<PAGE> 1
[VANGUARD
FIXED INCOME
SECURITIES FUND LOGO]
ANNUAL REPORT 1996
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, assumed my responsibilities as Chief
Executive Officer of Vanguard Fixed Income Securities Fund and the other Funds
in The Vanguard Group. Mr. Brennan will continue to serve as President of the
Funds, and I will continue to serve as Chairman of the Board.
As a shareholder of the Fund since its inception and as Chairman of
all the Vanguard Funds, I want to tell you that I am enthusiastic and confident
that Jack Brennan is exactly the right person to succeed me as Chief Executive
Officer. To use yet another Vanguard nautical metaphor, he will be the new
captain. He has the qualities of leadership, integrity, intelligence, and
vision that must continue to be Vanguard's hallmark as we move toward, and then
into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
[FIGURE 1]
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in
me in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
VANGUARD FIXED INCOME SECURITIES FUND SEEKS TO PROVIDE THE HIGHEST LEVEL OF
CURRENT INCOME CONSISTENT WITH THE CONSERVATION OF CAPITAL AND THE INVESTMENT
POLICIES OF EACH OF ITS NINE PORTFOLIOS: SHORT-TERM U.S. TREASURY PORTFOLIO -
SHORT-TERM FEDERAL PORTFOLIO - SHORT-TERM CORPORATE PORTFOLIO -
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO - INTERMEDIATE-TERM CORPORATE
PORTFOLIO - GNMA PORTFOLIO - LONG-TERM U.S. TREASURY PORTFOLIO - LONG-TERM
CORPORATE PORTFOLIO - HIGH YIELD CORPORATE PORTFOLIO.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
The bond market soared during the twelve months ended January 31, 1996,
reversing its dismal performance during our previous fiscal year, and providing
solid returns across all sectors of the market. As a result, this Annual Report
has only good news to report to the shareholders of Vanguard Fixed Income
Securities Fund.
Each of our nine Portfolios earned double-digit returns, ranging from a
stellar gain of +26.7% for our Long-Term U.S. Treasury Portfolio to generous
gains of +11.4% to +12.0% for our three short-term Portfolios. In every case,
our tightly constructed Portfolios achieved total returns (capital change plus
reinvested dividends) that were roughly commensurate with the sectors of the
bond market that they represent. Such parallel performance is what we expect of
our Portfolios. What we did not expect was the dimension of advantage we
achieved over fixed-income mutual funds with maturity and quality standards
similar to ours. Indeed, the return of each Vanguard Portfolio exceeded
competitive norms by amounts that ranged from "substantial" to "huge."
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 31, 1996
----------------------------------------------------
COMPONENTS OF
TOTAL RETURN
------------------------- SEC
VANGUARD TOTAL INCOME CAPITAL ANNUALIZED
PORTFOLIO RETURN RETURN RETURN YIELD
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM PORTFOLIOS
U.S. TREASURY +11.4% + 6.6% + 4.8% +5.1%
FEDERAL +11.4 + 6.4 + 5.0 +5.4
CORPORATE +12.0 + 6.8 + 5.2 +5.6
- --------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM PORTFOLIOS
U.S. TREASURY +19.0% + 7.3% +11.7% +5.5%
CORPORATE +19.9 + 7.8 +12.1 +6.0
GNMA +15.6 + 8.0 + 7.6 +6.9
- --------------------------------------------------------------------------------------------------
LONG-TERM PORTFOLIOS
U.S. TREASURY +26.7% + 8.0% +18.7% +5.9%
CORPORATE +23.6 + 8.3 +15.3 +6.4
- --------------------------------------------------------------------------------------------------
HIGH YIELD CORP. +19.0% +10.0% + 9.0% +8.3%
- --------------------------------------------------------------------------------------------------
</TABLE>
The detailed per share figures for each Portfolio, including net asset values,
income dividends, and any distributions from net realized capital gains, are
shown in the table on page 6 of this Report.
AN OUTSTANDING YEAR FOR THE BOND MARKET
Simply put, the bond market during the past fiscal year was just as good
(very) as the previous fiscal year was bad (also very). In fact, bond prices
not only recouped last year's lost ground, but also achieved gains that were
more than compensatory. Looking at it from the perspective of yield levels,
interest rates at the close of January 1996 had returned to levels not seen
since the close of 1993--before their quantum leap that began in February 1994.
Interest rates on long-term (30-year) U.S. Treasury bonds were at 7.8% on
January 31, 1995, and declined to 6.1% on January 31, 1996. Other maturities
followed suit: the yield on intermediate-term (10-year) U.S. Treasury bonds
fell from 7.8% to 5.6%, and the yield on short-term (3-year) U.S. Treasury
bonds fell from 7.5% to 5.0%. This table shows the components of return for
each of these three maturity classes:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
TOTAL RETURNS
--------------------------------------
YIELDS AT TWELVE MONTHS ENDED
FISCAL JANUARY 31, 1996
YEAR END --------------------------------------
U.S. TREASURY ----------------- PRICE INTEREST TOTAL
BOND MATURITY 1995 1996 INCREASE INCOME RETURN
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHORT-TERM 7.5% 5.0% + 3.6% +7.4% +11.0%
INTERMEDIATE-
TERM 7.8 5.6 +13.0 +7.6 +20.6
LONG-TERM 7.8 6.1 +20.8 +7.7 +28.5
- -------------------------------------------------------------------------------------------------
</TABLE>
This table is presented to reinforce two principal points: (1) price volatility
increases as maturity increases (last year, enhancing bond returns; in the
prior year, hampering returns); and (2) interest income is a vital component of
total return. During a bear market for bonds, income helps to mitigate the
sharp decline in bond prices; in a bull market, income provides an important
increment to bond price increases.
(continued)
1
<PAGE> 4
[FIGURE 2]
"THE EXPERTS SPEAK"
To say that the interest rate decline during the past twelve months was
unexpected is to understate the cautious market sentiment as the year began.
Early in January 1995, The Wall Street Journal published its regular poll of
some 50 learned economists and senior bond managers of large investment firms.
As a group, they forecast a yield of 7.6% on long-term U.S. Treasury bonds on
December 31, 1995, a decline of 20 basis points. In fact, as we now know, the
year-end yield was 6.0%, a decline of 180 basis points. The experts were also
wide of the mark--well, just plain wrong-- in forecasting the yield on 90-day
U.S. Treasury bills, predicting a large rise in rates, only to see rates fall
sharply. This table compares the yields they forecast with actual yields at
calendar year end:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
YIELD AS OF
DECEMBER 31, BASIS POINT
--------------------------- CHANGE IN YIELD
1994 1995 1995 --------------------
ACTUAL FORECAST ACTUAL FORECAST ACTUAL
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
90-DAY U.S.
TREASURY BILLS 5.6% 6.4% 5.0% +80 - 60
LONG-TERM U.S.
TREASURY BONDS 7.8 7.6 6.0 -20 - 180
- ------------------------------------------------------------------------------------------------
</TABLE>
This example of failed economic forecasting is far from rare. It suggests that
bond investors should be leery of taking action on the basis of conventional
wisdom and professional qualifications.
In all, as the earlier table shows, it was a splendid year for bonds of
all maturities. In a sense, it was the culmination of a three-year period that
contains an important slice of U.S. economic history. At the outset, the low
level of short-term interest rates that prevailed from September 1992 through
January 1994 reflected an economy that was at first in recession, and then
recovered sluggishly. By February 1994, however, the economy had moved into
higher gear, and the Federal Reserve decided it was time to put on the brakes
to avoid the risk that inflation would again rear its ugly head. The Fed
intervened by raising the Federal funds rate (the short-term rate at which
banks borrow from one another) an unprecedented seven times in the 13 ensuing
months. Taken together, these increases doubled this key rate, from 3.0% in
February 1994 to 6.0% in February 1995.
This series of increases was designed to rein in a vibrant economy and
quell inflationary fears. The Fed apparently achieved its objective, as
inflation remained at low levels throughout this period. However, with the
economy again showing evidence of weakness by mid-1995, the Fed returned to the
offensive and lowered the Federal funds rate in July (to 5.75%), in December
(to 5.50%), and again in January 1996 (to 5.25%).
The dramatic swings in interest rates that have marked virtually the first
six years of the 1990s, illustrated in the chart at the upper left, were
accompanied by enormous fluctuations in the prices of long-term Treasuries,
more moderate fluctuations in the prices of intermediate-term Treasuries, and
very modest price fluctuations for short-term issues. For example, the upward
rate swing in calendar 1994 drove the prices of long-term bonds down by -16%;
the ensuing recovery in 1995 sent prices right back up by +24%.
To mitigate the high volatility that is indigenous to long-term bonds,
investors should normally hold some bonds with intermediate-term or short-term
maturities, accepting (usually) lower yields and
2
<PAGE> 5
(always) reduced income durability. Of course, 90-day U.S. Treasury bills are
essentially devoid of principal volatility, but only at the price of minimal
yields and even lower income durability. (Vanguard Money Market Reserves offers
a Portfolio that invests solely in short-term U.S. Treasury securities.)
VANGUARD PORTFOLIOS' OUTSTANDING RESULTS
I am happy to report that all of our Vanguard Portfolios achieved handsome
total returns during the past twelve months. A year ago, I had the unhappy duty
of reporting that six of our nine Portfolios earned negative total returns, and
the remaining three Portfolios earned returns that were barely positive (less
than +1%, including a healthy yield component). I pointed out, however, that
negative total returns were a very rare occurrence in the bond market, as we
demonstrated in an accompanying table.
In retrospect, it occurs to me that last year's table should have shown
not only total returns (including income) but also pure capital returns
(without income). The table below rectifies that oversight. It reiterates that
negative total returns are rare. But it also shows that negative capital
returns occurred in about one-half of the years (only the Short-Term Corporate
Portfolio proved an exception to this rule). In other words, capital returns
behaved randomly, positive in about one-half of the years, negative in the
other half. This conclusion is hardly surprising in view of the fact that
interest rates seem to rise and fall at random. This table presents the
results:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
NUMBER OF NEGATIVE NEGATIVE
YEARS SINCE TOTAL CAPITAL
VANGUARD PORTFOLIO* INCEPTION RETURNS RETURNS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM CORPORATE 13 0 4
GNMA 15 0 6
HIGH YIELD CORPORATE 17 3 9
LONG-TERM CORPORATE 22 2 10
- -----------------------------------------------------------------------------------------
</TABLE>
*Includes all Portfolios in operation for ten years or more.
I am even happier to report that each of the Fund's Portfolios, without
exception, outpaced competitive norms during our past fiscal year. Our positive
margin advantage generally increased with the length of each Portfolio's
maturity. As this table shows, our advantage was keen and consistent:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
TOTAL RETURNS
------------------------------------------
FISCAL YEAR ENDED
JANUARY 31, 1996
------------------------------------------
AVERAGE
VANGUARD COMPETITIVE VANGUARD
PORTFOLIO FUND FUND ADVANTAGE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM PORTFOLIOS
U.S. TREASURY +11.4% +10.6% +0.8%
FEDERAL +11.4 +10.7 +0.7
CORPORATE +12.0 +10.7 +1.3
- -------------------------------------------------------------------------------------------
INTERMEDIATE-TERM PORTFOLIOS
U.S. TREASURY +19.0% +15.2% +3.8%
CORPORATE +19.9 +15.5 +4.4
GNMA +15.6 +14.7 +0.9
- -------------------------------------------------------------------------------------------
LONG-TERM PORTFOLIOS
U.S. TREASURY +26.7% +19.6% +7.1%
CORPORATE +23.6 +17.0 +6.6
- -------------------------------------------------------------------------------------------
HIGH YIELD CORP. +19.0% +18.1% +0.9%
- -------------------------------------------------------------------------------------------
</TABLE>
We have presented this table of relative returns in each of the past twelve
years, and we have dominated our peer groups in virtually every year. The
strong margins that we experienced in fiscal 1996 merely reinforced that
pattern, and our "success rate" remains remarkable. Of 73 year-by-year
comparisons in our Annual Reports (our Portfolios have various inception
dates), our Portfolios provided superior returns relative to competitive norms
in 62 cases, a success rate of 85%.
As wonderful as were our relative returns during the past year, we should
note that they reflect three independent factors:
- - First, we believe that our Portfolios, while properly placed in their
maturity and quality groups, intentionally carried somewhat longer
maturities than our peers (not that our peers lack the ability to lengthen
their maturities if they wish to do so). To the extent our Portfolios hold
longer maturities than our peers, our net asset values may rise more when
interest rates fall (as in the past year), but
3
<PAGE> 6
decline more when interest rates rise (as in the prior year). For the two
years combined, I should note, we enjoyed a large net advantage in each of
our nine Portfolios.
- - Second, we gain, I believe, a significant advantage both by the
professionalism of our capable and experienced investment staff and by our
policy of maintaining our maturities within clearly defined limits. In
short, we do not make major bets on the inevitably imponderable future
course of interest rates. (A wise course, considering the failed forecasts
that I mentioned earlier in this letter.)
- - Third, we hold what has proved to be a durable advantage in terms of our low
costs, which has provided a strong enhancement in our relative returns. The
Portfolios managed by our Vanguard Fixed Income Group incurred expense
ratios (expenses as a percentage of average net assets) of only 0.27% last
year; those Portfolios for which Wellington Management Company serves as
investment adviser incurred expense ratios of about 0.31%.(1) These costs
are far below those of 1.00% for the average fixed-income mutual fund. The
Vanguard advantage, other factors held equal, enhances our returns by about
0.70% annually, equivalent to an almost 15% increase in income in a bond
portfolio which earns a gross yield of, say, 6%.
A LONGER-TERM VIEW
Suffice it to say that it is the long-term record of a fixed-income portfolio,
rather than the record in any single year, that is of the greatest significance
in evaluating performance. The charts on pages 7-11 present the long-term
picture for each of our Portfolios, showing cumulative returns for either the
past decade or since the inception of the Portfolio. The table to the right
summarizes the long-term returns of each Portfolio relative to the average
return achieved by comparable fixed-income mutual funds during the same
periods.
- -----------------
(1) We have reached an agreement with Wellington Management Company on a further
reduction in their advisory fee schedule, as described on page 17 of this
Annual Report.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
ANNUAL RATE OF RETURN
-----------------------------------
TEN YEARS ENDED
JANUARY 31, 1996
-----------------------------------
AVERAGE ANNUAL
VANGUARD COMPETITIVE VANGUARD
PORTFOLIO FUND FUND ADVANTAGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM PORTFOLIOS
U.S. TREASURY* +6.7% +6.1% +0.6%
FEDERAL* +7.8 +7.2 +0.6
CORPORATE +8.3 +7.4 +0.9
INTERMEDIATE-TERM PORTFOLIOS
U.S. TREASURY* +9.6% +8.3% +1.3%
CORPORATE* +7.4 +5.8 +1.6
GNMA +9.2 +8.3 +0.9
LONG-TERM PORTFOLIOS
U.S. TREASURY* +10.0% +8.0% +2.0%
CORPORATE +10.7 +8.8 +1.9
HIGH YIELD CORP. +10.3% +9.5% +0.8%
- ---------------------------------------------------------------------------------------
</TABLE>
- - Since inception: Long-Term U.S. Treasury, May 1986; Short-Term Federal,
December 1987; Intermediate-Term U.S. Treasury and Short-Term U.S. Treasury,
October 1991; Intermediate-Term Corporate, November 1993.
The ten-year returns illustrated cover a period that was favorable on balance
for bond funds of all types, largely because of the climate of generally
declining interest rates. We do not intend to suggest that the future absolute
returns of the Portfolios will match those of the past decade. Indeed, in light
of the relatively low yields available in the bond market today, there is
little reason to expect that future total returns will equal those in the
table. However, given our advantages of professional management, stringent
maturity and quality policies, and exceedingly low costs, we are confident that
the returns of each Portfolio will continue to be more than competitive
relative to industry norms.
The charts on pages 7-11 also present the returns of each Portfolio's
comparable unmanaged Lehman Bond Index. We come extremely close to matching
these bond market indexes, which represent tough performance standards for all
actively managed bond funds. The reason is straightforward: indexes are merely
"paper" portfolios, existing only in computer-generated statistics and
unencumbered by the "real
4
<PAGE> 7
world" costs of doing business, including operating expenses, advisory fees,
and portfolio transaction costs. All mutual funds must bear these costs in
their daily activities; therefore, almost inevitably, higher cost funds must
fall short of the index returns, even if they are competently managed. (Not all
are, of course.) As the charts show, the returns of our average competitor
rarely approach those of the indexes as closely as does Vanguard's. Our claim
to fame, as it were, is that we have nearly always outpaced other fixed-income
mutual funds holding portfolios of similar quality and maturity to ours.
IN SUMMARY
The past year has been an extraordinarily productive period for each of our
nine Portfolios. It is the capstone of a splendid decade in which returns on
bond portfolios were well above historical norms. This is in itself a reason
for caution. But I feel confident that investors who use the Fund's Portfolios
as they are intended to be used--as part of a balanced asset allocation
strategy--will earn long-term returns that not only parallel the returns of the
bond market segments on which they focus, but exceed the competitive norms of
other similarly situated bond portfolios.
A year ago, near the depths of the bond market plunge, I expressed to you
the thought that, with the generous current yields then available, "the
probabilities favor much better total returns in the coming year." That
prediction was something of an understatement, and we subsequently enjoyed
returns that were truly outstanding. I also stated that, "virtually
unequivocally, the lowest-cost bond funds will provide higher returns than the
highest-cost bond funds." That prediction, hardly surprisingly, was right on
the mark, for that is precisely what happened during the past year.
Today, we are among the largest bond funds in the mutual fund field. All
of us at Vanguard Fixed Income Securities Fund appreciate the investor
confidence represented by our $22 billion asset base. We shall not let you
down. What's more, we shall, of course, maintain the professional management
and the carefully structured, high-quality and low-cost philosophy that you
have every right to expect.
In short, we shall "stay the course." A year ago, with the bond market in a
state of disarray, we urged you to stay the course as well. That proved to be
good advice then; we reiterate that advice today.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle,
Chairman of the Board
February 27, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
5
<PAGE> 8
PORTFOLIO STATISTICS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value
Per Share Twelve Months SEC
------------------- ------------------------------------ 30-Day
Average Average Jan. 31, Jan. 31, Income Capital Gains Total Annualized
Portfolio Maturity Quality 1995 1996 Dividends Distributions Return Yield
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM U.S. TREASURY 21.5 years Aaa $ 9.23 $10.73 $.669 $.225 +26.7% 5.92%
LONG-TERM CORPORATE 21.6 years Aa3 8.18 9.43 .627 -- +23.6 6.43
HIGH YIELD CORPORATE 9.0 years Ba3 7.24 7.89 .678 -- +19.0 8.32*
INTERMEDIATE-TERM
CORPORATE 7.4 years A1 9.07 10.17 .658 -- +19.9 6.01
INTERMEDIATE-TERM
U.S. TREASURY 7.5 years Aaa 9.76 10.90 .662 -- +19.0 5.48
GNMA 6.6 years Aaa 9.71 10.45 .734 -- +15.6 6.86
SHORT-TERM FEDERAL 2.4 years Aaa 9.79 10.28 .601 -- +11.4 5.37
SHORT-TERM U.S. TREASURY 2.4 years Aaa 9.89 10.36 .625 -- +11.4 5.08
SHORT-TERM CORPORATE 2.6 years Aa3 10.40 10.94 .671 -- +12.0 5.58
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- - HIGH YIELD CORPORATE PORTFOLIO. Yield reflects a premium based on the
possibility that interest payments on some bonds may be reduced or
eliminated. Also, since bonds with higher interest coupons may be replaced
by bonds with lower coupons, income dividends are subject to reduction.
6
<PAGE> 9
CUMULATIVE PERFORMANCE
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1996
- --------------------------------------------------------------------------------
Since
1 Year 5 Years Inception*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM TREASURY PORTFOLIO +26.72% +11.99% +10.01%
AVERAGE L-T TREASURY FUND +19.55 + 9.33 + 8.01
LEHMAN L-T TREASURY INDEX +27.43 +12.34 +10.68
</TABLE>
* Inception, May 19, 1986.
Note: Past performance is not predictive of future performance.
[FIGURE 4]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1996
- ---------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM CORPORATE PORTFOLIO +23.64% +12.46% +10.75%
AVERAGE CORPORATE A-RATED FUND +17.02 + 9.32 + 8.82
LEHMAN LONG-TERM CORP AA
OR BETTER BOND INDEX +23.93 +11.68 +11.06
</TABLE>
Note: Past performance is not predictive of future performance.
7
<PAGE> 10
CUMULATIVE PERFORMANCE (continued)
[FIGURE 5]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1996
- ---------------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
HIGH YIELD CORPORATE PORTFOLIO +19.01% +15.47% +10.35%
AVERAGE HIGH YIELD BOND FUND +18.07 +16.59 + 9.45
LEHMAN HIGH YIELD BOND INDEX +19.70 +18.29 +11.50
</TABLE>
Note: Past performance is not predictive of future performance.
[FIGURE 6]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1996
- ---------------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
GNMA PORTFOLIO +15.64% +8.78% +9.17%
AVERAGE GNMA FUND +14.67 +7.86 +8.27
LEHMAN GNMA INDEX +15.48 +8.73 +9.64
</TABLE>
Note: Past performance is not predictive of future performance.
8
<PAGE> 11
[FIGURE 7]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1996
- ---------------------------------------------------------------------------------------
Since
1 Year Inception*
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INTERMEDIATE-TERM TREASURY PORTFOLIO +18.96% +9.56%
AVERAGE I-T TREASURY FUND +15.15 +8.28
LEHMAN I-T TREASURY INDEX +19.62 +9.77
</TABLE>
*Inception, October 28, 1991.
Note: Past performance is not predictive of future performance.
[FIGURE 8]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1996
- ----------------------------------------------------------------------------------------
Since
1 Year Inception*
- ----------------------------------------------------------------------------------------
<S> <C> <C>
INTERMEDIATE-TERM CORPORATE PORTFOLIO +19.94% +7.39%
AVERAGE I-T CORPORATE FUND +15.46 +5.85
LEHMAN I-T CORPORATE INDEX +21.08 +8.05
</TABLE>
*Inception, November 1, 1993.
Note: Past performance is not predictive of future performance.
9
<PAGE> 12
CUMULATIVE PERFORMANCE (continued)
[FIGURE 9]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1996
- ------------------------------------------------------------------------------------
Since
1 Year 5 Years Inception*
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM FEDERAL PORTFOLIO +11.43% +7.23% +7.83%
AVERAGE SHORT-TERM GOV'T FUND +10.72 +6.36 +7.23
LEHMAN SHORT-TERM GOV'T INDEX +11.97 +7.54 +8.19
</TABLE>
*Inception, December 31, 1987.
Note: Past performance is not predictive of future performance.
[FIGURE 10]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1996
- -------------------------------------------------------------------------------------
1 Year Since Inception*
- -------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM TREASURY PORTFOLIO +11.37% +6.67%
AVERAGE SHORT-TERM TREASURY FUND +10.56 +6.08
LEHMAN SHORT-TERM TREASURY INDEX +12.02 +6.98
</TABLE>
*Inception, October 28, 1991.
Note: Past performance is not predictive of future performance.
10
<PAGE> 13
[FIGURE 11]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1996
- ------------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM CORPORATE PORTFOLIO +11.95% +7.85% +8.28%
AVERAGE S-T CORPORATE FUND +10.65 +6.85 +7.41
LEHMAN S-T CORPORATE INDEX +13.75 +8.84 +8.98
</TABLE>
Note: Past performance is not predictive of future performance.
11
<PAGE> 14
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIOS (PERIODS ENDED DECEMBER 31,
1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
--------------------------------------
INCEPTION TOTAL INCOME CAPITAL
PORTFOLIO DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
- --------- --------- ------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
LONG-TERM U.S. TREASURY 5/19/86 +30.11% +12.24% +10.11%* + 8.02%* +2.09%*
LONG-TERM CORPORATE 7/9/73 +26.40 +12.71 +10.83 + 9.00 +1.83
HIGH YIELD CORPORATE 12/27/78 +19.15 +15.33 +10.31 +11.39 -1.08
INTERMEDIATE-TERM
CORPORATE 11/1/93 +21.39 + 7.32* + 7.32* + 6.63* +0.69*
INTERMEDIATE-TERM
U.S. TREASURY 10/28/91 +20.44 + 9.58* + 9.58* + 6.51* +3.07*
GNMA 6/27/80 +17.04 + 8.90 + 9.18 + 8.68 +0.50
SHORT-TERM FEDERAL 12/31/87 +12.26 + 7.24 + 7.81* + 7.06* +0.75*
SHORT-TERM U.S.
TREASURY 10/28/91 +12.11 + 6.58* + 6.58* + 5.49* +1.09*
SHORT-TERM CORPORATE 10/29/82 +12.74 + 7.89 + 8.28 + 7.53 +0.75
</TABLE>
*PERFORMANCE FIGURES SINCE INCEPTION.
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
12
<PAGE> 15
REPORT FROM WELLINGTON MANAGEMENT COMPANY
MARKET REVIEW
Long-term interest rates declined seventy-five basis points (0.75%)
during the second half of the fiscal year ended January 31, 1996. The decrease
in rates came after an additional decline of the same magnitude during the
first six months of the fiscal year. The decline in rates over the past twelve
months translated into one of the strongest bond market rallies in some years
and served to offset the large price declines of 1994. The belief by long-term
fixed-income investors that the monetary authorities were succeeding in their
efforts to contain inflation at a time when the economy was slowing contributed
significantly to the decline in rates during the fiscal year. As economic
weakness developed, the Federal Reserve lowered short-term interest rates three
times.
Additional reductions in short-term rates will be necessary to keep
economic growth from slowing further. Despite the recent reduction in the
Federal funds rate, its level is over 3% in real terms. Bank reserves are
declining, and money growth is decelerating. With this backdrop, continued soft
economic data, low inflation, and eventually a constructive fiscal package will
likely compel the Federal Reserve to lower interest rates several more times in
1996. The yield spreads on corporate bonds have remained narrow, implying that
the additional reward for investors who assume the risk of corporate securities
is not very generous. We find this phenomenon surprising since several of the
recently announced mega-mergers are going to use a greater percentage of debt
than similar mergers that have occurred in the past three years. Bond investors
rationalize that these business combinations make strategic sense and that the
additional debt will be paid down rapidly. Although we may agree with this
rationale, yield premiums should be wider to compensate for the additional
leverage.
While we do not expect another significant move down in long-term
rates, we also do not foresee any major upward pressure on rates. Bonds in
almost all sectors still seem reasonably priced given our outlook of low
inflation and moderate growth. We slightly favor mortgage-backed securities
given their relative underperformance in 1995. As noted above, corporate yield
premiums are somewhat narrow for this point in the economic cycle and therefore
are less attractive.
GNMA PORTFOLIO
As the economy weakened during the second half of the year, intermediate-term
interest rates declined sharply. These declines in interest rates provided the
GNMA Portfolio with a reasonable amount of price appreciation in addition to a
healthy level of income. This performance came in spite of the risk of a drag
on performance caused by homeowners refinancing their mortgages at lower
interest rate levels, which would result in prepayments on GNMA pools. We have
now reached a level of interest rates that is low enough that we must consider
the possibility that refinancing and prepayments will ratchet up another notch
should interest rates fall farther. We have tried to insulate the Portfolio as
much as possible from such a possibility; however, all mortgage securities
portfolios are exposed to some degree to the negative effects of refinancing.
On the positive side, the GNMA securities held in the Portfolio offer
substantially more yield than other securities of comparable quality. In other
words, investors are being compensated in yield for the possible, but not
definite, effects of homeowner refinancing. In our view, the odds favor a
further interest rate decline of only modest proportions, and therefore, our
expectation is that the GNMA Portfolio will provide its shareholders with
attractive levels of both income and total return.
LONG-TERM CORPORATE PORTFOLIO
The Long-Term Corporate Portfolio's average maturity is slightly over 20 years
as it pursues its charter as a long-term corporate bond fund. As a result of
its long average maturity, the Portfolio's net asset value rose sharply as
rates continued to fall over the past six months. The Portfolio has maintained
its excellent call protection which means that many of our higher-coupon
securities cannot be redeemed by their issuers at today's lower rates. Thus,
the Portfolio's income stream has some protection from falling interest rates.
The major risk to this Portfolio, which was evident in 1994, is a rise
in long-term interest rates.
(continued)
13
<PAGE> 16
Over 50% of the Portfolio is currently invested (and is intended always to be
so) in corporate bonds with an average maturity longer than 15 years. Cash is
minimal. The duration of the Portfolio is approximately eight years which
implies that the principal value of the bonds could change 8% with a parallel
shift in interest rates of 1%. Thus, if interest rates continue to be as
volatile as they have been over the last two years, the Portfolio's net asset
value can change dramatically.
The second risk inherent in this Portfolio, which is always present,
is credit deterioration. Over 90% of the value of the Portfolio is invested in
issues rated "A" or better, and at no time do we expect more than 20% of the
assets to be in Treasuries and mortgage-backed securities. There are no
below-investment-grade corporate bonds currently in the Portfolio. At this
mature stage of the economic cycle, rating downgrades could increase while
upgrades decrease. Our focus going forward will be on less economically
sensitive issuers whose sales and cash flows are not as relatively volatile. We
also emphasize well-established larger companies with stable to improving
fundamentals. The Portfolio does not own any bonds denominated in foreign
currencies which can be more influenced by currency movements than by interest
rates.
HIGH YIELD CORPORATE PORTFOLIO
The below-investment-grade market had a surprisingly strong year since it
matched the high-grade market during a period of sharply falling interest
rates. Below-investment-grade bonds usually underperform higher-quality bonds
in an environment where investors are anticipating sluggish growth and when
interest rates are falling. The below-investment-grade market is somewhat more
concerned now than six months ago that the economy is slowing. The Federal
Reserve lowered short-term interest rates twice in the second half of 1995
which normally would ease the fears of a recession. The concern now in the
high-yield bond market is that the Federal Reserve has not proceeded quickly
enough to prevent further credit deterioration. We expect the economic growth
rate for 1996 to be reasonably positive. Thus we do not anticipate any major
problems in the economy that would cause this Portfolio to underperform
higher-quality securities over the next twelve months. As lower-rated borrowers
are usually the first to have their credit lines curtailed in a recession, we
must be particularly sensitive to the health of the economy. As long as the
equity market remains strong, fueled by growing sales and profits, high-yield
issuers will also be able to raise money in the stock market to reduce debt or
to fund capital expenditures.
As in the Long-Term Corporate Portfolio, another phenomenon we are
watching is the constant merger and acquisition activity. Several large
investment-grade companies have announced mega-mergers with a heavy reliance on
debt financing. As a result of these corporate combinations, several new
"fallen angels" have become available in the below-investment-grade market.
Recent emphasis in the Portfolio has focused on these larger companies. Our
expectation in the purchase of such issuers as Westinghouse Electric and
Northrop Grumman is that the downgrades in the ratings will be temporary as the
new companies cut costs and shed non-strategic assets. The relative prices of
the securities should improve over time as the realization of these strategies
occurs.
The Portfolio's holdings continue to be focused on cash-paying issues
rated "B" or better. We continue to exercise in-depth credit research on a
company-by-company basis and to emphasize diversification in the Portfolio's
construction. The Portfolio currently owns over 100 issuers representing a
fairly broad range of industries and companies. In addition, we continue to
maintain a Treasury reserve in the event that such liquidity is necessary.
Respectfully,
Paul D. Kaplan, Senior Vice President
Portfolio Manager
Earl E. McEvoy, Senior Vice President
Portfolio Manager
Wellington Management Company
February 10, 1996
14
<PAGE> 17
REPORT FROM VANGUARD FIXED INCOME GROUP
IT DOESN'T GET ANY BETTER THAN THIS
A confluence of favorable events propelled bond and note prices
sharply higher over the past fiscal year. The rally in bonds reached all
issuing sectors and all maturities, thus lifting the net asset values of your
Portfolios generally in direct proportion to their intrinsic exposure to the
market. The Long-Term Treasury Portfolio (Vanguard's most market-volatile bond
portfolio) rose +18.7% in price over the fiscal year which, combined with +8.0%
in dividends, produced a total return of +26.7%. Similarly, the
Intermediate-Term and Short-Term Treasury Portfolios rose in net asset value by
+11.7% and +4.8% over the twelve months ending January 31, 1996. Combined with
their dividends, these Portfolios' total returns summed to a "none too shabby"
+19.0% and +11.4%, respectively. Our Corporate and Federal Portfolios performed
roughly in-line with their respective Treasury brethren.
The recovery in bond prices effectively eliminated the damage done in
1994 when interest rates rose sharply. Bondholders who stuck with it over the
bleak 1994 period got their just rewards in 1995 and early this year. Indeed,
the bond price rally over the past twelve months is the frothiest and most
exuberant since 1985. (Performance details are given in the Chairman's letter.)
Suffice it to say, we enjoyed a great year and are not apt to see its like for
quite some time. It is very difficult to imagine what the bond market will be
able to give us for an encore.
THE MAKING OF A BOND MARKET BLOW-OUT
The dramatic turnaround in bond returns, from a dismal 1994 to a euphoric 1995,
found its antecedents in both the movements in the national economy and the
nation's Central Bank reaction to those movements. Recall that in early 1994 it
appeared that the economy and inflation were overheating. Real Gross Domestic
Product was growing at a 4% annual rate, commodity prices were accelerating,
manufacturing capacity utilization was nudging into territory historically
associated with supply shortages, and the unemployment rate was falling
rapidly. The Federal Reserve Bank policymakers reacted to these somewhat
alarming symptoms with steady and graduated dosages of monetary restraint.
Between February 1994 and February 1995, the Federal Reserve initiated seven
separate operations to force short-term interest rates higher. This
prescription was designed to raise the cost of borrowing and thereby slow down
the rate of economic expansion. The economy's excessive vigor and the Fed's
response were (and are) widely regarded as the principal causes of the 1994
bond market selloff. The good news is that by early 1995 it began to appear
that the Fed's medicine was finally working.
By February 1995, short-term interest rates had been pushed a total of
three percentage points higher (from 3% to 6%) while long-term interest rates
had risen from about 6% to nearly 8%. Needless to say, rising interest rates
create a directly opposed effect on bond prices, and these yield movements are
synonymous with the malaise of 1994. Fortunately, the economy slowed in 1995 to
growth levels deemed by the Fed to be desirable. What constitutes desirability?
There is no definitive answer; however, many economists believe that the
economy can grow sustainably between 2% to 3% annually without causing an
acceleration in inflation. Alternatively, they believe there is a "natural"
unemployment rate below which lies the likelihood of increased inflationary
pressures. The 1995 economic story was one of growth and unemployment at
acceptable non-inflationary levels. The fabled "soft landing" had at long last
arrived. This was all the markets needed to fuel a bond rally majestic in both
size and duration. Looking back, we can visualize each of the last two years as
having a sharply etched and satisfyingly compensatory symmetry.
VANGUARD FIXED INCOME FUND PORTFOLIOS
The Fixed Income Group at Vanguard manages six of the nine Portfolios of the
Fixed Income Securities Fund. As you know, each Portfolio represents a basket
of bonds/notes that have internally similar risk and return characteristics to
one another; but by design and structure are quite different from one basket to
the next. The principal difference is their intrinsic market risk.
Specifically, the Portfolios designated "Short-Term" have approximately one
half the volatility in net asset value as those Portfolios designated
"Intermediate." Moreover, the
15
<PAGE> 18
"Intermediate" Portfolios' net asset values will fluctuate in price about half
as much (for a given change in interest rates) as Vanguard Portfolios
designated "Long." Completing the analogy reveals that Vanguard's "Short"
Portfolios are about 25% as volatile as Vanguard's "Long" Portfolios.
Since we tend to manage our market risk exposures with moderate
adjustments at the margin, these proportionalities are relatively consistent
over time and represent useful rules of thumb. By observing the yield
differences among short, intermediate, and long portfolios, the astute investor
can assess an important aspect of the market's tradeoffs between prospective
return and risk. At the end of the fiscal year, the bond markets permitted
funds to offer about 0.4% additional yield for each doubling of intrinsic
market risk.
The other principal differentiating characteristic associated with
Vanguard Fixed Income Fund Portfolios is that of credit quality. With the
exception of the High Yield Portfolio, Vanguard offers Portfolios whose
exposures to default risk vary from virtually nil (Treasury and Federal agency
issues) to low (investment-grade corporate bonds), for each of the
aforementioned market risk categories (short, intermediate, and long). Again,
each of these Portfolios is managed so it doesn't "overlap" appreciably with
its neighbor, and so it does offer a discernible trade-off in credit risk and
incremental return.
The Portfolios we manage that are permitted to hold corporate bonds
have gravitated toward the middle and lower end of the investment-grade
ratings, thereby garnering additional income for shareholders. At fiscal year
end, the credit risk tradeoffs between the Corporate and Treasury Portfolios
stood at about 0.5% for each market risk sector.
DOUBLING YOUR MONEY
The rally in bond prices (and concomitant drop in interest rates) is anything
but an unmixed blessing. Reinvestment of dividends or net new investment of
savings must now occur at appreciably lower and less productive yields. If we
were viewing the investment landscape as a gardener might view his acreage, we
would say the "soil" has been badly depleted. In 1994, an investor could take a
dollar of savings, buy a Treasury bond at 8% and, through compounding (at the
same rate), effectively double the investment in nine years. Today, at 6%, our
hypothetical investor needs twelve years to double the same dollar. With 5%
interest rates it takes almost fifteen years. One can administer some
"fertilizer" in the form of increased credit risk exposure (producing as noted,
about 0.5% more yield), but that doesn't really restore much of the market's
lost compounding productivity.
The problem for prospective bond returns is similar to the problem we
now face for prospective stock returns. If your bond fund or stock dividend
yields are low, your returns will necessarily be low unless prices move higher.
Unfortunately, it is difficult to imagine inflation getting that much better
than the past decade's 3.5% annualized rate or interest rates heading much
lower than the prevailing 5% to 6%.
YIELDS, COSTS, AND TIME
If interest rates were still 9% (as they were in 1989), Vanguard's expense
ratio advantage of roughly +0.75% over the average competitive fund would only
represent about one month's worth of income. In today's 5% to 6% interest rate
environment, the identical 0.75% advantage represents almost two months worth
of income. Consequently, if you invest with the average competitor rather than
with Vanguard, your money is effectively idle for January and February of each
and every year. We applaud your decision to invest with us and keep your money
working for a full 366 days this year and thereafter. Naturally, we also will
endeavor to squeeze as much incremental return as our conservative policies and
these potentially inhospitable markets permit.
Sincerely,
Ian A. MacKinnon, Senior Vice President
Robert F. Auwaerter, Principal
John W. Hollyer, Principal
Vanguard Fixed Income Group February 25, 1996
16
<PAGE> 19
SPECIAL NOTICE TO SHAREHOLDERS
NEW AGREEMENT TO REDUCE INVESTMENT ADVISORY FEES
We are pleased to announce that the Board of Directors of Vanguard Fixed Income
Securities Fund has reached an agreement with Wellington Management Company
(WMC), the investment adviser for three of the Fund's nine Portfolios, on a
revised investment advisory agreement. WMC provides portfolio management
services for the Long-Term Corporate, GNMA, and High Yield Corporate
Portfolios.
The revised agreement involves a reduction in the annual rate of
advisory fees to be paid to WMC. At the current asset level of the three
Portfolios ($13.4 billion), the dollar amount of the annual fee would decline
from $4,442,000 to $3,238,000, a reduction of $1,204,000. The new effective
annual fee rate would equal 0.024% of current assets and would decline further
if WMC-managed assets were to continue to grow.
Under the terms of the new agreement, the Fund will pay WMC a basic
advisory fee at the end of each fiscal quarter based on the WMC-managed
Portfolios' average month-end net assets during the quarter. The quarterly rate
is applied according to the following annual fee schedules:
<TABLE>
<CAPTION>
LONG-TERM CORPORATE PORTFOLIO
- ------------------------------------------------------------------
NET ASSETS ANNUAL BASIC FEE RATE
- ------------------------------------------------------------------
<S> <C>
FIRST $1 BILLION 0.040%
NEXT $1 BILLION 0.030
NEXT $1 BILLION 0.020
OVER $3 BILLION 0.015
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GNMA PORTFOLIO
- ------------------------------------------------------------------
NET ASSETS ANNUAL BASIC FEE RATE
- ------------------------------------------------------------------
<S> <C>
FIRST $3 BILLION 0.020%
NEXT $3 BILLION 0.010
OVER $6 BILLION 0.008
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD PORTFOLIO
- ------------------------------------------------------------------
NET ASSETS ANNUAL BASIC FEE RATE
- ------------------------------------------------------------------
<S> <C>
FIRST $1 BILLION 0.060%
NEXT $1 BILLION 0.040
NEXT $1 BILLION 0.030
OVER $3 BILLION 0.025
- ------------------------------------------------------------------
</TABLE>
This revised investment advisory agreement replaces the current agreement with
the adviser dated May 31, 1993, and will go into effect on May 1, 1996. Until
the effective date, the adviser has agreed to waive its advisory fees to the
extent necessary to abide by the new fee schedule. For the fiscal year ended
January 31, 1996, the Fund paid approximately $3,743,000 to WMC for investment
advisory services.
The adviser, located at 75 State Street, Boston, Massachusetts, is a
professional investment advisory firm which globally provides investment
services to investment companies, institutions, and individuals. Among the
clients of WMC are 12 investment companies of The Vanguard Group. Under the
terms of its investment advisory agreement with the Fund, the adviser agrees to
manage the investment and reinvestment of the assets of the Portfolios and to
continuously review, supervise, and administer the Portfolios' investment
programs. The adviser discharges its responsibilities subject to the control of
the officers and directors of the Fund.
17
<PAGE> 20
TOTAL INVESTMENT RETURN TABLES
The following tables illustrate the results of single-share investments in
VANGUARD FIXED INCOME SECURITIES Fund through January 31, 1996. The percentage
figures show results on a "total return" basis and assume the reinvestment of
both income dividends and any capital gains distributions. During the periods
illustrated, bond prices fluctuated widely; these results should not be
considered a representation of the dividend income or capital gain or loss that
may be realized from an investment made in the Portfolios today.
<TABLE>
<CAPTION>
HIGH YIELD CORPORATE PORTFOLIO (BEGAN OPERATIONS DECEMBER 27, 1978)
- -----------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- -----------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Portfolio
Value with Income ------------------------------ Lehman High Yield
January 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Bond Index
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Total Return*
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (12/78) $10.00 -- -- $10.00 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
1979 10.33 -- -- 10.33 + 3.3% 0.0% + 3.3% + 2.0%
- -----------------------------------------------------------------------------------------------------------------------------
1980 9.26 -- $1.235 10.49 -10.4 +11.9 + 1.5 - 8.7
- -----------------------------------------------------------------------------------------------------------------------------
1981 8.50 -- 1.180 10.99 - 8.2 +13.0 + 4.8 + 4.6
- -----------------------------------------------------------------------------------------------------------------------------
1982 7.88 -- 1.240 11.87 - 7.3 +15.3 + 8.0 + 3.3
- -----------------------------------------------------------------------------------------------------------------------------
1983 8.96 -- 1.280 15.70 +13.7 +18.6 +32.3 +39.7
- -----------------------------------------------------------------------------------------------------------------------------
1984 8.97 -- 1.200 17.93 + 0.1 +14.1 +14.2 +11.8
- -----------------------------------------------------------------------------------------------------------------------------
1985 8.52 -- 1.180 19.62 - 5.0 +14.4 + 9.4 +10.0
- -----------------------------------------------------------------------------------------------------------------------------
1986 8.84 -- 1.140 23.23 + 3.8 +14.6 +18.4 +22.6
- -----------------------------------------------------------------------------------------------------------------------------
1987 9.33 $.118 1.081 27.91 + 6.9 +13.2 +20.1 +20.7
- -----------------------------------------------------------------------------------------------------------------------------
1988 8.53 -- 1.006 28.62 - 8.6 +11.1 + 2.5 + 4.2
- -----------------------------------------------------------------------------------------------------------------------------
1989 8.44 -- 1.016 31.89 - 1.1 +12.5 +11.4 +10.8
- -----------------------------------------------------------------------------------------------------------------------------
1990 7.31 -- 1.004 31.31 -13.4 +11.6 - 1.8 - 3.0
- -----------------------------------------------------------------------------------------------------------------------------
1991 6.19 -- .904 30.30 -15.3 +12.1 - 3.2 - 5.1
- -----------------------------------------------------------------------------------------------------------------------------
1992 7.27 -- .770 39.78 +17.4 +13.9 +31.3 +47.3
- -----------------------------------------------------------------------------------------------------------------------------
1993 7.56 -- .727 45.62 + 4.0 +10.7 +14.7 +15.1
- -----------------------------------------------------------------------------------------------------------------------------
1994 8.14 -- .695 53.62 + 7.7 + 9.8 +17.5 +16.3
- -----------------------------------------------------------------------------------------------------------------------------
1995 7.24 -- .679 52.27 -11.1 + 8.6 - 2.5 - 1.8
- -----------------------------------------------------------------------------------------------------------------------------
1996 7.89 -- .678 62.20 + 9.0 +10.0 +19.0 +19.7
- -----------------------------------------------------------------------------------------------------------------------------
LIFETIME +522.0% +529.7%
- -----------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +11.3% +11.4%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Lehman Mutual Fund "BBB" Rated Bond Index through January 1984; Lehman High
Yield Bond Index thereafter.
18
<PAGE> 21
<TABLE>
<CAPTION>
LONG-TERM U.S. TREASURY PORTFOLIO (BEGAN OPERATIONS MAY 19, 1986)
- -----------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- -----------------------------------------------------------------------------------------------------------------------------
Long-Term Corporate Portfolio
VALUE WITH INCOME ----------------------------- Lehman Long-Term
January 31 NET ASSET CAPITAL GAINS INCOME DIVIDENDS & CAPITAL Capital Income Total Treasury Bond Index
Fiscal Year VALUE DISTRIBUTIONS DIVIDENDS GAINS REINVESTED Return Return Return Total Return
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (5/86) $10.00 -- -- $10.00 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
1987 10.28 $.034 $.530 10.86 + 3.1% +5.5% + 8.6% +11.9%
- -----------------------------------------------------------------------------------------------------------------------------
1988 9.49 -- .776 10.89 - 7.7 +8.0 + 0.3 + 1.5
- -----------------------------------------------------------------------------------------------------------------------------
1989 9.28 -- .778 11.59 - 2.2 +8.6 + 6.4 + 5.1
- -----------------------------------------------------------------------------------------------------------------------------
1990 9.53 -- .781 12.91 + 2.7 +8.6 +11.3 +12.3
- -----------------------------------------------------------------------------------------------------------------------------
1991 9.74 -- .776 14.33 + 2.2 +8.8 +11.0 +11.6
- -----------------------------------------------------------------------------------------------------------------------------
1992 10.14 -- .763 16.11 + 4.1 +8.3 +12.4 +13.4
- -----------------------------------------------------------------------------------------------------------------------------
1993 10.04 .700 .734 18.38 + 6.1 +8.0 +14.1 +14.6
- -----------------------------------------------------------------------------------------------------------------------------
1994 10.75 .176 .685 21.34 + 8.9 +7.2 +16.1 +16.7
- -----------------------------------------------------------------------------------------------------------------------------
1995 9.23 .119 .665 19.92 -13.0 +6.3 - 6.7 - 7.5
- -----------------------------------------------------------------------------------------------------------------------------
1996 10.73 .225 .669 25.24 +18.7 +8.0 +26.7 +27.4
- -----------------------------------------------------------------------------------------------------------------------------
LIFETIME +152.4% +167.6%
- -----------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +10.0% +10.7%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM CORPORATE PORTFOLIO (BEGAN OPERATIONS OCTOBER 29, 1982)
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- -----------------------------------------------------------------------------------------------------------------------------------
Short-Term Corporate Portfolio
VALUE WITH INCOME ------------------------------- Lehman Mutual Fund
January 31 NET ASSET CAPITAL GAINS INCOME DIVIDENDS & CAPITAL Capital Income Total Short-Term Corporate
Fiscal Year VALUE DISTRIBUTIONS DIVIDENDS GAINS REINVESTED Return Return Return Bond Total Return
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial (10/82) $10.00 -- -- $10.00 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1983 10.05 -- $ .264 10.32 +0.5% + 2.7% + 3.2% + 4.6%
- -----------------------------------------------------------------------------------------------------------------------------------
1984 9.94 -- 1.020 11.30 -1.1 +10.6 + 9.5 +10.9
- -----------------------------------------------------------------------------------------------------------------------------------
1985 10.17 -- 1.067 12.88 +2.3 +11.7 +14.0 +14.1
- -----------------------------------------------------------------------------------------------------------------------------------
1986 10.55 -- 1.001 14.72 +3.7 +10.5 +14.2 +14.6
- -----------------------------------------------------------------------------------------------------------------------------------
1987 10.67 $.184 .877 16.42 +2.9 + 8.7 +11.6 +11.9
- -----------------------------------------------------------------------------------------------------------------------------------
1988 10.43 -- .761 17.27 -2.2 + 7.4 + 5.2 + 6.8
- -----------------------------------------------------------------------------------------------------------------------------------
1989 10.23 -- .833 18.36 -1.9 + 8.2 + 6.3 + 6.5
- -----------------------------------------------------------------------------------------------------------------------------------
1990 10.34 -- .895 20.23 +1.1 + 9.1 +10.2 +10.7
- -----------------------------------------------------------------------------------------------------------------------------------
1991 10.50 -- .876 22.35 +1.5 + 9.0 +10.5 + 9.8
- -----------------------------------------------------------------------------------------------------------------------------------
1992 10.88 -- .804 24.96 +3.6 + 8.1 +11.7 +13.4
- -----------------------------------------------------------------------------------------------------------------------------------
1993 10.99 .165 .695 27.28 +2.6 + 6.7 + 9.3 + 9.5
- -----------------------------------------------------------------------------------------------------------------------------------
1994 10.94 .099 .605 28.95 +0.4 + 5.7 + 6.1 + 7.9
- -----------------------------------------------------------------------------------------------------------------------------------
1995 10.40 -- .596 29.12 -4.9 + 5.5 + 0.6 + 0.3
- -----------------------------------------------------------------------------------------------------------------------------------
1996 10.94 -- .671 32.60 +5.2 + 6.8 +12.0 +13.8
- -----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +226.0% +258.4%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +9.3% +10.1%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
TOTAL INVESTMENT RETURN TABLES (CONTINUED)
<TABLE>
<CAPTION>
GNMA PORTFOLIO (BEGAN OPERATIONS JUNE 27, 1980)
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- -----------------------------------------------------------------------------------------------------------------------------------
GNMA Portfolio
Value with Income ------------------------------- Lehman GNMA
January 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Bond Index
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Total Return
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (6/80) $10.00 -- -- $10.00 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1981 8.75 -- $ .610 9.37 -12.5% + 6.2% - 6.3% - 8.8%
- -----------------------------------------------------------------------------------------------------------------------------------
1982 7.92 -- 1.120 9.74 - 9.5 +13.5 + 4.0 + 1.7
- -----------------------------------------------------------------------------------------------------------------------------------
1983 9.21 -- 1.110 12.87 +16.3 +15.8 +32.1 +39.6
- -----------------------------------------------------------------------------------------------------------------------------------
1984 9.20 -- 1.070 14.43 - 0.1 +12.3 +12.2 +12.0
- -----------------------------------------------------------------------------------------------------------------------------------
1985 9.25 -- 1.080 16.39 + 0.5 +13.0 +13.5 +15.4
- -----------------------------------------------------------------------------------------------------------------------------------
1986 9.92 -- 1.040 19.59 + 7.2 +12.4 +19.6 +22.6
- -----------------------------------------------------------------------------------------------------------------------------------
1987 10.10 $.006 .965 21.98 + 1.9 +10.3 +12.2 +13.6
- -----------------------------------------------------------------------------------------------------------------------------------
1988 9.69 -- .889 23.15 - 4.1 + 9.4 + 5.3 + 6.8
- -----------------------------------------------------------------------------------------------------------------------------------
1989 9.34 -- .882 24.49 - 3.6 + 9.4 + 5.8 + 6.6
- -----------------------------------------------------------------------------------------------------------------------------------
1990 9.54 -- .878 27.42 + 2.1 + 9.9 +12.0 +12.9
- -----------------------------------------------------------------------------------------------------------------------------------
1991 9.85 -- .855 30.95 + 3.2 + 9.7 +12.9 +13.2
- -----------------------------------------------------------------------------------------------------------------------------------
1992 10.25 -- .831 34.97 + 4.1 + 8.9 +13.0 +12.9
- -----------------------------------------------------------------------------------------------------------------------------------
1993 10.50 -- .778 38.61 + 2.4 + 8.0 +10.4 +10.1
- -----------------------------------------------------------------------------------------------------------------------------------
1994 10.39 -- .641 40.61 - 1.0 + 6.2 + 5.2 + 6.1
- -----------------------------------------------------------------------------------------------------------------------------------
1995 9.71 .007 .693 40.76 - 6.5 + 6.9 + 0.4 - 0.3
- -----------------------------------------------------------------------------------------------------------------------------------
1996 10.45 -- .734 47.13 + 7.6 + 8.0 +15.6 +15.5
- -----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +371.3% +415.2%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +10.5% +11.1%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM FEDERAL PORTFOLIO (BEGAN OPERATIONS DECEMBER 31, 1987)
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- -----------------------------------------------------------------------------------------------------------------------------------
Short-Term Federal Portfolio
Value with Income ------------------------------- Lehman Mutual Fund
January 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Short-Term U.S. Gov't
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Index Total Return
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (12/87) $10.00 -- -- $10.00 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1988 10.05 -- $.050 10.10 +0.5% +0.5% + 1.0% + 1.9%
- -----------------------------------------------------------------------------------------------------------------------------------
1989 9.78 -- .816 10.67 -2.7 +8.4 + 5.7 + 5.0
- -----------------------------------------------------------------------------------------------------------------------------------
1990 9.89 -- .842 11.75 +1.1 +9.0 +10.1 +10.5
- -----------------------------------------------------------------------------------------------------------------------------------
1991 10.08 -- .801 12.98 +1.9 +8.6 +10.5 +11.1
- -----------------------------------------------------------------------------------------------------------------------------------
1992 10.31 $.077 .721 14.35 +3.1 +7.5 +10.6 +11.3
- -----------------------------------------------------------------------------------------------------------------------------------
1993 10.38 .162 .609 15.57 +2.3 +6.2 + 8.5 + 8.9
- -----------------------------------------------------------------------------------------------------------------------------------
1994 10.38 .110 .521 16.54 +1.1 +5.1 + 6.2 + 6.1
- -----------------------------------------------------------------------------------------------------------------------------------
1995 9.79 .010 .550 16.51 -5.6 +5.4 - 0.2 - 0.1
- -----------------------------------------------------------------------------------------------------------------------------------
1996 10.28 -- .601 18.39 +5.0 +6.4 +11.4 +12.0
- -----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +83.9% +89.0%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +7.8% +8.2%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
LONG-TERM CORPORATE PORTFOLIO (BEGAN OPERATIONS JULY 9, 1973)
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- -----------------------------------------------------------------------------------------------------------------------------------
Long-Term Corporate Portfolio Lehman Long-Term
VALUE WITH INCOME ------------------------------- Corporate AA
January 31 NET ASSET CAPITAL GAINS INCOME DIVIDENDS & CAPITAL Capital Income Total or Better Bond
Fiscal Year VALUE DISTRIBUTIONS DIVIDENDS GAINS REINVESTED Return Return Return Index Total Return
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (7/73) $10.00 -- -- $10.00 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1974 9.93 $.030 $.380 10.34 - 0.4% + 3.8% + 3.4% + 5.7%
- -----------------------------------------------------------------------------------------------------------------------------------
1975 9.20 -- .740 10.39 - 7.4 + 7.8 + 0.4 + 2.1
- -----------------------------------------------------------------------------------------------------------------------------------
1976 9.25 -- .730 11.32 + 0.5 + 8.5 + 9.0 +10.3
- -----------------------------------------------------------------------------------------------------------------------------------
1977 9.61 -- .740 12.71 + 3.9 + 8.4 +12.3 +13.0
- -----------------------------------------------------------------------------------------------------------------------------------
1978 9.36 -- .770 13.42 - 2.6 + 8.1 + 5.5 + 4.2
- -----------------------------------------------------------------------------------------------------------------------------------
1979 8.91 -- .790 13.92 - 4.8 + 8.5 + 3.7 + 2.6
- -----------------------------------------------------------------------------------------------------------------------------------
1980 7.68 -- .820 13.22 -13.8 + 8.8 - 5.0 -12.0
- -----------------------------------------------------------------------------------------------------------------------------------
1981 7.41 -- .880 14.30 - 3.5 +11.7 + 8.2 + 3.0
- -----------------------------------------------------------------------------------------------------------------------------------
1982 7.06 -- .930 15.51 - 4.7 +13.2 + 8.5 - 0.8
- -----------------------------------------------------------------------------------------------------------------------------------
1983 8.00 -- .960 19.91 +13.3 +15.0 +28.3 +43.4
- -----------------------------------------------------------------------------------------------------------------------------------
1984 7.84 -- .950 21.95 - 2.0 +12.3 +10.3 + 9.9
- -----------------------------------------------------------------------------------------------------------------------------------
1985 7.84 -- .960 24.90 0.0 +13.4 +13.4 +17.4
- -----------------------------------------------------------------------------------------------------------------------------------
1986 8.42 -- .920 29.96 + 7.4 +12.9 +20.3 +25.1
- -----------------------------------------------------------------------------------------------------------------------------------
1987 8.77 .123 .846 34.89 + 5.6 +10.9 +16.5 +21.1
- -----------------------------------------------------------------------------------------------------------------------------------
1988 8.11 -- .770 35.50 - 7.5 + 9.3 + 1.8 + 3.0
- -----------------------------------------------------------------------------------------------------------------------------------
1989 7.91 -- .742 38.03 - 2.5 + 9.6 + 7.1 + 6.6
- -----------------------------------------------------------------------------------------------------------------------------------
1990 8.00 -- .732 42.09 + 1.1 + 9.6 +10.7 +11.2
- -----------------------------------------------------------------------------------------------------------------------------------
1991 8.02 -- .720 46.22 + 0.3 + 9.5 + 9.8 +11.2
- -----------------------------------------------------------------------------------------------------------------------------------
1992 8.63 -- .706 54.12 + 7.6 + 9.5 +17.1 +15.5
- -----------------------------------------------------------------------------------------------------------------------------------
1993 9.04 .151 .680 62.27 + 6.6 + 8.5 +15.1 +13.8
- -----------------------------------------------------------------------------------------------------------------------------------
1994 9.36 .259 .633 70.88 + 6.5 + 7.3 +13.8 +12.6
- -----------------------------------------------------------------------------------------------------------------------------------
1995 8.18 .072 .617 67.26 -11.9 + 6.8 - 5.1 - 5.3
- -----------------------------------------------------------------------------------------------------------------------------------
1996 9.43 -- .627 83.15 +15.3 + 8.3 +23.6 +23.9
- -----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +731.5% +753.5%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +9.8% +10.0%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 24
PORTFOLIO SUMMARY
<TABLE>
<CAPTION>
Total SEC 30-Day Average Percent of
Net Annualized Weighted Quality Total
Portfolio Assets Yield Maturity Ratings Investments
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LONG-TERM U.S. TREASURY $ 915,763,000 5.92% 21.5 years Aaa 95
PORTFOLIO Temporary Cash Investments 5
----
Average Quality: Aaa 100
- -------------------------------------------------------------------------------------------------------------------
LONG-TERM CORPORATE $ 3,376,089,000 6.43% 21.6 years Aaa 20
PORTFOLIO Aa1, Aa2, Aa3 18
Average Quality: Aa3 A1, A2, A3 52
Baa1, Baa2, Baa3 9
Temporary Cash Investments 1
----
100
- -------------------------------------------------------------------------------------------------------------------
HIGH YIELD CORPORATE $ 3,006,579,000 8.32% 9.0 years Aaa 5
PORTFOLIO Ba1, Ba2, Ba3 36
Average Quality: Ba3 Baa1, Baa2, Baa3 4
B1, B2, B3 50
Temporary Cash Investments 5
----
100
- -------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM $ 423,937,000 6.01% 7.4 years Aaa 12
CORPORATE PORTFOLIO Aa1, Aa2, Aa3 13
Average Quality: A1 A1, A2, A3 48
Baa1, Baa2, Baa3 24
Temporary Cash Investments 3
----
100
- -------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM $ 1,226,360,000 5.48% 7.5 years Aaa 97
U.S. TREASURY PORTFOLIO Temporary Cash Investments 3
Average Quality: Aaa ----
100
- -------------------------------------------------------------------------------------------------------------------
GNMA PORTFOLIO $ 6,998,140,000 6.86% 6.6 years Aaa 97
Average Quality: Aaa Temporary Cash Investments 3
----
100
- -------------------------------------------------------------------------------------------------------------------
SHORT-TERM FEDERAL $ 1,401,736,000 5.37% 2.4 years Aaa 100
PORTFOLIO Temporary Cash Investments --
Average Quality: Aaa ----
100
- -------------------------------------------------------------------------------------------------------------------
SHORT-TERM U.S. $ 919,204,000 5.08% 2.4 years Aaa 99
TREASURY PORTFOLIO Temporary Cash Investments 1
Average Quality: Aaa ----
100
- -------------------------------------------------------------------------------------------------------------------
SHORT-TERM CORPORATE $ 3,873,013,000 5.58% 2.6 years Aaa 28
PORTFOLIO Aa1, Aa2, Aa3 14
Average Quality: Aa3 A1, A2, A3 38
Baa1, Baa2, Baa3 19
Temporary Cash Investments 1
----
100
- -------------------------------------------------------------------------------------------------------------------
Total Fund Assets $22,140,821,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
A VANGUARD GLOSSARY--QUALITY RATINGS
Aaa Judged to be the best quality, carrying the smallest degree of
investment risk. U.S. Government and Agency Securities are considered
to have Aaa ratings.
Aa Judged to be of high quality by all standards.
A Possess many favorable investment attributes and are to be considered
as higher medium-grade obligations.
Baa Considered to be medium-grade obligations, neither highly protected
nor poorly secured.
Ba Judged to have speculative elements; their future cannot be considered
as well-assured.
B Generally lacks characteristics of the desirable investment.
Caa Poor standing; may be in default.
N.R. Not Rated.
Note: Moody's applies numerical modifiers, 1, 2, and 3, in each generic
rating classification from Aa through Baa in its corporate bond rating
system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks
in the lower end of its generic rating category.
22
<PAGE> 25
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
January 31, 1996
<TABLE>
<CAPTION>
Face Market
Amount Value
GNMA PORTFOLIO (000) (000)+
- ------------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION OBLIGATIONS (98.2%)
- ------------------------------------------------------------------------------------
6.00%, 10/15/23-12/15/30 $ 145,176 $ 141,433
6.50%, 5/15/23-12/15/25 863,889 859,036
7.00%, 4/15/07-1/15/26 1,619,127 1,645,222
7.50%, 12/15/01-1/15/26 1,561,766 1,612,685
8.00%, 5/15/02-11/15/24 1,017,280 1,065,413
8.25%, 8/15/04-7/15/08 7,574 7,916
8.50%, 1/20/05-4/15/32 727,139 766,888
9.00%, 9/15/01-2/15/23 445,998 479,088
9.25%, 5/15/16-6/15/18 3,517 3,740
9.50%, 12/15/00-2/15/30 251,405 272,810
10.00%, 7/20/14-8/20/18 4,800 5,192
11.00%, 2/15/10-2/20/16 1,581 1,743
11.25%, 6/15/13-2/20/16 858 949
11.50%, 6/15/10-11/20/15 1,702 1,891
12.00%, 10/15/10-1/20/16 3,086 3,450
12.50%, 11/20/13-7/20/15 1,644 1,854
12.75%, 6/15/14-12/15/14 293 333
13.00%, 1/15/11-5/20/15 1,401 1,585
13.25%, 8/15/14-10/15/14 134 153
13.50%, 5/15/10-12/15/14 447 512
13.75%, 9/20/14 17 19
14.00%, 6/15/11-9/15/12 294 338
15.00%, 9/15/11-5/15/12 165 193
- ------------------------------------------------------------------------------------
TOTAL GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION OBLIGATIONS
(Cost $6,618,861) 6,872,443
- ------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.7%)
- ------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
5.87%, 2/1/96
(Cost $189,153) 189,153 189,153
- ------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.9%)
(Cost $6,808,014) 7,061,596
- ------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.9%)
- ------------------------------------------------------------------------------------
Other Assets-Note C $ 161,346
Liabilities (224,802)
----------
(63,456)
- ------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------
Applicable to 669,790,673
outstanding $.001 par
value shares (authorized
850,000,000 shares) $6,998,140
- ------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.45
====================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
AT JANUARY 31, 1996, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
---------- -------
<S> <C> <C>
PAID IN CAPITAL $6,748,031 $10.08
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED LOSSES--NOTE E (3,473) (.01)
UNREALIZED APPRECIATION OF
INVESTMENTS--NOTE F 253,582 .38
- ------------------------------------------------------------------------------------
NET ASSETS $6,998,140 $10.45
- ------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
LONG-TERM LONG-TERM HIGH YIELD
U.S. TREASURY CORPORATE CORPORATE
PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
January 31, 1996 January 31, 1996 January 31, 1996
(000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . $ 54,643 $221,991 $237,610
- -----------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . 54,643 221,991 237,610
- -----------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . . . 94 1,118 1,444
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . 1,734 7,114 6,307
Marketing and Distribution . . . . . . . . . . . . 172 566 447
Taxes (other than income taxes) . . . . . . . . . . . 63 239 213
Custodian Fees . . . . . . . . . . . . . . . . . . . . 20 89 90
Legal Fees . . . . . . . . . . . . . . . . . . . . . . -- -- 91
Auditing Fees . . . . . . . . . . . . . . . . . . . . 6 9 8
Shareholders' Reports . . . . . . . . . . . . . . . . 53 154 141
Annual Meeting and Proxy Costs . . . . . . . . . . . . 10 38 29
Directors' Fees and Expenses . . . . . . . . . . . . . 3 11 9
- -----------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . 2,155 9,338 8,779
- -----------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . 52,488 212,653 228,831
- -----------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . 20,585 46,604 21,161
Futures Contracts . . . . . . . . . . . . . . . . . . 353 -- --
- -----------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . 20,938 46,604 21,161
- -----------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION . . . . . . . . . . . .
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . 114,653 376,449 194,421
Futures Contracts . . . . . . . . . . . . . . . . . . -- -- --
- -----------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . 114,653 376,449 194,421
- -----------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . $188,079 $635,706 $444,413
=================================================================================================================
</TABLE>
The Statements of Net Assets of the Long-Term U.S. Treasury, Long-Term
Corporate, High Yield Corporate, Intermediate-Term Corporate, Intermediate-Term
U.S. Treasury, Short-Term Federal, Short-Term U.S. Treasury, and Short-Term
Corporate Portfolios, integral parts of the financial statements for each such
Portfolio, and the Report of Independent Accountants are included as an insert
to this Report.
24
<PAGE> 27
<TABLE>
<CAPTION>
INTERMEDIATE-TERM INTERMEDIATE-TERM
GNMA CORPORATE U.S. TREASURY
PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
January 31, 1996 January 31, 1996 January 31, 1996
(000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . $481,521 $18,893 $ 71,140
- ---------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . 481,521 18,893 71,140
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . . . . 1,181 28 127
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . 14,293 613 2,453
Marketing and Distribution . . . . . . . . . . . . . 1,177 56 247
Taxes (other than income taxes) . . . . . . . . . . . . 521 20 86
Custodian Fees . . . . . . . . . . . . . . . . . . . . . 823 17 12
Legal Fees . . . . . . . . . . . . . . . . . . . . . . . -- -- --
Auditing Fees . . . . . . . . . . . . . . . . . . . . . 12 5 6
Shareholders' Reports . . . . . . . . . . . . . . . . . 369 11 64
Annual Meeting and Proxy Costs . . . . . . . . . . . . . 99 3 25
Directors' Fees and Expenses . . . . . . . . . . . . . . 24 1 4
- ---------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . 18,499 754 3,024
- ---------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . 463,022 18,139 68,116
- ---------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . . 6,713 4,041 13,858
Futures Contracts . . . . . . . . . . . . . . . . . . . -- 159 384
- ---------------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . 6,713 4,200 14,242
- ---------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . 454,491 24,499 100,191
Futures Contracts . . . . . . . . . . . . . . . . . . . -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . . . . . . . 454,491 24,499 100,191
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . . $924,226 $46,838 $182,549
===========================================================================================================================
</TABLE>
25
<PAGE> 28
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
SHORT-TERM SHORT-TERM SHORT-TERM
FEDERAL U.S. TREASURY CORPORATE
PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
January 31, 1996 January 31, 1996 January 31, 1996
(000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 91,832 $54,470 $220,789
- ---------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . 91,832 54,470 220,789
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . . . . . 193 103 408
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . 3,173 1,835 7,347
Marketing and Distribution . . . . . . . . . . . . . . 386 219 876
Taxes (other than income taxes) . . . . . . . . . . . . . 117 66 262
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . 37 11 72
Legal Fees . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . 7 6 9
Shareholders' Reports . . . . . . . . . . . . . . . . . . 97 39 171
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . 31 16 49
Directors' Fees and Expenses . . . . . . . . . . . . . . . 6 3 12
- ---------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . 4,047 2,298 9,206
- ---------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . 87,785 52,172 211,583
- ---------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . . . 8,092 3,842 13,204
Futures Contracts . . . . . . . . . . . . . . . . . . . . -- -- 823
- ---------------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . 8,092 3,842 14,027
- ---------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . 65,368 34,257 152,638
Futures Contracts . . . . . . . . . . . . . . . . . . . . -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . . . . . . . . . 65,368 34,257 152,638
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . . . . $161,245 $90,271 $378,248
===========================================================================================================================
</TABLE>
26
<PAGE> 29
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
LONG-TERM LONG-TERM
U.S. TREASURY PORTFOLIO CORPORATE PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, January 31, JANUARY 31, January 31,
1996 1995 1996 1995
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . $ 52,488 $ 47,632 $ 212,653 $ 199,241
Realized Net Gain (Loss) . . . . . . . . 20,938 7,669 46,604 (18,694)
Change in Unrealized
Appreciation (Depreciation) . . . . . 114,653 (110,899) 376,449 (346,597)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . 188,079 (55,598) 635,706 (166,050)
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . (52,488) (47,632) (212,653) (199,241)
Realized Net Gain . . . . . . . . . . . . . . . (18,723) (8,474) -- (23,247)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . (71,211) (56,106) (212,653) (222,488)
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . 258,877 127,478 469,709 319,926
--In Lieu of Cash Distributions . 56,537 42,818 170,653 176,448
--Exchange . . . . . . . . . . . . 165,442 127,038 285,794 270,850
Redeemed --Regular . . . . . . . . . . . . (183,292) (155,346) (303,624) (435,204)
--Exchange . . . . . . . . . . . . (170,115) (187,408) (276,823) (502,225)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . . . . . 127,449 (45,420) 345,709 (170,205)
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . 244,317 (157,124) 768,762 (558,743)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . 671,446 828,570 2,607,327 3,166,070
- ----------------------------------------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . . . . . . . . $ 915,763 $ 671,446 $3,376,089 $2,607,327
============================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . $.669 $.665 $.627 $.617
Realized Net Gain . . . . . . . . . . . . $.225 $.119 -- $.072
- ----------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . 41,863 27,480 85,001 70,326
Issued in Lieu of Cash Distributions . . . 5,454 4,560 19,078 21,118
Redeemed . . . . . . . . . . . . . . . . . (34,704) (36,391) (64,930) (110,976)
- ---------------------------------------------------------------------------------------------------------------------------
12,613 (4,351) 39,149 (19,532)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 30
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
HIGH YIELD GNMA
CORPORATE PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, January 31, JANUARY 31, January 31,
1996 1995 1996 1995
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . $ 228,831 $ 202,381 $ 463,022 $ 432,526
Realized Net Gain (Loss) . . . . . . . . 21,161 (3,102) 6,713 231
Change in Unrealized
Appreciation (Depreciation) . . . . . 194,421 (276,810) 454,491 (441,790)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net
Assets Resulting from
Operations . . . . . . . . . . . 444,413 (77,531) 924,226 (9,033)
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . (228,831) (202,381) (463,022) (432,526)
Realized Net Gain . . . . . . . . . . . . -- -- -- (4,202)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . (228,831) (202,381) (463,022) (436,728)
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . 428,286 260,680 826,863 626,098
--In Lieu of Cash Distributions 160,148 138,818 353,323 327,946
--Exchange . . . . . . . . . . 429,255 346,291 462,521 345,136
Redeemed --Regular . . . . . . . . . . (176,674) (290,865) (604,667) (1,092,663)
--Exchange . . . . . . . . . . (212,318) (637,676) (351,939) (953,131)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . . 628,697 (182,752) 686,101 (746,614)
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . 844,279 (462,664) 1,147,305 (1,192,375)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . 2,162,300 2,624,964 5,850,835 7,043,210
- ----------------------------------------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . . . . $3,006,579 $2,162,300 $6,998,140 $ 5,850,835
============================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . $.678 $.679 $.734 $.693
Realized Net Gain . . . . . . . . -- -- -- $.007
- ----------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . 112,052 81,260 126,652 98,532
Issued in Lieu of Cash Distributions . 20,855 18,773 34,673 33,480
Redeemed . . . . . . . . . . . . . . . (50,868) (123,489) (94,085) (207,195)
- ----------------------------------------------------------------------------------------------------------------------------
82,039 (23,456) 67,240 (75,183)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
INTERMEDIATE-TERM INTERMEDIATE-TERM
CORPORATE PORTFOLIO U.S. TREASURY PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, January 31, JANUARY 31, January 31,
1996 1995 1996 1995
(000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . $ 18,139 $ 7,345 $ 68,116 $ 52,753
Realized Net Gain (Loss) . . . . . . . . 4,200 (3,240) 14,242 (43,053)
Change in Unrealized
Appreciation (Depreciation) . . . . . . 24,499 (6,144) 100,191 (49,831)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . 46,838 (2,039) 182,549 (40,131)
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . (18,139) (7,345) (68,116) (52,753)
Realized Net Gain . . . . . . . . . . . . -- -- -- (2,427)
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . (18,139) (7,345) (68,116) (55,180)
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular. . . . . . . . . . . 178,078 65,624 317,444 192,104
--In Lieu of Cash Distributions 14,306 5,477 51,396 40,939
--Exchange . . . . . . . . . . 115,654 86,434 202,427 152,011
Redeemed --Regular . . . . . . . . . . (24,798) (16,092) (146,041) (197,947)
--Exchange . . . . . . . . . (50,803) (54,195) (161,463) (250,713)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions. . . . . . 232,437 87,248 263,763 (63,606)
- ---------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . 261,136 77,864 378,196 (158,917)
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets
Beginning of Year . . . . . . . . . . . . 162,801 84,937 848,164 1,007,081
- ---------------------------------------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . . . . . $423,937 $162,801 $1,226,360 $ 848,164
===========================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . $.658 $.587 $.662 $.603
Realized Net Gain . . . . . . . . -- -- -- $.027
- ---------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . 30,043 16,489 50,081 35,143
Issued in Lieu of Cash
Distributions 1,458 597 4,907 4,125
Redeemed . . . . . . . . . . . . . (7,765) (7,597) (29,390) (45,489)
- ---------------------------------------------------------------------------------------------------------------------------
23,736 9,489 25,598 (6,221)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 32
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
SHORT-TERM SHORT-TERM
FEDERAL PORTFOLIO U.S. TREASURY PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, January 31, JANUARY 31, January 31,
1996 1995 1996 1995
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . $ 87,785 $ 91,716 $ 52,172 $ 37,327
Realized Net Gain (Loss) . . . . . . . . . 8,092 (40,359) 3,842 (17,893)
Change in Unrealized
Appreciation (Depreciation) . . . . . . . 65,368 (62,827) 34,257 (16,958)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net
Assets Resulting from
Operations . . . . . . . . . . . . . 161,245 (11,470) 90,271 2,476
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . (87,785) (91,716) (52,172) (37,327)
Realized Net Gain . . . . . . . . . . . . . -- (1,751) -- (1,367)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . (87,785) (93,467) (52,172) (38,694)
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . 291,529 349,688 321,724 225,562
--In Lieu of Cash Distributions 75,104 78,745 46,819 34,277
--Exchange . . . . . . . . . . . 69,674 126,121 131,072 175,994
Redeemed --Regular . . . . . . . . . . . . (290,132) (556,402) (256,814) (222,881)
--Exchange . . . . . . . . . . . (292,064) (355,446) (116,015) (151,003)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . . . . (145,889) (357,294) 126,786 61,949
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . (72,429) (462,231) 164,885 25,731
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . 1,474,165 1,936,396 754,319 728,588
- ----------------------------------------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . . . . . $1,401,736 $1,474,165 $ 919,204 $ 754,319
============================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . $.601 $.550 $.625 $.532
Realized Net Gain . . . . . . . . . . -- $.010 -- $.020
- ----------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . 35,818 47,838 44,543 40,501
Issued in Lieu of Cash Distributions . 7,436 7,941 4,595 3,434
Redeemed . . . . . . . . . . . . . . . (57,585) (91,716) (36,661) (37,618)
- ----------------------------------------------------------------------------------------------------------------------------
(14,331) (35,937) 12,477 6,317
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
SHORT-TERM
CORPORATE PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended
JANUARY 31, January 31,
1996 1995
(000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . $ 211,583 $ 184,425
Realized Net Gain (Loss) . . . . . . . . 14,027 (43,286)
Change in Unrealized
Appreciation (Depreciation) . . . . . 152,638 (130,778)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net
Assets Resulting from
Operations . . . . . . . . . . . . 378,248 10,361
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . (211,583) (184,425)
Realized Net Gain . . . . . . . . . . . -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . (211,583) (184,425)
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . 1,141,368 880,717
--In Lieu of Cash Distributions 178,724 152,829
--Exchange . . . . . . . . . . 513,022 381,200
Redeemed --Regular . . . . . . . . . . . (674,623) (1,121,979)
--Exchange . . . . . . . . . . (376,191) (767,664)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . . . 782,300 (474,897)
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . 948,965 (648,961)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . 2,924,048 3,573,009
- ----------------------------------------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . . . . $3,873,013 $ 2,924,048
============================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . $.671 $.596
Realized Net Gain . . . . . . . . . -- --
- ----------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . 154,147 119,706
Issued in Lieu of Cash
Distributions 16,618 14,548
Redeemed . . . . . . . . . . . . . . (97,915) (179,811)
- ----------------------------------------------------------------------------------------------------------------------------
72,850 (45,557)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 34
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
LONG-TERM U.S. TREASURY PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
---------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $ 9.23 $10.75 $10.04 $10.14 $ 9.74
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .669 .665 .685 .733 .763
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . 1.725 (1.401) .886 .600 .400
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 2.394 (.736) 1.571 1.333 1.163
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.669) (.665) (.685) (.733) (.763)
Distributions from Realized Capital Gains . . . . (.225) (.119) (.176) (.700) --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.894) (.784) (.861) (1.433) (.763)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $10.73 $9.23 $10.75 $10.04 $10.14
===============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +26.72% -6.68% +16.09% +14.12% +12.44%
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . $916 $671 $829 $874 $833
Ratio of Expenses to Average Net Assets . . . . . . . .27% .28% .26% .27% .26%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 6.57% 7.02% 6.44% 7.26% 7.72%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 105% 85% 7% 170% 89%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
LONG-TERM CORPORATE PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
---------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $8.18 $9.36 $9.04 $8.63 $8.02
----- ------ ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . .627 .617 .632 .680 .706
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . 1.250 (1.108) .579 .561 .610
----- ------ ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.877 (.491) 1.211 1.241 1.316
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.627) (.617) (.632) (.680) (.706)
Distributions from Realized Capital Gains . . . . -- (.072) (.259) (.151) --
----- ------ ----- ----- -----
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.627) (.689) (.891) (.831) (.706)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $9.43 $8.18 $9.36 $9.04 $8.63
===============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +23.64% -5.12% +13.83% +15.06% +17.09%
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . $3,376 $2,607 $3,166 $2,763 $1,992
Ratio of Expenses to Average Net Assets . . . . . . . .31% .32% .30% .31% .31%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 7.03% 7.37% 6.71% 7.68% 8.46%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 49% 43% 77% 50% 72%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
HIGH YIELD CORPORATE PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
---------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $7.24 $8.14 $7.56 $7.27 $6.19
----- ----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . .678 .679 .695 .727 .770
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . .650 (.900) .580 .290 1.080
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.328 (.221) 1.275 1.017 1.850
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.678) (.679) (.695) (.727) (.770)
Distributions from Realized Capital Gains . . . . -- -- -- -- --
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.678) (.679) (.695) (.727) (.770)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $7.89 $7.24 $8.14 $7.56 $7.27
===============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +19.01% -2.52% +17.54% +14.68% +31.27%
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . $3,007 $2,162 $2,625 $2,184 $1,593
Ratio of Expenses to Average Net Assets . . . . . . . .34% .34% .32% .34% .34%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 8.85% 9.13% 8.81% 9.82% 11.13%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 38% 33% 51% 83% 44%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 36
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
GNMA PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
---------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $ 9.71 $10.39 $10.50 $10.25 $ 9.85
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . .734 .693 .641 .778 .831
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . .740 (.673) (.110) .250 .400
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.474 .020 .531 1.028 1.231
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.734) (.693) (.641) (.778) (.831)
Distributions from Realized Capital Gains . . . . -- (.007) -- -- --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.734) (.700) (.641) (.778) (.831)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $10.45 $ 9.71 $10.39 $10.50 $10.25
===============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +15.64% +0.36% +5.18% +10.40% +13.00%
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . $6,998 $5,851 $7,043 $7,167 $5,207
Ratio of Expenses to Average Net Assets . . . . . . . .29% .30% .28% .29% .29%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 7.22% 7.04% 6.19% 7.38% 8.22%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 7% 35% 2% 7% 1%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
INTERMEDIATE-TERM CORPORATE PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
------------------------ November 1, 1993-
For a Share Outstanding Throughout Each Period 1996 1995 January 31, 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $ 9.07 $10.04 $10.00
------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . .658 .587 .125
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . 1.100 (.970) .040
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.758 (.383) .165
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.658) (.587) (.125)
Distributions from Realized Capital Gains . . . . -- -- --
------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.658) (.587) (.125)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $10.17 $ 9.07 $10.04
===============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +19.94% -3.73% +1.66%
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $424 $163 $85
Ratio of Expenses to Average Net Assets . . . . . . . .28% .28% .25%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 6.70% 6.46% 5.11%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . 78% 97% 74%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
35
<PAGE> 38
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
-------------------------------------------------- October 28, 1991-
For a Share Outstanding Throughout Each Period 1996 1995 1994 1993 January 31, 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $ 9.76 $10.82 $10.79 $10.19 $10.00
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .662 .603 .617 .676 .170
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . 1.140 (1.033) .443 .617 .190
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.802 (.430) 1.060 1.293 .360
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.662) (.603) (.617) (.676) (.170)
Distributions from Realized Capital Gains . . . . -- (.027) (.413) (.017) --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.662) (.630) (1.030) (.693) (.170)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $10.90 $ 9.76 $10.82 $10.79 $10.19
==================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +18.96% -3.90% +10.09% +13.14% +3.59%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $1,226 $848 $1,007 $673 $190
Ratio of Expenses to Average Net Assets . . . . . . . .28% .28% .26% .26% .26%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 6.34% 6.05% 5.55% 6.44% 6.47%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . 56% 128% 118% 123% 32%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
36
<PAGE> 39
<TABLE>
<CAPTION>
SHORT-TERM FEDERAL PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
---------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $ 9.79 $10.38 $10.38 $10.31 $10.08
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . .601 .550 .522 .609 .720
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . .490 (.580) .110 .232 .307
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.091 (.030) .632 .841 1.027
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.601) (.550) (.522) (.609) (.720)
Distributions from Realized Capital Gains . . . . -- (.010) (.110) (.162) (.077)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.601) (.560) (.632) (.771) (.797)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $10.28 $ 9.79 $10.38 $10.38 $10.31
===============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +11.43% -0.21% +6.23% +8.49% +10.59%
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . $1,402 $1,474 $1,936 $1,688 $1,274
Ratio of Expenses to Average Net Assets . . . . . . . .27% .28% .26% .27% .26%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 5.93% 5.53% 4.98% 5.88% 6.98%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 74% 57% 49% 70% 111%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 40
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
SHORT-TERM U.S. TREASURY PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
-------------------------------------------------- October 28, 1991-
For a Share Outstanding Throughout Each Period 1996 1995 1994 1993 January 31, 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $ 9.89 $10.41 $10.41 $10.12 $10.00
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .625 .532 .486 .528 .140
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . .470 (.500) .079 .332 .120
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.095 .032 .565 .860 .260
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.625) (.532) (.486) (.528) (.140)
Distributions from Realized Capital Gains . . . . -- (.020) (.079) (.042) --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.625) (.552) (.565) (.570) (.140)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . $10.36 $ 9.89 $10.41 $10.41 $10.12
==================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +11.37% +0.40% +5.54% +8.74% +2.60%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $919 $754 $729 $526 $102
Ratio of Expenses to Average Net Assets . . . . . . . .27% .28% .26% .26% .26%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 6.14% 5.33% 4.64% 5.12% 5.22%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . 93% 126% 86% 71% 40%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
38
<PAGE> 41
<TABLE>
<CAPTION>
SHORT-TERM CORPORATE PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
---------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $10.40 $10.94 $10.99 $10.88 $10.50
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . .671 .596 .605 .695 .804
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . .540 (.540) .049 .275 .380
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.211 .056 .654 .970 1.184
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.671) (.596) (.605) (.695) (.804)
Distributions from Realized Capital Gains . . . . -- -- (.099) (.165) --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.671) (.596) (.704) (.860) (.804)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $10.94 $10.40 $10.94 $10.99 $10.88
===============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +11.95% +0.60% +6.11% +9.29% +11.70%
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . $3,873 $2,924 $3,573 $2,811 $1,911
Ratio of Expenses to Average Net Assets . . . . . . . .27% .28% .26% .27% .26%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 6.23% 5.66% 5.48% 6.33% 7.44%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 62% 69% 61% 71% 99%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 42
NOTES TO FINANCIAL STATEMENTS
Vanguard Fixed Income Securities Fund is registered under the Investment
Company Act of 1940 as a diversified open-end investment company and consists
of the Long-Term U.S. Treasury, Long-Term Corporate, High Yield Corporate,
GNMA, Intermediate-Term Corporate, Intermediate-Term U.S. Treasury, Short-Term
Federal, Short-Term U.S. Treasury, and Short-Term Corporate Portfolios. Certain
investments of the Long-Term Corporate, High Yield Corporate, Intermediate-Term
Corporate, and Short-Term Corporate Portfolios are in corporate debt
instruments; the issuers' abilities to meet these obligations may be affected
by economic developments in their respective industries.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities are valued utilizing the latest bid prices
and on the basis of a matrix system (which considers such factors as
security prices, yields, maturities, and ratings), both as furnished by
independent pricing services. Temporary cash investments are valued at
amortized cost which approximates market value.
2. FEDERAL INCOME TAXES: Each Portfolio of the Fund intends to continue to
qualify as a regulated investment company and distribute all of its taxable
income. Accordingly, no provision for Federal income taxes is required in
the financial statements.
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard
Group of Investment Companies, transfers uninvested cash balances into a
Pooled Cash Account, the daily aggregate of which is invested in repurchase
agreements secured by U.S. Government obligations. Securities pledged as
collateral for repurchase agreements are held by a custodian bank until
maturity of each repurchase agreement. Provisions of the agreement require
that the market value of the collateral is sufficient in the event of
default; however, in the event of default or bankruptcy by the other party
to the agreement, realization and/or retention of the collateral may be
subject to legal proceedings.
4. FUTURES: The Long-Term, Intermediate-Term, and Short-Term U.S. Treasury
Portfolios and the Intermediate-Term and Short-Term Corporate Portfolios
utilize Municipal Bond Index, U.S. Treasury Bond, and U.S. Treasury Note
futures contracts to a limited extent, with the objectives of enhancing
returns, managing interest rate risk, maintaining liquidity, and minimizing
transaction costs. The Portfolios may purchase futures contracts instead of
bonds when futures contracts are believed to be priced more attractively
than bonds. The Portfolios may also seek to take advantage of price
differences among bond market sectors by simultaneously buying futures (or
bonds) of one market sector and selling futures (or bonds) of another
sector. Futures contracts may also be used to simulate a fully invested
position in the underlying bonds while maintaining a cash balance for
liquidity.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of bonds held by the Portfolios
and the prices of futures contracts, and the possibility of an illiquid
market. Futures contracts are valued based upon their quoted daily
settlement prices. Fluctuations in the values of futures contracts are
recorded as unrealized appreciation (depreciation) until terminated at which
time realized gains (losses) are recognized. Unrealized appreciation
(depreciation) related to open futures contracts is required to be treated
as realized gain (loss) for Federal income tax purposes.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on sales of investment securities are those of specific securities sold.
Discounts and premiums on
40
<PAGE> 43
securities purchased are amortized to interest income over the lives of the
respective securities. Distributions from net investment income are declared
on a daily basis payable on the first business day of the following month.
Annual distributions from realized gains, if any, are recorded on the
ex-dividend date. Capital gain distributions are determined on a tax basis
and may differ from realized capital gains for financial reporting purposes
depending on the timing of realization of gains.
B. Under the terms of a contract expiring May 1, 1996, the Fund pays
Wellington Management Company for investment advisory services performed for
the Long-Term Corporate, High Yield Corporate, and GNMA Portfolios at a fee
calculated at an annual percentage rate of average net assets. For the year
ended January 31, 1996, the investment advisory fees of the Long-Term
Corporate, High Yield Corporate, and GNMA Portfolios represent effective annual
rates of .04 of 1%, .06 of 1%, and .02 of 1% of average net assets,
respectively, after giving effect to fee waivers of $118,000, $145,000 (.01 of
1%), and $127,000, respectively.
The Vanguard Group, Inc. furnishes investment advisory services to the
Intermediate-Term and Short-Term Corporate, Short-Term Federal, and the
Long-Term, Intermediate-Term, and Short-Term U.S. Treasury Portfolios on an
at-cost basis.
C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing, and distribution services. The costs of such
services are allocated to the Fund under methods approved by the Board of
Directors. At January 31, 1996, the Fund had contributed capital of $2,499,000
to Vanguard (included in Other Assets), representing 12.5% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
D. During the year ended January 31, 1996, purchases and sales of investment
securities, other than U.S. Government securities and temporary cash
investments, were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(000)
-------------------------
Portfolio Purchases Sales
- ------------------------------------------------------------
<S> <C> <C>
LONG-TERM CORPORATE $1,245,786 $ 734,084
HIGH YIELD CORPORATE 1,208,922 580,497
INTERMEDIATE-TERM CORPORATE 311,762 87,559
SHORT-TERM CORPORATE 1,994,511 1,070,025
- ------------------------------------------------------------
</TABLE>
Purchases and sales of U.S. Government securities were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(000)
-------------------------
Portfolio Purchases Sales
- ------------------------------------------------------------
<S> <C> <C>
LONG-TERM U.S. TREASURY $ 854,442 $ 781,450
LONG-TERM CORPORATE 470,880 670,350
HIGH YIELD CORPORATE 274,842 325,035
GNMA 1,685,191 466,030
INTERMEDIATE-TERM CORPORATE 110,600 111,407
INTERMEDIATE-TERM U.S. TREASURY 848,484 555,550
SHORT-TERM FEDERAL 1,070,742 1,172,965
SHORT-TERM U.S. TREASURY 769,847 751,432
SHORT-TERM CORPORATE 846,112 935,249
- ------------------------------------------------------------
</TABLE>
E. At January 31, 1996, the Portfolios had the following capital losses
available to offset future net capital gains:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Expiration
Fiscal Year(s)
Ending Amount
Portfolio January 31 (000)
- ------------------------------------------------------------
<S> <C> <C>
HIGH YIELD CORPORATE 1999-2000 $101,666
GNMA 2004 3,310
INTERMEDIATE-TERM U.S. TREASURY 2003 28,823
SHORT-TERM FEDERAL 2003-2004 32,267
SHORT-TERM U.S. TREASURY 2003-2004 14,060
SHORT-TERM CORPORATE 2003-2004 31,541
- ------------------------------------------------------------
</TABLE>
41
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS (continued)
The Long-Term U.S. Treasury, Long-Term Corporate, and Intermediate-Term
Corporate Portfolios utilized capital loss carryforwards of $1,071,000,
$18,694,000, and $3,271,000, respectively, to offset taxable capital gains
realized during the year ended January 31, 1996.
F. At January 31, 1996, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes was:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(000)
----------------------------------------
Net
Appreciated Depreciated Unrealized
Portfolio Securities Securities Appreciation
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM
U.S. TREASURY $101,020 -- $101,020
LONG-TERM CORPORATE 306,403 $ 868 305,535
HIGH YIELD CORPORATE 119,684 11,596 108,088
GNMA 269,914 16,332 253,582
INTERMEDIATE-TERM
CORPORATE 18,922 63 18,859
INTERMEDIATE-TERM
U.S. TREASURY 68,653 84 68,569
SHORT-TERM FEDERAL 34,313 1,774 32,539
SHORT-TERM
U.S. TREASURY 25,707 267 25,440
SHORT-TERM CORPORATE 82,728 2,554 80,174
- ---------------------------------------------------------------------------
</TABLE>
G. The market values of securities on loan to broker/dealers at January 31,
1996, and collateral received with respect to such loans, were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(000)
- ---------------------------------------------------------------------------
Collateral Received
Market -------------------------
Value of U.S.
Loaned Treasury
Portfolio Securities Cash Securities
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM
U.S. TREASURY $ 33,673 $ 7,665 $27,362
LONG-TERM CORPORATE 34,421 35,023 --
HIGH YIELD CORPORATE 35,130 36,055 --
INTERMEDIATE-TERM
CORPORATE 3,283 3,345 --
INTERMEDIATE-TERM
U.S. TREASURY 21,307 -- 21,761
SHORT-TERM
U.S. TREASURY 110,153 112,309 --
SHORT-TERM CORPORATE 21,695 1,016 21,598
- ---------------------------------------------------------------------------
</TABLE>
Security loans are required to be secured at all times by collateral at least
equal to the market value of securities loaned; however, in the event of
default or bankruptcy by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal proceedings.
42
<PAGE> 45
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Fixed Income Securities Fund
GNMA Portfolio
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the GNMA Portfolio of Vanguard Fixed Income Securities Fund (the "Fund") at
January 31, 1996, and the results of its operations, the changes in its net
assets and the financial highlights for each of the respective periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at January 31, 1996 by correspondence with the custodian and brokers
and the application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.
We have also audited the financial statements of the other Portfolios included
in the Fund at January 31, 1996, and we have issued an unqualified opinion
thereon. An insert to this Annual Report containing our report on the financial
statements of the other Portfolios is available from the Fund.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 29, 1996
43
<PAGE> 46
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board
Chairman and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The
Vanguard Group.
JOHN J. BRENNAN, President and Chief Executive Officer
President and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc
Rorer Inc.; Director of Sun Company, Inc.; Director of
Westinghouse Electric Corporation.
BARBARA BARNES HAUPTFUHRER, Director of The Great
Atlantic and Pacific Tea Co., Alco Standard Corp.,
Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MacLAURY, President of The Brookings
Institution; Director of American Express Bank Ltd. and
The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's
Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern
New England Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and
Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co.,
and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer
of The Nature Conservancy; formerly, Director and
Senior Partner of McKinsey & Co. and President of New
York University; Director of Pacific Gas and Electric Co.
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco
Brands, Inc.; retired Vice Chairman and Director of RJR
Nabisco; Director of TECO Energy, Inc. and Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive
Officer of Rohm & Haas Co.; Director of Cummins
Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice
President and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The
Vanguard Group, Inc., and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, Controller; Vice President of The
Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
ROBERT A. DiSTEFANO F. WILLIAM McNABB III
Senior Vice President Senior Vice President
Information Technology Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
IAN A. MacKINNON
Senior Vice President
Fixed Income Group
44
<PAGE> 47
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[THE VANGUARD GROUP(R) LOGO]
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q280-01/96
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 48
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
January 31, 1996
<TABLE>
<CAPTION>
VANGUARD FIXED INCOME
SECURITIES FUND
Face Market
LONG-TERM Amount Value
U.S. TREASURY PORTFOLIO (000) (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (92.6%)
- -----------------------------------------------------------------------------------------
U.S. TREASURY BONDS
6.25%, 8/15/23 $ 25,700 $ 26,190
7.625%, 2/15/25 6,000 7,264
7.875%, 2/15/21 328,743 402,145
8.875%, 8/15/17 114,050 151,722
8.875%, 2/15/19 124,010 166,115
10.375%, 11/15/12 68,450 94,503
- -----------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT
OBLIGATIONS (Cost $746,919) 847,939
- -----------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (5.3%)
- -----------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.87%, 2/1/96
(Cost $48,261) 48,261 48,261
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.9%)
(Cost $795,180) 896,200
- -----------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.1%)
- -----------------------------------------------------------------------------------------
Other Assets--Notes C and G 33,228
Liabilities--Note G (13,665)
----------
19,563
- -----------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------
Applicable to 85,366,999 outstanding
$.001 par value shares
(authorized 300,000,000 shares) $915,763
- -----------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.73
=========================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
AT JANUARY 31, 1996,
- -----------------------------------------------------------------------------------------
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------- -------
<S> <C> <C>
PAID IN CAPITAL $813,564 $ 9.54
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED GAINS 1,179 .01
UNREALIZED APPRECIATION
OF INVESTMENTS--NOTE F 101,020 1.18
- -----------------------------------------------------------------------------------------
NET ASSETS $915,763 $10.73
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
LONG-TERM Rating(1) Amount Value
CORPORATE PORTFOLIO (Moody's) (000) (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS (81.3%)
- -----------------------------------------------------------------------------------------
FINANCE (20.5%)
H.F. Ahmanson & Co.
8.25%, 10/1/02 Baa1 $ 10,000 $ 11,108
Allstate Corp.
7.50%, 6/15/13 A2 10,000 10,661
AMBAC, Inc.
7.50%, 5/1/23 Aa2 20,000 21,583
Banc One Corp.
7.75%, 7/15/25 A1 30,000 33,170
Bank of Boston Corp.
6.625%, 12/1/05 Baa1 48,000 48,784
BankAmerica Corp.
10.00%, 2/1/03 A3 20,000 24,379
Barnett Banks, Inc.
8.50%, 1/15/07 A3 20,000 22,782
Chemical Banking Corp.
8.625%, 5/1/02 A2 10,000 11,348
Citicorp
7.125%, 9/1/05 A2 15,000 15,944
7.625%, 5/1/05 A2 10,000 10,901
Comerica, Inc.
7.125%, 12/1/13 A2 10,000 10,001
8.375%, 7/15/24 A2 20,000 22,431
Continental Bank Corp.
12.50%, 4/1/01 A2 15,000 19,395
Exxon Capital Corp.
6.00%, 7/1/05 Aaa 10,000 10,009
Fifth Third Bancorp
6.75%, 7/15/05 A2 25,000 25,951
First Bank NA
7.55%, 6/15/04 A2 18,000 19,503
First Bank System
7.625%, 5/1/05 A3 7,500 8,186
First Chicago Corp.
6.375%, 1/30/09 A2 20,000 19,806
First Union Corp.
6.00%, 10/30/08 A2 10,000 9,707
7.50%, 4/15/35 A2 11,000 12,159
</TABLE>
<TABLE>
<CAPTION>
The Portfolio listings begin on the following pages:
<S> <C>
LONG-TERM U.S. TREASURY PORTFOLIO . . . . . . . . . . . . . . 1
LONG-TERM CORPORATE PORTFOLIO . . . . . . . . . . . . . . . . 1
HIGH YIELD CORPORATE PORTFOLIO . . . . . . . . . . . . . . . 5
INTERMEDIATE-TERM CORPORATE PORTFOLIO . . . . . . . . . . . . 9
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO . . . . . . . . . . 13
SHORT-TERM FEDERAL PORTFOLIO . . . . . . . . . . . . . . . . 14
SHORT-TERM U.S. TREASURY PORTFOLIO . . . . . . . . . . . . . 16
SHORT-TERM CORPORATE PORTFOLIO . . . . . . . . . . . . . . . 17
</TABLE>
1
<PAGE> 49
<TABLE>
<CAPTION>
Face Market
LONG-TERM Rating(1) Amount Value
CORPORATE PORTFOLIO (continued) (Moody's) (000) (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
General Electric Capital Corp.
8.125%, 5/15/12 Aaa $ 42,000 $ 48,683
General Electric
Capital Services
7.50%, 8/21/35 Aaa 10,960 12,279
General Motors Acceptance
Corp. MTN
8.50%, 1/1/03 A3 15,000 16,956
General RE Corp.
9.00%, 9/12/09 Aa1 15,000 18,520
Golden West Financial Corp.
6.00%, 10/1/03 A3 25,000 24,523
National City Corp.
7.20%, 5/15/05 A2 20,000 21,290
NationsBank Corp.
7.25%, 10/15/25 A3 20,000 20,708
7.75%, 8/15/04 A3 20,000 21,952
7.75%, 8/15/15 A3 10,000 10,966
Republic New York Corp.
9.70%, 2/1/09 A1 20,000 25,666
Society National Bank
7.85%, 11/1/02 A1 7,500 8,176
SunTrust Banks, Inc.
7.375%, 7/1/02 A1 10,000 10,716
Transamerica Corp.
9.375%, 3/1/08 A2 10,000 12,409
Wachovia Bank
6.605%, 10/1/25 A1 30,000 30,978
Wachovia Corp.
6.80%, 6/1/05 A1 20,000 20,851
Wells Fargo & Co.
6.125%, 11/1/03 A3 20,000 19,802
----------
GROUP TOTAL 692,283
----------
- -----------------------------------------------------------------------------------------
INDUSTRIAL (41.2%)
ARCO Chemical Co.
9.80%, 2/1/20 A3 25,000 33,606
Air Products & Chemicals, Inc.
7.375%, 5/1/05 A1 15,000 16,421
8.75%, 4/15/21 A1 7,750 9,608
Amoco Canada Petroleum Co.
7.95%, 10/1/22 Aa1 30,000 33,239
Browning-Ferris Industries, Inc.
6.375%, 1/15/08 A2 15,000 15,195
7.40%, 9/15/35 A2 30,000 31,987
Burlington Northern
Santa Fe Corp.
6.375%, 12/15/05 Baa2 12,500 12,539
Burlington Resources, Inc.
7.15%, 5/1/99 A3 10,000 10,458
CPC International, Inc.
6.15%, 1/15/06 A2 20,000 20,164
The Coca-Cola Co.
6.00%, 7/15/03 Aa3 15,000 15,011
Coca-Cola Enterprises, Inc.
8.50%, 2/1/22 A3 20,000 24,063
E.I. du Pont de Nemours & Co.
8.25%, 1/15/22 Aa3 35,000 38,535
Eastman Chemical Co.
7.25%, 1/15/24 A3 20,000 20,880
Eaton Corp.
6.50%, 6/1/25 A2 10,000 10,287
7.625%, 4/1/24 A2 15,000 16,486
Exxon Capital Corp. Euro Bond
6.125%, 9/8/08 Aaa 5,000 5,000
Ford Motor Co.
8.875%, 1/15/22 A1 40,000 48,956
General Motors Corp.
7.40%, 9/1/25 A3 20,000 21,186
9.40%, 7/15/21 A3 20,000 25,514
Georgia Pacific Corp.
8.625%, 4/30/25 Baa2 10,000 10,911
9.50%, 5/15/22 Baa2 10,000 11,545
9.875%, 11/1/21 Baa2 30,000 34,862
Hubbell Inc.
6.625%, 10/1/05 A2 10,000 10,422
International Business
Machines Corp.
8.375%, 11/1/19 A1 30,000 35,597
International Paper Co.
6.875%, 11/1/23 A3 10,000 9,855
8.125%, 6/15/24 A3 30,000 32,095
Johnson & Johnson
8.72%, 11/1/24 Aaa 30,000 35,262
Johnson Controls
8.20%, 6/15/24 A2 10,000 10,730
Eli Lilly & Co.
7.125%, 6/1/25 Aa3 45,000 47,825
McDonald's Corp.
7.05%, 11/15/25 Aa2 23,275 23,843
7.375%, 7/15/33 Aa2 8,500 8,952
The Mead Corp.
8.125%, 2/1/23 A3 15,000 15,855
Merck & Co.
6.30%, 1/1/26 Aaa 30,000 29,306
Mobil Corp.
8.625%, 8/15/21 Aa2 22,000 27,587
Monsanto Co.
8.20%, 4/15/25 A1 20,000 21,999
8.875%, 12/15/09 A1 20,000 24,558
Morton International, Inc.
9.25%, 6/1/20 A1 10,000 13,007
Motorola, Inc.
7.50%, 5/15/25 Aa3 50,000 55,654
</TABLE>
2
<PAGE> 50
<TABLE>
<CAPTION>
Face Market
Rating(1) Amount Value
(Moody's) (000) (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York Times
8.25%, 3/15/25 A1 $ 30,000 $ 33,121
Norfolk Southern Corp.
9.00%, 3/1/21 Aa3 15,000 19,145
Northrop Grumman Corp.
9.375%, 10/15/24 Baa3 20,000 22,156
Phillips Petroleum Co.
9.18%, 9/15/21 Baa1 25,000 29,037
PPG Industries, Inc.
9.00%, 5/1/21 A1 9,750 12,407
Procter & Gamble Co.
8.50%, 8/10/09 Aa2 10,000 12,014
9.36%, 1/1/21* Aa2 35,000 45,464
Raytheon Co.
7.375%, 7/15/25 A1 35,000 36,259
Rohm & Haas Co.
9.375%, 11/15/19 A1 10,000 11,941
9.80%, 4/15/20* A1 10,000 13,108
Sears, Roebuck & Co.
9.375%, 11/1/11 A2 20,000 24,936
Talisman Energy
7.125%, 6/1/07 Baa1 20,000 20,954
Texaco Capital Inc.
8.625%, 11/15/31 A1 13,000 16,205
9.75%, 3/15/20 A1 17,000 23,099
Union Pacific Corp.
7.00%, 2/1/16 A3 20,000 20,128
United Parcel Service
8.375%, 4/1/20 Aaa 40,000 48,816
United Technologies Corp.
8.875%, 11/15/19 A2 20,000 24,867
Westvaco Corp.
9.75%, 6/15/20 A1 15,000 20,105
Weyerhaeuser Co.
7.95%, 3/15/25 A2 12,000 13,814
8.50%, 1/15/25 A2 40,000 48,699
Whirlpool Corp.
9.10%, 2/1/08 A3 20,000 24,380
----------
GROUP TOTAL 1,389,655
----------
- -----------------------------------------------------------------------------------------
UTILITIES (19.6%)
AT&T Corp.
8.625%, 12/1/31 Aa3 40,000 45,412
BellSouth Telecommunications
7.00%, 10/1/25 Aaa 10,000 10,536
7.50%, 6/15/33 Aaa 35,000 36,715
Cincinnati Gas & Electric Co.
6.90%, 6/1/25 Baa1 16,000 17,227
7.20%, 10/1/23 A3 5,100 5,093
Coastal Corp.
7.75%, 10/15/35 Baa3 20,000 20,562
9.625%, 5/15/12 Baa3 20,000 23,910
Consolidated Edison Co. of
New York, Inc.
6.375%, 4/1/03 A1 20,000 20,211
Duke Power Co.
7.00%, 7/1/33 Aa2 10,000 10,009
Enron Corp.
6.875%, 10/15/07 Baa2 20,000 20,870
7.00%, 8/15/23 Baa2 8,000 7,844
GTE Florida, Inc.
6.31%, 12/15/02 A2 10,000 10,206
GTE Southwest Inc.
6.00%, 1/15/06 A2 10,000 9,971
Houston Lighting & Power
9.15%, 3/15/21 A2 20,000 25,271
Michigan Bell Telephone Co.
7.85%, 1/15/22 Aa1 20,000 23,211
New Jersey Bell Telephone Co.
8.00%, 6/1/22 Aaa 20,000 23,360
New York Telephone Co.
7.25%, 2/15/24 A2 20,000 20,005
9.375%, 7/15/31 A2 10,000 11,966
Northern Illinois Gas
7.26%, 10/15/25 Aa1 5,000 5,177
Northern States Power Corp.
7.125%, 7/1/25 A1 30,000 31,805
Oklahoma Gas & Electric Co.
7.30%, 10/15/25 A1 15,000 15,589
Pacific Bell Telephone Co.
7.125%, 3/15/26 Aa3 15,000 15,812
7.375%, 6/15/25 Aa3 10,000 10,381
Pacific Gas & Electric Co.
8.25%, 11/1/22 A2 25,000 28,153
8.375%, 5/1/25 A2 10,000 10,776
PacifiCorp
6.71%, 1/15/26 A2 10,000 10,012
PacifiCorp MTN
6.625%, 6/1/07 A2 10,000 10,324
Southern California Edison Co.
6.90%, 10/1/18 A2 6,000 5,917
Southern California Gas Co.
7.50%, 6/15/23 A2 20,000 20,656
Southwestern Bell
Telephone Co.
7.20%, 10/15/26 A1 32,500 33,690
7.25%, 7/15/25 A1 12,500 12,966
Southwestern Public Services
8.20%, 12/1/22 Aa2 12,500 13,708
Texas Utilities Electric Co.
9.75%, 5/1/21 Baa2 5,000 5,892
U S WEST Communications Group
6.875%, 9/15/33 Aa3 45,000 44,005
</TABLE>
3
<PAGE> 51
<TABLE>
<CAPTION>
Face Market
LONG-TERM Rating(1) Amount Value
CORPORATE PORTFOLIO (continued) (Moody's) (000) (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Virginia Electric & Power Co.
8.25%, 3/1/25 A2 $ 20,000 $ 22,289
8.625%, 10/1/24 A2 11,000 12,526
8.75%, 4/1/21 A2 10,000 11,068
----------
GROUP TOTAL 663,125
----------
- -----------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $2,466,557) 2,745,063
- -----------------------------------------------------------------------------------------
FOREIGN BONDS (4.2%)
- -----------------------------------------------------------------------------------------
Province of British Columbia
6.50%, 1/15/26 Aa2 30,000 29,752
European Investment Bank
9.125%, 6/1/02 Aaa 25,000 29,436
Province of Manitoba
6.125%, 1/19/04 A1 7,000 7,043
8.875%, 9/15/21 A1 10,000 12,643
Province of Nova Scotia
8.875%, 7/1/19 A3 9,500 11,374
9.50%, 2/1/19 A3 10,000 12,753
Province of Ontario
7.75%, 6/4/02 Aa3 15,000 16,526
Province of Saskatchewan
8.50%, 7/15/22 A3 19,000 22,825
- -----------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $135,630) 142,352
- -----------------------------------------------------------------------------------------
U.S. GOVERNMENT &
AGENCY OBLIGATIONS (11.3%)
- -----------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
8.14%, 9/29/04 10,000 10,880
Federal National Mortgage Association
15.50%, 10/1/12 12 14
Government National
Mortgage Association
6.50%, 11/15/23-5/15/24 90,675 90,164
Tennessee Valley Authority
6.875%, 12/15/43 25,000 24,832
U.S. Treasury Bond
8.125%, 8/15/19 45,000 56,165
U.S. Treasury Notes
5.75%, 8/15/03 75,000 76,089
7.125%, 2/29/00 115,000 122,977
- -----------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS
(Cost $360,814) 381,121
- -----------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.4%)
- -----------------------------------------------------------------------------------------
Repurchase Agreement
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
5.87%, 2/1/96
(Cost $48,089) $ 48,089 $ 48,089
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.2%)
(Cost $3,011,090) 3,316,625
- -----------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.8%)
Other Assets--Notes C and G 103,213
Liabilities--Note G (43,749)
----------
59,464
- -----------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------
Applicable to 357,851,645 outstanding
$.001 par value shares
(authorized 450,000,000 shares) $3,376,089
- -----------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.43
=========================================================================================
</TABLE>
+ See Note A to Financial Statements.
(1) Unaudited.
* The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
AT JANUARY 31, 1996,
- -----------------------------------------------------------------------------------------
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
---------- -----
<S> <C> <C>
PAID IN CAPITAL $3,042,862 $8.50
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED GAINS 27,692 .08
UNREALIZED APPRECIATION OF
INVESTMENTS--NOTE F 305,535 .85
- -----------------------------------------------------------------------------------------
NET ASSETS $3,376,089 $9.43
- -----------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 52
<TABLE>
<CAPTION>
Face Market
HIGH YIELD Rating(1) Amount Value
CORPORATE PORTFOLIO (Moody's) (000) (000)+
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS (88.6%)
- -------------------------------------------------------------------------------
AEROSPACE & DEFENSE (1.5%)
K & F Industries
13.75%, 8/1/01 B2 $ 16,357 $ 16,991
Northrop Grumman
9.375%, 10/15/24 Baa3 17,025 18,860
Wyman-Gordon Co.
10.75%, 3/15/03 B1 9,000 9,630
----------
GROUP TOTAL 45,481
----------
- -------------------------------------------------------------------------------
BASIC INDUSTRIES (12.6%)
American Standard, Inc.
9.875%, 6/1/01 B1 20,000 21,600
11.375%, 5/15/04 Ba3 20,000 22,200
Bell & Howell Co.
9.25%, 7/15/00 B1 8,000 8,200
Cincinnati milacron
8.375%, 3/15/04 Ba2 11,500 12,046
Coltec Industries
10.25%, 4/1/02 B3 19,000 19,712
Dominion Textile (USA), Inc.
8.875%, 11/1/03 Ba3 15,000 14,850
Envirosource, Inc.
9.75%, 6/15/03 B3 15,000 13,350
Essex Group
10.00%, 5/1/03 B1 17,000 17,127
EXIDE Corp.
10.00%, 4/15/05 B1 15,800 16,985
10.75%, 12/15/02 B1 15,000 16,200
JPS Automotive Products
11.125%, 6/15/01 B2 8,000 7,760
Koppers Industries, Inc.
8.50%, 2/1/04 B1 9,000 8,910
Lear Siegler Seating Corp.
8.25%, 2/1/02 B2 13,000 12,967
11.25%, 7/15/00 B1 10,730 11,293
Mark IV Industries, Inc.
8.75%, 4/1/03 Ba3 9,500 9,975
Owens-Illinois, Inc.
10.00%, 8/1/02 B2 22,000 23,320
10.25%, 4/1/99 B2 23,000 23,719
11.00%, 12/1/03 Ba3 35,000 39,638
Portola Packaging Inc.
10.75%, 10/1/05 B2 6,000 6,240
Schuller International Group
10.875%, 12/15/04 Ba3 32,000 36,000
Specialty Equipment
11.375%, 12/1/03 B3 16,500 17,284
UCAR Global Enterprises
12.00%, 1/15/05 B2 8,000 9,360
Wolverine Tube, Inc.
10.125%, 9/1/02 Ba3 9,000 9,541
----------
GROUP TOTAL 378,277
----------
- -------------------------------------------------------------------------------
CABLE (11.1%)
Cablevision System Corp.
9.25%, 11/1/05 B3 25,000 26,187
9.875%, 2/15/13 B3 15,000 16,050
Comcast Corp.
9.125%, 10/15/06 B1 25,000 26,000
9.375%, 5/15/05 B1 24,000 25,200
9.50%, 1/15/08 B1 18,750 19,875
10.625%, 7/15/12 B1 30,000 34,200
Continental Cablevision
8.625%, 8/15/03 Ba2 2,250 2,340
8.875%, 9/15/05 Ba2 12,500 13,156
9.00%, 9/1/08 Ba2 30,000 31,800
11.00%, 6/1/07 B1 15,000 16,800
Galaxy Telecom L.P.
12.375%, 10/1/05 B3 12,000 12,780
Le Groupe Videotron LTEE
10.625%, 2/15/05 Ba3 5,000 5,463
Lenfest Communications Inc.
8.375%, 11/1/05 Ba3 35,000 35,175
Rogers Cablesystem
9.625%, 8/1/02 Ba3 12,000 12,870
Tele-Communications Inc.
8.75%, 2/15/23 Baa3 21,000 21,980
9.25%, 1/15/23 Baa3 30,750 33,299
----------
GROUP TOTAL 333,175
----------
- -------------------------------------------------------------------------------
CHEMICALS (4.3%)
Agricultural Mineral
& Chemical
10.75%, 9/30/03 Ba3 15,000 16,500
Arcadian Partner
10.75%, 5/1/05 B2 30,000 33,300
Borden Chemical
9.50%, 5/1/05 Ba2 20,000 20,700
Buckeye Cellulose Corp.
8.50%, 12/15/05 Ba3 10,150 10,607
General Chemical
9.25%, 8/15/03 B2 10,000 10,100
Sherritt Gordon
10.50%, 3/31/14 B1 9,000 10,316
UCC Investors Holdings
11.00%, 5/1/03 B3 27,000 27,810
----------
GROUP TOTAL 129,333
----------
- -------------------------------------------------------------------------------
COMPUTERS & ELECTRONIC
EQUIPMENT (.5%)
Digital Equipment Corp.
7.125%, 10/15/02 Ba1 15,000 15,195
----------
- -------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 53
<TABLE>
<CAPTION>
Face Market
HIGH YIELD CORPORATE Rating(1) Amount Value
PORTFOLIO (continued) (Moody's) (000) (000)+
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER GOODS & SERVICES (3.9%)
Dr. Pepper Bottling Co.
10.25%, 2/15/00 B3 $ 5,650 $ 5,989
Kinder Care Learning
Centers Inc.
10.375%, 6/1/01 Ba3 10,000 10,625
Playtex Family Products
9.00%, 12/15/03 B2 20,000 18,450
Sweetheart Cup
9.625%, 9/1/00 Ba3 19,000 19,950
10.50%, 9/1/03 B2 11,000 11,440
Westpoint Stevens
8.75%, 12/15/01 B1 30,000 30,375
9.375%, 12/15/05 B3 20,000 20,050
----------
GROUP TOTAL 116,879
----------
- -------------------------------------------------------------------------------
ENERGY & RELATED GOODS
& SERVICES (2.5%)
Energy Ventures Inc.
10.25%, 3/15/04 B1 2,875 3,033
Georgia Gulf Corp.
7.625%, 11/15/05 Ba1 4,550 4,613
Maxus Energy Corp.
9.375%, 11/1/03 B1 15,000 15,150
Noble Drilling Corp.
9.25%, 10/1/03 Ba3 5,000 5,300
Oryx Energy Co.
8.00%, 10/15/03 Ba3 10,000 10,163
8.125%, 10/15/05 Ba3 15,000 15,281
Santa Fe Energy
Resources, Inc.
11.00%, 5/15/04 B1 10,000 10,800
Seagull Energy Corp.
8.625%, 8/1/05 B2 10,000 9,800
----------
GROUP TOTAL 74,140
----------
- -------------------------------------------------------------------------------
FINANCIAL SERVICES (2.6%)
American Reinsurance
10.875%, 9/15/04 Baa1 10,000 11,164
Anchor Bancorp Inc.
8.938%, 7/9/03 Ba3 10,000 10,400
Coast Federal Bank
13.00%, 12/31/02 Ba2 5,700 6,498
Coast Savings Financial, Inc.
10.00%, 3/1/00 Ba2 5,000 5,212
Dime Bancorp Inc.
10.50%, 11/15/05 Ba3 10,000 11,050
First Federal Financial
11.75%, 10/1/04 B2 5,000 4,850
Imperial Credit Industries
9.75%, 1/15/04 B1 7,500 7,125
Riggs National Corp.
8.50%, 2/1/06 Ba3 10,000 10,750
Western Financial Savings
8.50%, 7/1/03 Ba3 10,000 10,467
----------
GROUP TOTAL 77,516
----------
- -------------------------------------------------------------------------------
FOOD & LODGING (2.6%)
ARA Group, Inc.
8.50%, 6/1/03 Ba3 10,000 10,400
ARA Services, Inc.
10.625%, 8/1/00 Ba1 10,000 11,550
John Q. Hammons Hotel
8.875%, 2/15/04 B1 11,500 11,500
La Quinta Inns Inc.
9.25%, 5/15/03 Ba3 12,000 12,720
Purina Mills
10.25%, 9/1/03 B2 20,000 20,800
Red Roof Inns
9.625%, 12/15/03 B3 12,000 12,000
----------
GROUP TOTAL 78,970
----------
- -------------------------------------------------------------------------------
GROCERY STORES (3.1%)
Big V Supermarkets
11.00%, 2/15/04 B3 8,000 6,560
Brunos Inc.
10.50%, 8/1/05 B3 38,000 37,430
Eagle Food Centers, Inc.
8.625%, 4/15/00 B1 5,000 3,525
Kroger Co.
8.50%, 6/15/03 Ba1 15,000 15,900
Safeway, Inc.
9.65%, 1/15/04 Ba2 15,000 17,175
10.00%, 12/1/01 Ba2 10,000 11,325
----------
GROUP TOTAL 91,915
----------
- -------------------------------------------------------------------------------
HEALTH CARE (5.5%)
Abbey Healthcare
9.50%, 11/1/02 B1 8,000 8,600
Community Health Systems
10.25%, 11/30/03 B2 3,825 4,169
Grancare Inc.
9.375%, 9/15/05 B2 10,000 10,250
Manor Care, Inc.
9.50%, 11/15/02 Ba2 8,000 8,640
OrNda Healthcorp
11.375%, 8/15/04 B2 12,000 13,680
12.25%, 5/15/02 B2 18,000 19,845
Quorum Health Group
8.75%, 11/1/05 B1 5,000 5,300
Tenet Healthcare Corp.
10.125%, 3/1/05 Ba3 84,000 94,080
----------
GROUP TOTAL 164,564
----------
- -------------------------------------------------------------------------------
HOME BUILDING & REAL ESTATE (1.3%)
Triangle Pacific Corp.
10.50%, 8/1/03 B2 13,000 13,715
</TABLE>
6
<PAGE> 54
<TABLE>
<CAPTION>
Face Market
Rating(1) Amount Value
(Moody's) (000) (000)+
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
USG Corp.
8.50%, 8/1/05 Ba3 $ 3,750 $ 3,919
Del E. Webb & Co.
9.00%, 2/15/06 B2 10,000 9,600
10.875%, 3/31/00 Ba3 10,000 10,350
----------
GROUP TOTAL 37,584
----------
- -------------------------------------------------------------------------------
MEDIA & COMMUNICATIONS (13.1%)
CBS Inc.
7.625%, 1/1/02 Ba1 15,000 15,137
EZ Communications
9.75%, 12/1/05 B2 10,000 10,125
Infinity Broadcasting
10.375%, 3/15/02 Ba3 15,000 16,237
MobileMedia Corp.
9.375%, 11/1/07 B3 22,000 22,990
Paging Network of
America, Inc.
8.875%, 2/1/06 B2 19,000 19,665
10.125%, 8/1/07 B2 20,000 22,000
Rogers Cantel Mobile
10.75%, 11/1/01 Ba3 17,000 17,893
11.125%, 7/15/02 B2 20,000 21,625
Time Warner Inc.
7.48%, 7/15/08 Ba1 16,000 16,174
9.125%, 1/15/13 Ba1 30,000 33,478
9.15%, 2/1/23 Ba1 35,000 39,368
Turner Broadcasting System
7.40%, 2/1/04 Ba2 25,000 25,244
8.375%, 7/1/13 Ba2 25,000 25,393
Viacom International
8.00%, 7/7/06 B1 42,000 42,630
Westinghouse Electric Corp.
6.875%, 9/1/03 Ba1 13,000 12,587
8.375%, 6/15/02 Ba1 20,000 21,071
8.875%, 6/1/01 Ba1 9,700 10,317
World Color Press
9.125%, 3/15/03 B1 15,000 15,375
Young Broadcasting Corp.
11.75%, 11/14/04 B2 6,750 7,543
----------
GROUP TOTAL 394,852
----------
- -------------------------------------------------------------------------------
METAL (6.1%)
AK Steel Holding Corp.
10.75%, 4/1/04 Ba3 32,000 35,640
Acme Metals Inc.
12.50%, 8/1/02 B1 6,000 6,195
Algoma Steel Inc.
12.375%, 7/15/05 B1 10,000 9,200
Armco Steel
9.375%, 11/1/00 B2 12,000 12,000
11.375%, 10/15/99 B2 10,000 10,450
Bethlehem Steel Corp.
10.375%, 9/1/03 B1 10,500 11,288
GS Technologies Inc.
12.25%, 10/1/05 B2 12,500 12,562
Inland Steel
12.75%, 12/15/02 Ba3 13,000 14,820
Kaiser Aluminum International
9.875%, 2/15/02 B1 10,775 11,233
Magma Copper Co.
12.00%, 12/15/01 Ba3 10,000 11,075
Northwestern Steel & Wire
9.50%, 6/15/01 B1 11,500 11,270
Russel Metals Inc.
10.25%, 6/15/00 B3 7,000 6,808
Weirton Steel Corp.
10.875%, 10/15/99 B2 8,800 8,910
11.50%, 3/1/98 B2 7,000 7,175
Wheeling-Pittsburgh Corp.
9.375%, 11/15/03 B1 15,000 14,400
----------
GROUP TOTAL 183,026
----------
- -------------------------------------------------------------------------------
PAPER (13.0%)
Container Corp. of America
9.75%, 4/1/03 B1 50,000 49,750
10.75%, 5/1/00 B1 3,000 3,082
Doman Industries, Ltd.
8.75%, 3/15/04 Ba3 12,000 11,460
Domtar Inc.
11.75%, 3/15/99 Ba1 13,250 14,840
12.00%, 4/15/01 Ba1 8,945 10,577
Fort Howard Corp.
8.25%, 2/1/02 B1 10,000 9,750
9.00%, 2/1/06 B2 25,000 24,750
9.25%, 3/15/01 B1 49,500 51,232
Quno Corp.
9.125%, 5/15/05 Ba3 15,000 15,638
Rainy River Forest Products
10.75%, 10/15/01 Ba1 11,000 12,128
Repap New Brunswick
9.875%, 7/15/00 Ba3 10,000 10,100
10.625%, 4/15/05 B2 35,000 33,863
Repap Wisconsin
9.875%, 5/1/06 B3 15,000 14,288
SD Warren Co.
12.00%, 12/15/04 B1 37,500 40,500
Stone Consolidated Corp.
10.25%, 12/12/00 Ba1 10,000 10,750
Stone Container Corp.
9.875%, 2/1/01 B1 70,000 67,725
10.75%, 4/1/02 B2 12,150 11,663
----------
GROUP TOTAL 392,096
----------
- -------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 55
<TABLE>
<CAPTION>
Face Market
HIGH YIELD CORPORATE Rating(1) Amount Value
PORTFOLIO (continued) (Moody's) (000) (000)+
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
TRANSPORTATION (.7%)
Southern Pacific Railroad
9.375%, 8/15/05 Ba3 $ 20,225 $ 21,843
----------
- -------------------------------------------------------------------------------
UTILITIES (4.1%)
Cleveland Electrical
Illumination
9.50%, 5/15/05 Ba2 24,225 25,254
First Public Venture Funding
10.15%, 1/15/16 B1 20,000 20,700
Long Island Lighting Co.
9.00%, 11/1/22 Ba1 20,000 19,948
Midland Cogeneration Venture
11.75%, 7/23/05 B2 25,000 26,491
Niagara Mohawk Power Corp.
6.625%, 7/1/05 Ba1 10,000 8,976
6.875%, 4/1/03 Ba1 10,000 9,342
Texas-New Mexico Power
10.75%, 9/15/03 B1 13,000 13,845
----------
GROUP TOTAL 124,556
----------
- -------------------------------------------------------------------------------
OTHER--INDUSTRIAL (.1%)
Great Lakes Carbon Corp.
10.00%, 1/1/06 Ba3 4,200 4,368
----------
- -------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $2,559,685) 2,663,770
- -------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS (5.1%)
- -------------------------------------------------------------------------------
U.S. TREASURY NOTES
4.75%, 9/30/98 50,000 49,656
6.25%, 5/31/00 50,000 51,953
6.75%, 5/31/99 50,000 52,469
- -------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $150,075) 154,078
- -------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.8%)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
5.87%, 2/1/96
(Cost $144,698) 144,698 144,698
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.5%)
(Cost $2,854,458) 2,962,546
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.5%)
- -------------------------------------------------------------------------------
Other Assets--Notes C and G 112,368
Liabilities--Note G (68,335)
----------
44,033
- -------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------
Applicable to 380,865,068 outstanding
$.001 par value shares
(authorized 450,000,000 shares) $3,006,579
- -------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $7.89
===============================================================================
</TABLE>
+ See Note A to Financial Statements.
(1) Unaudited.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AT JANUARY 31, 1996,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
AMOUNT PER
(000) SHARE
---------- -----
<S> <C> <C>
PAID IN CAPITAL $3,003,774 $7.89
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED LOSSES--NOTE E (105,283) (.28)
UNREALIZED APPRECIATION OF
INVESTMENTS--NOTE F 108,088 .28
- ----------------------------------------------------------------
NET ASSETS $3,006,579 $7.89
- ----------------------------------------------------------------
</TABLE>
8
<PAGE> 56
<TABLE>
<CAPTION>
Face Market
INTERMEDIATE-TERM Rating(1) Amount Value
CORPORATE PORTFOLIO (Moody's) (000) (000)+
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS (73.1%)
- -------------------------------------------------------------------------------
ASSET BACKED SECURITIES (1.4%)
Ford Credit Auto Loan
Master Trust
6.50%, 8/15/02 Aaa $ 2,000 $ 2,070
Standard Credit Card
Master Trust
5.50%, 2/7/00 Aaa 2,000 2,007
8.25%, 11/7/03 Aaa 1,800 2,011
----------
GROUP TOTAL 6,088
----------
- -------------------------------------------------------------------------------
FINANCE--AUTOMOBILE (2.0%)
Ford Motor Credit Corp.
5.621%, 1/31/96(2) A1 1,000 1,001
6.25%, 12/8/05 A1 2,000 1,984
6.75%, 5/15/05 A1 1,000 1,028
7.50%, 1/15/03 A1 1,000 1,078
7.75%, 11/15/02 A1 1,000 1,094
General Motors
Acceptance Corp.
6.625%, 9/19/02 A3 2,000 2,056
----------
GROUP TOTAL 8,241
----------
- -------------------------------------------------------------------------------
FINANCE--BANKS (11.8%)
Banc One Corp.
9.875%, 3/1/09 A1 3,690 4,761
The Chase Manhattan Bank
8.00%, 6/15/99 A2 3,000 3,217
Chemical Banking Corp.
10.125%, 11/1/00 A2 1,500 1,765
CoreStates Capital Corp.
9.625%, 2/15/01 A2 2,500 2,910
First Interstate Bancorp
9.90%, 11/15/01 A3 3,000 3,571
10.875%, 4/15/01 A3 1,000 1,220
First Union Corp.
7.05%, 8/1/05 A3 2,000 2,109
MBNA America
7.25%, 9/15/02 A3 1,000 1,059
Meridian Bancorp
6.625%, 3/15/03 Baa1 3,000 3,089
NBD Bancorp
8.10%, 3/1/02 A2 5,000 5,544
National City Corp.
7.20%, 5/15/05 A2 2,500 2,661
NationsBank Corp.
6.875%, 2/15/05 A3 3,000 3,130
8.125%, 6/15/02 A3 3,000 3,328
Republic New York Corp.
7.75%, 5/15/09 A1 1,500 1,683
Security Pacific Corp.
11.00%, 3/1/01 A3 3,000 3,674
Union Planters Corp.
6.25%, 11/1/03 Baa3 3,000 2,975
UJB financial
8.625%, 12/10/02 Baa3 3,000 3,398
----------
GROUP TOTAL 50,094
----------
- -------------------------------------------------------------------------------
FINANCE--CONSUMERS (4.1%)
Beneficial Corp.
6.80%, 9/10/99 A2 1,000 1,036
10.10%, 11/27/00 A2 3,000 3,535
Commercial Credit Co.
7.375%, 4/15/05 A1 5,000 5,402
Fleet Mortgage Group
6.50%, 9/15/99 A3 1,000 1,027
Norwest Financial, Inc.
6.875%, 12/15/99 Aa3 1,000 1,044
7.50%, 4/15/05 Aa3 5,000 5,454
----------
GROUP TOTAL 17,498
----------
- -------------------------------------------------------------------------------
FINANCE--DIVERSIFIED (2.3%)
Associates Corp. of North America
7.54%, 4/14/04 Aa3 3,000 3,259
7.875%, 9/30/01 Aa3 2,000 2,195
Caterpillar Financial Services
6.075%, 5/9/97(2) A2 1,000 1,001
Comdisco Inc.
6.50%, 6/15/00 Baa2 2,000 2,048
General Electric Capital Corp.
8.70%, 2/15/03 Aaa 1,000 1,162
----------
GROUP TOTAL 9,665
----------
- -------------------------------------------------------------------------------
FINANCE--INSURANCE (2.1%)
Harleysville Group
6.75%, 11/15/03 Baa2 1,000 1,007
Horance Mann
Educators Corp.
6.625%, 1/15/06 A3 3,500 3,542
Progressive Corp.
6.60%, 1/15/04 A3 1,000 1,019
USF&G Corp.
8.375%, 6/15/01 Baa2 3,000 3,323
----------
GROUP TOTAL 8,891
----------
- -------------------------------------------------------------------------------
FINANCE--OTHER (5.2%)
Bear Stearns Co.
6.75%, 4/15/03 A2 2,000 2,057
Dean Witter Discover & Co.
6.30%, 1/15/06 A2 5,000 5,003
Donaldson Lufkin
& Jenrette Inc.
6.875%, 11/1/05 Baa1 3,000 3,086
Goldman Sachs Group
7.80%, 7/15/02 A1 1,000 1,082
</TABLE>
9
<PAGE> 57
<TABLE>
<CAPTION>
INTERMEDIATE- Face Market
TERM CORPORATE Rating(1) Amount Value
PORTFOLIO (continued) (Moody's) (000) (000)+
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Lehman Brothers
8.75%, 3/15/05 Baa1 $ 3,000 $ 3,405
Morgan Stanley Group
8.875%, 10/15/01 A1 1,350 1,538
9.375%, 6/15/01 A1 1,000 1,157
Smith Barney Holdings
6.875%, 6/15/05 A3 1,000 1,034
7.50%, 5/1/02 A3 3,500 3,754
----------
GROUP TOTAL 22,116
----------
- -------------------------------------------------------------------------------
INDUSTRIAL (33.4%)
American Airlines
9.71%, 1/2/07* A3 4,929 5,718
American Stores
7.40%, 5/15/05 Baa3 3,000 3,223
9.125%, 4/1/02 Baa3 4,000 4,612
Anheuser Busch Co.
6.75%, 6/1/05 A1 2,000 2,064
8.75%, 12/1/99 A1 2,300 2,554
Applied Materials
8.00%, 9/1/04 Baa3 2,000 2,218
BP America, Inc.
8.50%, 4/15/01 A1 2,668 3,002
The Boeing Co.
8.10%, 11/15/06 A1 2,000 2,314
CSC Enterprises
6.80%, 4/15/99 A3 1,000 1,033
CSX Corp.
9.50%, 8/1/00 A3 1,000 1,143
Cardinal Health Inc.
6.00%, 1/15/06 A3 4,500 4,441
6.50%, 2/15/04 A3 1,000 1,019
The Coca-Cola Co.
7.875%, 9/15/98 Aa3 1,301 1,380
COMPAQ Computer Corp.
7.25%, 3/15/04 Baa2 3,500 3,706
Cox Communications, Inc.
6.50%, 11/15/02 Baa2 2,000 2,050
Delta Airlines
(Pass-Through Certificates)
8.54%, 1/2/07* Baa2 3,048 3,352
R. R. Donnelley & Sons Co.
7.96%, 11/8/99 Aa3 2,000 2,155
Eastman Chemical Co.
6.375%, 1/15/04 A3 1,500 1,522
Electronic Data Systems Corp.
6.85%, 5/15/00 A1 2,000 2,090
Federal Express
9.875%, 4/1/02 Baa2 2,000 2,382
10.125%, 7/15/03 Baa2 2,000 2,442
General Motors Corp.
8.875%, 6/11/01 A3 1,000 1,134
9.22%, 7/18/01 A3 1,000 1,152
9.625, 12/1/00 A3 3,000 3,472
Hoechst-Celanese
6.125%, 2/1/04 A2 2,000 1,999
IBP Inc.
6.125%, 2/1/06 A3 4,000 3,987
Jet Equipment Trust
7.63%, 2/15/15* A1 3,000 3,297
Knight-Ridder
9.875%, 4/15/09 A1 4,750 6,285
Eli Lilly & Co.
8.375%, 12/1/06 Aa3 2,000 2,363
Lockheed Corp.
9.375%, 10/15/99 A3 1,125 1,266
McDonnell Douglas
9.25%, 4/1/02 Baa2 2,000 2,335
Mobil Corp.
7.25%, 3/15/99 Aa2 2,000 2,102
News America Holdings
8.50%, 2/15/05 Baa3 5,000 5,621
Occidental Petroleum
10.125%, 11/15/01 Baa3 3,000 3,597
J.C. Penney & Co., Inc.
6.00%, 5/1/06 A1 1,000 967
9.05%, 3/1/01 A1 1,240 1,420
PepsiCo, Inc.
7.48%, 4/27/02 A1 2,000 2,074
Philips Petroleum Co.
8.00%, 4/12/99 Baa1 1,000 1,067
9.00%, 6/1/01 Baa1 1,000 1,140
Praxair
6.85%, 6/15/05 A3 1,000 1,040
Price/Costco
7.125%, 6/15/05 Baa1 3,500 3,654
Quaker State
6.625%, 10/15/05 Baa1 2,000 2,042
Rockwell International
8.375%, 2/15/01 Aa3 2,361 2,633
Sears Roebuck & Co.
8.52%, 5/13/02 A2 1,000 1,130
Southern Pacific
Transportation Co.
8.66%, 7/2/11* Baa1 1,897 2,204
Tenneco Corp.
10.00%, 3/15/08 Baa2 2,000 2,567
Texaco Capital Corp.
7.70%, 12/15/99 A1 1,065 1,144
Texas Instruments
6.125%, 2/1/06 A3 3,000 2,989
9.00%, 3/15/01 A3 1,600 1,819
9.25%, 6/15/03 A3 2,000 2,364
Timken Co.
7.30%, 8/13/02 A3 2,500 2,678
Union Carbide Corp.
7.00%, 8/1/99 Baa2 2,000 2,078
</TABLE>
10
<PAGE> 58
<TABLE>
<CAPTION>
Face Market
Rating(1) Amount Value
(Moody's) (000) (000)+
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Union Pacific Railroad Co.
(Equipment Trust
Certificates)
6.12%, 2/1/04 Aa2 $ 2,000 $ 1,973
Upjohn Co. Employee
Stock Ownership Trust
9.79%, 2/1/04* A1 7,195 8,465
Wal-Mart Stores, Inc.
5.875%, 10/15/05 Aa1 1,000 986
Western Atlas, Inc.
7.875%, 6/15/04 Baa1 2,000 2,213
----------
GROUP TOTAL 141,677
----------
- -------------------------------------------------------------------------------
UTILITIES (10.8%)
Arizona Public Service
8.125%, 3/15/02 Baa1 4,000 4,434
BellSouth Telecommunications
6.50%, 2/1/00 Aaa 2,000 2,066
Chesapeake & Potomac
Telephone Co. (MD)
6.00%, 5/1/03 Aa3 2,000 2,009
Cincinnati Gas & Electric
7.25%, 9/1/02 A3 1,500 1,603
Delmarva Power & Light
6.40%, 7/1/03 A2 5,000 5,056
GTE North Inc.
5.50%, 2/15/99 A1 1,000 1,001
GTE Northwest Inc.
7.375%, 5/1/01 A3 4,000 4,284
MCI Communications Corp.
7.50%, 8/20/04 A2 1,500 1,634
New Jersey Telephone Co.
5.875%, 2/1/04 Aaa 1,000 993
Panhandle Eastern Corp.
7.25%, 5/15/05 Baa2 5,000 5,297
Pennsylvania Power & Light
6.875%, 3/1/04 A3 5,000 5,182
Southwestern Bell Telephone
5.77%, 10/14/03 A1 6,000 5,915
Texas Utilities Co.
6.27%, 2/1/00 Baa2 3,000 3,046
U S WEST
Communications Group
6.375%, 10/15/02 Aa3 3,000 3,090
----------
GROUP TOTAL 45,610
----------
- -------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $297,308) 309,880
- -------------------------------------------------------------------------------
U.S. GOVERNMENT &
AGENCY OBLIGATIONS (6.1%)
- -------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSN.
5.82%, 11/4/03 2,900 2,864
(Collateralized Mortgage Obligations)
6.90%, 12/25/03* 1,622 1,674
GUARANTEED TRADE TRUST
(U.S. Government Guaranteed)
8.17%, 1/15/07* 4,583 5,108
U.S. TREASURY BOND
10.375%, 11/15/12 5,700 7,870
U.S. TREASURY NOTES
5.625%, 11/30/00 5,000 5,074
6.50%, 8/15/05 3,000 3,193
- -------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS
(Cost $23,868) 25,783
- -------------------------------------------------------------------------------
FOREIGN BONDS (16.4%)
- -------------------------------------------------------------------------------
ABN AMRO Holding NV
7.25%, 5/31/05 Aa2 5,000 5,359
Aegon NV
8.00%, 8/15/06 A1 5,000 5,651
Australia & New Zealand
Banking Group Ltd.
6.25%, 2/1/04 A2 1,000 998
Bank of Nova Scotia
6.25%, 9/15/08 A1 1,000 986
Bayer Corp.
6.50%, 10/1/02 Aa2 6,000 6,229
Bayerische Landesbank
Girozentrale
6.375%, 10/15/05 Aaa 2,000 2,038
British Telecom Finance Inc.
9.375%, 2/15/99 Aaa 3,500 3,883
Dresdner Bank
Aktiengesellschaft
6.625%, 9/15/05 Aa1 5,000 5,188
KFW International Finance
8.20%, 6/1/06 Aaa 3,750 4,367
Province of Manitoba
7.75%, 2/1/02 A1 4,000 4,388
8.75%, 5/15/01 A1 3,000 3,406
Methanex Corp.
7.40%, 8/15/02 BBB+(3) 4,000 4,203
Noranda, Inc.
8.00%, 6/1/03 Baa2 1,500 1,647
8.125%, 6/15/04 Baa2 1,510 1,672
8.625%, 7/15/02 Baa2 1,000 1,130
Philips Electronics NV
8.375%, 9/15/06 A3 2,000 2,302
</TABLE>
11
<PAGE> 59
<TABLE>
<CAPTION>
INTERMEDIATE- Face Market
TERM CORPORATE Rating(1) Amount Value
PORTFOLIO (continued) (Moody's) (000) (000)+
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Placer Dome
7.125%, 5/15/03 Baa2 $ 5,000 $ 5,203
Republic of Portugal
5.75%, 10/8/03 A1 2,000 1,991
Province of Saskatchewan
7.125%, 3/15/08 A3 2,000 2,135
Swiss Bank Corp.
6.75%, 7/15/05 Aa2 4,000 4,175
Toronto-Dominion Bank
6.45%, 1/15/09 Aa3 2,500 2,514
- -------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $65,441) 69,465
- -------------------------------------------------------------------------------
TAXABLE MUNICIPAL SECURITIES (.8%)
- -------------------------------------------------------------------------------
Dade County Aviation
8.60%, 10/1/02 Aaa 2,000 2,265
Mississippi Business Finance
Corp. (Guaranteed by
Kimberly-Clark)
7.55%, 6/1/04 Aa2 1,000 1,083
- -------------------------------------------------------------------------------
TOTAL TAXABLE MUNICIPAL SECURITIES
(Cost $3,000) 3,348
- -------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.1%)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.87%, 2/1/96
(Cost $13,291) 13,291 13,291
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(Cost $402,908) 421,767
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.5%)
Other Assets--Notes C and G 14,144
Liabilities--Note G (11,974)
----------
2,170
- -------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------
Applicable to 41,686,351 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $423,937
- -------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.17
===============================================================================
</TABLE>
+ See Note A to Financial Statements.
(1) Unaudited.
(2) Floating Rate Notes.
(3) Rated by Standard & Poor's.
* The average maturity is shorter than the final maturity shown due to
scheduled interim principle payments.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AT JANUARY 31, 1996,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- -------
<S> <C> <C>
PAID IN CAPITAL $404,149 $ 9.70
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED GAINS 929 .02
UNREALIZED APPRECIATION OF
INVESTMENTS--NOTE F 18,859 .45
- ----------------------------------------------------------------
NET ASSETS $423,937 $10.17
- ----------------------------------------------------------------
</TABLE>
12
<PAGE> 60
<TABLE>
<CAPTION>
Face Market
INTERMEDIATE-TERM Amount Value
U.S. TREASURY PORTFOLIO (000) (000)+
- ---------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (96.3%)
- ---------------------------------------------------------------
U.S. TREASURY BONDS
10.375%, 11/15/12 $218,950 $ 302,287
10.75%, 2/15/03 4,000 5,211
10.75%, 5/15/03 26,100 34,203
11.125%, 8/15/03 9,000 12,067
11.625%, 11/15/02 58,250 78,565
11.625%, 11/15/04 27,300 38,578
11.875%, 11/15/03 20,700 28,877
U.S. TREASURY NOTES
5.75%, 8/15/03 33,700 34,190
5.875%, 3/31/99 40,000 40,938
6.25%, 2/15/03 28,300 29,600
6.875%, 8/31/99 8,500 8,969
7.25%, 5/15/04 140,484 155,981
7.25%, 8/15/04 6,000 6,673
7.50%, 11/15/01 107,509 118,965
7.75%, 12/31/99 52,000 56,672
7.875%, 8/15/01 5,000 5,610
7.875%, 11/15/04 5,000 5,780
8.875%, 2/15/99 14,000 15,477
AGENCY FOR INTERNATIONAL
DEVELOPMENT
(U.S. Government Guaranteed)
5.25%, 9/15/00 5,000 4,941
GOVERNMENT EXPORT TRUST
(U.S. Government Guaranteed)
6.00%, 3/15/05* 19,271 19,501
7.46%, 12/15/05* 33,478 36,058
8.21%, 2/27/02* 30,178 33,821
GUARANTEED TRADE TRUST
(U.S. Government Guaranteed)
7.02%, 9/1/04* 15,938 16,751
7.39%, 6/26/06* 5,373 5,763
7.80%, 8/15/06* 9,865 10,774
8.17%, 1/15/07* 8,250 9,194
OVERSEAS PRIVATE INVESTMENT CORP.
(U.S. Government Guaranteed)
5.735%, 1/15/02* 22,800 22,913
5.94%, 6/20/06* 20,000 20,126
6.08%, 8/15/04* 22,500 22,854
- ---------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost $1,112,770) 1,181,339
- ---------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.7%)
- ---------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.87%, 2/1/96
(Cost $32,499) 32,499 32,499
- ---------------------------------------------------------------
TOTAL INVESTMENTS (99.0%)
(Cost $1,145,269) 1,213,838
- ---------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.0%)
- ---------------------------------------------------------------
Other Assets--Notes C and G 21,679
Liabilities--Note G (9,157)
----------
12,522
- ---------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------
Applicable to 112,463,848 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $1,226,360
- ---------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.90
===============================================================
</TABLE>
+ See Note A to Financial Statements.
* The average maturity is shorter than the final maturity shown due to scheduled
interim principal payments.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AT JANUARY 31, 1996,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
AMOUNT PER
(000) SHARE
---------- ------
<S> <C> <C>
PAID IN CAPITAL $1,186,623 $10.55
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED LOSSES--NOTE E (28,832) (.26)
UNREALIZED APPRECIATION
OF INVESTMENTS--NOTE F 68,569 .61
- ----------------------------------------------------------------
NET ASSETS $1,226,360 $10.90
- ----------------------------------------------------------------
</TABLE>
13
<PAGE> 61
<TABLE>
<CAPTION>
Face Market
SHORT-TERM Amount Value
FEDERAL PORTFOLIO (000) (000)+
- ---------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (98.8%)
- ---------------------------------------------------------------
AGENCY FOR INTERNATIONAL
DEVELOPMENT (ISRAEL)
(U.S. Government Guaranteed)
7.75%, 4/1/98* $14,925 $ 15,278
FEDERAL HOME LOAN BANK
5.00%, 10/20/00 31,000 30,549
5.05%, 3/1/99 8,330 8,326
5.215%, 7/8/98 4,750 4,724
5.362%, 7/25/00(1) 25,000 24,750
5.43%, 2/25/99 10,000 10,052
6.37%, 6/30/97 12,000 12,212
7.64%, 9/21/98 19,900 20,964
8.25%, 5/27/96 5,000 5,046
FEDERAL HOME LOAN MORTGAGE CORP.
6.40%, 8/1/00 15,000 15,577
6.905%, 4/13/98 25,000 25,910
(Collateralized Mortgage
Obligations)
6.50%, 3/15/00* 27,061 27,501
(Pooled Mortgage Notes)
5.50%, 8/1/98 5,064 5,051
5.50%, 5/1/99 9,878 9,880
5.50%, 11/1/00 16,431 16,405
5.50%, 1/1/01 12,977 12,924
6.00%, 7/1/98 12,433 12,542
6.00%, 9/1/98 31,599 31,836
6.00%, 10/1/98 24,655 24,870
6.00%, 1/1/99 7,139 7,209
6.00%, 3/1/99 8,095 8,171
6.00%, 5/1/00 11,349 11,463
6.00%, 9/1/00 12,027 12,147
6.00%, 11/1/00 49,729 50,133
6.50%, 10/1/97 9,424 9,503
FEDERAL NATIONAL MORTGAGE ASSN.
4.70%, 9/10/98 36,200 35,693
4.94%, 10/30/98 20,000 19,800
5.10%, 4/28/98 6,000 5,995
5.23%, 11/25/98 67,535 67,197
5.33%, 6/26/98 17,535 17,573
5.39%, 8/5/98 80,000 79,880
6.08%, 9/25/00 10,000 10,253
7.00%, 7/13/98 82,150 85,436
7.23%, 9/15/99 15,000 15,945
7.80%, 6/10/02 18,200 18,803
8.15%, 8/12/96 15,000 15,232
8.15%, 5/11/98 25,000 26,578
8.45%, 7/12/99 17,845 19,607
8.50%, 6/10/96 5,000 5,058
8.50%, 2/1/05 17,000 18,708
8.65%, 2/10/98 6,000 6,403
11.50%, 11/1/99 46,000 55,375
(Collateralized Mortgage
Obligations)
0.00%, 12/25/15* 160 160
5.50%, 9/25/00* 23,361 23,299
5.50%, 8/25/02* 32,551 32,520
6.90%, 12/25/03* 5,418 5,590
7.00%, 3/25/18* 535 533
7.50%, 3/25/05* 6,227 6,243
(Pooled Mortgage Notes)
6.00%, 1/1/01 24,936 25,096
U.S. TREASURY NOTES
5.875%, 3/31/99 8,000 8,187
6.75%, 5/31/99 6,000 6,296
6.875%, 8/31/99 10,000 10,552
7.75%, 12/31/99 5,000 5,449
BANAMEX EXPORT FUNDING CORP.
(U.S. Government Guaranteed)
4.91%, 10/15/98* 22,014 21,832
6.46%, 4/15/99* 17,010 17,264
BANCO NACIONAL DE
COMERCIO EXTERIOR
(U.S. Government Guaranteed)
5.10%, 4/15/98* 5,755 5,738
5.295%, 10/15/97* 10,620 10,617
5.48%, 10/15/97* 5,400 5,402
5.95%, 4/15/97* 5,100 5,126
6.82%, 4/15/99* 3,910 4,004
8.038%, 1/15/00* 12,000 12,656
BANK LEUMI LE-ISRAEL
(U.S. Export Finance--
U.S. Government Guaranteed)
8.375%, 2/10/96 551 551
GOVERNMENT EXPORT TRUST
(U.S. Government Guaranteed)
4.61%, 9/1/98* 14,400 14,281
4.85%, 11/1/97* 14,000 13,943
5.41%, 3/1/99* 6,204 6,212
5.69%, 2/1/98* 16,309 16,373
5.79%, 1/1/97* 3,363 3,373
GUARANTEED EXPORT CERTIFICATES
(U.S. Government Guaranteed)
4.43%, 6/15/98* 17,367 17,174
4.743%, 9/15/98* 2,254 2,238
4.813%, 12/15/98* 11,781 11,698
6.61%, 9/15/99* 19,174 19,583
GUARANTEED TRADE TRUST
(U.S. Government Guaranteed)
4.86%, 4/1/98* 7,900 7,862
OVERSEAS PRIVATE INVESTMENT CORP.
(U.S. Government Guaranteed)
7.815%, 11/15/01* 7,500 7,972
8.75%, 11/15/01* 11,250 12,247
</TABLE>
14
<PAGE> 62
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ---------------------------------------------------------------
<S> <C> <C>
PRIVATE EXPORT FUNDING CORP.
(U.S. Government Guaranteed)
5.75%, 4/30/98 $ 9,800 $ 9,914
7.125%, 10/31/96 10,000 10,137
8.95%, 10/31/97 7,575 8,057
9.45%, 12/31/99 33,580 38,278
U.S. EXIM TRUST
(U.S. Government Guaranteed)
5.20%, 8/25/97* 14,400 14,368
U.S. GOVERNMENT TRUST CERTIFICATES
(U.S. Government Guaranteed)
7.45%, 9/25/96* 1,809 1,823
7.50%, 8/15/00* 11,551 12,095
8.00%, 5/15/98* 13,485 13,891
8.55%, 11/15/97* 15,902 16,297
9.25%, 11/15/96* 2,566 2,608
9.40%, 8/23/96* 1,301 1,328
- ---------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS
(Cost $1,352,887) 1,385,426
- ---------------------------------------------------------------
TEMPORARY CASH INVESTMENT (.2%)
- ---------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.87%, 2/1/96
(Cost $3,308) 3,308 3,308
- ---------------------------------------------------------------
TOTAL INVESTMENTS (99.0%)
(Cost $1,356,195) 1,388,734
- ---------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.0%)
Other Assets--Note C 20,788
Liabilities (7,786)
---------
13,002
- ---------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------
Applicable to 136,312,816
outstanding $.001 par value
shares (authorized 300,000,000
shares) $1,401,736
- ---------------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.28
===============================================================
</TABLE>
+ See Note A to Financial Statements.
(1) Floating Rate Note.
* The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AT JANUARY 31, 1996,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
AMOUNT PER
(000) SHARE
---------- ------
<S> <C> <C>
PAID IN CAPITAL $1,401,590 $10.28
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED LOSSES--NOTE E (32,393) (.24)
UNREALIZED APPRECIATION
OF INVESTMENTS--NOTE F 32,539 .24
- ----------------------------------------------------------------
NET ASSETS $1,401,736 $10.28
- ----------------------------------------------------------------
</TABLE>
15
<PAGE> 63
<TABLE>
<CAPTION>
Face Market
SHORT-TERM Amount Value
U.S. TREASURY PORTFOLIO (000) (000)+
- ---------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (97.4%)
- ---------------------------------------------------------------
U.S. TREASURY NOTES
4.375%, 11/15/96 $ 26,000 $ 25,874
5.125%, 6/30/98 37,500 37,611
5.25%, 7/31/98 104,000 104,584
6.125%, 7/31/96 64,000 64,330
6.75%, 6/30/99 124,000 130,238
6.875%, 10/31/96 115,000 116,546
6.875%, 8/31/99 27,000 28,489
7.75%, 11/30/99 61,000 66,395
7.75%, 12/31/99 153,000 166,746
7.75%, 1/31/00 9,000 9,817
8.00%, 10/15/96 35,000 35,700
BANAMEX EXPORT FUNDING
(U.S. Government Guaranteed)
4.91%, 10/15/98* 3,600 3,570
BANCO NACIONAL DE
COMERCIO EXTERIOR
(U.S. Government Guaranteed)
4.62%, 10/15/98* 12,000 11,882
5.95%, 4/15/97* 3,240 3,257
6.475%, 5/15/00* 11,700 11,971
6.82%, 4/15/99* 5,000 5,121
8.038%, 1/15/00* 12,000 12,656
GOVERNMENT EXPORT TRUST
(U.S. Government Guaranteed)
4.85%, 11/1/97* 4,800 4,781
5.69%, 2/1/98* 6,000 6,024
5.79%, 1/1/97* 1,000 1,003
7.75%, 1/1/00* 10,666 11,172
GOVERNMENT TRUST
CERTIFICATE (ISRAEL)
(U.S. Government Guaranteed)
8.55%, 11/15/97* 1,291 1,323
GUARANTEED EXPORT CERTIFICATES
(U.S. Government Guaranteed)
4.743%, 9/15/98* 15,600 15,490
GUARANTEED TRADE TRUST
(U.S. Government Guaranteed)
4.77%, 11/1/97* 6,680 6,646
PRIVATE EXPORT FUNDING CORP.
(U.S. Government Guaranteed)
5.65%, 3/15/03* 7,975 8,031
SMALL BUSINESS ADMINISTRATION
(U.S. Government Guaranteed)
6.95%, 6/1/97 6,000 6,119
- ---------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS
(Cost $869,936) 895,376
- ---------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.2%)
- ---------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.87%, 2/1/96
(Cost $11,048) 11,048 11,048
- ---------------------------------------------------------------
TOTAL INVESTMENTS (98.6%)
(Cost $880,984) 906,424
- ---------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.4%)
- ---------------------------------------------------------------
Other Assets--Notes C and G 143,712
Liabilities--Note G (130,932)
--------
12,780
- ---------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------
Applicable to 88,757,481 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $919,204
- ---------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.36
===============================================================
</TABLE>
+ See Note A to Financial Statements.
* The average maturity is shorter than the final maturity shown due to scheduled
interim principal payments.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AT JANUARY 31, 1996,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- -----
<S> <C> <C>
PAID IN CAPITAL $907,884 $10.23
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED LOSSES--NOTE E (14,120) (.16)
UNREALIZED APPRECIATION
OF INVESTMENTS--NOTE F 25,440 .29
- ----------------------------------------------------------------
NET ASSETS $919,204 $10.36
- ----------------------------------------------------------------
</TABLE>
16
<PAGE> 64
<TABLE>
<CAPTION>
Face Market
SHORT-TERM Rating(1) Amount Value
CORPORATE PORTFOLIO (Moody's) (000) (000)+
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS (81.7%)
- -------------------------------------------------------------------------------
ASSET BACKED SECURITIES (12.3%)
Banc One Credit Card
Master Trust
7.55%, 12/15/99 Aaa $53,255 $ 55,352
Carco Auto Loan
Master Trust
7.875%, 7/15/99 Aaa 57,000 59,138
The Chase Manhattan Corp.
Grantor Trust
6.00%, 9/17/01* Aaa 34,735 35,028
Discover Card Master Trust
6.70%, 2/16/00 Aaa 5,000 5,105
First Chicago Master Trust
6.25%, 8/15/99 Aaa 10,500 10,641
First Deposit Credit Card Trust
6.80%, 10/15/99* Aaa 3,274 3,284
Ford Credit Auto Loan
Master Trust
6.50%, 8/15/02* Aaa 28,000 28,985
Household Credit Card
Master Trust
7.00%, 12/15/99* Aaa 79,775 82,043
MBNA Credit Card
Master Trust
6.20%, 8/15/99 Aaa 10,000 10,128
NationsBank Credit Card
Master Trust
4.75%, 9/15/98 Aaa 42,500 42,327
6.45%, 4/15/03* Aaa 25,000 25,898
Series 1991 A Mortgage Trust
(Prudential Support Agreement)
7.20%, 12/15/02 Aa2 2,966 3,004
Standard Credit Card
Master Trust
6.75%, 6/7/00* Aaa 21,000 21,663
7.875%, 1/7/00* Aaa 16,100 17,096
8.50%, 8/7/97* Aaa 45,000 45,450
Toyota Auto Grantor Trust
5.85%, 3/15/01* Aaa 29,232 29,395
----------
GROUP TOTAL 474,537
----------
- -------------------------------------------------------------------------------
FINANCE--AUTOMOBILE (4.6%)
Chrysler Financial Corp.
7.81%, 2/23/98 A3 15,000 15,661
10.34%, 5/15/08 A3 16,634 16,837
Ford Motor Credit Corp.
5.37%, 9/8/98 A1 14,475 14,470
5.83%, 6/29/98 A1 25,000 24,975
5.621%, 10/31/97(2) A1 30,000 30,030
7.90%, 5/17/99 A1 5,000 5,346
7.95%, 5/17/99 A1 5,000 5,353
9.10%, 7/18/96 A1 5,000 5,075
General Motors
Acceptance Corp.
6.00%, 12/30/98 A3 5,000 5,068
6.156%, 5/6/96(2) A3 30,000 29,990
8.40%, 10/15/99 A3 5,000 5,452
8.50%, 12/21/98 A3 20,000 21,550
----------
GROUP TOTAL 179,807
----------
- -------------------------------------------------------------------------------
FINANCE--BANKS (11.0%)
Advanta Corp.
6.84%, 9/23/96 Baa3 15,000 15,117
Advanta National Bank
6.03%, 10/31/97 Baa3 30,000 30,233
6.71%, 9/30/99 Baa2 6,000 6,202
Bank South Inc.
10.20%, 6/1/99 Baa3 7,500 8,521
BankAmerica Corp.
7.50%, 10/15/02 A3 4,200 4,540
Barnett Banks Inc.
6.25%, 7/28/98 A2 36,800 37,525
Capital One Bank
6.66%, 8/17/98 Baa3 5,000 5,110
6.49%, 8/15/97 Baa3 9,000 9,109
8.625%, 1/15/97 Baa3 11,900 12,231
The Chase Manhattan Corp.
8.00%, 6/15/99 A2 19,450 20,857
10.00%, 6/15/99 A2 20,840 23,607
First Fidelity Bancorp
9.625%, 8/15/99 A3 23,540 26,531
First Interstate Bancorp
9.90%, 11/15/01 A3 9,000 10,713
10.50%, 3/1/96 A2 5,000 5,013
First Union Corp.
9.45%, 6/15/99 A2 5,500 6,137
MBNA America Bank
7.12%, 4/12/99 A2 10,000 10,452
MBNA Corp.
6.875%, 10/1/99 A3 15,785 16,403
7.49%, 9/14/99 A3 6,600 6,970
Manufacturers Hanover Corp.
8.50%, 2/15/99 A3 9,272 10,020
Meridian Bancorp
6.625%, 6/15/00 A3 5,225 5,392
7.875%, 7/15/02 Baa1 5,650 6,208
NBD Bancorp
8.10%, 3/1/02 A2 5,000 5,544
Norwest Corp.
6.75%, 5/12/00 Aa3 15,000 15,590
Provident Bank of Ohio
5.00%, 6/15/96 A3 15,000 14,967
</TABLE>
17
<PAGE> 65
<TABLE>
<CAPTION>
Face Market
SHORT-TERM CORPORATE Rating(1) Amount Value
PORTFOLIO (continued) (Moody's) (000) (000)+
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Security Pacific Corp.
9.75%, 5/15/99 A3 $ 5,000 $ 5,609
11.00%, 3/1/01 A3 18,800 23,022
UJB Financial
8.625%, 12/10/02 Baa3 11,725 13,279
Wachovia Bank
4.47%, 8/26/96 Aa2 20,000 19,904
4.60%, 11/15/96 Aa2 21,000 20,895
5.35%, 11/13/98 Aa2 20,000 19,983
Wachovia Corp.
7.00%, 12/15/99 A1 9,900 10,366
----------
GROUP TOTAL 426,050
----------
- -------------------------------------------------------------------------------
FINANCE--CONSUMERS (1.8%)
Avco Financial Services
6.35%, 9/15/00 A2 15,000 15,341
Commercial Credit Corp.
6.75%, 5/15/00 A1 5,000 5,201
Countrywide Funding
6.11%, 8/5/96 A3 5,000 5,013
7.85%, 3/3/97 A3 9,800 10,042
Sears Roebuck Acceptance Corp.
6.25%, 10/6/98 A2 35,000 35,684
----------
GROUP TOTAL 71,281
----------
- -------------------------------------------------------------------------------
FINANCE--DIVERSIFIED (6.9%)
Associates Corp.
7.55%, 9/1/99 Aa3 10,000 10,640
8.25%, 12/1/99 Aa3 25,000 27,088
8.37%, 12/21/99 Aa3 19,000 20,784
8.40%, 11/29/99 Aa3 10,000 10,951
8.625%, 6/15/97 Aa3 6,000 6,259
CIT Group Holdings
6.00%, 2/15/97* Aa3 28,420 28,526
Caterpillar Financial Services
6.075%, 5/9/97(2) A2 21,000 21,021
Comdisco Inc.
6.10%, 1/8/99 Baa2 15,000 15,167
6.50%, 6/15/00 Baa2 18,000 18,435
General Electric
Capital Corp.
4.70%, 11/19/96 Aaa 38,000 37,764
4.84%, 2/10/97 Aaa 10,000 9,972
6.20%, 3/15/97* Aaa 33,130 33,326
7.625%, 7/30/96 Aaa 5,000 5,051
8.10%, 1/26/99 Aaa 5,000 5,385
U S WEST Financial Services
8.45%, 4/24/96 A2 18,500 18,625
----------
GROUP TOTAL 268,994
----------
- -------------------------------------------------------------------------------
FINANCE--INSURANCE (.4%)
USF&G Corp.
8.375%, 6/15/01 Baa2 14,100 15,619
----------
- -------------------------------------------------------------------------------
FINANCE--OTHER (8.9%)
Bear Stearns Co.
7.625%, 9/15/99 A2 10,000 10,591
7.625%, 4/15/00 A2 26,900 28,657
Dean Witter Discover & Co.
5.00%, 4/1/96 A2 23,750 23,727
6.00%, 3/1/98 A2 11,000 11,140
6.25%, 3/15/00 A2 7,000 7,136
6.75%, 8/15/00 A2 15,000 15,601
Goldman Sachs Group
5.90%, 1/25/99(2) A1 14,000 14,000
6.10%, 4/15/98 A1 30,000 30,365
6.875%, 9/15/99 A1 16,175 16,766
Lehman Brothers Holdings
5.75%, 2/15/98 Baa1 5,000 5,008
7.46%, 9/6/96 Baa1 20,000 20,209
8.375%, 2/15/99 Baa1 5,000 5,340
Morgan Stanley Group
6.93%, 3/12/97* A1 16,000 16,266
7.32%, 1/15/97 A1 11,500 11,700
8.875%, 10/15/01 A1 10,500 11,965
PaineWebber Group
7.16%, 6/15/99 Baa1 25,000 26,024
Pitney Bowes Credit Corp.
7.43%, 4/15/97 Aa3 14,000 14,359
Smith Barney Holdings
5.375%, 6/1/96 A3 19,000 18,980
5.50%, 1/15/99 A3 5,000 4,987
7.00%, 5/15/00 A3 15,500 16,178
7.98%, 3/1/00 A3 17,500 18,835
Tenneco Credit
9.625%, 8/15/01 Baa2 15,605 18,233
----------
GROUP TOTAL 346,067
----------
- -------------------------------------------------------------------------------
INDUSTRIAL (29.0%)
Products & Chemicals
4.66%, 8/26/96 A1 5,000 4,979
CBI Industries
7.53%, 8/26/99 Baa2 15,000 15,760
CSC Enterprises
6.80%, 4/15/99 A3 21,500 22,201
CSX Corp.
9.04%, 2/28/97 A3 8,500 8,818
The Coca-Cola Co.
7.875%, 9/15/98 Aa3 18,000 19,099
COMPAQ Computer Corp.
6.50%, 3/15/99 Baa2 40,600 41,544
R.R. Donnelley & Sons Co.
7.27%, 10/20/97 Aa3 15,000 15,491
7.96%, 11/8/99 Aa3 40,000 43,100
Electronic Data Systems Corp.
6.85%, 5/15/00 A1 13,000 13,583
</TABLE>
18
<PAGE> 66
<TABLE>
<CAPTION>
Face Market
Rating(1) Amount Value
(Moody's) (000) (000)+
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Express Co.
9.875%, 4/1/02 Baa2 $ 8,195 $ 9,760
10.00%, 9/1/98 Baa2 24,875 27,458
10.00%, 4/15/99 Baa2 6,255 7,023
Gannett Co.
5.25%, 3/1/98 A2 40,000 39,984
General Electric Co.
7.875%, 9/15/98 Aaa 15,000 15,909
General Motors Corp.
9.625%, 12/1/00 A3 26,990 31,237
Hertz Corp.
6.50%, 4/1/00 A3 5,000 5,073
8.30%, 2/2/98 A3 19,500 20,578
International Paper Co.
7.40%, 3/4/97 A3 10,000 10,219
9.50%, 5/30/97 A3 5,000 5,263
Kellogg Co.
5.90%, 7/15/97 Aaa 30,565 30,862
Knight-Ridder, Inc.
8.50%, 9/1/01* A1 16,025 17,633
Lockheed Corp.
5.65%, 4/1/97 A2 31,000 31,118
McDonald's Corp.
8.375%, 10/29/99 Aa2 8,550 9,372
McDonnell Douglas Corp.
8.10%, 1/27/97 Baa3 10,000 10,247
8.11%, 1/30/97 Baa3 10,000 10,248
8.625%, 4/1/97 Baa3 20,500 21,239
Minnesota Mining &
Manufacturing Co.
6.25%, 3/29/99 Aaa 15,000 15,373
Mobil Oil Corp.
9.17%, 2/29/00* Aa2 64,609 69,737
News America
7.50%, 3/1/00 Baa3 30,000 31,702
9.125%, 10/15/99 Baa3 14,095 15,653
Occidental Petroleum
6.75%, 9/16/99 Baa3 6,000 6,206
8.50%, 11/9/01 Baa3 10,000 11,235
10.125%, 11/15/01 Baa3 2,000 2,398
J.C. Penney & Co., Inc.
5.375%, 11/15/98 A1 13,350 13,356
6.875%, 6/15/99 A1 14,000 14,582
PepsiCo, Inc.
5.00%, 2/24/97 A1 32,000 31,915
7.48%, 4/27/02 A1 28,000 29,040
Phillips Petroleum Co.
7.66%, 4/9/97 Baa2 5,000 5,131
8.00%, 4/12/99 Baa2 4,000 4,268
Rockwell International
7.625%, 2/17/98 Aa3 55,000 57,477
8.875%, 9/15/99 Aa3 23,210 25,722
Sears, Roebuck & Co.
5.25%, 2/24/97 A2 10,000 9,989
9.12%, 1/10/97 A2 5,000 5,169
9.25%, 4/15/98 A2 13,100 14,121
Southern Pacific
Transportation Co.
6.92%, 7/2/96 Baa1 6,714 6,753
7.21%, 1/2/98 Baa1 6,687 6,890
7.61%, 7/2/98 Baa1 7,470 7,804
Tenneco, Inc.
10.00%, 8/1/98 Baa2 14,000 15,442
Texaco Capital Corp.
6.87%, 6/30/97 A1 30,000 30,654
8.22%, 2/12/97 A1 15,000 15,439
8.65%, 1/30/98 A1 16,750 17,805
9.00%, 11/15/97 A1 8,000 8,504
Texas Instruments, Inc.
9.00%, 7/15/99 A3 16,192 16,428
Union Carbide
7.00%, 8/1/99 Baa2 12,315 12,797
Union Oil of California
6.33%, 2/28/97 Baa2 20,000 20,186
6.38%, 2/18/97 Baa2 15,000 15,151
6.625%, 2/28/97 Baa2 15,000 15,185
8.97%, 3/6/98 Baa2 6,000 6,417
Union Pacific Railroad Co.
(Equipment Trust Certificate)
6.99%, 12/24/99* Aa1 8,082 8,314
9.625%, 3/15/02 Aa1 18,350 19,148
United Technologies Corp.
9.625%, 5/15/99 A2 5,000 5,052
Weyerhauser Co.
8.72%, 3/23/98 A2 40,000 42,737
----------
GROUP TOTAL 1,121,578
----------
- -------------------------------------------------------------------------------
UTILITIES (6.8%)
Delmarva Power & Light
6.40%, 7/1/03 A2 14,000 14,158
Enron Corp.
8.10%, 12/15/96 Baa2 14,000 14,290
8.50%, 2/1/00 Baa2 20,000 20,560
Florida Gas Transmission
7.75%, 11/1/97 Baa2 6,000 6,216
Florida Power & Light
5.50%, 7/1/99 A1 20,600 20,595
GTE North Inc.
5.50%, 2/15/99 A1 18,175 18,192
GTE Northwest Inc.
7.375%, 5/1/01 A3 4,000 4,284
GTE Southwest Inc.
5.82%, 12/1/99 A3 18,650 18,789
Idaho Power Co.
5.33%, 9/1/98 A2 4,500 4,490
</TABLE>
19
<PAGE> 67
<TABLE>
<CAPTION>
Face Market
SHORT-TERM CORPORATE Rating(1) Amount Value
PORTFOLIO (continued) (Moody's) (000) (000)+
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Illinois Power Co.
5.625%, 4/15/00 Baa2 $15,000 $ 14,933
MCI Communications Corp.
6.25%, 3/23/99 A2 5,000 5,107
7.625%, 11/7/96 A2 14,250 14,477
MCN Investment Corp.
6.03%, 2/1/01 Baa2 4,000 4,039
NYNEX Corp. Capital Funding
8.01%, 11/1/99 A3 15,000 16,152
8.10%, 11/1/99 A3 5,070 5,474
Texas Utilities Co.
6.27%, 2/1/00 Baa2 22,000 22,341
6.375%, 8/1/97 Baa2 5,000 5,062
9.39%, 11/21/96 Baa2 5,850 6,033
United Telecom
9.75%, 4/1/00 Baa1 10,550 12,037
Wisconsin Electric Power
5.875%, 10/1/97 Aa2 30,000 30,296
Wisconsin Power & Light
6.125%, 7/15/97 Aa2 5,000 5,061
----------
GROUP TOTAL 262,586
----------
- -------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $3,097,300) 3,166,519
- -------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (8.6%)
- -------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
(Pooled Mortgage Notes)
5.50%, 10/1/00* 15,750 15,721
6.00%, 9/1/98* 16,176 16,333
6.00%, 2/1/01* 21,596 21,771
6.00%, 7/1/01* 51,708 52,193
Federal National Mortgage Assn.
(Pooled Mortgage Notes)
6.00%, 1/1/01 17,455 17,567
8.00%, 6/1/99* 7,543 7,781
Government Export Trust
(U.S. Government Guaranteed)
4.85%, 11/1/97* 8,800 8,764
6.61%, 9/15/99* 7,375 7,532
U.S. Treasury Notes
4.375%, 8/15/96 12,500 12,455
5.125%, 11/30/98 17,000 17,032
5.625%, 11/30/00 50,000 50,742
5.75%, 10/31/00 28,000 28,569
6.50%, 9/30/96 21,000 21,200
7.75%, 12/31/99 25,000 27,245
7.75%, 1/31/00 25,000 27,270
- -------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS
(Cost $329,835) 332,175
- -------------------------------------------------------------------------------
TAXABLE MUNICIPAL SECURITIES (1.1%)
Lower Colorado River Auth.
7.375%, 1/1/97 Aa+(3) 25,000 25,414
New York City GO
10.00%, 11/15/96 Baa1 6,000 6,178
Sacramento Municipal
Utility Dist.
5.25%, 11/15/96 A2 5,000 4,987
5.625%, 11/15/97 A2 7,000 7,005
- -------------------------------------------------------------------------------
TOTAL TAXABLE MUNICIPAL SECURITIES
(Cost $42,982) 43,584
- -------------------------------------------------------------------------------
FOREIGN BONDS (6.4%)
- -------------------------------------------------------------------------------
Province of Alberta
9.20%, 11/1/97 Aa2 23,000 24,499
Bayerische Landesbank
Girozentrale
6.375%, 8/31/00 Aaa 50,000 51,428
British Telecom Finance Inc.
9.375%, 2/15/99 Aaa 32,425 35,977
KFW International Finance
9.02%, 2/23/99 Aaa 5,000 5,503
9.125%, 5/15/01 Aaa 7,995 9,270
Province of Manitoba
6.00%, 10/15/97 A1 30,000 30,362
7.75%, 2/1/02 A1 7,310 8,019
8.75%, 5/15/01 A1 7,000 7,947
9.625%, 3/15/99 A1 10,000 11,189
Noranda, Inc.
8.00%, 6/1/03 Baa2 20,000 21,965
8.625%, 7/15/02 Baa2 15,000 16,951
Placer Dome
6.14%, 1/29/02 Baa2 15,000 15,030
Kingdom of Spain
9.27%, 11/1/96 Aa2 10,000 10,278
- -------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $240,405) 248,418
- -------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (.7%)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.87%, 2/1/96
(Cost $25,942) 25,942
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.5%)
(Cost $3,736,464) 3,816,638
- -------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 68
<TABLE>
<CAPTION>
Market
Value
(000)+
- ---------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (1.5%)
- ---------------------------------------------------------------
Other Assets--Notes C and G $ 80,302
Liabilities--Note G (23,927)
------------
56,375
- ---------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------
Applicable to 353,890,295 outstanding
$.001 par value shares
(authorized 450,000,000 shares) $3,873,013
- ---------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.94
===============================================================
</TABLE>
+ See Note A to Financial Statements.
(1) Unaudited.
(2) Floating Rate Notes.
(3) Rated by Standard & Poor's.
* The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
GO--General Obligation.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AT JANUARY 31, 1996,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------- -----
<S> <C> <C>
PAID IN CAPITAL $3,824,380 $10.81
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED LOSSES--NOTE E (31,541) (.09)
UNREALIZED APPRECIATION
OF INVESTMENTS--NOTE F 80,174 .22
- ----------------------------------------------------------------
NET ASSETS $3,873,013 $10.94
- ----------------------------------------------------------------
</TABLE>
21
<PAGE> 69
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Fixed Income Securities Fund
Long-Term U.S. Treasury, Long-Term Corporate, High Yield Corporate,
Intermediate-Term Corporate, Intermediate-Term U.S. Treasury, Short-Term
Federal, Short-Term U.S. Treasury and Short-Term Corporate Portfolios
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights appearing in the Vanguard Fixed Income Securities Fund (the "Fund")
1996 Annual Report (the "Annual Report") present fairly, in all material
respects, the financial position of the Long-Term U.S. Treasury, Long-Term
Corporate, High Yield Corporate, Intermediate-Term Corporate, Intermediate-Term
U.S. Treasury, Short-Term Federal, Short-Term U.S. Treasury and Short-Term
Corporate Portfolios of the Fund at January 31, 1996, and the results of each
of their operations, the changes in each of their net assets and the financial
highlights for each of the respective periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities by correspondence with
the custodians and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
We have also audited the financial statements of the GNMA Portfolio of the Fund
at January 31, 1996, and we have issued an unqualified opinion thereon. The
Annual Report containing our report on the financial statements of the GNMA
Portfolio is available from the Fund.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 29, 1996
22
<PAGE> 70
VANGUARD FIXED INCOME SECURITIES FUND
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile".
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through eleven.
A line chart of the Month-End Yields (3-Year U.S. Treasury Note, 10-Year U.S.
Treasury Bond, and 30-Year U.S. Treasury Bond) for the fiscal years 1991
through 1996 appears at the top of page two.
A line chart illustrating cumulative performance between the Long-Term Treasury
Portfolio, Lehman Long-Term U.S. Treasury Index and Average Long-Term U.S.
Treasury Fund, average Annual Total Returns for the period May 19, 1986, to
January 31, 1996 appears at the top of page seven.
A line chart illustrating cumulative performance between the Long-Term
Corporate Portfolio, Lehman Long Term Corporate AA or Better Bond Index and
Average Corporate A-Rated Fund, average Annual Total Returns for the period
January 31, 1986, to January 31, 1996 appears at the bottom of page seven.
A line chart illustrating cumulative performance between the High-Yield
Corporate Portfolio, Lehman High Yield Bond and Average High Yield Bond Fund,
average Annual Total Returns for the period January 31, 1986, to January 31,
1996 appears at the top of page eight.
A line chart illustrating cumulative performance between the GNMA Portfolio,
GNMA Index, and Average GNMA Fund, average Annual Total Returns for the period
January 31, 1986, to January 31, 1996 appears at the bottom of page eight.
A line chart illustrating cumulative performance between the Intermediate-Term
Treasury Portfolio, Lehman Intermediate-Term U.S. Treasury Index, and Average
Intermediate-Term U.S. Treasury Fund, average Annual Total Returns for the
period October 28, 1991, to January 31, 1996 appears at the top of page nine.
A line chart illustrating cumulative performance between the Intermediate-Term
Corporate Portfolio, Lehman Intermediate-Term Corporate Index, and Average
Intermediate-Term
<PAGE> 71
Corporate Fund, average Annual total returns for the period November 1, 1993,
to January 31, 1996 appears at the bottom of page nine.
A line chart illustrating cumulative performance between the Short-Term Federal
Portfolio, Lehman Short-Term Government Index, and Average Short-Term
Government Fund, average Annual Total Returns for the period December 31, 1987,
to January 31, 1996 appears at the top of page ten.
A line chart illustrating cumulative performance between the Short-Term U.S.
Treasury Portfolio, Lehman Short-Term U.S. Treasury Index, and Average
Short-Term U.S. Treasury Fund, average Annual Total Returns for the period
October 28, 1991, to January 31, 1996 appears at the bottom of page ten.
A line chart illustrating cumulative performance between the Short-Term
Corporate Portfolio, Lehman Short-Term Corporate Index, and Average Short-Term
Corporate Fund, average Annual Total Returns for the period January 31, 1986,
to January 31, 1996 appears at the top of page eleven.
A running head featuring an hourglass, compass, and telescope and battleships
in the background appears at the top of page twelve.
A running head featuring a ships wheel and battleships in the background
appears at the top of pages thirteen through seventeen.
A running head featuring a cannon and battleships in the background appears at
the top of pages eighteen through twenty-one.
A running head featuring an hourglass, compass, and telescope and battleships
in the background appears at the top of page twenty-two.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages twenty-three through forty-three.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page forty-four.
A running head featuring birds flying and ships in the background appears at
the top of the inside back cover.
A running head featuring open log book, pen and battleships in the background
appears at the top of page one through twenty-two of insert (Financial
Statements).
