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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
(Address of principal executive offices) (zip code)
Christina T. Simmons, Vice President & Assistant Secretary
90 Hudson Street, Jersey City, NJ 07302
(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 201-6984
Date of fiscal year end: 12/31
Date of reporting period: 6/30/2006
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ITEM 1: REPORT TO SHAREHOLDERS.
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[LORD ABBETT LOGO]
LORD ABBETT
2006 SEMIANNUAL REPORT
LORD ABBETT BOND DEBENTURE FUND
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2006
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- --------------------------------------------------------------------------------
LORD ABBETT BOND DEBENTURE FUND
SEMIANNUAL REPORT
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2006
DEAR SHAREHOLDERS: We are pleased to provide you with this overview of the Lord
Abbett Bond Debenture Fund's performance for the six month period ended June 30,
2006. On this and the following pages, we discuss the major factors that
influenced performance. For detailed and more timely information about the Fund,
please visit our Website at www.LordAbbett.com, where you also can access the
quarterly commentaries of the Fund's portfolio managers.
General information about Lord Abbett mutual funds, as well as in-depth
discussion of market trends and investment strategies, is also provided in LORD
ABBETT INSIGHTS, a newsletter accompanying your quarterly account statements. We
also encourage you to call Lord Abbett at 800-821-5129 and speak to one of our
professionals if you would like more information.
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: The Federal Reserve Board (the Fed) continued its measured pace of interest
rate hikes, raising the fed funds rate in 0.25% increments in January, March,
May, and June, bringing the rate to 5.25% at the end of the six month period.
The June 29, 2006, interest rate hike marked the seventeenth quarter-point
increase since June 2004. Longer-term rates rose also, with the yield on the
30-year Treasury bond reaching its highest level in nearly two years on higher
energy costs and fears of increasing inflation.
Despite a weak bond market, high yield and convertible securities managed
to advance. These securities tend to be less sensitive to interest rate
movements than more traditional fixed income investments, and thus were less
affected by the bond market's decline. Convertible and high yield securities do
tend to be more sensitive to economic activity, and these securities benefited
from the continued economic strength and low credit default rates of the past
two quarters.
Q: HOW DID THE FUND PERFORM OVER THE SIX MONTH PERIOD ENDED JUNE 30, 2006?
A: The Fund returned 2.2%, reflecting performance at the net asset value (NAV)
of Class A shares with all distributions reinvested, compared with its
benchmark, the Lehman Brothers U.S. Aggregate Bond Index,1 which returned -0.7%
over the same period. AVERAGE ANNUAL TOTAL
1
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- --------------------------------------------------------------------------------
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: -0.75%, 5 YEARS: 5.32%, AND 10 YEARS: 5.74%.
PERFORMANCE DATA QUOTED REFLECT PAST PERFORMANCE AND ARE NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
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 greatest contributor to performance in the period, relative to the Fund's
benchmark, was the portfolio's holdings of high yield securities. Convertible
securities also added to performance, as did the portfolio's equity holdings.
Both high yield bonds and convertible securities outperformed investment-grade
bonds in the period. Within the investment-grade sector, the portfolio's
holdings in mortgage-backed securities also helped relative performance, as
mortgages outperformed both investment-grade corporate bonds and U.S. Treasury
bonds. Detracting from performance relative to the Fund's benchmark in the high
yield bond sector was the portfolio's underweight position in CCC rated
securities and preference for higher rated securities. Triple Cs outperformed
both BB and B rated securities during the period.
In the convertible securities sector, drug manufacturer Celgene Corp. made
the greatest individual contribution to performance, followed by Schlumberger
Ltd., an oil field services company; Hanover Compressor, a firm that rents and
repairs compressors for the oil and gas industries; and Apogent Technologies, a
manufacturer of laboratory products for the clinical and industrial markets.
Detracting from performance in the convertible securities sector were Teva
Pharmaceutical Finance, the finance arm of the Israeli-based pharmaceutical
firm; CV Therapeutics, a developer of molecular cardiology products; Openwave
Sytems, a software and services provider to the telecommunications business; and
The Interpublic Group of Companies, an advertising and marketing services firm.
Contributing to performance in the high yield bond sector were auto
manufacturer General Motors Corp.; Ineos Group Holdings, a diversified chemical
company; and global communications and information services company Level 3
Communications and its financing arm, Level 3 Financing. Detracting from
performance in the high yield bond sector were: Dole Food Co., a major food
processor firm; Chesapeake Energy Corp., an
2
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independent explorer and production company focusing on natural gas; Ainsworth
Lumber Co., a producer of lumber, plywood and flooring; and hospital operator
HCA Inc.
In the investment-grade sector, as mentioned earlier, the portfolio's
holdings in the mortgage-backed securities market contributed to performance
relative to the benchmark. The greatest single contributor to performance in the
investment-grade sector was Airgate PCS Inc., a wireless telecommunications
company. Also adding to performance were Corning Inc., a provider of optical
fiber, cable, and communications network equipment; Alamosa Holdings, a wireless
communications company; and Cummins, Inc., a manufacturer of large diesel
engines. Detracting from performance were gaming company Harrah's; utility
company PG&E Corp.; Freescale Semiconductor, a manufacturer of microchips; and
Wells Fargo & Co., the nation's fifth largest bank.
The Fund also participates in the equity market. Contributing to
performance in the equity sector were Archer Daniels Midland, a processor of
oilseeds, corn, and wheat; Qwest Communications International, a provider of
long-distance telephone, as well as broadband data, voice, and video services;
BEA Systems, a provider of application server software; and Mentor Graphics
Corp., a provider of electronic design automation software and systems.
Detracting from performance in the equity sector were Comverse Technology, a
manufacturer of communication systems and software; Amgen Inc., a biotech drug
manufacturer; Sun Microsystems, a maker of UNIX-based servers used to power
corporate computer networks and Websites; and utility company TECO Energy, Inc.
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.
NOTE: Class A shares purchased subject to a front-end sales charge have no
contingent deferred sales charge (CDSC). However, certain purchases of Class A
shares made without a front-end sales charge may be subject to a CDSC. Please
see section "Your Investment - Purchases" in the prospectus for more information
on redemptions that may be subject to a CDSC.
A PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT A FUND, INCLUDING ITS
INVESTMENT OBJECTIVES, RISKS, CHARGES, AND ONGOING EXPENSES, WHICH AN INVESTOR
SHOULD CAREFULLY CONSIDER BEFORE INVESTING. TO OBTAIN A PROSPECTUS ON ANY LORD
ABBETT MUTUAL FUND, PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR LORD ABBETT
DISTRIBUTOR LLC AT 800-874-3733 OR VISIT OUR WEBSITE AT www.LordAbbett.com. READ
THE PROSPECTUS CAREFULLY BEFORE INVESTING.
3
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(1) The Lehman Brothers U.S. 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.
Indexes 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, 2006; 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.
4
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EXPENSE EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges on purchase payments (these charges vary among
the share classes); and (2) ongoing costs, including management fees;
distribution and service (12b-1) fees (these charges vary among the share
classes); and other Fund expenses. This Example is intended to help you
understand your ongoing costs (in dollars) of investing in the Fund and to
compare these costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning
of the period and held for the entire period (January 1, 2006 through June 30,
2006).
ACTUAL EXPENSES
For each class of the Fund, the first line of the table on the following
page provides information about actual account values and actual expenses. You
may use the information in this line, together with the amount you invested, to
estimate the expenses that you paid over the period. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number in the first line under the heading
entitled "Expenses Paid During the Period 1/1/06 - 6/30/06" to estimate the
expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
For each class of the Fund, the second line of the table on the following
page provides information about hypothetical account values and hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5.0% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing costs of investing in the Fund and other
funds. To do so, compare this 5.0% hypothetical example with the 5.0%
hypothetical examples that appear in the shareholder reports of the other funds.
5
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===============================================================================
Please note that the expenses shown in the table are meant to highlight
your ongoing costs only and do not reflect any transactional costs, such as
sales charges. Therefore, the second line of the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
<Table>
<Caption>
EXPENSES
BEGINNING ENDING PAID DURING
ACCOUNT ACCOUNT PERIOD+
VALUE VALUE -----------
--------- --------- 1/1/06 -
1/1/06 6/30/06 6/30/06
--------- --------- -----------
CLASS A
Actual $1,000.00 $1,021.80 $4.96
Hypothetical (5% Return Before Expenses) $1,000.00 $1,019.88 $4.96
CLASS B
Actual $1,000.00 $1,019.60 $8.21
Hypothetical (5% Return Before Expenses) $1,000.00 $1,016.64 $8.20
CLASS C
Actual $1,000.00 $1,019.70 $8.21
Hypothetical (5% Return Before Expenses) $1,000.00 $1,016.64 $8.20
CLASS P
Actual $1,000.00 $1,022.20 $5.47
Hypothetical (5% Return Before Expenses) $1,000.00 $1,019.37 $5.46
CLASS Y
Actual $1,000.00 $1,023.70 $3.21
Hypothetical (5% Return Before Expenses) $1,000.00 $1,021.61 $3.21
</Table>
+ For each class of the Fund, expenses are equal to the annualized expense
ratio for such class (0.99% for Class A, 1.64% for Classes B and C, 1.09%
for Class P and 0.64% for Class Y) multiplied by the average account value
over the period, multiplied by 181/365 (to reflect one-half year period).
===============================================================================
PORTFOLIO HOLDINGS PRESENTED BY SECTOR
JUNE 30, 2006
<Table>
<Caption>
SECTOR* %**
Agency 7.34%
Banking 1.20%
Basic Industry 7.42%
Brokerage 0.42%
Capital Goods 5.55%
Communications 0.14%
Consumer Cyclical 5.92%
Consumer Non-Cyclical 6.83%
Energy 8.79%
Finance & Investment 1.21%
Government Guaranteed 2.31%
Insurance 0.37%
Media 9.23%
Mortgage Backed 1.43%
Services Cyclical 11.69%
Services Non-Cyclical 4.92%
Technology & Electronics 4.79%
Telecommunications 5.47%
Utility 5.31%
Short-Term Investments 9.66%
Total 100.00%
</Table>
* A sector may comprise several industries.
** Represents percent of total investments.
6
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SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 2006
<Table>
<Caption>
SHARES U.S. $
INVESTMENTS (000) VALUE
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 96.90%
COMMON STOCKS 5.35%
AEROSPACE/DEFENSE 0.11%
EDO CORP. 350 $ 8,519,000
-----------
AGRICULTURE 0.14%
ARCHER DANIELS MIDLAND CO. 250 10,320,000
-----------
BANKING 0.23%
WACHOVIA CORP. 325 17,576,000
-----------
BEVERAGE 0.32%
COCA-COLA CO. (THE) 150 6,453,000
PEPSICO, INC. 300 18,012,000
-----------
TOTAL 24,465,000
-----------
BROKERAGE 0.11%
FRANKLIN RESOURCES, INC. 94 8,125,677
-----------
CHEMICALS 0.38%
LYONDELL CHEMICAL CO. 325 7,364,500
PRAXAIR, INC. 400 21,600,000
-----------
TOTAL 28,964,500
-----------
COMPUTER HARDWARE 0.08%
SUN MICROSYSTEMS, INC.* 1,500 6,225,000
-----------
DIVERSIFIED CAPITAL GOODS 0.32%
3M CO. 300 24,231,000
-----------
ELECTRIC - INTEGRATED 0.68%
NISOURCE, INC. 600 13,104,000
NORTHEAST UTILITIES SYSTEM CO. 1,000 20,670,000
TECO ENERGY, INC. 1,200 17,928,000
-----------
TOTAL 51,702,000
-----------
ELECTRONICS 0.37%
EMERSON ELECTRIC CO. 300 25,143,000
MENTOR GRAPHICS CORP.* 250 3,245,000
-----------
TOTAL 28,388,000
-----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS. 7
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
SHARES U.S. $
INVESTMENTS (000) VALUE
- --------------------------------------------------------------------------------
ENERGY - EXPLORATION & PRODUCTION 0.40%
DEVON ENERGY CORP. 350 $21,143,500
EXXON MOBIL CORP. 150 9,202,500
-----------
TOTAL 30,346,000
-----------
FOOD - WHOLESALE 0.31%
CONAGRA FOODS, INC. 400 8,844,000
KELLOGG CO. 300 14,529,000
-----------
TOTAL 23,373,000
-----------
INTEGRATED ENERGY 0.16%
CHEVRON CORP. 200 12,412,000
-----------
MACHINERY 0.12%
ROPER INDUSTRIES, INC. 200 9,350,000
-----------
MEDIA - BROADCAST 0.10%
CLEAR CHANNEL COMMUNICATIONS, INC. 250 7,737,500
-----------
NON-ELECTRIC UTILITIES 0.17%
NATIONAL FUEL GAS CO. 300 10,542,000
SEMCO ENERGY, INC.* 489 2,717,622
-----------
TOTAL 13,259,622
-----------
PHARMACEUTICALS 0.57%
AMGEN, INC.* 175 11,415,250
CV THERAPEUTICS, INC.* 100 1,397,000
MERCK & CO., INC. 375 13,661,250
MYLAN LABORATORIES, INC. 400 8,000,000
PFIZER, INC. 400 9,388,000
-----------
TOTAL 43,861,500
-----------
RESTAURANTS 0.13%
MCDONALD'S CORP. 300 10,080,000
-----------
SOFTWARE/SERVICES 0.09%
BEA SYSTEMS, INC.* 525 6,872,250
-----------
SUPPORT - SERVICES 0.07%
CRA INT'L., INC.* 125 5,642,500
-----------
</Table>
8 SEE NOTES TO FINANCIAL STATEMENTS.
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
SHARES U.S. $
INVESTMENTS (000) VALUE
- --------------------------------------------------------------------------------
TELECOM - INTEGRATED/SERVICES 0.33%
QWEST COMMUNICATIONS INT'L., INC.* 801 $ 6,480,074
SPRINT NEXTEL CORP. 350 6,996,500
VERIZON COMMUNICATIONS, INC. 350 11,721,500
------------
TOTAL 25,198,074
------------
TELECOMMUNICATIONS EQUIPMENT 0.16%
AVAYA INC.* 750 8,565,000
COMVERSE TECHNOLOGY, INC.* 200 3,954,000
------------
TOTAL 12,519,000
------------
TOTAL COMMON STOCKS (cost $363,556,276) 409,167,623
============
</Table>
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
RATE DATE (000)
-------------------------------
CONVERTIBLE NOTES & BONDS 9.78%
AEROSPACE/DEFENSE 1.04%
ALLIANT TECHSYSTEMS, INC.^ 2.75% 2/15/2024 $15,000 16,143,750
EDO CORP. 4.00% 11/15/2025 15,000 14,681,250
L-3 COMMUNICATIONS CORP.^ 3.00% 8/1/2035 15,000 14,700,000
LOCKHEED MARTIN CORP.^ 4.92%# 8/15/2033 30,000 34,246,800
----------
TOTAL 79,771,800
----------
BROKERAGE 0.21%
MORGAN STANLEY+ 1.00% 3/30/2012 15,000 16,104,000
----------
BUILDING & CONSTRUCTION 0.58%
FLUOR CORP.^ 1.50% 2/15/2024 26,000 44,037,500
----------
COMPUTER HARDWARE 0.22%
INTEL CORP.^ 2.95% 12/15/2035 20,000 16,925,000
----------
ELECTRONICS 0.68%
CYPRESS SEMICONDUCTOR CORP.^ 1.25% 6/15/2008 12,500 14,265,625
FLIR SYSTEMS, INC.^ 3.00% 6/1/2023 12,500 15,062,500
MILLIPORE CORP.+ 3.75% 6/1/2026 12,500 12,390,625
RF MICRO DEVICES, INC.^ 1.50% 7/1/2010 10,000 9,950,000
----------
TOTAL 51,668,750
----------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS. 9
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- ------------------------------------------------------------------------------------------------
GAMING 0.23%
INTERNATIONAL GAME TECHNOLOGY Zero Coupon 1/29/2033 $22,000 $17,765,000
-----------
GAS DISTRIBUTION 0.05%
NORTHERNSTAR NATURAL GAS+ 5.00%# 5/15/2013 4,000 3,980,000
-----------
HEALTH SERVICES 0.79%
FISHER SCIENTIFIC INT'L., INC.^ 3.25% 3/1/2024 10,000 11,175,000
INVITROGEN CORP.^ 1.50% 2/15/2024 20,000 16,850,000
INVITROGEN CORP.^ 3.25% 6/15/2025 7,500 7,068,750
MANOR CARE, INC. 2.125%# 8/1/2035 11,500 12,937,500
SFBC INT'L., INC. 2.25% 8/15/2024 14,500 12,379,375
-----------
TOTAL 60,410,625
-----------
HOTELS 0.29%
HILTON HOTELS CORP.^ 3.375% 4/15/2023 17,000 22,397,500
-----------
INVESTMENTS & MISC. FINANCIAL SERVICES 0.66%
AMERICAN EXPRESS CO.^ 1.85% 12/1/2033 20,000 20,575,000
LEHMAN BROTHERS HOLDINGS, INC. 0.25% 7/7/2011 11,000 11,990,000
LEHMAN BROTHERS HOLDINGS, INC. 0.25% 12/8/2012 18,000 17,685,000
-----------
TOTAL 50,250,000
-----------
MEDIA - BROADCAST 0.33%
SINCLAIR BROADCAST GROUP, INC. 4.875%# 7/15/2018 10,000 8,725,000
SINCLAIR BROADCAST GROUP, INC. 6.00% 9/15/2012 18,970 16,503,900
-----------
TOTAL 25,228,900
-----------
MEDIA - DIVERSIFIED 0.88%
LIBERTY MEDIA CORP. 3.25% 3/15/2031 45,000 34,312,500
WALT DISNEY CO. (THE)^ 2.125% 4/15/2023 30,000 33,187,500
-----------
TOTAL 67,500,000
-----------
OIL FIELD EQUIPMENT & SERVICES 0.71%
HANOVER COMPRESSOR CO. 4.75% 1/15/2014 10,000 14,300,000
SCHLUMBERGER LTD. (NETHERLANDS ANTILLES)^(b) 1.50% 6/1/2023 22,000 40,040,000
-----------
TOTAL 54,340,000
-----------
PHARMACEUTICALS 1.14%
CELGENE CORP.^ 1.75% 6/1/2008 4,000 15,720,000
CV THERAPEUTICS, INC.^ 3.25% 8/16/2013 15,000 12,693,750
</Table>
10 SEE NOTES TO FINANCIAL STATEMENTS.
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- ---------------------------------------------------------------------------------------------------------
MGI PHARMA, INC. 1.682% 3/2/2024 $25,000 $ 16,875,000
TEVA PHARMACEUTICAL FINANCE B.V. (ISRAEL)(b) 0.375% 11/15/2022 22,500 33,131,250
WATSON PHARMACEUTICALS, INC. 1.75% 3/15/2023 10,000 8,825,000
------------
TOTAL 87,245,000
------------
SOFTWARE/SERVICES 1.01%
CADENCE DESIGN SYSTEMS, INC.^ Zero Coupon 8/15/2023 20,000 22,950,000
DST SYSTEMS, INC. 4.125% 8/15/2023 20,000 26,550,000
MANUGISTICS GROUP, INC. 5.00% 11/1/2007 15,000 14,981,250
OPENWAVE SYSTEMS, INC.^ 2.75% 9/9/2008 12,500 12,671,875
------------
TOTAL 77,153,125
------------
SUPPORT - SERVICES 0.26%
CHARLES RIVER ASSOC., INC. 2.875% 6/15/2034 15,000 19,706,250
------------
TELECOM - WIRELESS 0.13%
NEXTEL COMMUNICATIONS, INC. 5.25% 1/15/2010 10,000 9,712,500
------------
TELECOMMUNICATIONS 0.15%
LIBERTY MEDIA CORP. CLASS A^ 3.50% 1/15/2031 12,000 11,445,000
------------
TELECOMMUNICATIONS EQUIPMENT 0.34%
LSI LOGIC CORP.^ 4.00% 5/15/2010 25,000 25,531,250
------------
THEATERS & ENTERTAINMENT 0.08%
LIONS GATE ENTERTAINMENT CORP.(b) 3.625% 3/15/2025 7,500 6,412,500
------------
TOTAL CONVERTIBLE NOTES & BONDS (cost $708,475,351) 747,584,700
============
SHARES
(000)
---------
CONVERTIBLE PREFERRED STOCKS 3.28%
AGENCY 0.12%
FEDERAL NATIONAL MORTGAGE ASSOC. 5.375% --(d) 9,287,663
------------
AUTOMOTIVE 0.06%
FORD MOTOR CO. CAPITAL TRUST II 6.50% 175 4,865,000
------------
BANKING 0.33%
MARSHALL & ILSLEY CORP. 6.50% 950 25,526,500
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS. 11
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
INTEREST SHARES U.S. $
INVESTMENTS RATE (000) VALUE
- -----------------------------------------------------------------------------------------
BEVERAGE 0.15%
CONSTELLATION BRANDS, INC. 5.75% 300 $ 11,145,000
------------
BROKERAGE 0.27%
MORGAN STANLEY+ 9.50% 150 9,978,750
MORGAN STANLEY+ 7.60% 144 10,692,278
------------
TOTAL 20,671,028
------------
ELECTRIC - GENERATION 0.47%
NRG ENERGY, INC. 5.75% 60 14,886,562
PNM RESOURCES, INC. 6.75% 425 20,867,500
------------
TOTAL 35,754,062
------------
FOOD & DRUG RETAILERS 0.10%
ALBERTSON'S, INC. 7.25% 300 7,554,000
------------
GAS DISTRIBUTION 0.25%
EL PASO CORP. 4.99% 15 19,389,375
------------
INTEGRATED ENERGY 0.52%
WILLIAMS COS., INC. (THE) 5.50% 360 39,780,000
------------
LIFE INSURANCE 0.35%
METLIFE, INC. 6.375% 960 26,467,200
------------
PHARMACEUTICALS 0.40%
SCHERING-PLOUGH CORP. 6.00% 600 30,198,000
------------
PRINTING & PUBLISHING 0.21%
INTERPUBLIC GROUP OF COS. INC. SERIES A (THE) 5.375% 500 16,000,000
------------
PROPERTY & CASUALTY INSURANCE 0.05%
XL CAPITAL LTD. CLASS A (BERMUDA)(b) 6.50% 200 4,174,000
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (cost $246,621,667) 250,811,828
============
</Table>
12 SEE NOTES TO FINANCIAL STATEMENTS.
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- ------------------------------------------------------------------------------------------------
GOVERNMENT SPONSORED ENTERPRISES BONDS 2.11%
FEDERAL HOME LOAN MORTGAGE CORP. 5.75% 4/15/2008 $85,000 $ 85,409,190
FEDERAL NATIONAL MORTGAGE ASSOC. 6.625% 10/15/2007 75,000 76,035,225
------------
TOTAL GOVERNMENT SPONSORED ENTERPRISES BONDS (cost $164,068,987) 161,444,415
============
GOVERNMENT SPONSORED ENTERPRISES PASS-THROUGHS 6.91%
FEDERAL NATIONAL MORTGAGE ASSOC. 7.00% 3/1/2032 4,722 4,838,900
FEDERAL NATIONAL MORTGAGE ASSOC. 5.50% 2/1/2033 37,866 36,546,148
FEDERAL NATIONAL MORTGAGE ASSOC. 5.50% 7/1/2033 45,136 43,556,812
FEDERAL NATIONAL MORTGAGE ASSOC. 6.00% 10/1/2033 6,445 6,365,457
FEDERAL NATIONAL MORTGAGE ASSOC. 6.00% 1/1/2034 18,342 18,115,062
FEDERAL NATIONAL MORTGAGE ASSOC. 6.00% 2/1/2034 34,146 33,723,427
FEDERAL NATIONAL MORTGAGE ASSOC. 6.00% 8/1/2034 24,264 23,963,802
FEDERAL NATIONAL MORTGAGE ASSOC. 6.00% 11/1/2034 54,185 53,455,912
FEDERAL NATIONAL MORTGAGE ASSOC. 6.00% 2/1/2035 25,547 25,202,782
FEDERAL NATIONAL MORTGAGE ASSOC. 6.00% 4/1/2035 21,525 21,234,761
FEDERAL NATIONAL MORTGAGE ASSOC. 6.00% 12/1/2035 24,010 23,658,365
FEDERAL NATIONAL MORTGAGE ASSOC. 6.00% 1/1/2036 22,613 22,267,149
FEDERAL NATIONAL MORTGAGE ASSOC. 6.00% 3/1/2036 24,675 24,313,065
FEDERAL NATIONAL MORTGAGE ASSOC. 6.00% 4/1/2036 98,851 97,340,315
FEDERAL NATIONAL MORTGAGE ASSOC. 6.50% 2/1/2036 18,555 18,660,931
FEDERAL NATIONAL MORTGAGE ASSOC. 6.50% 9/1/2035 36,160 36,383,525
FEDERAL NATIONAL MORTGAGE ASSOC. 6.50% 10/1/2035 3,480 3,501,804
FEDERAL NATIONAL MORTGAGE ASSOC. 6.50% 12/1/2035 34,361 34,573,640
------------
TOTAL GOVERNMENT SPONSORED ENTERPRISES PASS-THROUGHS (cost $542,843,682) 527,701,857
============
HIGH YIELD CORPORATE NOTES & BONDS 66.73%
AEROSPACE/DEFENSE 1.15%
ARMOR HOLDINGS, INC.^ 8.25% 8/15/2013 10,000 10,400,000
DRS TECHNOLOGIES, INC.^ 6.875% 11/1/2013 30,000 29,025,000
ESTERLINE TECHNOLOGIES CORP.^ 7.75% 6/15/2013 16,000 16,280,000
L-3 COMMUNICATIONS CORP. 6.125% 1/15/2014 14,000 13,370,000
L-3 COMMUNICATIONS CORP. 6.375% 10/15/2015 11,850 11,376,000
MOOG INC. CLASS A 6.25% 1/15/2015 8,000 7,560,000
------------
TOTAL 88,011,000
============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS. 13
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------
APPAREL/TEXTILES 0.59%
INVISTA+ 9.25% 5/1/2012 $ 25,000 $ 26,375,000
QUIKSILVER, INC.^ 6.875% 4/15/2015 20,000 18,700,000
------------
TOTAL 45,075,000
------------
AUTO LOANS 2.61%
FORD MOTOR CREDIT CO.^ 7.25% 10/25/2011 35,000 31,080,455
FORD MOTOR CREDIT CO.^ 7.375% 10/28/2009 35,000 32,381,825
GENERAL MOTORS ACCEPTANCE CORP.^ 6.75% 12/1/2014 12,590 11,712,062
GENERAL MOTORS ACCEPTANCE CORP. 7.25% 3/2/2011 128,500 124,702,311
------------
TOTAL 199,876,653
------------
AUTO PARTS & EQUIPMENT 1.05%
ACCURIDE CORP.^ 8.50% 2/1/2015 10,050 9,698,250
COOPER-STANDARD AUTOMOTIVE, INC. 8.375% 12/15/2014 20,000 15,875,000
CUMMINS, INC.^ 9.50% 12/1/2010 16,650 17,622,760
STANADYNE CORP.
(ZERO COUPON UNTIL 8/15/2009)** 12.00% 2/15/2015 15,000 7,575,000
STANADYNE CORP.^ 10.00% 8/15/2014 10,000 9,400,000
TENNECO INC.^ 8.625% 11/15/2014 20,000 20,050,000
------------
TOTAL 80,221,010
------------
AUTOMOTIVE 0.47%
GENERAL MOTORS CORP.^ 7.20% 1/15/2011 40,000 35,600,000
VENTURE HOLDINGS TRUST(c) 9.50% 7/1/2005 10,000 87,500
------------
TOTAL 35,687,500
------------
BANKING 0.73%
REGIONS FINANCIAL CORP. 4.50% 8/8/2008 25,000 24,445,300
REGIONS FINANCIAL CORP.^ 7.00% 3/1/2011 11,500 12,118,838
WELLS FARGO & CO. 5.35% 5/6/2018 20,000 19,049,120
------------
TOTAL 55,613,258
------------
BUILDING & CONSTRUCTION 0.57%
BEAZER HOMES USA, INC.^ 6.50% 11/15/2013 10,000 9,100,000
BEAZER HOMES USA, INC. 8.375% 4/15/2012 10,000 10,050,000
STANDARD PACIFIC CORP.^ 7.00% 8/15/2015 16,600 14,815,500
WILLIAM LYON HOMES, INC.^ 10.75% 4/1/2013 10,000 9,650,000
------------
TOTAL 43,615,500
------------
</Table>
14 SEE NOTES TO FINANCIAL STATEMENTS.
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------
CHEMICALS 2.83%
AIRGAS, INC. 6.25% 7/15/2014 $10,000 $ 9,400,000
EQUISTAR CHEMICALS, L.P.^ 7.55% 2/15/2026 26,000 25,350,000
HERCULES, INC. 6.75% 10/15/2029 25,000 23,750,000
HUNTSMAN LLC^ 11.50% 7/15/2012 5,181 5,815,672
IMC GLOBAL, INC.^ 11.25% 6/1/2011 35,000 37,100,000
INEOS GROUP HOLDINGS PLC
(UNITED KINGDOM)+(a) 7.875% 2/15/2016 10,000 11,959,122
INEOS GROUP HOLDINGS PLC
(UNITED KINGDOM)+^(b) 8.50% 2/15/2016 15,175 14,283,469
LYONDELL CHEMICAL CO.^ 9.625% 5/1/2007 9,100 9,282,000
NALCO CO.^ 8.875% 11/15/2013 12,000 12,150,000
NOVA CHEMICALS CORP. (CANADA)^(b) 6.50% 1/15/2012 12,000 11,100,000
RHODIA S.A. (FRANCE)^(b) 8.875% 6/1/2011 21,031 21,057,289
ROCKWOOD SPECIALTIES GROUP, INC.^ 7.50% 11/15/2014 18,250 17,976,250
ROCKWOOD SPECIALTIES GROUP, INC.^ 10.625% 5/15/2011 2,916 3,131,055
TERRA CAPITAL, INC. 11.50% 6/1/2010 13,000 14,235,000
------------
TOTAL 216,589,857
------------
CONSUMER PRODUCTS 0.86%
ELIZABETH ARDEN, INC. 7.75% 1/15/2014 25,000 24,687,500
PLAYTEX PRODUCTS, INC. 9.375% 6/1/2011 17,000 17,786,250
RAYOVAC CORP.^ 8.50% 10/1/2013 13,050 11,223,000
SPECTRUM BRANDS, INC.^ 7.375% 2/1/2015 15,000 12,262,500
------------
TOTAL 65,959,250
------------
DIVERSIFIED CAPITAL GOODS 0.43%
PARK-OHIO INDUSTRIES, INC.^ 8.375% 11/15/2014 14,200 12,567,000
SENSUS METERING SYSTEMS, INC.^ 8.625% 12/15/2013 21,000 20,580,000
------------
TOTAL 33,147,000
------------
ELECTRIC - GENERATION 2.37%
AES CORP. (THE) 9.50% 6/1/2009 10,000 10,650,000
DYNEGY HOLDINGS, INC.^ 6.875% 4/1/2011 22,000 20,900,000
DYNEGY HOLDINGS, INC.+^ 8.375% 5/1/2016 24,750 24,502,500
EDISON MISSION ENERGY+ 7.75% 6/15/2016 31,025 30,637,187
MISSION ENERGY HOLDING CO. 13.50% 7/15/2008 16,000 17,920,000
NRG ENERGY, INC.^ 7.25% 2/1/2014 10,000 9,775,000
NRG ENERGY, INC.^ 7.375% 2/1/2016 12,525 12,243,188
RELIANT RESOURCES, INC.^ 6.75% 12/15/2014 17,500 16,187,500
</Table>
SEE NOTES TO FINANCIAL STATEMENTS. 15
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- ------------------------------------------------------------------------------------------
RELIANT RESOURCES, INC.^ 9.50% 7/15/2013 $38,200 $ 38,582,000
------------
TOTAL 181,397,375
------------
ELECTRIC - INTEGRATED 1.82%
DUKE ENERGY CORP.^ 5.375% 1/1/2009 12,000 11,884,452
MIDWEST GENERATION, LLC^ 8.75% 5/1/2034 25,000 26,625,000
MIRANT AMERICAS GENERAL LLC 9.125% 5/1/2031 11,075 10,798,125
MIRANT NORTH AMERICA LLC+ 7.375% 12/31/2013 15,225 14,768,250
NEVADA POWER CO. 5.875% 1/15/2015 15,000 14,300,310
PG&E CORP.^ 4.80% 3/1/2014 10,000 9,333,140
PPL ENERGY SUPPLY LLC 6.40% 11/1/2011 12,000 12,168,276
PSEG ENERGY HOLDINGS, INC.^ 8.50% 6/15/2011 22,500 23,737,500
PSEG ENERGY HOLDINGS, INC.^ 8.625% 2/15/2008 15,000 15,450,000
------------
TOTAL 139,065,053
------------
ELECTRONICS 0.56%
AMKOR TECHNOLOGY, INC. 9.25% 6/1/2016 9,575 9,120,187
AVAGO TECHNOLOGIES FIN+(b) 10.125% 12/1/2013 7,000 7,402,500
COMMUNICATIONS & POWER INDUSTRIES, INC. 8.00% 2/1/2012 9,675 9,820,125
FREESCALE SEMICONDUCTOR, INC.^ 7.125% 7/15/2014 16,000 16,240,000
------------
TOTAL 42,582,812
------------
ENERGY - EXPLORATION & PRODUCTION 3.82%
CHESAPEAKE ENERGY CORP.^ 6.25% 1/15/2018 50,000 45,875,000
CHESAPEAKE ENERGY CORP.^ 6.50% 8/15/2017 14,000 12,845,000
CHESAPEAKE ENERGY CORP.^ 7.00% 8/15/2014 31,750 30,876,875
EL PASO PRODUCTION HOLDING CO. 7.75% 6/1/2013 35,000 35,437,500
ENERGY PARTNERS, LTD. 8.75% 8/1/2010 15,000 14,512,500
FOREST OIL CORP. 7.75% 5/1/2014 7,000 7,052,500
FOREST OIL CORP.^ 8.00% 6/15/2008 15,000 15,393,750
HOUSTON EXPLORATION CO. 7.00% 6/15/2013 27,095 26,824,050
KCS ENERGY SERVICES, INC.^ 7.125% 4/1/2012 25,000 23,687,500
KERR-MCGEE CORP. 6.95% 7/1/2024 15,000 15,152,910
MAGNUM HUNTER RESOURCES CORP. 9.60% 3/15/2012 4,500 4,770,000
POGO PRODUCING CO.^ 6.625% 3/15/2015 26,700 24,797,625
QUICKSILVER RESOURCES, INC. 7.125% 4/1/2016 12,325 11,616,312
RANGE RESOURCES CORP.^ 7.375% 7/15/2013 22,925 22,867,688
------------
TOTAL 291,709,210
------------
</Table>
16 SEE NOTES TO FINANCIAL STATEMENTS.
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- ------------------------------------------------------------------------------------------
ENVIRONMENTAL 1.16%
ALLIED WASTE NORTH AMERICA, INC.^ 5.75% 2/15/2011 $10,000 $ 9,375,000
ALLIED WASTE NORTH AMERICA, INC.^ 6.125% 2/15/2014 35,000 31,675,000
ALLIED WASTE NORTH AMERICA, INC.+^ 7.125% 5/15/2016 20,000 18,950,000
ALLIED WASTE NORTH AMERICA, INC.^ 7.25% 3/15/2015 29,800 28,608,000
------------
TOTAL 88,608,000
------------
FOOD & DRUG RETAILERS 1.58%
INGLES MARKETS, INC.^ 8.875% 12/1/2011 25,000 26,281,250
JEAN COUTU GROUP (PJC), INC. (THE)(b) 8.50% 8/1/2014 5,000 4,625,000
RITE AID CORP. 6.875% 8/15/2013 34,000 29,580,000
RITE AID CORP. 8.125% 5/1/2010 35,150 35,501,500
STATER BROS. HOLDINGS, INC.^ 8.125% 6/15/2012 25,000 24,812,500
------------
TOTAL 120,800,250
------------
FOOD - WHOLESALE 0.75%
CHIQUITA BRANDS INT'L., INC.^ 7.50% 11/1/2014 6,895 5,791,800
CORN PRODUCTS INT'L., INC. 8.25% 7/15/2007 15,000 15,279,915
DOLE FOOD CO.^ 8.75% 7/15/2013 22,500 20,362,500
LAND O'LAKES, INC. 9.00% 12/15/2010 15,000 15,675,000
------------
TOTAL 57,109,215
------------
FORESTRY/PAPER 3.34%
ABITIBI-CONSOLIDATED, INC. (CANADA)^(b) 8.55% 8/1/2010 23,606 22,484,715
AINSWORTH LUMBER CO. LTD. (CANADA)^(b) 7.25% 10/1/2012 19,470 16,062,750
BOISE CASCADE, LLC^ 7.125% 10/15/2014 10,000 8,900,000
BOWATER, INC. 6.50% 6/15/2013 25,000 21,875,000
BUCKEYE TECHNOLOGIES, INC.^ 8.00% 10/15/2010 21,000 19,320,000
DOMTAR, INC. (CANADA)^(b) 7.875% 10/15/2011 20,000 18,900,000
JEFFERSON SMURFIT CORP.^ 7.50% 6/1/2013 20,000 18,000,000
JEFFERSON SMURFIT CORP.^ 8.25% 10/1/2012 10,000 9,425,000
JSG FUNDING PLC (IRELAND)^(b) 7.75% 4/1/2015 18,000 16,380,000
JSG FUNDING PLC (IRELAND)^(b) 9.625% 10/1/2012 14,500 15,007,500
NEWARK GROUP, INC. (THE) 9.75% 3/15/2014 10,000 9,300,000
NORSKE SKOG CANADA LTD. (CANADA)(b) 7.375% 3/1/2014 18,925 17,032,500
ROCK-TENN COMPANY - CL A^ 8.20% 8/15/2011 15,320 15,396,600
STONE CONTAINER CORP. 8.375% 7/1/2012 15,000 14,250,000
STONE CONTAINER CORP. 9.75% 2/1/2011 17,186 17,744,545
TEMBEC INDUSTRIES, INC.(b) 7.75% 3/15/2012 5,000 2,575,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS. 17
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------
TEMBEC INDUSTRIES, INC.(b) 8.625% 6/30/2009 $22,325 $ 12,334,562
------------
TOTAL 254,988,172
------------
GAMING 4.82%
AZTAR CORP. 7.875% 6/15/2014 10,000 10,625,000
BOYD GAMING CORP.^ 7.125% 2/1/2016 6,500 6,313,125
BOYD GAMING CORP. 8.75% 4/15/2012 8,650 9,104,125
HARD ROCK HOTEL, INC.^ 8.875% 6/1/2013 32,000 34,520,000
HARRAH'S OPERATING CO., INC.^ 5.375% 12/15/2013 10,000 9,258,250
ISLE OF CAPRI CASINOS, INC.^ 7.00% 3/1/2014 35,550 33,728,062
ISLE OF CAPRI CASINOS, INC. 9.00% 3/15/2012 15,000 15,731,250
LAS VEGAS SANDS CORP.^ 6.375% 2/15/2015 35,000 32,637,500
MANDALAY RESORT GROUP^ 9.375% 2/15/2010 20,000 21,150,000
MGM MIRAGE, INC.^ 6.75% 9/1/2012 32,000 30,960,000
PARK PLACE ENTERTAINMENT CORP.^ 8.125% 5/15/2011 15,000 15,881,250
PARK PLACE ENTERTAINMENT CORP. 9.375% 2/15/2007 23,500 23,970,000
PENN NATIONAL GAMING, INC.^ 6.875% 12/1/2011 14,000 13,755,000
PREMIER ENTERTAINMENT BILOXI LLC 10.75% 2/1/2012 7,785 8,076,938
RIVER ROCK ENTERTAINMENT AUTHORITY 9.75% 11/1/2011 15,700 16,602,750
SCIENTIFIC GAMES CORP.^ 6.25% 12/15/2012 10,000 9,400,000
SENECA GAMING CORP.^ 7.25% 5/1/2012 10,000 9,737,500
STATION CASINOS, INC.^ 6.50% 2/1/2014 27,000 25,245,000
TURNING STONE CASINO RESORT+ 9.125% 12/15/2010 12,800 12,992,000
WYNN LAS VEGAS LLC/CAPITAL CORP.^ 6.625% 12/1/2014 30,000 28,425,000
------------
TOTAL 368,112,750
------------
GAS DISTRIBUTION 2.95%
EL PASO CORP. 7.00% 5/15/2011 72,500 71,865,625
EL PASO CORP.^ 7.75% 1/15/2032 28,250 27,649,687
FERRELLGAS PARTNERS, L.P. 6.75% 5/1/2014 15,950 15,192,375
FERRELLGAS PARTNERS, L.P.^ 8.75% 6/15/2012 15,625 15,937,500
INERGY FINANCE L.P.^ 8.25% 3/1/2016 10,000 10,150,000
MARKWEST ENERGY PARTNERS, L.P. 6.875% 11/1/2014 23,050 21,321,250
SONAT, INC.^ 7.625% 7/15/2011 18,000 18,270,000
WILLIAMS COS., INC. (THE)^ 7.875% 9/1/2021 43,975 44,854,500
------------
TOTAL 225,240,937
------------
HEALTH SERVICES 3.33%
ALLIANCE IMAGING, INC.^ 7.25% 12/15/2012 10,150 9,084,250
</Table>
18 SEE NOTES TO FINANCIAL STATEMENTS.
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- ------------------------------------------------------------------------------------------------------
AMERICAN MEDICAL SYS HOLDINGS 3.25% 7/1/2036 $ 5,000 $ 5,343,750
AMERIPATH, INC. 10.50% 4/1/2013 23,000 24,236,250
BIO-RAD LABORATORIES, INC. 6.125% 12/15/2014 11,700 10,793,250
CDRV INVESTORS, INC. (ZERO COUPON UNTIL 1/1/2010)** 9.625% 1/1/2015 20,000 13,600,000
DAVITA, INC.^ 7.25% 3/15/2015 10,500 10,132,500
FRESENIUS MEDICAL CARE CAPITAL TRUST II 7.875% 2/1/2008 15,000 15,262,500
HANGER ORTHOPEDIC GROUP, INC.+ 10.25% 6/1/2014 11,700 11,641,500
HCA, INC.^ 6.375% 1/15/2015 22,250 20,726,965
OMNICARE, INC.^ 6.875% 12/15/2015 7,000 6,685,000
SELECT MEDICAL CORP. 7.625% 2/1/2015 12,125 10,609,375
STEWART ENTERPRISES, INC. 6.25% 2/15/2013 7,500 6,871,875
TENET HEALTHCARE CORP. 7.375% 2/1/2013 30,775 28,236,063
TENET HEALTHCARE CORP.+ 9.50% 2/1/2015 28,700 28,269,500
TENET HEALTHCARE CORP.^ 9.875% 7/1/2014 10,000 10,050,000
TRIAD HOSPITALS, INC.^ 7.00% 11/15/2013 16,650 16,275,375
VANGUARD HEALTH HOLDINGS CO. II LLC^ 9.00% 10/1/2014 26,750 26,816,875
------------
TOTAL 254,635,028
------------
HOTELS 1.21%
FELCOR LODGING L.P. 8.50% 6/1/2011 15,000 15,975,000
GAYLORD ENTERTAINMENT CO.^ 6.75% 11/15/2014 15,000 14,137,500
HOST MARRIOTT L.P.^ 6.375% 3/15/2015 17,250 16,301,250
HOST MARRIOTT L.P.^ 7.00% 8/15/2012 20,000 19,925,000
HOST MARRIOTT L.P.^ 9.25% 10/1/2007 25,000 25,906,250
------------
TOTAL 92,245,000
------------
HOUSEHOLD & LEISURE PRODUCTS 0.15%
ACCO BRANDS CORP.^ 7.625% 8/15/2015 12,525 11,679,562
------------
INVESTMENTS & MISC. FINANCIAL SERVICES 0.64%
DOW JONES CDX HY+ 7.75% 12/29/2009 48,500 48,742,500
------------
LEISURE 0.63%
GAYLORD ENTERTAINMENT CO.^ 8.00% 11/15/2013 31,000 31,116,250
SIX FLAGS, INC.^ 9.625% 6/1/2014 8,750 8,006,250
UNIVERSAL CITY DEVELOPMENT PARTNERS, LTD. 11.75% 4/1/2010 8,000 8,750,000
------------
TOTAL 47,872,500
------------
MACHINERY 1.05%
BRIGGS & STRATTON CORP. 8.875% 3/15/2011 10,000 10,850,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS. 19
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------
CASE NEW HOLLAND, INC.^ 9.25% 8/1/2011 $10,000 $ 10,575,000
DRESSER, INC.^ 9.375% 4/15/2011 15,000 15,262,500
GARDNER DENVER, INC. 8.00% 5/1/2013 16,990 17,924,450
JLG INDUSTRIES, INC.^ 8.25% 5/1/2008 15,000 15,562,500
MANITOWOC CO., INC. (THE) 7.125% 11/1/2013 10,000 9,850,000
------------
TOTAL 80,024,450
------------
MEDIA - BROADCAST 1.62%
ALLBRITTON COMMUNICATIONS CO. 7.75% 12/15/2012 65,000 64,675,000
LIN TELEVISION CORP.^ 6.50% 5/15/2013 10,075 9,243,812
PAXSON COMMUNICATIONS CORP.+^ 11.318%# 1/15/2013 10,000 10,075,000
RADIO ONE, INC.^ 6.375% 2/15/2013 10,000 9,200,000
SINCLAIR BROADCAST GROUP, INC.^ 8.00% 3/15/2012 20,032 20,432,640
SINCLAIR BROADCAST GROUP, INC.^ 8.75% 12/15/2011 10,000 10,500,000
------------
TOTAL 124,126,452
------------
MEDIA - CABLE 3.76%
CCH I LLC^ 11.00% 10/1/2015 53,225 46,838,000
CENTURY COMMUNICATIONS CORP.(c) 8.375% 12/15/2007 8,000 8,080,000
CENTURY COMMUNICATIONS CORP.(c) 9.50% 3/1/2005 40,000 40,200,000
CHARTER COMMUNICATION HOLDINGS, LLC II 10.25% 9/15/2010 20,000 20,150,000
DIRECTV HOLDINGS LLC 6.375% 6/15/2015 25,000 23,187,500
DIRECTV HOLDINGS LLC^ 8.375% 3/15/2013 12,000 12,630,000
ECHOSTAR DBS CORP. 6.375% 10/1/2011 20,000 19,200,000
ECHOSTAR DBS CORP.+ 7.125% 2/1/2016 25,000 24,187,500
FRONTIERVISION L.P.(c) 11.875% 9/15/2007 20,000 24,275,000
FRONTIERVISION L.P. SERIES B(c) 11.875% 9/15/2007 10,000 12,137,500
MEDIACOM BROADBAND LLC / CORP.^ 8.50% 10/15/2015 14,400 13,896,000
MEDIACOM COMMUNICATIONS CORP.^ 9.50% 1/15/2013 42,500 42,500,000
------------
TOTAL 287,281,500
------------
MEDIA - SERVICES 0.67%
AFFINION GROUP INC+ 11.50% 10/15/2015 10,000 9,850,000
INTERPUBLIC GROUP OF COS.(THE)^ 6.25% 11/15/2014 14,820 12,152,400
WARNER MUSIC GROUP CORP. 7.375% 4/15/2014 30,000 29,250,000
------------
TOTAL 51,252,400
------------
METALS/MINING EXCLUDING STEEL 0.63%
FOUNDATION PA COAL CO.^ 7.25% 8/1/2014 10,000 9,800,000
NOVELIS INC. (CANADA)+(b) 8.00% 2/15/2015 15,000 14,475,000
</Table>
20 SEE NOTES TO FINANCIAL STATEMENTS.
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -------------------------------------------------------------------------------------------------------
PEABODY ENERGY CORP.^ 5.875% 4/15/2016 $15,000 $ 13,800,000
TIMKEN CO. (THE) 5.75% 2/15/2010 10,000 9,795,110
------------
TOTAL 47,870,110
------------
NON-ELECTRIC UTILITIES 0.18%
SEMCO ENERGY, INC. 7.75% 5/15/2013 14,050 14,163,201
------------
NON-FOOD & DRUG RETAILERS 0.77%
BON-TON DEPT STORES INC.+^ 10.25% 3/15/2014 19,475 18,160,438
COUCHE-TARD U.S. L.P. 7.50% 12/15/2013 14,000 14,000,000
NEIMAN MARCUS GROUP, INC. (THE) PIK+ 9.00% 10/15/2015 14,150 14,857,500
TOYS "R" US, INC.^ 7.625% 8/1/2011 15,000 12,262,500
------------
TOTAL 59,280,438
------------
OIL & GAS STORAGE & TRANSPORTATION 0.05%
MARKWEST ENERGY PARTNERS, L.P.+(e) 8.50% 7/15/2016 3,775 3,712,712
------------
OIL FIELD EQUIPMENT & SERVICES 0.53%
GRANT PRIDECO, INC. 6.125% 8/15/2015 10,000 9,375,000
HANOVER COMPRESSOR CO. 7.50% 4/15/2013 3,925 3,866,125
HANOVER COMPRESSOR CO.^ 8.625% 12/15/2010 12,075 12,558,000
HANOVER COMPRESSOR CO.^ 9.00% 6/1/2014 6,150 6,457,500
PRIDE INT'L., INC.^ 7.375% 7/15/2014 8,000 8,080,000
------------
TOTAL 40,336,625
------------
PACKAGING 1.73%
CROWN CORK & SEAL, INC. 7.375% 12/15/2026 47,425 41,852,563
OWENS-BROCKWAY GLASS CONTAINER INC. 7.75% 5/15/2011 25,000 25,312,500
OWENS-BROCKWAY GLASS CONTAINER INC.^ 8.875% 2/15/2009 35,000 36,225,000
OWENS ILLINOIS, INC.^ 7.50% 5/15/2010 23,000 22,597,500
VITRO ENVASES NORTEAMERICA S.A. DE C.V. (MEXICO)+(b) 10.75% 7/23/2011 6,000 6,210,000
------------
TOTAL 132,197,563
------------
PHARMACEUTICALS 1.02%
ANGIOTECH PHARMACEUTICALS, INC. (CANADA)+(b) 7.75% 4/1/2014 15,750 15,120,000
MYLAN LABORATORIES, INC. 6.375% 8/15/2015 20,000 19,200,000
WARNER CHILCOTT CORP. 8.75% 2/1/2015 42,000 43,470,000
------------
TOTAL 77,790,000
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS. 21
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- ----------------------------------------------------------------------------------------------------------
PRINTING & PUBLISHING 2.32%
CLARKE AMERICAN CORP. 11.75% 12/15/2013 $10,000 $ 10,350,000
DEX MEDIA WEST^ 9.875% 8/15/2013 25,394 27,647,591
DEX MEDIA, INC. (ZERO COUPON UNTIL 11/15/2008)**^ 9.00% 11/15/2013 15,000 12,712,500
HOUGHTON MIFFLIN CO. (ZERO COUPON UNTIL 10/15/2008)**^ 11.50% 10/15/2013 36,000 29,880,000
HOUGHTON MIFFLIN CO. 9.875% 2/1/2013 29,000 30,232,500
PRIMEDIA, INC.^ 8.875% 5/15/2011 15,000 14,475,000
R.H. DONNELLEY CORP.^ 6.875% 1/15/2013 22,150 20,488,750
R.H. DONNELLEY CORP.+ 8.875% 1/15/2016 20,450 20,731,187
R.H. DONNELLEY FINANCE INC. 10.875% 12/15/2012 10,000 11,025,000
------------
TOTAL 177,542,528
------------
RAILROADS 0.30%
UNION PACIFIC CORP.^ 3.625% 6/1/2010 25,000 23,148,925
------------
RESTAURANTS 0.51%
DENNY'S CORP./DENNY'S HOLDINGS INC.^ 10.00% 10/1/2012 15,500 15,500,000
FRIENDLY ICE CREAM CORP.^ 8.375% 6/15/2012 14,000 12,110,000
LANDRY'S RESTAURANTS, INC.^ 7.50% 12/15/2014 12,000 11,070,000
------------
TOTAL 38,680,000
------------
SOFTWARE/SERVICES 1.50%
ELECTRONIC DATA SYSTEMS CORP. 6.50% 8/1/2013 35,000 34,576,255
SERENA SOFTWARE INC.+ 10.375% 3/15/2016 8,950 9,017,125
SUNGARD DATA SYSTEMS, INC.+ 9.125% 8/15/2013 25,000 26,062,500
SUNGARD DATA SYSTEMS, INC.+ 10.25% 8/15/2015 25,000 25,968,750
UNISYS CORP.^ 6.875% 3/15/2010 10,000 9,387,500
UNISYS CORP.^ 8.00% 10/15/2012 10,000 9,350,000
------------
TOTAL 114,362,130
------------
STEEL PRODUCERS/PRODUCTS 0.62%
AK STEEL HOLDING CORP. 7.75% 6/15/2012 22,000 21,670,000
ALLEGHENY LUDLUM CORP. 6.95% 12/15/2025 15,000 15,375,000
CENTURY ALUMINUM CO.^ 7.50% 8/15/2014 10,000 10,050,000
------------
TOTAL 47,095,000
------------
SUPPORT - SERVICES 2.30%
AVIS BUDGET CAR RENTAL+^ 7.625% 5/15/2014 9,475 9,238,125
HERTZ CORP. (THE)+ 8.875% 1/1/2014 20,000 20,600,000
</Table>
22 SEE NOTES TO FINANCIAL STATEMENTS.
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- --------------------------------------------------------------------------------------------------
HERTZ CORP. (THE)+^ 10.50% 1/1/2016 $10,500 $ 11,182,500
IRON MOUNTAIN, INC.^ 6.625% 1/1/2016 37,000 33,485,000
IRON MOUNTAIN, INC. 7.75% 1/15/2015 50,000 48,000,000
IRON MOUNTAIN, INC. 8.625% 4/1/2013 15,000 15,075,000
UNITED RENTALS NORTH AMERICA, INC.^ 7.75% 11/15/2013 18,580 17,743,900
WILLIAMS SCOTSMAN, INC.^ 8.50% 10/1/2015 15,000 14,887,500
WILLIAMS SCOTSMAN, INC.+ 8.50% 10/1/2015 5,900 5,855,750
------------
TOTAL 176,067,775
------------
TELECOM - FIXED LINE 0.40%
LEVEL 3 COMMUNICATIONS, INC. 11.25% 3/15/2010 10,000 9,900,000
LEVEL 3 FINANCING, INC. 10.75% 10/15/2011 20,000 20,650,000
------------
TOTAL 30,550,000
------------
TELECOM - INTEGRATED/SERVICES 3.35%
CINCINNATI BELL, INC. 8.375% 1/15/2014 60,000 59,400,000
EMBARQ CORP. 7.082% 6/1/2016 5,000 4,981,275
HUGHES NETWORK SYSTEMS LLC/HNS FINANCE CORP.+ 9.50% 4/15/2014 10,000 9,850,000
INTELSAT LTD. (BERMUDA)(b) 8.25% 1/15/2013 22,750 22,693,125
INTELSAT LTD. (BERMUDA)+(b)(e) 9.25% 6/15/2016 5,000 5,187,500
INTELSAT LTD. (BERMUDA)+(b)(e) 11.25% 6/15/2016 10,000 10,300,000
NORDIC TELEPHONE CO. HOLDINGS (DENMARK)+^(b) 8.875% 5/1/2016 20,000 20,650,000
QWEST CAPITAL FUNDING, INC. 7.90% 8/15/2010 75,000 75,000,000
QWEST COMMUNICATIONS INT'L., INC.^ 7.25% 2/15/2011 37,000 36,075,000
SYNIVERSE TECHNOLOGIES 7.75% 8/15/2013 12,000 11,730,000
------------
TOTAL 255,866,900
------------
TELECOM - WIRELESS 1.67%
AIRGATE PCS, INC. 8.827%# 10/15/2011 12,000 12,330,000
ALAMOSA DELAWARE, INC. 11.00% 7/31/2010 15,000 16,500,000
CENTENNIAL COMMUNICATIONS CORP.^ 10.125% 6/15/2013 10,000 10,575,000
DOBSON COMMUNICATIONS CORP. 8.875% 10/1/2013 5,775 5,702,813
NEXTEL PARTNERS, INC.^ 8.125% 7/1/2011 27,200 28,594,000
ROGERS WIRELESS, INC. (CANADA)(b) 7.25% 12/15/2012 6,500 6,581,250
RURAL CELLULAR CORP. 9.75% 1/15/2010 20,225 20,250,281
UBIQUITEL OPERATING CO. 9.875% 3/1/2011 15,000 16,387,500
WIND ACQUISITION FINANCE S.A. (LUXEMBOURG)+(b) 10.75% 12/1/2015 10,000 10,675,000
------------
TOTAL 127,595,844
------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS. 23
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2006
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- ------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT 0.14%
LUCENT TECHNOLOGIES, INC. 6.45% 3/15/2029 $ 3,750 $ 3,206,250
NORTEL NETWORK+(b)(e) 10.125% 7/15/2013 7,275 7,438,688
--------------
TOTAL 10,644,938
--------------
THEATERS & ENTERTAINMENT 0.60%
AMC ENTERTAINMENT, INC.^ 8.00% 3/1/2014 25,000 23,031,250
AMC ENTERTAINMENT, INC.^ 11.00% 2/1/2016 10,000 10,750,000
CINEMARK USA, INC. 9.00% 2/1/2013 11,775 12,422,625
--------------
TOTAL 46,203,875
--------------
TRANSPORTATION EXCLUDING AIR/RAIL 0.59%
BRISTON GROUP, INC. 6.125% 6/15/2013 17,525 16,254,437
CHC HELICOPTER CORP. CLASS A (CANADA)(b) 7.375% 5/1/2014 15,000 14,475,000
HORNBECK OFFSHORE SERVICES, INC.^ 6.125% 12/1/2014 15,790 14,724,175
--------------
TOTAL 45,453,612
--------------
TOTAL HIGH YIELD CORPORATE NOTES & BONDS (cost $5,195,099,231) 5,099,831,370
==============
NON-AGENCY COMMERCIAL MORTGAGE-BACKED SECURITY 0.26%
CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP.
SERIES 1998-C2 CLASS A2 (COST $19,099,399) 6.30% 11/11/2030 19,564 19,806,061
==============
U.S. TREASURY OBLIGATIONS 2.48%
U.S. TREASURY NOTE 4.375% 5/15/2007 40,000 39,706,280
U.S. TREASURY NOTE 5.00% 2/15/2011 150,000 149,677,800
--------------
TOTAL U.S. TREASURY OBLIGATIONS (cost $196,243,849) 189,384,080
==============
SHARES
(000)
-------
WARRANT 0.00%
SOFTWARE/SERVICES
INTERPATH COMMUNICATIONS WARRANT EXPIRING 5/21/2007* (COST $0) --(d) 1
==============
TOTAL LONG-TERM INVESTMENTS (cost $7,436,008,442) 7,405,731,935
==============
SHORT-TERM INVESTMENTS 10.37%
COLLATERAL FOR SECURITIES ON LOAN 9.02%
STATE STREET NAVIGATOR SECURITIES LENDING PRIME
PORTFOLIO 5.06%(f) 689,509 689,508,616
--------------
</Table>
24 SEE NOTES TO FINANCIAL STATEMENTS.
<Page>
SCHEDULE OF INVESTMENTS (UNAUDITED)(CONCLUDED)
JUNE 30, 2006
<Table>
<Caption>
PRINCIPAL
AMOUNT U.S. $
(000) VALUE
- -------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 1.35%
REPURCHASE AGREEMENT DATED 6/30/2006,
4.62% DUE 7/3/2006 WITH STATE STREET
BANK & TRUST CO. COLLATERALIZED BY
$16,795,000 OF FEDERAL HOME LOAN
MORTGAGE CORP. AT 5.375% DUE 5/22/2008
AND $88,180,000 OF FEDERAL NATIONAL
MORTGAGE ASSOC. AT 5.55% DUE 7/16/2007;
VALUE: $104,975,000; PROCEEDS: $102,955,994 $102,916 $ 102,916,371
--------------
TOTAL SHORT-TERM INVESTMENTS (cost $792,424,987) 792,424,987
==============
TOTAL INVESTMENTS IN SECURITIES 107.27% (cost $8,228,433,429) 8,198,156,922
==============
LIABILITIES IN EXCESS OF CASH, FOREIGN CASH AND OTHER ASSETS (7.27%) (555,578,507)
--------------
NET ASSETS 100.00% $7,642,578,415
==============
</Table>
* Non-income producing security.
** The rate shown reflects the coupon rate after the step date.
+ Security was purchased pursuant to Rule 144A of the Securities Act of 1933
or is a private placement and, unless registered under the Act or exempted
from registration, may only be resold to qualified institutional investors.
Unless otherwise noted, 144A securities are deemed to be liquid.
^ All (or a portion of security) on loan. See Note 2(h).
# Variable rate security. The interest rate represents the rate at June 30,
2006.
(a) Investment in non-U.S. dollar denominated securities (0.15%). The remaining
securities (99.85%) are invested in U.S. dollar-denominated securities.
(b) Foreign security traded in U.S. dollars.
(c) Defaulted security. Maturity date shown represents original maturity date.
(d) Amount represents less than 1,000 shares.
(e) Security purchased on a when-issued basis.
(f) Rate shown reflects 7-day yield as of June 30, 2006.
PIK Payment-in-kind.
SEE NOTES TO FINANCIAL STATEMENTS. 25
<Page>
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 2006
<Table>
ASSETS:
Investment in securities, at value (cost $8,228,433,429) $8,198,156,922
Cash 20,958,085
Foreign cash, at value (cost $35) 36
Receivables:
Interest and dividends 118,200,294
Investment securities sold 68,132,243
Capital shares sold 7,234,993
Prepaid expenses and other assets 150,583
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS 8,412,833,156
- ----------------------------------------------------------------------------------------------------
LIABILITIES:
Payable upon return of securities on loan 689,508,616
Payables:
Investment securities purchased 44,878,295
Capital shares reacquired 25,143,497
12b-1 distribution fees 4,229,792
Management fee 2,850,795
Directors' fees 1,134,821
Fund administration 253,704
To affiliate (See Note 3) 53,564
Accrued expenses and other liabilities 2,201,657
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 770,254,741
====================================================================================================
NET ASSETS $7,642,578,415
====================================================================================================
COMPOSITION OF NET ASSETS:
Paid-in capital $8,233,380,125
Distributions in excess of net investment income (71,676,562)
Accumulated net realized loss on investments and foreign currency related
transactions (488,862,714)
Net unrealized depreciation on investments, and translation of assets and
liabilities denominated in foreign currency (30,262,434)
- ----------------------------------------------------------------------------------------------------
NET ASSETS $7,642,578,415
====================================================================================================
NET ASSETS BY CLASS:
Class A Shares $4,597,140,910
Class B Shares $1,327,214,388
Class C Shares $1,305,797,142
Class P Shares $ 101,955,886
Class Y Shares $ 310,470,089
OUTSTANDING SHARES BY CLASS:
Class A Shares (740 million shares of common stock authorized, $.001 par value) 595,942,767
Class B Shares (500 million shares of common stock authorized, $.001 par value) 171,907,937
Class C Shares (300 million shares of common stock authorized, $.001 par value) 169,028,388
Class P Shares (160 million shares of common stock authorized, $.001 par value) 13,014,939
Class Y Shares (300 million shares of common stock authorized, $.001 par value) 40,366,215
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE (NET ASSETS DIVIDED BY
OUTSTANDING SHARES):
Class A Shares-Net asset value $ 7.71
Class A Shares-Maximum offering price (Net asset value plus sales charge of 4.75%) $ 8.09
Class B Shares-Net asset value $ 7.72
Class C Shares-Net asset value $ 7.73
Class P Shares-Net asset value $ 7.83
Class Y Shares-Net asset value $ 7.69
- ----------------------------------------------------------------------------------------------------
</Table>
26 SEE NOTES TO FINANCIAL STATEMENTS.
<Page>
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2006
<Table>
INVESTMENT INCOME:
Dividends $ 12,248,804
Interest 243,999,470
Securities lending-net 603,305
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 256,851,579
- -------------------------------------------------------------------------------------------
EXPENSES:
Management fee 17,902,914
12b-1 distribution plan-Class A 8,220,838
12b-1 distribution plan-Class B 7,034,359
12b-1 distribution plan-Class C 6,813,902
12b-1 distribution plan-Class P 261,805
Shareholder servicing 4,734,808
Fund administration 1,580,350
Reports to shareholders 434,666
Subsidy (See Note 3) 262,590
Custody 169,351
Registration 146,525
Directors' fees 145,563
Professional 81,325
Other 94,181
- -------------------------------------------------------------------------------------------
Gross expenses 47,883,177
Expense reductions (See Note 7) (167,649)
- -------------------------------------------------------------------------------------------
NET EXPENSES 47,715,528
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 209,136,051
===========================================================================================
NET REALIZED AND UNREALIZED LOSS:
Net realized gain on investments and foreign currency related transactions 69,746,919
Net change in unrealized appreciation on investments and translation of
assets and liabilities denominated in foreign currencies (103,579,594)
===========================================================================================
NET REALIZED AND UNREALIZED LOSS (33,832,675)
===========================================================================================
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 175,303,376
===========================================================================================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS. 27
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE SIX MONTHS
ENDED JUNE 30, 2006 FOR THE YEAR ENDED
DECREASE IN NET ASSETS (UNAUDITED) DECEMBER 31, 2005
OPERATIONS:
Net investment income $ 209,136,051 $ 446,882,211
Net realized gain on investments and
foreign currency related transactions 69,746,919 131,223,692
Net change in unrealized appreciation on investments
and translation of assets and liabilities
denominated in foreign currencies (103,579,594) (475,701,766)
- -----------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 175,303,376 102,404,137
===============================================================================================
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (157,673,581) (325,559,605)
Class B (42,332,595) (95,747,886)
Class C (41,014,455) (92,010,995)
Class P (3,794,001) (8,006,271)
Class Y (10,824,175) (20,020,997)
- -----------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (255,638,807) (541,345,754)
===============================================================================================
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares 408,602,568 1,206,658,233
Reinvestment of distributions 195,021,386 405,952,005
Cost of shares reacquired (1,032,207,091) (2,020,188,152)
- -----------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM
CAPITAL SHARE TRANSACTIONS (428,583,137) (407,577,914)
===============================================================================================
NET DECREASE IN NET ASSETS (508,918,568) (846,519,531)
===============================================================================================
NET ASSETS:
Beginning of period 8,151,496,983 8,998,016,514
- -----------------------------------------------------------------------------------------------
END OF PERIOD $ 7,642,578,415 $ 8,151,496,983
===============================================================================================
DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME $ (71,676,562) $ (25,173,806)
===============================================================================================
</Table>
28 SEE NOTES TO FINANCIAL STATEMENTS.
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2006 -----------------------------------------
(UNAUDITED) 2005 2004 2003 2002 2001
PER SHARE OPERATING PERFORMANCE (CLASS A SHARES)
NET ASSET VALUE, BEGINNING OF PERIOD $7.80 $8.20 $ 8.06 $ 7.19 $7.91 $8.23
===== ===== ====== ====== ===== =====
Investment operations:
Net investment income(a) .21 .43 .46 .48 .55 .65
Net realized and unrealized gain (loss) (.04) (.31) .20 .92 (.64) (.26)
----- ----- ------ ------ ----- -----
Total from investment operations .17 .12 .66 1.40 (.09) .39
----- ----- ------ ------ ----- -----
Distributions to shareholders from:
Net investment income (.26) (.52) (.52) (.50) (.58) (.67)
Paid-in capital -- -- -- (.03) (.05) (.04)
----- ----- ------ ------ ----- -----
Total distributions (.26) (.52) (.52) (.53) (.63) (.71)
----- ----- ------ ------ ----- -----
NET ASSET VALUE, END OF PERIOD $7.71 $7.80 $ 8.20 $ 8.06 $7.19 $7.91
===== ===== ====== ====== ===== =====
Total Return(b) 2.18%(c) 1.56% 8.56% 20.28% (1.08)% 4.86%
RATIOS TO AVERAGE NET ASSETS:
Expenses, including expense reductions .49%(c) .99% .99% 1.00% 1.00% 1.02%
Expenses, excluding expense reductions .49%(c) 1.00% .99% 1.00% 1.00% 1.02%
Net investment income 2.73%(c) 5.45% 5.71% 6.31% 7.51% 7.96%
</Table>
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2006 --------------------------------------------------------------
SUPPLEMENTAL DATA: (UNAUDITED) 2005 2004 2003 2002 2001
===================================================================================================================
Net assets, end of period (000) $4,597,141 $4,815,148 $5,093,236 $4,497,233 $3,048,301 $2,500,544
Portfolio turnover rate 17.63%(c) 46.63% 42.02% 40.96% 37.03% 55.44%
===================================================================================================================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS. 29
<Page>
FINANCIAL HIGHLIGHTS (CONTINUED)
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2006 ----------------------------------------
(UNAUDITED) 2005 2004 2003 2002 2001
PER SHARE OPERATING PERFORMANCE (CLASS B SHARES)
NET ASSET VALUE, BEGINNING OF PERIOD $7.80 $8.20 $8.06 $ 7.20 $ 7.92 $8.23
----- ----- ----- ------ ------ -----
Investment operations:
Net investment income(a) .19 .38 .41 .43 .51 .60
Net realized and unrealized gain (loss) (.04) (.31) .20 .92 (.65) (.25)
----- ----- ----- ------ ------ -----
Total from investment operations .15 .07 .61 1.35 (.14) .35
----- ----- ----- ------ ------ -----
Distributions to shareholders from:
Net investment income (.23) (.47) (.47) (.46) (.53) (.63)
Paid-in capital -- -- -- (.03) (.05) (.03)
----- ----- ----- ------ ------ -----
Total distributions (.23) (.47) (.47) (.49) (.58) (.66)
----- ----- ----- ------ ------ -----
NET ASSET VALUE, END OF PERIOD $7.72 $7.80 $8.20 $ 8.06 $ 7.20 $7.92
===== ===== ===== ====== ====== =====
Total Return(b) 1.96%(c) .88% 7.86% 19.43% (1.67)% 4.29%
RATIOS TO AVERAGE NET ASSETS:
Expenses, including expense reductions .82%(c) 1.64% 1.64% 1.64% 1.65% 1.63%
Expenses, excluding expense reductions
reductions .82%(c) 1.64% 1.64% 1.64% 1.65% 1.63%
Net investment income 2.41%(c) 4.80% 5.07% 5.67% 6.86% 7.35%
</Table>
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2006 ---------------------------------------------------------------
SUPPLEMENTAL DATA: (UNAUDITED) 2005 2004 2003 2002 2001
==================================================================================================================
Net assets, end of period (000) $1,327,214 $1,473,891 $1,803,609 $1,861,920 $1,294,955 $1,105,501
Portfolio turnover rate 17.63%(c) 46.63% 42.02% 40.96% 37.03% 55.44%
==================================================================================================================
</Table>
30 SEE NOTES TO FINANCIAL STATEMENTS.
<Page>
FINANCIAL HIGHLIGHTS (CONTINUED)
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2006 ----------------------------------------
(UNAUDITED) 2005 2004 2003 2002 2001
PER SHARE OPERATING PERFORMANCE (CLASS C SHARES)
NET ASSET VALUE, BEGINNING OF PERIOD $7.81 $8.21 $8.07 $ 7.21 $ 7.93 $8.24
----- ----- ----- ------ ------ -----
Investment operations:
Net investment income(a) .19 .38 .41 .43 .51 .60
Net realized and unrealized gain (loss) (.04) (.31) .20 .92 (.64) (.25)
----- ----- ----- ------ ------ -----
Total from investment operations .15 .07 .61 1.35 (.13) .35
----- ----- ----- ------ ------ -----
Distributions to shareholders from:
Net investment income (.23) (.47) (.47) (.46) (.54) (.63)
Paid-in capital -- -- -- (.03) (.05) (.03)
----- ----- ----- ------ ------ -----
Total distributions (.23) (.47) (.47) (.49) (.59) (.66)
----- ----- ----- ------ ------ -----
NET ASSET VALUE, END OF PERIOD $7.73 $7.81 $8.21 $ 8.07 $ 7.21 $7.93
===== ===== ===== ====== ====== =====
Total Return(b) 1.97%(c) .89% 7.86% 19.43% (1.58)% 4.29%
RATIOS TO AVERAGE NET ASSETS:
Expenses, including expense reductions .82%(c) 1.64% 1.64% 1.64% 1.59% 1.62%
Expenses, excluding expense reductions .82%(c) 1.64% 1.64% 1.64% 1.59% 1.62%
Net investment income 2.41%(c) 4.80% 5.07% 5.67% 6.92% 7.36%
</Table>
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2006 ----------------------------------------------------------
SUPPLEMENTAL DATA: (UNAUDITED) 2005 2004 2003 2002 2001
=============================================================================================================
Net assets, end of period (000) $1,305,797 $1,423,141 $1,703,329 $1,593,650 $905,629 $662,848
Portfolio turnover rate 17.63%(c) 46.63% 42.02% 40.96% 37.03% 55.44%
=============================================================================================================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS. 31
<Page>
FINANCIAL HIGHLIGHTS (CONTINUED)
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2006 ---------------------------------------
(UNAUDITED) 2005 2004 2003 2002 2001
PER SHARE OPERATING PERFORMANCE (CLASS P SHARES)
NET ASSET VALUE, BEGINNING OF PERIOD $7.91 $8.31 $8.17 $ 7.29 $ 8.02 $8.33
===== ===== ===== ====== ====== =====
Investment operations:
Net investment income(a) .21 .43 .45 .48 .55 .64
Net realized and unrealized gain (loss) (.03) (.32) .20 .93 (.65) (.24)
----- ----- ----- ------ ------ -----
Total from investment operations .18 .11 .65 1.41 (.10) .40
----- ----- ----- ------ ------ -----
Distributions to shareholders from:
Net investment income (.26) (.51) (.51) (.50) (.58) (.67)
Paid-in capital -- -- -- (.03) (.05) (.04)
----- ----- ----- ------ ------ -----
Total distributions (.26) (.51) (.51) (.53) (.63) (.71)
----- ----- ----- ------ ------ -----
NET ASSET VALUE, END OF PERIOD $7.83 $7.91 $8.31 $ 8.17 $ 7.29 $8.02
===== ===== ===== ====== ====== =====
Total Return(b) 2.22%(c) 1.45% 8.37% 20.10% (1.19)% 4.90%
RATIOS TO AVERAGE NET ASSETS:
Expenses, including expense reductions .54%(c) 1.09% 1.09% 1.09% 1.10% 1.08%
Expenses, excluding expense reductions .54%(c) 1.09% 1.09% 1.09% 1.10% 1.08%
Net investment income 2.68%(c) 5.35% 5.62% 6.22% 7.41% 7.88%
</Table>
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2006 ------------------------------------------------
SUPPLEMENTAL DATA: (UNAUDITED) 2005 2004 2003 2002 2001
=====================================================================================================
Net assets, end of period (000) $101,956 $134,592 $113,216 $60,848 $18,736 $7,017
Portfolio turnover rate 17.63%(c) 46.63% 42.02% 40.96% 37.03% 55.44%
=====================================================================================================
</Table>
32 SEE NOTES TO FINANCIAL STATEMENTS.
<Page>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2006 --------------------------------------
(UNAUDITED) 2005 2004 2003 2002 2001
PER SHARE OPERATING PERFORMANCE (CLASS Y SHARES)
NET ASSET VALUE, BEGINNING OF PERIOD $7.78 $8.18 $8.04 $ 7.18 $7.90 $8.21
===== ===== ===== ====== ===== =====
Investment operations:
Net investment income(a) .23 .46 .48 .51 .58 .68
Net realized and unrealized gain (loss) (.05) (.31) .21 .91 (.64) (.24)
----- ----- ----- ------ ----- -----
Total from investment operations .18 .15 .69 1.42 (.06) .44
----- ----- ----- ------ ----- -----
Distributions to shareholders from:
Net investment income (.27) (.55) (.55) (.53) (.61) (.71)
Paid-in capital -- -- -- (.03) (.05) (.04)
----- ----- ----- ------ ----- -----
Total distributions (.27) (.55) (.55) (.56) (.66) (.75)
----- ----- ----- ------ ----- -----
NET ASSET VALUE, END OF PERIOD $7.69 $7.78 $8.18 $ 8.04 $7.18 $7.90
===== ===== ===== ====== ===== =====
Total Return(b) 2.37%(c) 1.93% 8.97% 20.58% (.66)% 5.44%
RATIOS TO AVERAGE NET ASSETS:
Expenses, including expense reductions .32%(c) .64% .64% .64% .65% .63%
Expenses, excluding expense reductions .32%(c) .64% .64% .64% .65% .63%
Net investment income 2.91%(c) 5.80% 6.07% 6.67% 7.86% 8.36%
</Table>
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED 12/31
6/30/2006 --------------------------------------------------
SUPPLEMENTAL DATA: (UNAUDITED) 2005 2004 2003 2002 2001
======================================================================================================
Net assets, end of period (000) $310,470 $304,725 $284,627 $181,603 $68,691 $44,931
Portfolio turnover rate 17.63%(c) 46.63% 42.02% 40.96% 37.03% 55.44%
======================================================================================================
</Table>
(a) Calculated using average shares outstanding during the year.
(b) Total return does not consider the effects of sales loads and assumes the
reinvestment of all distributions.
(c) Not annualized.
SEE NOTES TO FINANCIAL STATEMENTS. 33
<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 Classes 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 (12 months if shares were purchased on or after November
1, 2004) following certain purchases 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 the 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 sale price in the
market where they are principally traded. If no sale has occurred, the mean
between the most recently quoted bid and asked prices is used. Securities
for which market quotations are not readily available are valued at fair
value as determined by management and approved in good faith by the Board
of Directors. Short-term securities with 60 days or less remaining to
maturity are valued using the amortized cost method, which approximates
current market value.
(b) SECURITY TRANSACTIONS-Security transactions are recorded as of the date
that the securities are purchased or sold (trade date). Realized gains and
losses on sales of portfolio securities are calculated using the
identified-cost method. Realized and unrealized gains (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.
34
<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 taxable income and
capital gains to its shareholders. Therefore, no Federal income tax
provision is required.
(e) EXPENSES-Expenses, excluding class specific expenses, are generally
allocated to each class of shares based upon the relative proportion of net
assets at the beginning of the day. Classes 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 (Loss) 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 (loss) is
included in Net Change in Unrealized Appreciation (Depreciation) on
Investments and Translation of Assets and Liabilities Denominated in
Foreign Currencies on the Statement of Operations. The gain (loss) arising
from the difference between the U.S. dollars 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 (Loss) on Investments and
Foreign Currency Related Transactions on the Statement of Operations. As of
June 30, 2006, there were no open forward foreign currency exchange
contracts outstanding.
(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.
Government 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. As of June 30, 2006, the
value of securities loaned was $678,677,044. These loans are collateralized
by cash of $689,508,616, which is invested in a restricted money market
account. State Street Bank & Trust Company ("SSB") received fees of
$258,559 for the six months ended June 30, 2006, which are netted against
Securities Lending Income on the Statement of Operations.
(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
35
<Page>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
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, or by securities of the U.S. Government, its agencies, its
instrumentalities, or U.S. Government sponsored enterprises having a value
equal to, or in excess of, the value of the repurchase agreement (including
accrued interest). If the seller of the agreement defaults on its
obligation to repurchase the underlying securities at a time when the value
of those securities has declined, the Fund may incur a loss upon
disposition of the securities.
(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 (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
(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, forward
transactions or to-be-announced ("TBA") 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. 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 or U.S.
Government sponsored enterprises securities) marked to market daily in an
amount sufficient to make payment at settlement will be segregated at a
Fund's custodian in order to pay for the commitment. At the time the Fund
makes the 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 FEES AND OTHER TRANSACTIONS WITH AFFILIATES
MANAGEMENT FEES
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:
..50% of the first $500 million of average daily net assets;
..45% of the next $9.5 billion;
..40% over $10 billion.
36
<Page>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
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.
The Fund, along with certain other funds managed by Lord Abbett (the "Underlying
Funds"), have entered into a Servicing Arrangement with Balanced Strategy Fund
of Lord Abbett Investment Trust (the "Fund of Funds"), pursuant to which each
Underlying Fund pays a portion of the expenses (excluding management fees and
distribution and service fees) of the Fund of Funds in proportion to the average
daily value of Underlying Fund shares owned by the Fund of Funds. Amounts paid
pursuant to the Servicing Arrangement are included in Subsidy Expense on the
Statement of Operations.
12b-1 DISTRIBUTION PLAN
The Fund has adopted a distribution plan with respect to one or more classes of
shares pursuant to Rule 12b-1 of the Act, which provides for the payment of
ongoing 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) The amount of CDSC collected by the Fund for the six months ended June 30,
2006 was $10,925.
Class Y does not have a distribution plan.
COMMISSIONS
The 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, 2006:
<Table>
<Caption>
DISTRIBUTOR DEALERS'
COMMISSIONS CONCESSIONS
- -------------------------
$836,413 $4,328,364
</Table>
Distributor received CDSCs of $2,938 and $30,997 for Class A and Class C shares,
respectively, for the six months ended June 30, 2006. One Director and certain
of the Fund's officers have an interest in Lord Abbett.
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, if any, 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 earnings and profits for tax purposes, are reported
as a tax return of capital.
37
<Page>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
The tax character of distributions paid during the six months ended June 30,
2006 and the fiscal year ended December 31, 2005 are as follows:
<Table>
<Caption>
SIX MONTHS
ENDED 6/30/2006 YEAR ENDED
(UNAUDITED) 12/31/2005
- ------------------------------------------------------------
Distributions paid from:
Ordinary income $255,638,807 $541,345,754
- ------------------------------------------------------------
Total distributions paid $255,638,807 $541,345,754
============================================================
</Table>
As of December 31, 2005, the capital loss carryforwards, along with the related
expiration dates are as follows:
<Table>
<Caption>
2009 2010 TOTAL
- ------------------------------------------
$219,436,086 $303,185,812 $522,621,898
</Table>
As of June 30, 2006, the aggregate unrealized security gains and losses based on
cost for U.S. Federal income tax purposes are as follows:
<Table>
Tax cost $8,285,556,008
- ------------------------------------------------
Gross unrealized gain 243,694,215
Gross unrealized loss (331,093,301)
- ------------------------------------------------
Net unrealized security loss $ (87,399,086)
================================================
</Table>
The difference between book-basis and tax-basis unrealized gains (losses) is
attributable primarily to the tax treatment of amortization and other temporary
tax adjustments.
5. PORTFOLIO SECURITIES TRANSACTIONS
Purchases and sales of investment securities (excluding short-term investments)
for the six months ended June 30, 2006 are as follows:
<Table>
<Caption>
U.S. NON-U.S. U.S. NON-U.S.
GOVERNMENT GOVERNMENT GOVERNMENT GOVERNMENT
PURCHASES* PURCHASES SALES* SALES
- -------------------------------------------------------------
$346,341,794 $1,013,392,076 $259,694,906 $1,389,077,283
</Table>
* Includes U.S. Government sponsored enterprises securities
6. DIRECTORS' REMUNERATION
The Fund's officers and the one Director who are associated with Lord Abbett do
not receive any compensation from the Fund for serving in such capacities.
Outside Directors fees are allocated among all Lord Abbett-sponsored funds based
on the net assets of each fund. There is an equity based plan available to all
outside Directors under which outside Directors must defer receipt of a portion
of, and may elect to defer receipt of an additional portion of Directors' fees.
The deferred amounts are treated as though equivalent dollar amounts have 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.
38
<Page>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
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, have available
a $250,000,000 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 .08%.
As of June 30, 2006, there were no loans outstanding pursuant to this Facility
nor was the Facility utilized at any time during the six months ended June 30,
2006.
9. CUSTODIAN AND ACCOUNTING AGENT
SSB is the Fund's custodian and accounting agent. SSB performs custodial,
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 debt 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 debt 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 debt 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.
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
39
<Page>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
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 may
subject it to the general risks and considerations associated with investing in
equity securities. The value of an investment will fluctuate in response to
movements in the stock market in general and to the changing prospects of
individual companies in which the Fund invests.
The Fund may invest up to 20% of its net assets in foreign securities which may
present market liquidity, currency, political, information, and other risks.
These factors can affect the Fund's performance.
11. SUMMARY OF CAPITAL TRANSACTIONS
Transactions in shares of capital stock are as follows:
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, 2006 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2005
- --------------------------------------------------------------------------------------------
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------
Shares sold 36,820,369 $ 288,052,802 103,259,218 $ 819,704,525
Reinvestment of distributions 16,824,815 131,400,780 34,107,371 269,758,179
Shares reacquired (75,267,222) (588,419,822) (141,074,199) (1,115,061,375)
- --------------------------------------------------------------------------------------------
Decrease (21,622,038) $(168,966,240) (3,707,610) $ (25,598,671)
- --------------------------------------------------------------------------------------------
CLASS B SHARES
- --------------------------------------------------------------------------------------------
Shares sold 4,069,275 $ 31,853,561 12,056,362 $ 95,866,400
Reinvestment of distributions 3,539,016 27,675,632 7,695,860 60,953,657
Shares reacquired (24,611,020) (192,515,798) (50,763,239) (402,099,341)
- --------------------------------------------------------------------------------------------
Decrease (17,002,729) $(132,986,605) (31,011,017) $ (245,279,284)
- --------------------------------------------------------------------------------------------
CLASS C SHARES
- --------------------------------------------------------------------------------------------
Shares sold 8,722,395 $ 68,329,032 26,173,200 $ 208,457,988
Reinvestment of distributions 2,884,027 22,567,458 6,274,518 49,726,801
Shares reacquired (24,864,941) (194,845,828) (57,703,905) (456,751,182)
- --------------------------------------------------------------------------------------------
Decrease (13,258,519) $(103,949,338) (25,256,187) $ (198,566,393)
- --------------------------------------------------------------------------------------------
CLASS P SHARES
- --------------------------------------------------------------------------------------------
Shares sold 1,945,752 $ 15,471,709 7,799,188 $ 62,802,730
Reinvestment of distributions 397,883 3,155,456 759,442 6,086,105
Shares reacquired (6,335,493) (50,449,007) (5,169,067) (41,599,722)
- --------------------------------------------------------------------------------------------
Increase (decrease) (3,991,858) $ (31,821,842) 3,389,563 $ 27,289,113
- --------------------------------------------------------------------------------------------
CLASS Y SHARES
- --------------------------------------------------------------------------------------------
Shares sold 628,361 $ 4,895,464 2,511,586 $ 19,826,590
Reinvestment of distributions 1,313,110 10,222,060 2,463,768 19,427,263
Shares reacquired (766,665) (5,976,636) (593,696) (4,676,532)
- --------------------------------------------------------------------------------------------
Increase 1,174,806 $ 9,140,888 4,381,658 $ 34,577,321
- --------------------------------------------------------------------------------------------
</Table>
40
<Page>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONCLUDED)
12. RECENT ACCOUNTING PRONOUNCEMENT
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Fund will
adopt FIN 48 during 2007 and the impact to the Fund's financial statements, if
any, is currently being assessed.
41
<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 semiannual 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, PROCEDURES AND RECORD
A description of the policies and procedures that Lord Abbett uses to vote
proxies related to the Fund's portfolio securities, and information on how Lord
Abbett voted the Fund's proxies during the twelve month period ended June 30,
2006, are available without charge, upon request, (i) by calling 888-522-2388;
(ii) on Lord Abbett's website 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 is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. Copies of the
filings are 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. 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
duplicating fee to the SEC's Public Reference Room, Washington, DC 20549-0102;
or (iii) sending your request electronically to publicinfo@sec.gov.
42
<Page>
[LORD ABBETT(R) LOGO]
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 LABD-3-0606
LORD ABBETT DISTRIBUTOR LLC (08/06)
<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: PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9: PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the June 22, 2006 meetings of the Nominating and Governance
Committees (the "Committee") of the Boards of each of the Lord Abbett
Funds, the Committee adopted policies and procedures for the
nomination of independent directors/trustees ("Procedures"). The
Procedures provide criteria for the nomination of independent
directors/trustees, as well as a process for identifying and
evaluating candidates. With respect to shareholder recommendations, it
is the Committee's policy to consider director/trustee nominations
recommended by shareholders using the same criteria the Committee uses
in considering potential director/trustee nominations from other
sources. The Committee believes that directors/trustees must represent
all shareholders and not just a limited set of shareholders. A copy of
the Procedures may be found at www.LordAbbett.com.
<Page>
ITEM 11: 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 a date within 90 days prior to the filing date of
this report, 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 control
over financial reporting (as defined in Rule 30a-3(d) under the
Investment Company Act of 1940) that occurred during the second fiscal
quarter of the period covered by this report that have materially
affected, or are reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 12: EXHIBITS.
(a)(1) Amendments to Code of Ethics - Not applicable.
(a)(2) 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.
(a)(3) Not applicable.
(b) 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 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 22, 2006
<Page>
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
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 22, 2006