivery of the security. Under no circumstances will settlement for
such securities take place more than 120 days after the purchase date.
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.
37
<Page>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
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.
(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 $121,698 of CDSCs during the six months ended
June 30, 2004.
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 six months
ended June 30, 2004:
<Table>
<Caption>
DISTRIBUTOR DEALERS'
COMMISSIONS CONCESSIONS
- -------------------------------
$ 2,529,904 $ 12,981,666
</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 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.
38
<Page>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
The tax character of distributions paid during the six months ended June 30,
2004 and the fiscal year ended December 31, 2003 are as follows:
<Table>
<Caption>
SIX MONTHS ENDED
6/30/2004 YEAR ENDED
(UNAUDITED) 12/31/2003
- ----------------------------------------------------------------
Distributions paid from:
Ordinary income $ 259,567,296 $ 434,497,433
- ----------------------------------------------------------------
Total distributions 434,497,433
Tax return of capital - 24,067,161
- ----------------------------------------------------------------
Total distributions paid $ 259,567,296 $ 458,564,594
================================================================
</Table>
As of December 31, 2003, the capital loss carryforwards along with the related
expiration dates were 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>
As of June 30, 2004, the aggregate unrealized security gains and losses based on
cost for U.S. Federal income tax purposes were as follows:
<Table>
Tax cost $ 9,181,632,693
- ------------------------------------------------
Gross unrealized gain 394,817,870
Gross unrealized loss (185,839,081)
- ------------------------------------------------
Net unrealized security gain $ 208,978,789
================================================
</Table>
The difference between book-basis and tax-basis unrealized gains (losses) is
primarily attributable to wash sales and other temporary tax adjustments.
5. PORTFOLIO SECURITIES TRANSACTIONS
As of June 30, 2004, the value of securities loaned is $1,261,736,579. These
loans are collateralized by cash of $1,286,017,913, which is invested in a
restricted money market account, and U.S. Treasury securities with a value of
$1,785,375. In connection with the securities lending program, State Street Bank
and Trust Company ("SSB") received fees of $436,331 for the six months ended
June 30, 2004, 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 six months ended June 30, 2004 are as follows:
<Table>
<Caption>
U.S. GOVERNMENT NON-U.S. GOVERNMENT U.S. GOVERNMENT NON-U.S. GOVERNMENT
PURCHASES* PURCHASES SALES SALES
- ---------------------------------------------------------------------------
$ 103,531,250 $ 1,920,946,145 $ 51,765,625 $ 1,644,712,032
</Table>
*Includes U.S. Government sponsored enterprises securities.
39
<Page>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
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 June 30, 2004, there
were no loans outstanding pursuant to this Facility nor was the Facility
utilized at any time during the six months ended June 30, 2004.
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 NAV.
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 securities, 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 bonds are subject to greater price fluctuations,
as well as additional risks.
40
<Page>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
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 5% of its net assets in structured securities. The
Fund typically may use these securities as a substitute for taking a position in
the underlying asset and/or as part of a strategy designed to reduce exposure to
other risk, such as interest rate or currency risk. Structured securities may
present additional risks that are different from those associated with a direct
investment in fixed-income or equity securities; they may be volatile, less
liquid and more difficult to price accurately and subject to additional credit
risks. Changes in the value of structured securities may not correlate perfectly
with the underlying asset, rate or index. The Fund that invests in structured
securities could lose more than the principal amount invested.
The Fund may invest up to 20% of its net assets in equity securities which will
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
Transactions in shares of capital stock are as follows:
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2004 (UNAUDITED) DECEMBER 31, 2003
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
Shares sold 74,642,525 $ 598,936,012 223,314,498 $ 1,689,989,527
Reinvestment of distributions 15,145,097 121,007,306 27,714,251 209,698,270
Shares reacquired (68,446,705) (545,716,922) (116,943,155) (887,585,222)
- --------------------------------------------------------------------------------------------------------
Increase 21,340,917 $ 174,226,396 134,085,594 $ 1,012,102,575
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES
- --------------------------------------------------------------------------------------------------------
Shares sold 12,957,390 $ 103,990,304 72,430,972 $ 544,783,767
Reinvestment of distributions 4,047,334 32,359,502 8,005,065 60,644,990
Shares reacquired (23,977,165) (190,774,500) (29,396,050) (223,787,955)
- --------------------------------------------------------------------------------------------------------
Increase/decrease (6,972,441) $ (54,424,694) 51,039,987 $ 381,640,802
- --------------------------------------------------------------------------------------------------------
</Table>
41
<Page>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONCLUDED)
<Table>
<Caption>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2004 (UNAUDITED) DECEMBER 31, 2003
- -------------------------------------------------------------------------------------------------------
CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
Shares sold 27,090,248 $ 217,993,793 94,019,224 $ 711,800,299
Reinvestment of distributions 3,125,197 25,010,862 5,446,530 41,378,345
Shares reacquired (29,400,100) (234,274,492) (27,653,284) (211,351,213)
- -------------------------------------------------------------------------------------------------------
Increase 815,345 $ 8,730,163 71,812,470 $ 541,827,431
- -------------------------------------------------------------------------------------------------------
CLASS P SHARES
- -------------------------------------------------------------------------------------------------------
Shares sold 4,356,003 $ 35,481,411 5,912,734 $ 45,617,841
Reinvestment of distributions 202,022 1,633,958 226,620 1,749,236
Shares reacquired (1,364,959) (11,118,922) (1,263,181) (9,783,156)
- -------------------------------------------------------------------------------------------------------
Increase 3,193,066 $ 25,996,447 4,876,173 $ 37,583,921
- -------------------------------------------------------------------------------------------------------
CLASS Y SHARES
- -------------------------------------------------------------------------------------------------------
Shares sold 6,804,809 $ 54,252,780 12,393,435 $ 95,652,899
Reinvestment of distributions 866,579 6,897,994 999,864 7,586,878
Shares reacquired (480,716) (3,864,031) (383,339) (2,897,655)
- -------------------------------------------------------------------------------------------------------
Increase 7,190,672 $ 57,286,743 13,009,960 $ 100,342,122
- -------------------------------------------------------------------------------------------------------
</Table>
42
<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, (i) by calling 888-522-2388; (ii) on Lord Abbett's web site at
www.LordAbbett.com, and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund will be required to file its complete schedule of portfolio holdings
with the SEC for its first and third fiscal quarters on Form N-Q for fiscal
quarters ending on or after July 9, 2004. Once filed, the Fund's Form N-Q will
be available without charge, upon request on the SEC's website at www.sec.gov
and may be available by calling Lord Abbett at 800-821-5129; or on Lord Abbett's
website at www.LordAbbett.com. You can also obtain copies of Form N-Q by (i)
visiting the SEC's Public Reference Room in Washington, DC (information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330); (ii) sending your request and a duplicating fee to the SEC's
Public Reference Room, Washington, DC 20549-0102; or (iii) sending your request
electronically to publicinfo@sec.gov.
43
<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 LABD-3-604
90 Hudson Street - Jersey City, New Jersey 07302-3973 (8/04)
</Table>
<Page>
ITEM 2: CODE OF ETHICS.
Not applicable
ITEM 3: AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4: PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5: AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6: SCHEDULE OF INVESTMENTS.
Not applicable.
ITEM 7: DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8: PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 9: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 10: 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 August 25, 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 significant changes in the Registrant's internal
controls 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.
<Page>
ITEM 11: EXHIBITS.
ITEM 11(a): NOT APPLICABLE.ITEM 11(b):
(i) Certification of each principal executive officer and principal
financial officer of the Registrant as required by Rule 30a-2 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.
LORD ABBETT BOND-DEBENTURE
FUND, INC.
/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: August 25, 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.
LORD ABBETT BOND-DEBENTURE
FUND, INC.
/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: August 25, 2004