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VANGUARD
FIXED INCOME
SECURITIES FUND
Semiannual Report
July 31, 1997
[THE VANGUARD GROUP LOGO]
[PHOTO]
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[PHOTO]
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future. The montage
includes a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord
Nelson's flagship at The Battle of the Nile); a clock built circa 1816 in
Scotland, featuring a portrait of Nelson; and several views of our recently
completed campus, which is steeped in nautical imagery--from our buildings
named after Nelson's warships (Victory, Majestic, and Goliath are three shown),
to our artwork and ornamental compass rose.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
4
Report From
The Advisers
6
Performance
Summaries
10
Financial
Statements
15
Directors And
Officers
INSIDE BACK COVER
All comparative mutual fund data
are from Lipper Analytical Services, Inc.
or Morningstar unless otherwise noted.
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[PHOTO]
FELLOW SHAREHOLDER,
Interest rates declined on balance during the six months ended July 31,
1997, the first half of Vanguard Fixed Income Securities Fund's fiscal year. In
this environment, which was most favorable to bonds with the longest
maturities, the returns of our nine Portfolios were right in line with the
sectors of the bond market they represent. Total returns, which varied
according to each Portfolio's average maturity, ranged from +3.4% on our
Short-Term U.S. Treasury Portfolio to +9.1% on our Long-Term Corporate
Portfolio.
The table at right presents the total return (capital change plus
reinvested dividends) for each Portfolio during the past six months compared
with the average return of its peer group of mutual funds.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
JULY 31, 1997
----------------------
VANGUARD PEER GROUP
FIXED-INCOME FUNDS PORTFOLIO AVERAGE
- ------------------------------------------------------------
<S> <C> <C>
Short-Term U.S. Treasury +3.4% +3.5%
Short-Term Federal +3.5 +3.4
Short-Term Corporate +3.8 +3.6
- ------------------------------------------------------------
Intermediate-Term U.S. Treasury +5.2% +4.6%
Intermediate-Term Corporate +5.6 +5.1
GNMA +5.0 +4.9
- ------------------------------------------------------------
Long-Term U.S. Treasury +8.1% +6.3%
Long-Term Corporate +9.1 +5.7
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High Yield Corporate +6.9% +7.6%
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</TABLE>
Details about each Portfolio, including per-share net asset values, income
dividends, and distributions of net realized capital gains, as well as maturity
and credit quality data, are presented in the table that follows this letter.
The table also lists the annualized current yields for each Portfolio, which on
July 31 ranged from 5.64% on our Short-Term Federal Portfolio to 8.35% on our
High Yield Corporate Portfolio.
THE PERIOD IN REVIEW
As the half-year began, investors fretted about a possible resurgence of
inflation and interest rates. Under this cloud, the U.S. stock market went
nowhere in February and down in March. But the stall was short-lived. Inflation
fears began to recede in April and all but vanished by July. Long-term interest
rates retreated steadily after topping out in mid-April, and strong corporate
profits and steady economic growth helped push U.S. stocks to a gain of nearly
+27% in the final four months of the period alone. In sum, the nearly utopian
investment environment of the past two and one-half years prevailed.
In the U.S. bond market, interest rates declined for all but the shortest
maturities, making for a solid six months for fixed-income investments. On
balance, the yield on the benchmark 30-year U.S. Treasury bond fell to 6.30% on
July 31, from 6.79% when the period began in February. The long-bond yield was
rising as the period began and peaked in mid-April, then declined steadily
through the remainder of the half-year. The yield on intermediate-term Treasury
bonds followed a similar path, ending the period at 6.01%, 48 basis points
below its starting point of 6.49%. But short-term interest rates ended the
period at 5.23%, an increase of 8 basis points from 5.15% at the outset, as the
Federal Reserve Board raised its target for the federal funds rate by a
quarter-point to 5.50% on March 25.
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Though returns on bonds for the six months were generous, they were a far
cry from the returns provided by the U.S. stock market, which gained +22.5%
during the period (as measured by the Standard & Poor's 500 Composite Stock
Price Index). Common stocks continue to be aided by a powerful combination of
strong economic growth, rising corporate profits, and decelerating inflation.
For the Portfolios of Vanguard Fixed Income Securities Fund, the decline
in interest rates resulted in positive capital returns that augmented our
income returns. This benefit was most apparent, of course, among our
longer-term portfolios, since a decline in interest rates boosts the prices of
long-term bonds more than it does the prices of short-term bonds. Conversely,
the prices of longer-term bonds decline more than the prices of short-term
bonds when interest rates are rising.
In reviewing our half-year performance, it's important to note that
semiannual returns for bond funds account for only half of the year's interest
income, while price changes occur immediately in response to changes in
interest rates. Over the long run, however, interest income accounts for
virtually all of the total return on a bond fund; thus, a full year's interest
income should be considered. The table at left presents each Portfolio's return
for the past twelve months, divided into its income and capital components.
You'll note especially strong capital returns for our intermediate-term and
long-term Portfolios during a period when interest rates generally declined.
This represents a solid recovery from the marginally negative capital returns
experienced during the preceding twelve months. For longer-term information on
each Portfolio's income and capital return, see the Performance Summaries
beginning on page 10.
<TABLE>
<CAPTION>
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COMPONENTS OF TOTAL RETURN
TWELVE MONTHS ENDED
JULY 31, 1997
---------------------------------
INCOME CAPITAL TOTAL
RETURN RETURN RETURN
- --------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM PORTFOLIOS
U.S. Treasury +6.0% +1.3% + 7.3%
Federal +6.3 +1.2 + 7.5
Corporate +6.5 +1.5 + 8.0
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INTERMEDIATE-TERM PORTFOLIOS
U.S. Treasury +6.7% +3.4% +10.1%
Corporate +7.1 +4.2 +11.3
GNMA +7.6 +3.4 +11.0
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LONG-TERM PORTFOLIOS
U.S. Treasury +7.3% +6.8% +14.1%
Corporate +7.9 +7.5 +15.4
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HIGH YIELD CORPORATE +9.7% +6.2% +15.9%
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</TABLE>
As we mentioned in our annual report six months ago, the average
maturities of our Portfolios typically are somewhat longer than those of our
average competitors--a policy that we believe is in the best long-term
interests of our shareholders. While this factor works to our relative
disadvantage during periods of rising interest rates (such as last year), it
works to our competitive advantage in times of falling interest rates (so far
this year). As a result, our relative performance during the first half of this
fiscal year was good.
The returns of our four Long-Term and Intermediate-Term Portfolios
surpassed those of their peers during the period by solid margins ranging from
0.5 to 3.4 percentage points. Returns for our GNMA Portfolio and three
Short-Term Portfolios were about the same as their peers, but our High Yield
Corporate Portfolio fared somewhat worse than the average high-yield corporate
bond mutual fund (+6.9% versus +7.6%). Our High Yield Portfolio's shortfall is
the direct result of the larger share of lower credit-quality--and therefore
higher-yielding--bonds purchased by many competing mutual
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funds. This quality-for-yield trade-off has benefited our peers during this
time of strong economic growth, but it carries a credit risk that we are not
willing to take.
IN SUMMARY
The bond market followed a generally lackluster fiscal 1997 with a strong start
in the first six months of fiscal 1998. The returns from bonds need not
exceed--or even match--the returns of stocks to make owning bonds worthwhile.
Bonds play a critical role in a balanced investment program by adding
diversification that can help smooth some of the volatility of a portfolio that
also includes stock funds.
We look forward to reporting to you in further detail in our 1998 Annual
Report six months hence.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
August 19, 1997
Note: The Short-Term Corporate Portfolio has been authorized to sell two
classes of shares--an Investor Class (the performance of which is presented in
this Report) and an Institutional Class. As of July 31, 1997, no Institutional
Class shares had been sold.
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
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NET ASSET
VALUE PER SHARE TWELVE MONTHS
--------------------------------------------------
AVERAGE AVERAGE JAN. 31, JULY 31, INCOME CAPITAL GAINS SEC
PORTFOLIO MATURITY QUALITY** 1997 1997 DIVIDENDS DISTRIBUTIONS YIELD*
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<S> <C> <C> <C> <C> <C> <C> <C>
Short-Term U.S. Treasury 2.0 years Aaa $10.16 $10.21 $0.587 -- 5.65%
Short-Term Federal 2.1 years Aaa 10.11 10.15 0.614 -- 5.64
Short-Term Corporate 2.5 years A1 10.75 10.82 0.664 -- 6.04
- -----------------------------------------------------------------------------------------------------------------------------------
Intermediate-Term U.S. Treasury 6.9 years Aaa $10.37 $10.57 $0.650 -- 5.97%
Intermediate-Term Corporate 7.1 years A1 9.72 9.93 0.640 -- 6.45
GNMA 7.3 years Aaa 10.23 10.37 0.725 $0.003 6.76
- -----------------------------------------------------------------------------------------------------------------------------------
Long-Term U.S. Treasury 20.1 years Aaa $ 9.84 $10.30 $0.649 -- 6.21%
Long-Term Corporate 22.2 years A1 8.71 9.17 0.617 $0.083 6.75
- -----------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate 8.1 years Ba3 $ 7.87 $ 8.06 $0.688 -- 8.35%
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</TABLE>
*SEC 30-day annualized yield.
**Ratings provided by Moody's Investors Service, Inc.
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[PHOTO]
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JULY 31, 1997
U.S. EQUITY MARKETS
The Standard & Poor's 500 Composite Stock Price Index finished the first half
of the fiscal year with an impressive 8.0% gain in July, which brought the
overall six-month return to 22.5%.
Stocks benefited from the continued strength of corporate earnings, which
have been remarkably consistent in positively surprising Wall Street analysts.
At the end of January, the consensus forecast for 1997 called for a 6.8% rise
in earnings for the S&P 500 Index. Six months later, the consensus estimate had
risen to 8.8%. Investors' confidence is also reflected in increased
price/earnings ratios. For example, in July 1996 investors were willing to pay
roughly $15 for every dollar of the S&P's earnings. One year later, that
"price" is close to $20.
Within the S&P 500 Index, technology was the top-performing sector for the
half-year, gaining 29.6%. By contrast, numerous uncertainties for utilities
caused that sector to lag the broad market, although, on an absolute basis, its
8.1% return over six months is quite good.
<TABLE>
<CAPTION>
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TOTAL RETURNS
PERIODS ENDED JULY 31, 1997
---------------------------------
6 MONTHS 1 YEAR 5 YEARS*
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<S> <C> <C> <C>
EQUITY
S&P 500 Index 22.5% 52.1% 20.7%
Russell 2000 Index 13.1 33.4 18.1
MSCI EAFE Index 17.3 18.5 14.1
- ------------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 5.6% 10.8% 7.3%
Lehman 10-Year Municipal
Bond Index 5.8 10.3 7.3
Salomon Brothers Three-Month
U.S. Treasury Bill Index 1.8 5.3 4.5
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OTHER
Consumer Price Index 0.9% 2.2% 2.7%
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</TABLE>
*Average annual.
For the six months, large-capitalization stocks once again outperformed
smaller issues. The latter, as measured by the Russell 2000 Index, rose 13.1%
and actually outperformed the S&P 500 Index in the final three months (21.3%
versus 19.7%). The momentum in small-cap companies is a result of
better-than-expected earnings reports. In fact, the second-quarter earnings
increases for small companies were even stronger than those of their large-cap
counterparts. It is noteworthy that the recent small-cap gains were led by
small growth stocks, the worst segment of the U.S. market during the past 12
months. This group has surged 25% since the end of April, although at the end
of the six months it still lagged the S&P 500 Index return by a sizable margin
(7.9% versus 22.5%).
U.S. FIXED-INCOME MARKETS
The robust consumer spending that fueled the U.S. economy's remarkable 4.9%
growth in the first three months of 1997 slowed in the early summer. As a
result, the Gross Domestic Product expanded at a 2.2% annual rate in the second
quarter. Labor costs, which have been the flash point for inflation concerns,
grew at a modest rate over the
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period, despite an unemployment rate below 5% and strong growth in the number
of new jobs reported. In the past, strong economic growth and tight labor
markets have often led to rising inflation because of increased demand for
goods and services. With this in mind, in March the Federal Reserve raised its
federal-funds interest rate target by 0.25% in a "preemptive strike" against
inflationary pressures. Since that time, however, there has been scant evidence
that higher prices were a threat. Lower automobile prices and a sharp decrease
in the cost of imports (due to the strong dollar) were key factors.
As the market accepted the good news about inflation, yields on
longer-term issues fell during the six months. For example, the 10-year
Treasury yield dropped from 6.49% on January 31 to 6.01% at the end of July;
the 30-year bond's yield moved from 6.79% down to 6.30%. With the drop in
rates, bond investors fared reasonably well over the period, as illustrated by
the 5.6% return of the Lehman Brothers Aggregate Bond Index. Mortgage-backed
securities, which had outperformed other issues early in the period, gave back
some of their gains. Municipal issues tended to perform better than their
taxable counterparts.
INTERNATIONAL EQUITY MARKETS
International investors fared well over the six months. As measured by the
broad Morgan Stanley Capital International Europe, Australasia, Far East Index,
foreign markets gained 21.1% in local-currency terms. The strong dollar,
however, trimmed this return to 17.3% for U.S. investors. Regionally, the MSCI
Europe Index gained 19.2% while the MSCI Pacific Free Index rose 14.0%. The
latter gain masked significant turmoil in some of the smaller Asian markets,
most notably Thailand, Singapore, and the Philippines. Companies in Thailand,
in particular, face an environment of high real interest rates, a significant
number of nonperforming loans, and falling real estate prices. Over the
half-year, the Thai market dropped 26%.
The period saw two major developments. First, the Japanese stock market
moved sharply higher, gaining 15.8% for the six months. For U.S. investors, a
revived yen brought this return up to 18.8%. Better tone to the economy, good
earnings from the export-oriented sector, and renewed buying on the part of
foreign investors all contributed to the increase.
Arguably the biggest news came from the French elections at the end of
May. The new government is considered to be less friendly toward the austerity
measures needed to meet the eligibility requirements for the European Monetary
Union (EMU) in 1999. The French elections also had a broad impact across the
continent. Although most investors appear to agree that the elections won't
jeopardize the continent's move toward the EMU, the timing and intensity of the
fiscal measures are now less certain.
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REPORT FROM VANGUARD FIXED INCOME GROUP
SHORT-TERM U.S. TREASURY, FEDERAL, AND CORPORATE PORTFOLIOS; INTERMEDIATE-TERM
U.S. TREASURY AND CORPORATE PORTFOLIOS; AND LONG-TERM U.S. TREASURY PORTFOLIO
The bond markets performed well during the fiscal half-year ending July 31,
1997. This good news occurred despite the Federal Reserve Board's tightening of
monetary policy in March. Ordinarily, such a signal from the nation's monetary
authority would send bond traders scurrying toward the sidelines. Not this
time. Rather, interest rates dropped anywhere from 20 to 50 basis points (0.2
to 0.5 of 1 percentage point), with the specific amount dependent on the length
of a bond's final maturity. Longer-term issues fared best, followed by
intermediate-term bonds and short-term notes.
Naturally, the Portfolios that we manage for Vanguard Fixed Income
Securities Fund generated total returns commensurate with their specific
positions along the risk/return spectrum. In other words, the riskier
Portfolios, by virtue of their longer average maturities, did better than their
shorter brethren. Had interest rates gone up instead of down, the leaders and
followers would have reversed their order. Details of each Portfolio's total
return, consisting of both income return and capital return, are given in the
Message To Shareholders, which begins on page 1. The bottom line is this: We
are fortunate to have enjoyed a rare--indeed, almost unheard-of--period of
strong economic growth, extremely low unemployment, benign inflation, somewhat
tighter monetary policy, and (excluding the money markets) falling interest
rates. If interest rates are to descend further from prevailing levels, we'll
need a lot more of the same great news.
How did investors find themselves in this best of all possible worlds?
There is no single answer, but a variety of explanations have been offered by
economists and market commentators, not the least of whom was Alan Greenspan,
chairman of the Federal Reserve Board of Governors. On July 22, in his
semiannual "Humphrey-Hawkins" testimony before congressional banking and
finance committees, Chairman Greenspan lauded the "exceptional" performance of
the economy and noted that "in contrast to the typical postwar business cycle,
measured price inflation is lower now than when the expansion began . . . ." He
credited this benign situation to both temporary factors and potentially more
fundamental improvements in the long-run efficiency of our economy. Prominent
among these fundamental factors were initiatives to shrink the federal budget
deficit, deregulation of industry, technological change, and the globalization
of production and labor forces.
To say the least, it is unclear whether these factors alone will suffice
to overcome the countervailing forces of a garden-variety business cycle. In
every expansion in modern economic history, imbalances have arisen that
distorted growth in aggregate demand, production, and inflation, thereby
creating higher interest rates and other antecedents leading to the expansion's
demise. Until now, the long-sought "soft landing" for the economy was the
Panglossian stuff of myth. This time may be totally different, but we're not
betting on it.
The behavior of interest rates during the last two years or so has been
puzzling. Yields on U.S. Treasury bonds and notes of most maturities above
three years have fluctuated between 6% and 7%, neither breaking through the
lower end of the range with any enthusiasm nor testing the higher end during
market selloffs. In this environment, the total returns of various competitors'
portfolios tend to cluster more closely to one another and to their respective
average coupons.
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<PAGE> 9
Not surprisingly, those responsible for actively managing competing bond
funds have taken initiatives to make sure their coupons are as high as
possible. Typically, this entails taking on additional risk (usually credit
risk); and that's precisely what's occurred so far in 1996 and 1997. Among
competing corporate bond funds, there has been an almost insatiable appetite
for lower-quality, higher-yielding bonds. Many competitors are dabbling in the
sub-investment-grade sector, known familiarly as junk bonds, or in
emerging-market debt. The demand for such securities has been so high that one
now receives only minimal extra yield for descending the credit-quality
"ladder." For instance, intermediate-term, B-rated industrial bonds provide
only about 340 basis points (3.4 percentage points) more yield than a Treasury
note of equivalent maturity. The T-note, however, is ironclad in credit
quality, while the B-rated industrial note is defined as "speculative" and is
meaningfully subject to the vicissitudes of the business cycle and the
possibility of default. One can debate all day whether 3.4% extra yield per
year is enough compensation for the risk. What is not debatable is that as
recently as last year the incremental yield was 5.6%.
The corporate bond Portfolios that we manage pursue "value-driven"
strategies. We will lower the average quality somewhat when we believe that the
yield benefits will outweigh the incremental credit risk; and we will raise the
average quality somewhat when we believe the compensation is too paltry.
Regardless, we restrict our purchases to issues among the four highest ratings
categories. Right now, the rewards of lower-quality bonds are as meager as
we've seen in our 22 years in the business of managing fixed-income
investments.
It should not be a surprise to learn that our Portfolios are higher in
quality than many competitors'. Given our earlier remarks, it should be no more
surprising that this stance has cost us a small portion of incremental relative
return in 1996 and 1997. If the markets are working properly, riskier
Portfolios ought to perform better, before expenses are deducted from returns.
Therein hangs the tale. We believe that Vanguard's formidable expense-ratio
advantage will more than offset any yield and return we surrender by holding
more creditworthy securities. In the long run, we perform better, sleep more
easily, and hope shareholders do as well.
Ian A. MacKinnon, Senior Vice President
Robert F. Auwaerter, Principal
John W. Hollyer, Principal
August 13, 1997
7
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REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
GNMA, LONG-TERM CORPORATE, AND HIGH YIELD CORPORATE PORTFOLIOS
Favorable inflation numbers created a positive tone in the bond market during
the six months ended July 31, the first half of fiscal 1998 for Vanguard Fixed
Income Securities Fund.
The Federal Reserve Board's monetary policy strongly influences
fixed-income investments, including the Fund's GNMA, Long-Term Corporate, and
High Yield Corporate Portfolios. On March 25, the Fed raised short-term rates.
Since then, all but money market rates have fallen. Although the Fed has rarely
raised rates only once without soon raising them again, Fed Chairman Alan
Greenspan recently implied that he saw no reason to increase rates in the
foreseeable future. Longer-term interest rates declined further on this news,
and they are now approximately 50 basis points (0.5 percentage point) lower
than when we wrote to you six months ago.
Changes in interest rates affect all three of the Portfolios we manage,
but not uniformly. Long-term, investment-grade bonds generally outperform other
sectors in periods like the past fiscal half-year, when inflation is quiescent,
economic growth is moderate, and interest rates fall. A decline in interest
rates typically causes mortgage investors to fear prepayments of principal. We
have not seen this concern to any large degree and, surprisingly,
mortgage-backed securities have not noticeably lagged in performance until very
recently. When interest rates are declining, high-yield bond returns are
usually sandwiched between the returns on long-term corporates and those on
mortgage-backed securities. We do not expect big changes, up or down, in
interest rates in the foreseeable future, so we expect all three Portfolios to
essentially earn their coupons.
GNMA PORTFOLIO
GNMA securities performed well during the half-year, despite the general
decline in interest rates. For most of the period, investors were attracted to
the yield and credit quality of GNMAs and were not too concerned that lower
interest rates would generate a resurgence of mortgage refinancing. As the
quarter drew to a close, investors were becoming concerned that a further drop
in rates might cause refinancing to accelerate. However, there is not the sense
of panic that developed when interest rates fell in 1993.
Refinancings put GNMAs at a disadvantage versus other intermediate-term
fixed-income securities when interest rates are declining. The cash that is
returned to the Portfolio when mortgage loans are refinanced must be reinvested
at lower rates, which can cause income to erode. We are mindful of this
phenomenon and have constructed your Portfolio to protect against income
erosion as much as possible. However, if further declines in interest rates
cause refinancing to accelerate, the GNMA Portfolio probably will experience
some decline in its income per share. Having said that, we see every reason to
believe that your GNMA Portfolio will continue to provide a high level of
income and attractive total returns compared with those of other
intermediate-term bond portfolios.
LONG-TERM CORPORATE PORTFOLIO
The Portfolio's average maturity exceeds 20 years, so its net asset value is
extremely sensitive to changes in long-term rates. The average duration also is
long, at over nine years, which implies that the net asset value per share
could change 9% with a change of 1 percentage point in interest rates.
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<PAGE> 11
Because rates have fallen this year, the Portfolio's return has improved
over last year's, when rates were rising. With long-term corporate bonds
currently offering yields in excess of 3% over inflation, we are locking up
these attractive yields by maintaining a long duration for the Portfolio. The
Portfolio has excellent call protection, so that a majority of the securities
purchased at today's generous coupons cannot be redeemed by their issuers if
rates decline. We eliminated most mortgage holdings during the half-year to
improve call protection and reinvested the proceeds in corporate bonds.
The major risk to the Portfolio, owing to its long average maturity and
duration, is a rise in long-term interest rates. The second risk always present
in this Portfolio is credit deterioration of the corporate issuers. To mitigate
this risk, the Portfolio is well-diversified by issuer and industry. More than
80% of the Portfolio's assets are invested in issues rated A or better. The
Portfolio does not own below-investment-grade bonds, emerging-market debt, or
foreign bonds denominated in non-U.S. currencies.
HIGH YIELD CORPORATE PORTFOLIO
The below-investment-grade market continues to be popular with investors as the
annual rate of defaults by corporate issuers has fallen to historically low
levels. We expect moderate economic growth to continue and the default rate to
remain low. Given this constructive economic outlook, we continue to emphasize
large issuers whose businesses are sensitive to the economy's ups and downs.
We do not anticipate any major problems in the economy that would cause your
Portfolio to suffer meaningful deterioration in credit quality.
We remain very selective with respect to credit quality when examining the
large number of new issues coming to market. With strong cash flows into
high-yield mutual funds, more investment-grade investors dabbling in high-yield
bonds, and a strong stock market, the quality of companies coming to market
could deteriorate.
We exercise in-depth credit research on a company-by-company basis and
emphasize diversification: The Portfolio owns more than 200 issues from a broad
range of industries and companies. Its holdings continue to be focused on
cash-paying issues rated B or better. We maintain a modest reserve of U.S.
Treasury securities in the event that liquidity is necessary. Within the
high-yield market, we emphasize relatively higher quality bonds in the
below-investment-grade category.
Paul D. Kaplan, Senior Vice President and Portfolio Manager
Earl E. McEvoy, Senior Vice President and Portfolio Manager
August 14, 1997
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PERFORMANCE SUMMARIES
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolios. Note, too,
that both share price and return can fluctuate so that an investment in the
Portfolios could lose money.
<TABLE>
<CAPTION>
SHORT-TERM U.S. TREASURY PORTFOLIO
TOTAL INVESTMENT RETURNS: OCTOBER 28, 1991-JULY 31, 1997
- -----------------------------------------------------------
SHORT TERM U.S. TREASURY PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
1992 1.2% 1.4% 2.6% 3.0%
1993 3.3 5.4 8.7 9.0
1994 0.8 4.7 5.5 6.1
1995 -4.8 5.2 0.4 -0.1
1996 4.8 6.6 11.4 12.0
1997 -1.9 5.8 3.9 4.1
1998** 0.5 2.9 3.4 3.8
- -----------------------------------------------------------
</TABLE>
*Lehman 1-5 Year U.S. Treasury Index.
**Six months ended July 31, 1997.
See Financial Highlights table on page 25 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
SHORT-TERM FEDERAL PORTFOLIO
TOTAL INVESTMENT RETURNS: DECEMBER 31, 1987-JULY 31, 1997
- --------------------------------------------------
SHORT-TERM FEDERAL PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------
<S> <C> <C> <C> <C>
1988 0.5% 0.5% 1.0% 1.9%
1989 -2.7 8.4 5.7 5.0
1990 1.1 9.0 10.1 10.5
1991 1.9 8.6 10.5 11.1
1992 3.1 7.5 10.6 11.3
1993 2.3 6.2 8.5 8.9
1994 1.1 5.1 6.2 6.1
1995 -5.6 5.4 -0.2 -0.1
1996 5.0 6.4 11.4 12.0
1997 -1.7 6.2 4.5 4.1
1998** 0.4 3.1 3.5 3.8
- --------------------------------------------------
</TABLE>
*Lehman 1-5 Year U.S. Government Index.
**Six months ended July 31, 1997.
See Financial Highlights table on page 26 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997*
- -------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Short-Term U.S. Treasury Portfolio 10/28/91 6.36% 5.68% 0.49% 5.60% 6.09%
Short-Term Federal Portfolio 12/31/87 6.59 5.75 0.45 6.92 7.37
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
10
<PAGE> 13
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolios. Note, too,
that both share price and return can fluctuate so that an investment in the
Portfolios could lose money.
<TABLE>
<CAPTION>
SHORT-TERM CORPORATE PORTFOLIO
TOTAL INVESTMENT RETURNS: OCTOBER 29, 1982-JULY 31, 1997
- ------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------
<S> <C> <C> <C> <C>
1983 0.5% 2.7% 3.2% 4.6%
1984 -1.1 10.6 9.5 10.9
1985 2.3 11.7 14.0 14.1
1986 3.7 10.5 14.2 14.6
1987 2.9 8.7 11.6 11.9
1988 -2.2 7.4 5.2 6.8
1989 -1.9 8.2 6.3 6.5
1990 1.1 9.1 10.2 10.7
1991 1.5 9.0 10.5 9.8
1992 3.6 8.1 11.7 13.4
1993 2.6 6.7 9.3 9.5
1994 0.4 5.7 6.1 7.9
1995 -4.9 5.5 0.6 0.3
1996 5.2 6.8 12.0 13.8
1997 -1.7 6.2 4.5 4.6
1998** 0.7 3.1 3.8 4.3
- ------------------------------------------------
</TABLE>
*Lehman 1-5 Year Investment Grade Index.
**Six months ended July 31, 1997.
See Financial Highlights table on page 26 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
TOTAL INVESTMENT RETURNS: OCTOBER 28, 1991-JULY 31, 1997
- ------------------------------------------------
INTERMEDIATE-TERM
U.S. TREASURY PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------
<S> <C> <C> <C> <C>
1992 1.9% 1.7% 3.6% 4.0%
1993 6.1 7.0 13.1 13.2
1994 4.1 6.0 10.1 10.6
1995 -9.6 5.7 -3.9 -4.5
1996 11.7 7.3 19.0 19.6
1997 -4.9 6.2 1.3 1.3
1998** 1.9 3.3 5.2 5.6
- ------------------------------------------------
</TABLE>
*Lehman 5-10 Year U.S. Treasury Index.
**Six months ended July 31, 1997.
See Financial Highlights table on page 27 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997*
- --------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION --------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Short-Term Corporate Portfolio 10/29/82 6.77% 6.09% 0.55% 7.23% 7.78%
Intermediate-Term U.S. Treasury
Portfolio 10/28/91 7.21 7.19 1.32** 6.44** 7.76**
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
**Since inception.
11
<PAGE> 14
PERFORMANCE SUMMARIES (continued)
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolios. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolios could lose money.
<TABLE>
<CAPTION>
INTERMEDIATE-TERM CORPORATE PORTFOLIO
TOTAL INVESTMENT RETURNS: NOVEMBER 1, 1993-JULY 31, 1997
- ------------------------------------------------
INTERMEDIATE-TERM
CORPORATE PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------
<S> <C> <C> <C> <C>
1994 0.4% 1.3% 1.7% 2.4%
1995 -9.7 6.0 -3.7 -4.0
1996 12.1 7.8 19.9 21.1
1997 -4.2 6.5 2.3 2.7
1998** 2.2 3.4 5.6 6.1
- ------------------------------------------------
</TABLE>
*Lehman 5-10 Year Investment Grade Index.
**Six months ended July 31, 1997.
See Financial Highlights table on page 27 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
GNMA PORTFOLIO
TOTAL INVESTMENT RETURNS: JUNE 27, 1980-JULY 31, 1997
- ------------------------------------------------
GNMA PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------
<S> <C> <C> <C> <C>
1981 -12.5% 6.2% -6.3% -8.8%
1982 -9.5 13.5 4.0 1.7
1983 16.3 15.8 32.1 39.6
1984 -0.1 12.3 12.2 12.0
1985 0.5 13.0 13.5 15.4
1986 7.2 12.4 19.6 22.6
1987 1.9 10.3 12.2 13.6
1988 -4.1 9.4 5.3 6.8
1989 -3.6 9.4 5.8 6.6
1990 2.1 9.9 12.0 12.9
1991 3.2 9.7 12.9 13.2
1992 4.1 8.9 13.0 12.9
1993 2.4 8.0 10.4 10.1
1994 -1.0 6.2 5.2 6.1
1995 -6.5 6.9 0.4 -0.3
1996 7.6 8.0 15.6 15.5
1997 -2.1 7.3 5.2 5.6
1998** 1.4 3.6 5.0 5.1
- ------------------------------------------------
</TABLE>
*Lehman GNMA Index.
**Six months ended July 31, 1997.
See Financial Highlights table on page 28 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997*
- ---------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ----------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Intermediate-Term Corporate Portfolio 11/1/93 8.40% -- -0.77%** 6.62%** 5.85%**
GNMA Portfolio 6/27/80 9.34 6.91% 0.71 8.29 9.00
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
**Since inception.
12
<PAGE> 15
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolios. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolios could lose money.
<TABLE>
<CAPTION>
LONG-TERM U.S. TREASURY PORTFOLIO
TOTAL INVESTMENT RETURNS: MAY 19, 1986-JULY 31, 1997
- ------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------
<S> <C> <C> <C> <C>
1987 3.1% 5.5% 8.6% 11.9%
1988 -7.7 8.0 0.3 1.5
1989 -2.2 8.6 6.4 5.1
1990 2.7 8.6 11.3 12.3
1991 2.2 8.8 11.0 11.6
1992 4.1 8.3 12.4 13.4
1993 6.1 8.0 14.1 14.6
1994 8.9 7.2 16.1 16.7
1995 -13.0 6.3 -6.7 -7.5
1996 18.7 8.0 26.7 27.4
1997 -8.2 6.4 -1.8 -1.6
1998** 4.7 3.4 8.1 9.0
- ------------------------------------------------
</TABLE>
*Lehman Long U.S. Treasury Index.
**Six months ended July 31, 1997.
See Financial Highlights table on page 28 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
LONG-TERM CORPORATE PORTFOLIO
TOTAL INVESTMENT RETURNS: JANUARY 31, 1977-JULY 31, 1997
- ------------------------------------------------
LONG-TERM CORPORATE PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------
<S> <C> <C> <C> <C>
1978 -2.6% 8.1% 5.5% 4.2%
1979 -4.8 8.5 3.7 2.6
1980 -13.8 8.8 -5.0 -12.0
1981 -3.5 11.7 8.2 3.0
1982 -4.7 13.2 8.5 -0.8
1983 13.3 15.0 28.3 43.4
1984 -2.0 12.3 10.3 9.9
1985 0.0 13.4 13.4 17.4
1986 7.4 12.9 20.3 25.1
1987 5.6 10.9 16.5 21.1
1988 -7.5 9.3 1.8 3.0
1989 -2.5 9.6 7.1 6.6
1990 1.1 9.6 10.7 11.2
1991 0.3 9.5 9.8 11.2
1992 7.6 9.5 17.1 15.5
1993 6.6 8.5 15.1 13.8
1994 6.5 7.3 13.8 12.6
1995 -11.9 6.8 -5.1 -5.3
1996 15.3 8.3 23.6 23.9
1997 -6.0 6.9 0.9 0.8
1998** 5.3 3.8 9.1 8.8
- ------------------------------------------------
</TABLE>
*Lehman Long Corporate AA or Better Bond Index.
**Six months ended July 31, 1997.
See Financial Highlights table on page 29 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997*
- --------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION --------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long-Term U.S. Treasury Portfolio 5/19/86 8.28% 8.86% 1.66% 7.82% 9.48%
Long-Term Corporate Portfolio 7/9/73 9.24 8.73 1.43 8.50 9.93
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
13
<PAGE> 16
PERFORMANCE SUMMARIES (continued)
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
HIGH YIELD CORPORATE PORTFOLIO
TOTAL INVESTMENT RETURNS: DECEMBER 27, 1978-JULY 31, 1997
- -------------------------------------------------
HIGH YIELD CORPORATE PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------------
<S> <C> <C> <C> <C>
1979 3.3% 0.0% 3.3% 2.0%
1980 -10.4 11.9 1.5 -8.7
1981 -8.2 13.0 4.8 4.6
1982 -7.3 15.3 8.0 3.3
1983 13.7 18.6 32.3 39.7
1984 0.1 14.1 14.2 11.8
1985 -5.0 14.4 9.4 10.0
1986 3.8 14.6 18.4 22.6
1987 6.9 13.2 20.1 20.7
1988 -8.6 11.1 2.5 4.2
1989 -1.1 12.5 11.4 10.8
1990 -13.4 11.6 -1.8 -3.0
1991 -15.3 12.1 -3.2 -5.1
1992 17.4 13.9 31.3 47.3
1993 4.0 10.7 14.7 15.1
1994 7.7 9.8 17.5 16.3
1995 -11.1 8.6 -2.5 -1.8
1996 9.0 10.0 19.0 19.7
1997 -0.3 9.3 9.0 10.5
1998** 2.4 4.5 6.9 7.7
- -------------------------------------------------
</TABLE>
*Lehman Mutual Fund BBB Rated or Better Bond Index through January 1984;
Lehman High Yield Bond Index thereafter.
**Six months ended July 31, 1997.
See Financial Highlights table on page 29 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997*
- --------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ---------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
High Yield Corporate Portfolio** 12/27/78 14.38% 10.95% -1.19% 10.92% 9.73%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
14
<PAGE> 17
[PHOTO]
FINANCIAL STATEMENTS
JULY 31, 1997 (unaudited)
The Statements of Net Assets, integral parts of the Financial Statements for
each of the Vanguard Fixed Income Securities Fund Portfolios, are included as
an insert to this Report (except for the GNMA Portfolio, whose Statement of Net
Assets is provided below).
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each Portfolio's holdings, including
each security's market value on the last day of the reporting period.
Securities are grouped and subtotaled by bond type (U.S. government and agency
issues, corporate bonds, foreign bonds, etc.); corporate bonds are further
classified by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Portfolio's
Net Assets. Finally, Net Assets are divided by the outstanding shares of the
Portfolio to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets of each Portfolio, you will find
a table displaying the composition of the Portfolio's net assets on both a
dollar and per-share basis. Undistributed Net Investment Income is usually zero
because the Portfolio distributes its net income to shareholders as a dividend
each day. Any realized gains must be distributed annually, so the bulk of net
assets consists of Paid in Capital (money invested by shareholders). The
balance shown for Accumulated Net Realized Gains usually approximates the
amount available to distribute to shareholders as capital gains as of the
statement date, but may differ because certain investments or transactions may
be treated differently for financial statement and tax purposes. Any
Accumulated Net Realized Losses, and any cumulative excess of distributions
over net realized gains, will appear as negative balances. Unrealized
Appreciation (Depreciation) is the difference between the value of the
Portfolio's investments and their cost, and reflects the gains (losses) that
would be realized if the Portfolio were to sell all of its investments at their
statement-date values.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
GNMA PORTFOLIO COUPON DATE (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
OBLIGATIONS (98.1%)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Assn. 6.50% 7/15/08-4/15/27 (1) $ 876,429 $ 865,763
Government National Mortgage Assn. 7.00% 4/15/07-6/15/27 (1) 2,040,972 2,051,446
Government National Mortgage Assn. 7.25% 12/15/26-2/15/27 (1) 4,948 4,998
Government National Mortgage Assn. 7.50% 12/15/01-6/15/27 (1) 2,506,995 2,563,233
Government National Mortgage Assn. 7.75% 2/15/27 (1) 19,880 20,399
Government National Mortgage Assn. 8.00% 5/15/01-9/15/26 (1) 1,245,465 1,296,716
Government National Mortgage Assn. 8.25% 8/15/04-7/15/08 (1) 5,463 5,725
Government National Mortgage Assn. 8.50% 1/20/05-5/15/26 (1) 537,350 567,480
Government National Mortgage Assn. 9.00% 9/15/01-2/15/23 (1) 328,735 355,223
Government National Mortgage Assn. 9.25% 5/15/16-6/15/18 (1) 2,462 2,644
Government National Mortgage Assn. 9.50% 12/15/00-12/15/22 (1) 164,486 179,165
Government National Mortgage Assn. 10.00% 7/20/14-8/20/18 (1) 3,319 3,620
Government National Mortgage Assn. 11.00% 2/15/10-2/20/16 (1) 1,030 1,150
Government National Mortgage Assn. 11.25% 6/15/13-2/20/16 (1) 589 659
Government National Mortgage Assn. 11.50% 6/15/10-11/20/15 (1) 1,158 1,300
Government National Mortgage Assn. 12.00% 10/15/10-1/20/16 (1) 1,910 2,191
Government National Mortgage Assn. 12.50% 11/20/13-7/20/15 (1) 1,181 1,367
Government National Mortgage Assn. 12.75% 6/15/14-12/15/14 (1) 146 168
Government National Mortgage Assn. 13.00% 1/15/11-1/20/15 (1) 1,000 1,162
Government National Mortgage Assn. 13.25% 8/15/14-10/15/14 (1) 131 151
Government National Mortgage Assn. 13.50% 5/15/10-12/15/14 (1) 305 356
Government National Mortgage Assn. 13.75% 9/20/14 (1) 9 11
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
GNMA PORTFOLIO COUPON DATE (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government National Mortgage Assn. 14.00% 6/15/11-9/15/12 (1) $ 201 $ 236
Government National Mortgage Assn. 15.00% 9/15/11-5/12/12 (1) 148 175
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OBLIGATIONS
(COST $7,708,536) 7,925,338
- ---------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.3%)
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $266,959) 5.82% 8/1/97 266,959 266,959
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.4%)
(COST $7,975,495) 8,192,297
- ---------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.4%)
- ---------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 73,783
Liabilities (183,958)
-----------
(110,175)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------------------------------------------------
Applicable to 779,054,409 outstanding $.001 par value shares
(authorized 2,100,000,000 shares) $8,082,122
===========================================================================================================================
NET ASSET VALUE PER SHARE $10.37
===========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $7,865,539 $10.09
Undistributed Net Investment Income -- --
Overdistributed Net Realized Gains (219) --
Unrealized Appreciation--Note E 216,802 .28
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS $8,082,122 $10.37
===========================================================================================================================
</TABLE>
16
<PAGE> 19
STATEMENT OF OPERATIONS
This Statement shows interest earned by each Portfolio during the reporting
period, and details the operating expenses charged to the Portfolio. These
expenses directly reduce the amount of investment income available to pay to
shareholders as income dividends. This Statement also shows any Net Gain
(Loss) realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If a
Portfolio invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SHORT-TERM SHORT-TERM INTERMEDIATE-TERM
U.S. TREASURY FEDERAL CORPORATE U.S. TREASURY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------------
SIX MONTHS ENDED JULY 31, 1997
-----------------------------------------------------------------
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest $29,472 $42,723 $146,360 $42,097
-----------------------------------------------------------------
Total Income 29,472 42,723 146,360 42,097
-----------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 79 109 369 103
The Vanguard Group--Note C
Management and Administrative 1,182 1,654 5,548 1,582
Marketing and Distribution 145 170 667 171
Taxes (other than income taxes) 36 51 170 48
Custodian Fees 6 16 33 7
Legal Fees -- -- -- --
Auditing Fees 3 3 5 3
Shareholders' Reports 11 23 43 17
Annual Meeting and Proxy Costs 1 2 4 2
Directors' Fees and Expenses 1 2 5 2
-----------------------------------------------------------------
Total Expenses 1,464 2,030 6,844 1,935
- -------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 28,008 40,693 139,516 40,162
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold (568) (1,115) 2,928 (2,393)
Futures Contracts -- -- (1,770) (789)
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (568) (1,115) 1,158 (3,182)
- -------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities 5,199 6,785 32,348 32,340
Futures Contracts -- -- (4,748) (4,221)
- -------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 5,199 6,785 27,600 28,119
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $32,639 $46,363 $168,274 $65,099
===============================================================================================================================
</TABLE>
The Statements of Net Assets for the Short-Term U.S. Treasury, Short-Term
Federal, Short-Term Corporate, and Intermediate-Term U.S. Treasury Portfolios,
integral parts of the Financial Statements for each Portfolio, are included as
an insert to this Report.
17
<PAGE> 20
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM LONG-TERM LONG-TERM
CORPORATE GNMA U.S. TREASURY CORPORATE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------------
SIX MONTHS ENDED JULY 31, 1997
---------------------------------------------------------------------
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest $21,602 $280,561 $30,363 $120,309
---------------------------------------------------------------------
Total Income 21,602 280,561 30,363 120,309
---------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 50 516 72 471
The Vanguard Group--Note C
Management and Administrative 759 10,683 1,077 4,702
Marketing and Distribution 95 777 120 360
Taxes (other than income taxes) 23 283 33 122
Custodian Fees 8 421 10 16
Legal Fees -- -- -- 23
Auditing Fees 3 6 3 4
Shareholders' Reports 7 88 15 39
Annual Meeting and Proxy Costs 1 8 1 3
Directors' Fees and Expenses 1 10 1 4
---------------------------------------------------------------------
Total Expenses 947 12,792 1,332 5,744
- -------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 20,655 267,769 29,031 114,565
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 835 (18) (264) 8,956
Futures Contracts (685) -- (247) --
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 150 (18) (511) 8,956
- -------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities 16,068 114,490 44,481 168,113
Futures Contracts (1,582) -- (2,926) --
- -------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 14,486 114,490 41,555 168,113
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $35,291 $382,241 $70,075 $291,634
===============================================================================================================================
</TABLE>
The Statements of Net Assets for the Intermediate-Term Corporate, Long-Term
U.S. Treasury, and Long-Term Corporate Portfolios, integral parts of the
Financial Statements for each Portfolio, are included as an insert to this
Report.
18
<PAGE> 21
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
HIGH YIELD
CORPORATE
PORTFOLIO
----------------
SIX MONTHS ENDED
JULY 31, 1997
----------------
(000)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Interest $172,145
----------------
Total Income 172,145
----------------
EXPENSES
Investment Advisory Fees--Note B 760
The Vanguard Group--Note C
Management and Administrative 4,883
Marketing and Distribution 394
Taxes (other than income taxes) 142
Custodian Fees 5
Legal Fees 127
Auditing Fees 4
Shareholders' Reports 41
Annual Meeting and Proxy Costs 3
Directors' Fees and Expenses 5
----------------
Total Expenses 6,364
- -------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 165,781
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 19,714
Futures Contracts --
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 19,714
- -------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 78,859
Futures Contracts --
- -------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 78,859
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $264,354
===============================================================================================================================
</TABLE>
The Statement of Net Assets for the High Yield Corporate Portfolio, an integral
part of the Financial Statements for the Portfolio, is included as an insert to
this Report.
19
<PAGE> 22
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each Portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes
information that is detailed in the Statement of Operations. Because the
Portfolio distributes its income to shareholders each day, the amounts of
Distributions--Net Investment Income generally equal the net income earned as
shown under the Operations section. The amounts of Distributions--Realized
Capital Gain may not match the capital gains shown in the Operations section,
because distributions are determined on a tax basis and may be made in a period
different from the one in which the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount
shareholders invested in the Portfolio, either by purchasing shares or by
reinvesting distributions, and the amounts redeemed. The corresponding numbers
of Shares Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SHORT-TERM
U.S. TREASURY PORTFOLIO FEDERAL PORTFOLIO
-------------------------------- -------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1997 JAN. 31, 1997 JUL. 31, 1997 JAN. 31, 1997
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 28,008 $ 54,617 $ 40,693 $ 82,143
Realized Net Gain (Loss) (568) 5,716 (1,115) 1,232
Change in Unrealized Appreciation
(Depreciation) 5,199 (23,065) 6,785 (25,088)
--------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 32,639 37,268 46,363 58,287
--------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (28,008) (54,617) (40,693) (82,143)
Realized Capital Gain -- -- -- --
--------------------------------------------------------------------
Total Distributions (28,008) (54,617) (40,693) (82,143)
--------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 155,271 748,942 176,574 378,599
Issued in Lieu of Cash Distributions 25,007 48,587 34,932 69,751
Redeemed (163,252) (729,642) (197,507) (478,368)
--------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions 17,026 67,887 13,999 (30,018)
- --------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 21,657 50,538 19,669 (53,874)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 969,742 919,204 1,347,862 1,401,736
--------------------------------------------------------------------
End of Period $991,399 $969,742 $1,367,531 $1,347,862
================================================================================================================================
(1) Shares Issued (Redeemed)
Issued 15,333 73,794 17,541 37,486
Issued in Lieu of Cash Distributions 2,469 4,793 3,470 6,914
Redeemed (16,122) (71,920) (19,611) (47,354)
--------------------------------------------------------------------
Net Increase (Decrease)
in Shares Outstanding 1,680 6,667 1,400 (2,954)
================================================================================================================================
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INTERMEDIATE-TERM
CORPORATE PORTFOLIO U.S. TREASURY PORTFOLIO
--------------------------------- --------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1997 JAN. 31, 1997 JUL. 31, 1997 JAN. 31, 1997
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 139,516 $ 257,866 $ 40,162 $ 77,367
Realized Net Gain (Loss) 1,158 749 (3,182) (1,557)
Change in Unrealized Appreciation
(Depreciation) 27,600 (68,454) 28,119 (60,573)
---------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 168,274 190,161 65,099 15,237
---------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (139,516) (257,866) (40,162) (77,367)
Realized Capital Gain -- -- -- --
---------------------------------------------------------------------
Total Distributions (139,516) (257,866) (40,162) (77,367)
---------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 794,529 1,951,629 231,007 462,699
Issued in Lieu of Cash Distributions 121,274 220,371 29,716 57,839
Redeemed (826,476) (1,446,570) (222,419) (406,183)
---------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions 89,327 725,430 38,304 114,355
- --------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 118,085 657,725 63,241 52,225
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 4,530,738 3,873,013 1,278,585 1,226,360
---------------------------------------------------------------------
End of Period $4,648,823 $4,530,738 $1,341,826 $1,278,585
================================================================================================================================
(1) Shares Issued (Redeemed)
Issued 74,156 181,913 22,381 44,418
Issued in Lieu of Cash Distributions 11,320 20,549 2,881 5,590
Redeemed (77,201) (134,781) (21,570) (39,225)
---------------------------------------------------------------------
Net Increase (Decrease)
in Shares Outstanding 8,275 67,681 3,692 10,783
================================================================================================================================
</TABLE>
21
<PAGE> 24
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM
CORPORATE PORTFOLIO GNMA PORTFOLIO
---------------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1997 JAN. 31, 1997 JUL. 31, 1997 JAN. 31, 1997
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 20,655 $ 34,252 $ 267,769 $ 510,249
Realized Net Gain (Loss) 150 (49) (18) 7,036
Change in Unrealized Appreciation
(Depreciation) 14,486 (17,521) 114,490 (151,270)
---------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 35,291 16,682 382,241 366,015
---------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (20,655) (34,252) (267,769) (510,249)
Realized Capital Gain -- (929) (1,985) --
---------------------------------------------------------------------
Total Distributions (20,655) (35,181) (269,754) (510,249)
---------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 160,711 462,553 1,019,617 1,577,178
Issued in Lieu of Cash Distributions 16,899 28,621 203,587 388,322
Redeemed (80,396) (304,839) (653,649) (1,419,326)
---------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions 97,214 186,335 569,555 546,174
- --------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 111,850 167,836 682,042 401,940
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 591,773 423,937 7,400,080 6,998,140
---------------------------------------------------------------------
End of Period $703,623 $591,773 $8,082,122 $7,400,080
================================================================================================================================
(1) Shares Issued (Redeemed)
Issued 16,594 47,700 99,899 155,134
Issued in Lieu of Cash Distributions 1,746 2,960 19,985 38,301
Redeemed (8,315) (31,479) (64,200) (139,855)
---------------------------------------------------------------------
Net Increase (Decrease)
in Shares Outstanding 10,025 19,181 55,684 53,580
================================================================================================================================
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
LONG-TERM LONG-TERM
U.S. TREASURY PORTFOLIO CORPORATE PORTFOLIO
-------------------------------- --------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1997 JAN. 31, 1997 JUL. 31, 1997 JAN. 31, 1997
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 29,031 $ 59,745 $ 114,565 $ 235,167
Realized Net Gain (Loss) (511) (7,503) 8,956 36,899
Change in Unrealized Appreciation
(Depreciation) 41,555 (66,655) 168,113 (242,281)
----------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 70,075 (14,413) 291,634 29,785
----------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (29,031) (59,745) (114,565) (235,167)
Realized Capital Gain -- (1,178) (1,489) (58,376)
----------------------------------------------------------------------
Total Distributions (29,031) (60,923) (116,054) (293,543)
----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 138,484 341,995 316,519 801,372
Issued in Lieu of Cash Distributions 22,279 47,495 94,180 241,994
Redeemed (177,194) (331,974) (407,945) (832,158)
----------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions (16,431) 57,516 2,754 211,208
- --------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 24,613 (17,820) 178,334 (52,550)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 897,943 915,763 3,323,539 3,376,089
----------------------------------------------------------------------
End of Period $922,556 $897,943 $3,501,873 $3,323,539
================================================================================================================================
(1) Shares Issued (Redeemed)
Issued 14,162 34,824 36,529 91,142
Issued in Lieu of Cash Distributions 2,276 4,844 10,841 27,646
Redeemed (18,125) (33,750) (46,998) (95,201)
----------------------------------------------------------------------
Net Increase (Decrease)
in Shares Outstanding (1,687) 5,918 372 23,587
================================================================================================================================
</TABLE>
23
<PAGE> 26
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
HIGH YIELD
CORPORATE PORTFOLIO
--------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUL. 31, 1997 JAN. 31, 1997
(000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 165,781 $ 289,283
Realized Net Gain (Loss) 19,714 19,951
Change in Unrealized Appreciation (Depreciation) 78,859 (20,017)
--------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 264,354 289,217
--------------------------------
DISTRIBUTIONS
Net Investment Income (165,781) (289,283)
Realized Capital Gain -- --
--------------------------------
Total Distributions (165,781) (289,283)
--------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 611,737 1,071,470
Issued in Lieu of Cash Distributions 115,688 200,065
Redeemed (338,226) (604,106)
--------------------------------
Net Increase (Decrease) from Capital Share Transactions 389,199 667,429
- --------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 487,772 667,363
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 3,673,942 3,006,579
--------------------------------
End of Period $4,161,714 $3,673,942
================================================================================================================================
(1) Shares Issued (Redeemed)
Issued 77,513 138,649
Issued in Lieu of Cash Distributions 14,680 25,903
Redeemed (43,127) (78,406)
--------------------------------
Net Increase (Decrease) in Shares Outstanding 49,066 86,146
================================================================================================================================
</TABLE>
24
<PAGE> 27
FINANCIAL HIGHLIGHTS
This table summarizes each Portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the Portfolio's Total
Return and shows net investment income and expenses as percentages of average
net assets. These data will help you assess: the variability of the Portfolio's
net income and total returns from year to year; the relative contributions of
net income and capital gains to the Portfolio's total return; how much it costs
to operate the Portfolio; and the extent to which the Portfolio tends to
distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Portfolio for one year.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SHORT-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED --------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.16 $10.36 $ 9.89 $10.41 $10.41 $10.12
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .292 .586 .625 .532 .486 .528
Net Realized and Unrealized Gain (Loss)
on Investments .050 (.200) .470 (.500) .079 .332
--------------------------------------------------------------
Total from Investment Operations .342 .386 1.095 .032 .565 .860
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.292) (.586) (.625) (.532) (.486) (.528)
Distributions from Realized Capital Gains -- -- -- (.020) (.079) (.042)
--------------------------------------------------------------
Total Distributions (.292) (.586) (.625) (.552) (.565) (.570)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.21 $10.16 $10.36 $ 9.89 $10.41 $10.41
==========================================================================================================================
TOTAL RETURN 3.42% 3.89% 11.37% 0.40% 5.54% 8.74%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $991 $970 $919 $754 $729 $526
Ratio of Total Expenses to
Average Net Assets 0.30%* 0.25% 0.27% 0.28% 0.26% 0.26%
Ratio of Net Investment Income to
Average Net Assets 5.80%* 5.77% 6.14% 5.33% 4.64% 5.12%
Portfolio Turnover Rate 46%* 86% 93% 126% 86% 71%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
25
<PAGE> 28
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SHORT-TERM FEDERAL PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED --------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.11 $10.28 $ 9.79 $10.38 $10.38 $10.31
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .304 .615 .601 .550 .522 .609
Net Realized and Unrealized Gain (Loss)
on Investments .040 (.170) .490 (.580) .110 .232
-------------------------------------------------------------
Total from Investment Operations .344 .445 1.091 (.030) .632 .841
-------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.304) (.615) (.601) (.550) (.522) (.609)
Distributions from Realized Capital Gains -- -- -- (.010) (.110) (.162)
-------------------------------------------------------------
Total Distributions (.304) (.615) (.601) (.560) (.632) (.771)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.15 $10.11 $10.28 $ 9.79 $10.38 $10.38
==========================================================================================================================
TOTAL RETURN 3.46% 4.51% 11.43% -0.21% 6.23% 8.49%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,368 $1,348 $1,402 $1,474 $1,936 $1,688
Ratio of Total Expenses to
Average Net Assets 0.30%* 0.25% 0.27% 0.28% 0.26% 0.27%
Ratio of Net Investment Income to
Average Net Assets 6.09%* 6.09% 5.93% 5.53% 4.98% 5.88%
Portfolio Turnover Rate 62%* 57% 74% 57% 49% 70%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ---------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.75 $10.94 $10.40 $10.94 $10.99 $10.88
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .329 .663 .671 .596 .605 .695
Net Realized and Unrealized Gain (Loss)
on Investments .070 (.190) .540 (.540) .049 .275
-------------------------------------------------------------
Total from Investment Operations .399 .473 1.211 .056 .654 .970
-------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.329) (.663) (.671) (.596) (.605) (.695)
Distributions from Realized Capital Gains -- -- -- -- (.099) (.165)
-------------------------------------------------------------
Total Distributions (.329) (.663) (.671) (.596) (.704) (.860)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.82 $10.75 $10.94 $10.40 $10.94 $10.99
==========================================================================================================================
TOTAL RETURN 3.78% 4.52% 11.95% 0.60% 6.11% 9.29%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $4,649 $4,531 $3,873 $2,924 $3,573 $2,811
Ratio of Total Expenses to
Average Net Assets 0.31%* 0.25% 0.27% 0.28% 0.26% 0.27%
Ratio of Net Investment Income to
Average Net Assets 6.19%* 6.18% 6.23% 5.66% 5.48% 6.33%
Portfolio Turnover Rate 51%* 45% 62% 69% 61% 71%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
26
<PAGE> 29
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED --------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.37 $10.90 $ 9.76 $10.82 $10.79 $10.19
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .322 .649 .662 .603 .617 .676
Net Realized and Unrealized Gain (Loss)
on Investments .200 (.530) 1.140 (1.033) .443 .617
-------------------------------------------------------------
Total from Investment Operations .522 .119 1.802 (.430) 1.060 1.293
-------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.322) (.649) (.662) (.603) (.617) (.676)
Distributions from Realized Capital Gains -- -- -- (.027) (.413) (.017)
-------------------------------------------------------------
Total Distributions (.322) (.649) (.662) (.630) (1.030) (.693)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.57 $10.37 $10.90 $ 9.76 $10.82 $10.79
==========================================================================================================================
TOTAL RETURN 5.15% 1.28% 18.96% -3.90% 10.09% 13.14%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,342 $1,279 $1,226 $848 $1,007 $673
Ratio of Total Expenses to
Average Net Assets 0.30%* 0.25% 0.28% 0.28% 0.26% 0.26%
Ratio of Net Investment Income to
Average Net Assets 6.29%* 6.26% 6.34% 6.05% 5.55% 6.44%
Portfolio Turnover Rate 28%* 42% 56% 128% 118% 123%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM CORPORATE PORTFOLIO
YEAR ENDED JANUARY 31,
SIX MONTHS ENDED ------------------------------- NOV. 1, 1993,* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 JAN. 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.72 $10.17 $ 9.07 $10.04 $10.00
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .317 .639 .658 .587 .125
Net Realized and Unrealized Gain (Loss)
on Investments .210 (.430) 1.100 (.970) .040
---------------------------------------------------------------
Total from Investment Operations .527 .209 1.758 (.383) .165
---------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.317) (.639) (.658) (.587) (.125)
Distributions from Realized Capital Gains -- (.020) -- -- --
---------------------------------------------------------------
Total Distributions (.317) (.659) (.658) (.587) (.125)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.93 $ 9.72 $10.17 $ 9.07 $10.04
============================================================================================================================
TOTAL RETURN 5.55% 2.29% 19.94% -3.73% 1.66%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $704 $592 $424 $163 $85
Ratio of Total Expenses to
Average Net Assets 0.30%** 0.25% 0.28% 0.28% 0.25%**
Ratio of Net Investment Income to
Average Net Assets 6.60%** 6.61% 6.70% 6.46% 5.11%**
Portfolio Turnover Rate 85%** 85% 78% 97% 74%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
**Annualized.
27
<PAGE> 30
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
GNMA PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.23 $10.45 $ 9.71 $10.39 $10.50 $10.25
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .359 .727 .734 .693 .641 .778
Net Realized and Unrealized Gain (Loss)
on Investments .143 (.220) .740 (.673) (.110) .250
-------------------------------------------------------------
Total from Investment Operations .502 .507 1.474 .020 .531 1.028
-------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.359) (.727) (.734) (.693) (.641) (.778)
Distributions from Realized Capital Gains (.003) -- -- (.007) -- --
-------------------------------------------------------------
Total Distributions (.362) (.727) (.734) (.700) (.641) (.778)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.37 $10.23 $10.45 $ 9.71 $10.39 $10.50
==========================================================================================================================
TOTAL RETURN 5.03% 5.15% 15.64% 0.36% 5.18% 10.40%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $8,082 $7,400 $6,998 $5,851 $7,043 $7,167
Ratio of Total Expenses to
Average Net Assets 0.34%* 0.27% 0.29% 0.30% 0.28% 0.29%
Ratio of Net Investment Income to
Average Net Assets 7.11%* 7.16% 7.22% 7.04% 6.19% 7.38%
Portfolio Turnover Rate 0% 12% 7% 35% 2% 7%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.84 $10.73 $ 9.23 $10.75 $10.04 $10.14
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .320 .655 .669 .665 .685 .733
Net Realized and Unrealized Gain (Loss)
on Investments .460 (.877) 1.725 (1.401) .886 .600
-----------------------------------------------------------------
Total from Investment Operations .780 (.222) 2.394 (.736) 1.571 1.333
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.320) (.655) (.669) (.665) (.685) (.733)
Distributions from Realized Capital Gains -- (.013) (.225) (.119) (.176) (.700)
-----------------------------------------------------------------
Total Distributions (.320) (.668) (.894) (.784) (.861) (1.433)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.30 $ 9.84 $10.73 $ 9.23 $10.75 $10.04
==============================================================================================================================
TOTAL RETURN 8.15% -1.85% 26.72% -6.68% 16.09% 14.12%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $923 $898 $916 $671 $829 $874
Ratio of Total Expenses to
Average Net Assets 0.30%* 0.25% 0.27% 0.28% 0.26% 0.27%
Ratio of Net Investment Income to
Average Net Assets 6.60%* 6.66% 6.57% 7.02% 6.44% 7.26%
Portfolio Turnover Rate 15%* 31% 105% 85% 7% 170%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
28
<PAGE> 31
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
LONG-TERM CORPORATE PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED --------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.71 $9.43 $8.18 $9.36 $9.04 $8.63
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .304 .619 .627 .617 .632 .680
Net Realized and Unrealized Gain (Loss)
on Investments .464 (.566) 1.250 (1.108) .579 .561
--------------------------------------------------------------
Total from Investment Operations .768 .053 1.877 (.491) 1.211 1.241
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.304) (.619) (.627) (.617) (.632) (.680)
Distributions from Realized Capital Gains (.004) (.154) -- (.072) (.259) (.151)
--------------------------------------------------------------
Total Distributions (.308) (.773) (.627) (.689) (.891) (.831)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.17 $8.71 $9.43 $8.18 $9.36 $9.04
==========================================================================================================================
TOTAL RETURN 9.08% 0.86% 23.64% -5.12% 13.83% 15.06%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $3,502 $3,324 $3,376 $2,607 $3,166 $2,763
Ratio of Total Expenses to
Average Net Assets 0.36%* 0.28% 0.31% 0.32% 0.30% 0.31%
Ratio of Net Investment Income to
Average Net Assets 7.07%* 7.06% 7.03% 7.37% 6.71% 7.68%
Portfolio Turnover Rate 25%* 30% 49% 43% 77% 50%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
HIGH YIELD CORPORATE PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED --------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $7.87 $7.89 $7.24 $8.14 $7.56 $7.27
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .340 .688 .678 .679 .695 .727
Net Realized and Unrealized Gain (Loss)
on Investments .190 (.020) .650 (.900) .580 .290
-------------------------------------------------------------
Total from Investment Operations .530 .668 1.328 (.221) 1.275 1.017
-------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.340) (.688) (.678) (.679) (.695) (.727)
-------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- -- -- --
-------------------------------------------------------------
Total Distributions (.340) (.688) (.678) (.679) (.695) (.727)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $8.06 $7.87 $7.89 $7.24 $8.14 $7.56
==========================================================================================================================
TOTAL RETURN** 6.92% 9.01% 19.01% -2.52% 17.54% 14.68%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $4,162 $3,674 $3,007 $2,162 $2,625 $2,184
Ratio of Total Expenses to
Average Net Assets 0.34%* 0.29% 0.34% 0.34% 0.32% 0.34%
Ratio of Net Investment Income to
Average Net Assets 8.70%* 8.92% 8.85% 9.13% 8.81% 9.82%
Portfolio Turnover Rate 49%* 23% 38% 33% 51% 83%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
**Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
29
<PAGE> 32
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, or mutual
fund, and comprises the Short-Term U.S. Treasury, Short-Term Federal,
Short-Term Corporate, Intermediate-Term U.S. Treasury, Intermediate-Term
Corporate, GNMA, Long-Term U.S. Treasury, Long-Term Corporate, and High Yield
Corporate Portfolios. Certain of the Fund's investments 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 conform to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Bonds, and temporary cash investments acquired more
than 60 days to maturity, are valued using the latest bid prices or using
valuations based on a matrix system (which considers such factors as security
prices, yields, maturities, and credit ratings), both as furnished by
independent pricing services. Other temporary cash investments are valued at
amortized cost, which approximates market value.
2. FEDERAL INCOME TAXES: Each Portfolio intends to continue to qualify as a
regulated investment company and distribute all of its income. Accordingly, no
provision for federal income taxes is required in the financial statements.
3. REPURCHASE AGREEMENTS: Each Portfolio, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
the daily aggregate of which is invested in repurchase agreements secured by
U.S. government securities. Securities pledged as collateral for repurchase
agreements are held by a custodian bank until the agreements mature. Each
agreement requires that the market value of the collateral be sufficient to
cover payments of interest and principal; however, in the event of default or
bankruptcy by the other party to the agreement, retention of the collateral may
be subject to legal proceedings.
4. FUTURES CONTRACTS: Each Portfolio, except the Short-Term Federal
Portfolio, may use Municipal Bond Index, U.S. Treasury Bond, and U.S. Treasury
Note futures contracts, with the objectives of enhancing returns, managing
interest-rate risk, maintaining liquidity, diversifying credit risk, and
minimizing transaction costs. The Portfolios may purchase or sell futures
contracts instead of bonds to take advantage of pricing differentials between
the futures contracts and the underlying 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. The aggregate principal amounts of the contracts are not recorded in
the financial statements. Fluctuations in the value of the contracts are
recorded in the Statement of Net Assets as an asset (liability) and in the
Statement of Operations as unrealized appreciation (depreciation) until the
contracts are closed, when they are recorded as realized futures gains
(losses).
5. DISTRIBUTIONS: Distributions from net investment income are declared
daily and paid on the first business day of the following month. Annual
distributions from realized capital gains, if any, are recorded on the
ex-dividend date.
6. OTHER: Security transactions are accounted for on the date securities
are bought or sold. Costs used to determine realized gains (losses) on the sale
of investment securities are those of the specific securities sold. Premiums
and discounts on debt securities purchased are amortized and accreted,
respectively, to interest income over the lives of the respective securities.
30
<PAGE> 33
B. The Vanguard Group furnishes investment advisory services to the Short-Term
U.S. Treasury, Short-Term Federal, Short-Term Corporate, Intermediate-Term U.S.
Treasury, Intermediate-Term Corporate, and Long-Term U.S. Treasury Portfolios
on an at-cost basis.
Wellington Management Company, LLP provides investment advisory services to
the GNMA, Long-Term Corporate, and High Yield Corporate Portfolios for fees
calculated at an annual percentage rate of average net assets. For the six
months ended July 31, 1997, the investment advisory fees of the GNMA, Long-Term
Corporate, and High Yield Corporate Portfolios represented effective annual
rates of 0.01%, 0.03%, and 0.04%, respectively, of average net assets.
C. The Vanguard Group 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 July 31, 1997,
the Fund had contributed capital aggregating $1,844,000 to Vanguard (included
in Other Assets), representing 9.2% of Vanguard's capitalization. The Fund's
directors and officers are also directors and officers of Vanguard.
D. During the six months ended July 31, 1997, 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>
Short-Term Corporate $1,181,083 $960,328
Intermediate-Term Corporate 233,910 160,714
Long-Term Corporate 374,511 287,956
High Yield Corporate 1,304,737 832,589
------------------------------------------------------------------
</TABLE>
Purchases and sales of U.S. government securities were:
<TABLE>
<CAPTION>
------------------------------------------------------------------
(000)
--------------------------
PORTFOLIO PURCHASES SALES
------------------------------------------------------------------
<S> <C> <C>
Short-Term U.S. Treasury $214,446 $215,320
Short-Term Federal 404,512 419,016
Short-Term Corporate 112,718 142,977
Intermediate-Term U.S. Treasury 172,771 180,932
Intermediate-Term Corporate 72,401 93,566
GNMA 876,164 --
Long-Term U.S. Treasury 63,644 86,430
Long-Term Corporate 25,669 141,382
High Yield Corporate 89,914 79,497
------------------------------------------------------------------
</TABLE>
31
<PAGE> 34
At January 31, 1997, the Portfolios had the following capital losses
available to offset future net capital gains:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
EXPIRATION
FISCAL YEAR(S) AMOUNT
PORTFOLIO ENDING JANUARY 31, (000)
-------------------------------------------------------------------
<S> <C> <C>
Short-Term U.S. Treasury 2003-2006 $ 8,344
Short-Term Federal 2003-2004 31,035
Short-Term Corporate 2003-2004 30,792
Intermediate-Term U.S. Treasury 2003-2006 30,381
Intermediate-Term Corporate 2005 49
Long-Term U.S. Treasury 2005-2006 7,194
High Yield Corporate 1999-2000 81,715
-------------------------------------------------------------------
</TABLE>
E. At July 31, 1997, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
(000)
----------------------------------------------------
APPRECIATED DEPRECIATED NET UNREALIZED
PORTFOLIO SECURITIES SECURITIES APPRECIATION
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term U.S. Treasury $ 7,738 $ (164) $ 7,574
Short-Term Federal 15,542 (1,306) 14,236
Short-Term Corporate 48,822 (4,754) 44,068
Intermediate-Term U.S. Treasury 41,073 (737) 40,336
Intermediate-Term Corporate 18,038 (632) 17,406
GNMA 241,393 (24,591) 216,802
Long-Term U.S. Treasury 78,846 -- 78,846
Long-Term Corporate 237,393 (6,026) 231,367
High Yield Corporate 171,874 (4,944) 166,930
-----------------------------------------------------------------------------------
</TABLE>
At July 31, 1997, the aggregate settlement value of open futures
contracts expiring in September 1997 and the related unrealized depreciation
were:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
(000)
---------------------------------
NUMBER OF AGGREGATE
SHORT SETTLEMENT UNREALIZED
PORTFOLIO/FUTURES CONTRACTS CONTRACTS VALUE DEPRECIATION
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Corporate/
5-Year U.S. Treasury Note 1,900 $205,170 $(4,748)
Intermediate-Term U.S. Treasury/
U.S. Treasury Note 1,120 124,320 (4,221)
Intermediate-Term Corporate/
U.S. Treasury Note 446 49,506 (1,582)
Long-Term U.S. Treasury/
U.S. Treasury Bond 427 49,852 (2,926)
-------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 35
F. The market values of securities on loan to broker/dealers at July 31,
1997, and collateral received with respect to such loans, were:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
(000)
-----------------------------------------------
COLLATERAL RECEIVED
------------------------------
MARKET VALUE
OF LOANED U.S. TREASURY
PORTFOLIO SECURITIES CASH SECURITIES
---------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Corporate $ 14,321 $ 14,578 --
Intermediate-Term
U.S. Treasury 62,671 63,831 --
Intermediate-Term
Corporate 15,588 15,875 --
Long-Term U.S. Treasury 7,517 7,639 --
Long-Term Corporate 13,758 1,556 $13,138
High Yield Corporate 248,977 161,255 95,216
---------------------------------------------------------------------
</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, retention of the
collateral may be subject to legal proceedings.
"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and
"500" are trademarks of
The McGraw-Hill Companies, Inc.
Frank Russell Company is the owner of trademarks and copyrights relating to the
Russell Indexes.
33
<PAGE> 36
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer,
Inc.; Managing Director of Global Health Care Partners/DLJ Merchant
Banking Partners; Director of Sun Company, Inc. and Westinghouse
Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
IKON Office Solutions, Inc., Raytheon Co., Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.; Trustee Emerita of Wellesley
College.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
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., Procter & Gamble 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; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President,
Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President,
Institutional Investor Group.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
http://www.vanguard.com [email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 37
[PHOTO]
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Growth and Income Portfolio
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-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 Portfolios
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
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard International Value Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q282-7/97
<PAGE> 38
[PHOTO]
VANGUARD FIXED INCOME SECURITIES FUND
FINANCIAL STATEMENTS
JULY 31, 1997 (unaudited)
The Statement of Net Assets should be read in conjunction with the Statement of
Operations, Statement of Changes in Net Assets, Financial Highlights, and Notes
to Financial Statements, all of which appear in the accompanying Report. The
Statement of Net Assets for the GNMA Portfolio begins on page 15 of that Report.
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each Portfolio's holdings, including
each security's market value on the last day of the reporting period. Securities
are grouped and subtotaled by bond type (U.S. government and agency issues,
corporate bonds, foreign bonds, etc.); corporate bonds are further classified by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the Portfolio's Net Assets. Finally,
Net Assets are divided by the outstanding shares of the Portfolio to arrive at
its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets of each Portfolio, you will find a
table displaying the composition of the Portfolio's net assets on both a dollar
and per-share basis. Undistributed Net Investment Income is usually zero because
the Portfolio distributes its net income to shareholders as a dividend each day.
Any realized gains must be distributed annually, so the bulk of net assets
consists of Paid in Capital (money invested by shareholders). The balance shown
for Accumulated Net Realized Gains usually approximates the amount available to
distribute to shareholders as capital gains as of the statement date, but may
differ because certain investments or transactions may be treated differently
for financial statement and tax purposes. Any Accumulated Net Realized Losses,
and any cumulative excess of distributions over net realized gains, will appear
as negative balances. Unrealized Appreciation (Depreciation) is the difference
between the value of the Portfolio's investments and their cost, and reflects
the gains (losses) that would be realized if the Portfolio were to sell all of
its investments at their statement-date values.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Short-Term U.S. Treasury Portfolio............... 1
Short-Term Federal Portfolio..................... 3
Short-Term Corporate Portfolio................... 5
Intermediate-Term U.S. Treasury Portfolio........ 11
Intermediate-Term Corporate Portfolio............ 12
Long-Term U.S. Treasury Portfolio................ 16
Long-Term Corporate Portfolio.................... 17
High Yield Corporate Portfolio................... 21
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (96.8%)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Inflation-Indexed Note 3.625% 7/15/02 $ 19,594 $ 19,612
U.S. Treasury Notes 4.75% 8/31/98 64,000 63,443
U.S. Treasury Notes 6.125% 8/31/98 27,000 27,149
U.S. Treasury Notes 6.25% 7/31/98 75,900 76,408
U.S. Treasury Notes 6.75% 6/30/99 133,500 136,007
U.S. Treasury Notes 6.875% 8/31/99 111,000 113,460
U.S. Treasury Notes 7.125% 9/30/99 82,600 84,905
U.S. Treasury Notes 7.75% 11/30/99 77,900 81,250
U.S. Treasury Notes 7.75% 12/31/99 207,200 216,391
U.S. Treasury Notes 7.75% 1/31/00 73,600 76,952
Bariven, SA Eximbank Guaranteed Export Financing
(U.S. Government Guaranteed) 6.277% 4/15/01 (1)(3) 13,600 13,665
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 4.62% 10/15/98 (1)(2) 6,000 5,946
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 6.475% 5/15/00 (1) 7,800 7,855
</TABLE>
1
<PAGE> 39
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 6.82% 4/15/99 (1)(2) $ 2,857 $ 2,884
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 8.038% 1/15/00 (1) 7,500 7,712
Government Export Trust (U.S. Government Guaranteed) 4.85% 11/1/97 (1) 1,200 1,198
Government Export Trust (U.S. Government Guaranteed) 5.69% 2/1/98 (1) 2,400 2,400
Government Export Trust (U.S. Government Guaranteed) 7.75% 1/1/00 (1)(2) 6,666 6,824
Government Trust Certificate (Israel)(U.S. Government Guaranteed) 8.55% 11/15/97 (1) 83 84
Guaranteed Export Certificates (U.S. Government Guaranteed) 4.743% 9/15/98 (1) 7,800 7,754
Guaranteed Trade Trust (U.S. Government Guaranteed) 4.77% 11/1/97 (1)(2) 1,670 1,666
Private Export Funding Corp. (U.S. Government Guaranteed) 5.65% 3/15/03 (1) 6,380 6,325
- -------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $952,316) 959,890
- -------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.8%)
- -------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $27,670) 5.82% 8/1/97 27,670 27,670
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(COST $979,986) 987,560
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.4%)
- -------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 12,959
Liabilities (9,120)
---------
3,839
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------
Applicable to 97,104,352 outstanding $.001 par value shares
(authorized 1,250,000,000 shares) $991,399
===================================================================================================================
NET ASSET VALUE PER SHARE $10.21
===================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At July 31, 1997, the aggregate
value of these securities was $17,320,000, representing 1.75% of net assets.
(3) Restricted security representing 1.4% of net assets at July 31, 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $992,797 $10.22
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note D (8,972) (.09)
Unrealized Appreciation--Note E 7,574 .08
===================================================================================================================
NET ASSETS $991,399 $10.21
===================================================================================================================
</TABLE>
2
<PAGE> 40
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM FEDERAL PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (95.2%)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES (14.7%)
Agency For International Development (U.S. Government Guaranteed) 7.75% 4/1/98 (1) $ 8,087 $ 8,156
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 5.10% 4/15/98 (1)(3) 2,302 2,294
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 5.295% 10/15/97 (1)(3) 2,655 2,652
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 5.48% 10/15/97 (1)(3) 1,350 1,349
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 6.82% 4/15/99 (1)(3) 2,234 2,255
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 8.038% 1/15/00 (1) 7,500 7,712
Government Export Trust (U.S. Government Guaranteed) 4.61% 9/1/98 (1) 7,200 7,157
Government Export Trust (U.S. Government Guaranteed) 5.41% 3/1/99 (1)(3) 3,545 3,534
Government Export Trust (U.S. Government Guaranteed) 5.69% 2/1/98 (1) 6,524 6,523
Guaranteed Export Certificates (U.S. Government Guaranteed) 4.43% 6/15/98 (1) 6,947 6,893
Guaranteed Export Certificates (U.S. Government Guaranteed) 4.743% 9/15/98 (1) 1,127 1,120
Guaranteed Export Certificates (U.S. Government Guaranteed) 4.813% 12/15/98 (1) 5,243 5,208
Guaranteed Export Certificates (U.S. Government Guaranteed) 6.61% 9/15/99 (1) 11,374 11,457
Guaranteed Trade Trust (U.S. Government Guaranteed) 4.86% 4/1/98 (1) 3,160 3,146
Overseas Private Investment Corp. (U.S. Government Guaranteed) 7.815% 11/15/01 (1) 5,625 5,828
Overseas Private Investment Corp. (U.S. Government Guaranteed) 8.75% 11/15/01 (1) 8,438 8,908
Private Export Funding Corp. (U.S. Government Guaranteed) 5.75% 4/30/98 9,800 9,815
Private Export Funding Corp. (U.S. Government Guaranteed) 8.95% 10/31/97 7,575 7,638
Private Export Funding Corp. (U.S. Government Guaranteed) 9.45% 12/31/99 33,580 36,285
U.S. Exim Trust (U.S. Government Guaranteed) 5.20% 8/25/97 (1)(3) 3,600 3,599
U.S. Government Trust Certificates (U.S. Government Guaranteed) 7.50% 8/15/00 (1) 9,601 9,810
U.S. Government Trust Certificates (U.S. Government Guaranteed) 8.00% 5/15/98 (1) 4,286 4,303
U.S. Treasury Inflation-Indexed Note 3.375% 1/15/07 20,211 19,889
U.S. Treasury Inflation-Indexed Note 3.625% 7/15/02 25,992 26,016
---------
201,547
---------
AGENCY BONDS AND NOTES (60.4%)
Federal Home Loan Bank 5.20% 10/20/00 31,000 30,665
Federal Home Loan Bank 5.215% 7/8/98 4,750 4,733
Federal Home Loan Bank 5.43% 2/25/99 10,000 9,966
Federal Home Loan Bank 5.448% 8/25/97 (2) 25,000 24,730
Federal Home Loan Bank 6.10% 10/7/98 25,000 25,155
Federal Home Loan Bank 9.30% 1/25/99 40,050 42,112
Federal Home Loan Mortgage Corp. 5.875% 3/22/00 15,000 15,008
Federal Home Loan Mortgage Corp. 6.747% 8/23/01 19,350 19,598
Federal Home Loan Mortgage Corp. 6.92% 1/25/12 (1) 15,000 15,219
Federal National Mortgage Assn. 4.70% 9/10/98 36,200 35,830
Federal National Mortgage Assn. 4.94% 10/30/98 20,000 19,814
Federal National Mortgage Assn. 5.23% 1/25/98 67,535 67,108
Federal National Mortgage Assn. 5.33% 6/26/98 17,535 17,495
Federal National Mortgage Assn. 5.40% 3/12/99 13,000 12,946
Federal National Mortgage Assn. 5.91% 2/25/00 60,000 60,090
Federal National Mortgage Assn. 6.07% 3/15/01 44,800 44,635
Federal National Mortgage Assn. 6.14% 11/1/99 19,000 19,132
Federal National Mortgage Assn. 6.18% 12/10/01 25,000 24,950
Federal National Mortgage Assn. 6.25% 8/3/98 7,080 7,133
Federal National Mortgage Assn. 6.375% 10/13/00 9,000 9,038
Federal National Mortgage Assn. 6.43% 4/11/99 23,500 23,773
Federal National Mortgage Assn. 6.44% 11/15/01 28,635 28,763
Federal National Mortgage Assn. 6.45% 2/14/02 10,000 10,058
Federal National Mortgage Assn. 6.59% 4/17/00 10,000 10,181
Federal National Mortgage Assn. 6.60% 6/24/99 30,000 30,448
Federal National Mortgage Assn. 6.70% 8/10/01 30,000 30,346
Federal National Mortgage Assn. 6.71% 7/24/01 15,000 15,399
Federal National Mortgage Assn. 6.74% 5/7/01 10,000 10,115
Federal National Mortgage Assn. 7.00% 7/13/98 64,150 65,054
Federal National Mortgage Assn. 7.23% 9/15/99 15,000 15,423
Federal National Mortgage Assn. 8.35% 11/10/99 10,270 10,818
Federal National Mortgage Assn. 8.45% 7/12/99 17,845 18,713
Federal National Mortgage Assn. 11.50% 11/1/99 46,000 51,446
---------
825,894
---------
</TABLE>
3
<PAGE> 41
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM FEDERAL PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MORTGAGE OBLIGATIONS (20.1%)
Federal Home Loan Mortgage Corp.
(Collateralized Mortgage Obligations) 6.50% 3/15/00 (1) $23,337 $ 23,400
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 5.50% 2/5/98 (1) 3,846 3,838
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 5.50% 5/1/99 (1) 7,404 7,377
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 5.50% 11/1/00 (1) 13,648 13,466
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 5.50% 1/1/01 (1) 11,364 11,212
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 7/1/98 (1) 9,269 9,268
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 9/1/98 (1) 23,334 23,331
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 10/1/98 (1) 18,263 18,261
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 1/1/99 (1) 5,321 5,319
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 3/1/99 (1) 6,083 6,080
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 5/1/00 (1) 9,039 9,017
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 9/1/00 (1) 9,724 9,691
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 11/1/00 (1) 39,601 39,478
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 6/1/03 (1) 14,749 14,653
Federal National Mortgage Assn. (Collateralized Mortgage Obligations) 5.50% 9/25/00 (1) 11,954 11,862
Federal National Mortgage Assn. (Pooled Mortgage Notes) 6.00% 1/1/01 (1) 39,818 39,695
Federal National Mortgage Assn. (Pooled Mortgage Notes) 6.00% 7/1/02 (1) 19,155 19,083
Federal National Mortgage Assn. (Pooled Mortgage Notes) 6.00% 9/1/02 (1) 5,441 5,407
Federal National Mortgage Assn. (Pooled Mortgage Notes) 6.00% 5/1/04 (1) 3,889 3,862
----------
274,300
----------
- ------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $1,287,505) 1,301,741
- ------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.9%)
- ------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $53,252) 5.82% 8/1/97 53,252 53,252
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.1%)
(COST $1,340,757) 1,354,993
- ------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.9%)
- ------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 19,278
Liabilities (6,740)
----------
12,538
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------------------------
Applicable to 134,758,424 outstanding $.001 par value shares
(authorized 1,300,000,000 shares) $1,367,531
==================================================================================================================
NET ASSET VALUE PER SHARE $10.15
==================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Floating Rate Note.
(3) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At July 31, 1997,
the aggregate value of these securities was $15,683,000, representing 1.1%
of net assets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,385,571 $10.28
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note D (32,276) (.24)
Unrealized Appreciation--Note E 14,236 .11
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,367,531 $10.15
==================================================================================================================
</TABLE>
4
<PAGE> 42
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
SHORT-TERM CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (82.2%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSET BACKED SECURITIES (8.4%)
Banco Nacional de Mexico CCMT 6.23% 8/1/02 (1)(4) Aaa $ 25,000 $ 25,094
CIT Home Equity Loan Trust 6.37% 3/15/12 (1) Aaa 21,000 21,079
Carco Auto Loan Master Trust 7.875% 7/15/99 (1) Aaa 57,000 57,035
Chase Manhattan Auto Trust 6.65% 9/15/03 (1) A2 17,576 17,867
The Chase Manhattan Corp. Grantor Trust 6.00% 9/17/01 (1) Aaa 14,292 14,333
Citibank Credit Card Master Trust 6.70% 2/15/04 (1) A2 13,000 13,151
Contimortgage Home Equity Loan Trust 6.68% 5/15/12 (1) Aaa 25,000 25,094
Discover Card Master Trust 6.70% 2/16/00 (1) Aaa 5,000 5,002
Ford Credit Auto Loan Master Trust 6.50% 8/15/02 (1) Aaa 35,000 35,365
Household Credit Card Master Trust 5.90% 5/15/02 (1) A2 20,000 19,855
Household Credit Card Master Trust 7.00% 12/15/99 (1) Aaa 66,479 66,697
MBNA Master Credit Card Trust 6.20% 8/15/99 (1) Aaa 5,833 5,835
Neiman Marcus Credit Card Master Trust 7.60% 6/15/03 (1) Aaa 5,000 5,191
Premier Auto Trust 6.55% 9/6/03 (1) A3 5,000 5,044
Standard Credit Card Master Trust 6.75% 6/7/00 (1) Aaa 21,000 21,294
Standard Credit Card Master Trust 7.875% 1/7/00 (1) Aaa 16,100 16,506
Standard Credit Card Master Trust 8.875% 9/7/99 (1) Aaa 26,131 26,869
Toyota Auto Grantor Trust 5.85% 3/15/01 (1) Aaa 9,879 9,903
----------
391,214
----------
FINANCE (43.9%)
AUTOMOBILE (2.9%)
Chrysler Financial Corp. 7.81% 2/23/98 A3 15,000 15,159
Ford Motor Credit Corp. 5.37% 9/8/98 A1 14,475 14,423
Ford Motor Credit Corp. 5.83% 6/29/98 A1 25,000 24,995
Ford Motor Credit Corp. 5.898% 11/1/97 (2) A1 30,000 29,991
General Motors Acceptance Corp. 6.00% 12/30/98 A3 5,000 5,010
General Motors Acceptance Corp. 7.25% 4/30/99 A3 21,100 21,529
General Motors Acceptance Corp. 8.40% 10/15/99 A3 5,000 5,236
General Motors Acceptance Corp. 8.50% 12/21/98 A3 20,000 20,695
BANKS (12.3%)
Bank South Inc. 10.20% 6/1/99 A3 12,500 13,375
Barnett Banks Inc. 6.25% 7/28/98 A2 36,800 36,999
Capital One Financial Corp. 6.49% 8/15/97 Baa3 9,000 9,002
Capital One Financial Corp. 6.58% 4/17/01 Baa3 15,000 14,954
Capital One Financial Corp. 6.66% 8/17/98 Baa3 5,000 5,031
Capital One Financial Corp. 8.67% 2/15/00 Baa3 5,000 5,246
Capital One Financial Corp. 8.93% 2/1/00 Baa3 5,000 5,272
The Chase Manhattan Corp. 8.00% 6/15/99 A1 19,450 20,129
The Chase Manhattan Corp. 10.00% 6/15/99 A1 20,840 22,291
First Bank System Inc. 5.698% 8/20/97 (2) A2 24,000 23,969
First Fidelity Bancorp 9.625% 8/15/99 A2 23,540 25,134
First National Bank of Commerce 6.50% 1/14/00 A2 25,000 25,220
First Union Corp. 9.45% 6/15/99 A2 6,649 7,048
Huntington Bancshares 5.68% 12/8/98 A3 10,000 9,980
Long Island Savings Bank 7.00% 6/13/02 Baa3 13,500 13,790
MBNA America Bank 5.945% 8/7/97 (2) A2 40,650 40,618
MBNA America Bank 7.12% 4/12/99 A2 10,000 10,155
MBNA Corp. 6.875% 10/1/99 A3 15,785 15,990
MBNA Corp. 7.49% 9/14/99 A3 6,600 6,765
Manufacturers Hanover Corp. 8.50% 2/15/99 A2 9,272 9,612
Meridian Bancorp 6.625% 6/15/00 A1 26,550 26,870
National City Bank Cleveland 6.35% 3/15/01 A1 36,860 37,028
Norwest Corp. 6.125% 10/15/00 Aa3 6,000 6,002
PNC Funding Corp. 9.875% 3/1/01 A3 5,565 6,195
Security Pacific Corp. 9.75% 5/15/99 A1 5,000 5,314
Southern National Corp. 7.05% 5/23/03 A3 17,750 18,187
Summit Bancorp 8.625% 12/10/02 Baa1 21,725 23,799
U.S. Bancorp PATS 6.025% 8/19/97 (2)(4) A2 55,700 55,734
</TABLE>
5
<PAGE> 43
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
SHORT-TERM CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Oregon PATS 5.912% 8/27/97 (2)(4) A1 $ 25,000 $ 25,008
Wachovia Bank 5.35% 11/13/98 Aa2 20,000 19,899
Wachovia Bank 5.60% 3/8/99 Aa2 25,000 24,886
CONSUMERS (1.9%)
Norwest Financial, Inc. 6.68% 9/15/99 Aa3 46,000 46,607
Norwest Financial, Inc. 6.875% 12/15/99 Aa3 9,845 10,027
Sears Roebuck & Co. Acceptance Corp. 6.25% 10/6/98 A2 35,000 35,190
DIVERSIFIED (7.5%)
AT&T Capital Corp. 5.61% 2/1/99 Baa3 41,200 40,904
AT&T Capital Corp. 6.70% 2/15/01 Baa3 50,000 50,498
Associates Corp. of North America 6.50% 9/9/98 Aa3 25,000 25,206
Associates Corp. of North America 8.37% 12/21/99 Aa3 19,000 19,961
Associates Corp. of North America 8.40% 11/29/99 Aa3 10,000 10,496
CIT Group Holdings 5.70% 12/15/98 Aa3 20,000 19,976
CIT Group Holdings 6.25% 10/25/99 Aa3 50,000 50,292
Caterpillar Financial Services 6.10% 6/17/99 A2 16,000 16,018
Comdisco Inc. 5.75% 2/15/01 Baa1 5,000 4,925
Comdisco Inc. 6.34% 6/25/99 Baa1 25,000 25,104
Comdisco Inc. 6.50% 4/30/99 Baa1 18,500 18,665
Comdisco Inc. 6.52% 3/24/99 Baa1 15,000 15,139
Finova Capital Corp. 6.375% 4/15/99 Baa1 21,000 21,123
Finova Capital Corp. 6.38% 4/15/99 Baa1 25,000 25,149
General Electric Capital Corp. 8.10% 1/26/99 Aaa 5,000 5,159
INSURANCE (5.9%)
Conseco Inc. 10.50% 12/15/04 Ba1 32,475 39,199
Orion Capital Corp. 9.125% 9/1/02 Baa2 7,000 7,767
SunAmerica Inc. 6.20% 10/31/99 Baa1 26,000 26,067
SunAmerica Inc. 6.58% 1/15/02 Baa1 5,000 5,043
Travelers/Aetna Property Casualty Corp. 6.25% 10/1/99 A1 50,000 50,209
Travelers/Aetna Property Casualty Corp. 6.75% 9/1/99 A1 30,000 30,413
Travelers/Aetna Property Casualty Corp. 6.75% 4/15/01 A1 34,000 34,582
USAA Capital Corp. 5.97% 8/4/99 (4) Aa1 35,000 35,000
USAA Capital Corp. 6.60% 6/15/98 (4) Aa1 25,000 25,208
USF&G Corp. 8.375% 6/15/01 Baa2 17,545 18,680
OTHER (13.4%)
Associated Estates Realty Corp. 6.88% 12/9/04 Baa3 5,000 5,070
Associated Estates Realty Corp. 8.375% 4/15/00 Baa3 15,680 16,463
Bear Stearns Cos., Inc. 7.625% 9/15/99 A2 10,000 10,310
Bear Stearns Cos., Inc. 7.625% 4/15/00 A2 26,900 27,852
Camden Property Trust 6.136% 8/11/97 (2) Baa3 20,000 20,000
Colonial Realty LP 6.96% 7/26/04 Baa3 22,000 22,220
Dean Witter Discover & Co. 6.00% 3/1/98 A1 11,000 11,011
Donaldson Lufkin & Jenrette, Inc. 6.70% 6/30/00 Baa1 15,000 15,101
Equity Residential Properties Trust Operating LP 7.95% 4/15/02 A3 7,000 7,379
First Industrial PATS 7.375% 5/15/04 (4) Baa2 12,000 12,375
Goldman Sachs Group 6.10% 4/15/98 (4) A1 30,000 30,085
Goldman Sachs Group 6.228% 1/25/99 (2)(4) A1 14,000 14,021
Goldman Sachs Group 6.875% 9/15/99 (4) A1 16,175 16,408
JDN Realty Corp. 6.80% 8/1/04 Baa3 10,500 10,494
Kimco Realty Corp. 6.50% 10/1/03 A3 4,920 4,908
Lehman Brothers Holdings 5.75% 2/15/98 Baa1 5,000 4,999
Lehman Brothers Holdings 6.026% 8/18/97 (2) Baa1 10,000 9,988
Lehman Brothers Holdings 6.84% 10/7/99 Baa1 11,000 11,134
Lehman Brothers Holdings 6.92% 10/1/99 Baa1 13,000 13,178
Lehman Brothers Holdings 6.94% 9/30/99 Baa1 11,000 11,155
Lehman Brothers Holdings 7.14% 9/24/99 Baa1 11,900 12,113
Lehman Brothers Holdings 7.625% 7/15/99 Baa1 19,325 19,818
</TABLE>
6
<PAGE> 44
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
COUPON DATE (MOODY'S) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lehman Brothers Holdings 8.375% 2/15/99 Baa1 $ 5,000 $ 5,165
Merrill Lynch & Co., Inc. 7.26% 3/25/02 Aa3 50,000 51,328
Morgan Stanley Group 5.75% 2/15/01 A1 10,500 10,343
Morgan Stanley Group 6.425% 3/15/00 A1 15,000 15,091
Oasis Residential Inc. 6.75% 11/15/01 Baa3 15,350 15,449
PaineWebber Group 7.16% 6/15/99 Baa1 25,000 25,446
Post Apartment Homes LP 6.063% 9/3/97 (2) Baa1 30,000 29,930
Post Apartment Homes LP 7.02% 4/2/01 Baa1 20,000 20,405
Post Apartment Homes LP 7.25% 10/1/03 Baa1 7,000 7,235
Simon DeBartolo Group, Inc. 6.75% 7/15/04 Baa1 10,000 10,066
Simon DeBartolo PATS 6.75% 11/15/03 (4) Baa1 23,000 23,054
Smith Barney Holdings, Inc. 5.50% 1/15/99 A2 11,000 10,938
Smith Barney Holdings, Inc. 7.00% 5/15/00 A2 15,500 15,818
Smith Barney Holdings, Inc. 7.98% 3/1/00 A2 17,500 18,265
Taubman Realty 6.34% 8/20/97 (2) Baa3 36,675 36,707
Topaz Ltd. 6.92% 3/10/07 (1)(4) A1 16,000 16,243
Wellsford Residential Property Trust 9.375% 2/1/02 Baa3 5,175 5,730
----------
2,042,442
----------
INDUSTRIAL (22.4%)
AEROSPACE & DEFENSE (3.0%)
Lockheed Martin Corp. 6.85% 5/15/01 A3 47,000 48,047
Rockwell International Corp. 7.625% 2/17/98 A1 55,000 55,597
Rockwell International Corp. 8.875% 9/15/99 A1 33,860 35,759
BASIC INDUSTRIES (0.2%)
Allied Corp. 0.00% 9/15/98 A2 7,500 7,037
CABLE (1.1%)
Cox Communications, Inc. 6.375% 6/15/00 Baa2 37,000 37,130
Cox Communications, Inc. PATS 5.34% 6/15/99 (4) Baa2 12,500 12,335
CHEMICALS (1.4%)
Praxair, Inc. 6.70% 4/15/01 A3 50,000 50,692
Union Carbide Corp. 7.00% 8/1/99 Baa2 12,315 12,492
COMPUTERS & ELECTRONIC EQUIPMENT (1.6%)
CSC Enterprises 6.50% 11/15/01 (4) A3 25,000 25,209
CSC Enterprises 6.80% 4/15/99 (4) A3 21,500 21,793
Electronic Data Systems Corp. 6.85% 5/15/00 (4) A1 18,000 18,325
Seagate Technology Inc. 7.125% 3/1/04 Baa3 10,000 10,199
CONSUMER GOODS & SERVICES (2.2%)
The Coca-Cola Co. 7.875% 9/15/98 Aa3 18,000 18,426
The Walt Disney Co. 6.375% 3/30/01 A2 33,000 33,281
Sara Lee Corp. 5.70% 7/14/00 A1 5,000 4,952
Sara Lee Corp. 6.50% 5/16/00 A1 15,000 15,171
Sara Lee Corp. 6.70% 9/9/99 A1 10,000 10,141
Sara Lee Corp. 7.75% 2/3/00 A1 18,700 19,435
ENERGY & RELATED GOODS & SERVICES (2.7%)
Halliburton Co. 6.30% 8/5/02 A2 26,250 26,250
Mobil Corp. ESOP 9.17% 2/29/00 (1) Aa2 46,576 48,558
Occidental Petroleum Corp. 6.75% 9/16/99 Baa2 6,000 6,060
Occidental Petroleum Corp. 8.50% 11/9/01 Baa2 10,000 10,744
Phillips Petroleum Co. 8.00% 4/12/99 A3 4,000 4,131
Texaco Capital Corp. 8.65% 1/30/98 A1 16,750 16,994
Texaco Capital Corp. 9.00% 11/15/97 A1 8,000 8,076
Union Oil of California 8.97% 3/6/98 Baa1 6,000 6,105
FOOD & LODGING (0.2%)
McDonald's Corp. 8.375% 10/29/99 Aa2 8,550 8,971
</TABLE>
7
<PAGE> 45
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
SHORT-TERM CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GROCERY STORES (0.9%)
Food Lion, Inc. 8.41% 9/26/01 A3 $ 5,000 $ 5,405
Safeway, Inc. 9.61% 6/1/03 Baa2 31,000 35,470
MEDIA & ENTERTAINMENT (2.4%)
R.R. Donnelley & Sons Co. 7.27% 10/20/97 A1 15,000 15,054
R.R. Donnelley & Sons Co. 7.96% 11/8/99 A1 15,000 15,578
Gannett Co. 5.25% 3/1/98 A2 40,000 39,928
Knight-Ridder, Inc. 8.50% 9/1/01 (1) A3 17,025 17,977
News America Holdings Inc. 9.125% 10/15/99 Baa3 23,095 24,478
METAL (0.3%)
CBI Industries 7.53% 8/26/99 A3 15,000 15,384
PAPER (0.5%)
James River Corp. 7.65% 12/26/00 Baa3 10,000 10,415
James River Corp. 8.375% 11/15/01 Baa3 12,220 13,099
RETAIL (0.7%)
J.C. Penney & Co., Inc. 5.375% 11/15/98 A2 13,350 13,286
J.C. Penney & Co., Inc. 7.25% 4/1/02 A2 5,000 5,196
Sears, Roebuck & Co. 9.25% 4/15/98 A2 13,100 13,417
TRANSPORTATION (4.4%)
CSX Corp. 7.05% 5/1/02 (4) Baa2 31,000 31,876
Federal Express Corp. 9.875% 4/1/02 Baa2 8,195 9,313
Federal Express Corp. 10.00% 9/1/98 Baa2 24,875 25,879
Federal Express Corp. 10.00% 4/15/99 Baa2 6,255 6,648
Hertz Corp. 6.50% 4/1/00 A3 5,000 5,044
Hertz Corp. 8.30% 2/2/98 A3 19,500 19,755
Norfolk Southern Corp. 6.875% 5/1/01 Baa1 100,000 102,303
Union Pacific Railroad Co. (Equipment Trust Certificate) 6.99% 12/24/99 (1) Aa3 4,947 4,996
OTHER (0.8%)
General Electric Co. 7.875% 9/15/98 Aaa 15,000 15,359
Minnesota Mining & Manufacturing Co. 6.25% 3/29/99 Aaa 22,275 22,428
----------
1,040,198
----------
UTILITIES (7.5%)
Baltimore Gas & Electric Co. 6.68% 10/11/01 A2 16,000 16,256
Duquesne Light Co. 6.15% 2/12/98 Baa1 5,000 5,005
Edison Mission Energy Funding Corp. 6.77% 9/15/03 (1)(4) Baa1 21,320 21,539
Florida Gas Transmission 7.75% 11/1/97 (4) Baa2 6,000 6,024
Florida Gas Transmission 8.14% 11/1/99 (4) Baa2 10,000 10,432
Florida Power & Light Corp. 5.50% 7/1/99 Aa3 20,600 20,439
GTE North Inc. 5.50% 2/15/99 A1 18,175 18,079
GTE Northwest, Inc. 7.375% 5/1/01 A2 4,000 4,151
GTE Southwest Inc. 5.82% 12/1/99 A2 18,650 18,530
Idaho Power Co. 5.33% 9/1/98 A2 4,500 4,478
Indiana Michigan Power Co. 6.40% 3/1/00 Baa1 20,000 19,994
Kansas City Power & Light Co. 6.50% 11/14/01 A1 5,000 5,033
Kern River Funding Corp. 6.42% 3/31/01 (4) A2 14,511 14,577
MCI Communications Corp. 6.25% 3/23/99 A2 12,000 12,068
MCN Investment Corp. 6.03% 2/1/01 Baa2 4,000 3,973
MCN Investment Corp. 6.82% 5/13/99 Baa2 28,000 28,379
Nevada Power Co. 7.06% 5/1/00 Baa2 12,000 12,247
NYNEX Corp. Capital Funding 8.10% 11/1/99 A2 5,070 5,282
NYNEX Corp. Capital Funding 8.11% 11/1/99 A2 15,000 15,631
NYNEX Credit Co. 6.50% 9/15/00 (4) A3 30,000 30,247
Progress Capital Holdings 6.88% 8/1/01 (4) A2 20,000 20,361
Public Service Electric & Gas 6.50% 6/1/00 A3 28,000 28,253
</TABLE>
8
<PAGE> 46
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
COUPON DATE (MOODY'S) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Texas Utilities Co. 6.375% 8/1/97 Baa1 $ 5,000 $ 4,999
Texas Utilities Co. 9.50% 8/1/99 Baa1 8,500 8,992
United Telecom 9.75% 4/1/00 A3 10,550 11,460
----------
346,429
----------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $3,778,959) 3,820,283
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (8.8%)
- --------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp. 6.92% 1/25/12 (1) 15,000 15,219
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 5.50% 10/1/00 (1) 22,622 22,319
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 9/1/98 (1) 11,919 11,918
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 12/1/99 (1) 14,042 14,015
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 1/1/01 (1) 26,928 26,856
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 2/1/01 (1) 87,275 86,978
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 7/1/01 (1) 42,065 41,922
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.50% 10/1/99 (1) 11,958 12,055
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 7.00% 2/1/00 (1) 5,914 6,000
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 7.00% 3/1/00 (1) 20,885 21,191
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 7.00% 5/1/00 (1) 22,471 22,754
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 7.00% 6/1/01 (1) 15,704 15,924
Federal National Mortgage Assn. 6.70% 8/10/01 50,140 50,718
Federal National Mortgage Assn. (Pooled Mortgage Notes) 6.00% 1/1/01 (1) 27,196 27,112
Federal National Mortgage Assn. (Pooled Mortgage Notes) 6.00% 6/1/01 (1) 8,325 8,300
Federal National Mortgage Assn. (Pooled Mortgage Notes) 8.00% 6/1/99 (1) 5,417 5,505
Government Export Trust (U.S. Government Guaranteed) 4.85% 11/1/97 (1) 2,200 2,196
Government Export Trust (U.S. Government Guaranteed) 6.61% 9/15/99 (1) 4,375 4,406
U.S. Treasury Note 5.875% 2/15/04 14,000 13,942
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $410,674) 409,330
- --------------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLAR DENOMINATED)(6.6%)
- --------------------------------------------------------------------------------------------------------------------------------
Province of Alberta 9.20% 11/1/97 (3) Aa2 23,000 23,198
Bank of Nova Scotia 9.00% 10/1/99 A1 12,394 13,112
Bayerische Landesbank Girozentrale 5.625% 2/26/01 Aaa 16,000 15,724
Bayerische Landesbank Girozentrale 6.375% 8/31/00 Aaa 50,000 50,460
Export-Import Bank Korea 6.50% 5/15/00 A1 16,000 16,075
KFW International Finance, Inc. 9.125% 5/15/01 Aaa 7,995 8,797
Korean Development Bank 6.50% 11/15/02 A1 30,000 29,986
Province of Manitoba 6.00% 10/15/97 A1 30,000 30,029
Province of Manitoba 6.125% 5/28/98 A1 20,000 20,083
Province of Manitoba 7.75% 2/1/02 A1 7,310 7,746
Province of Manitoba 8.75% 5/15/01 A1 7,000 7,608
Province of Manitoba 9.50% 9/15/98 A1 10,000 10,402
Province of Manitoba 9.625% 3/15/99 A1 10,000 10,574
National Australia Bank (NY) 9.70% 10/15/98 A1 12,150 12,696
Noranda, Inc. 8.00% 6/1/03 Baa2 20,000 21,361
Noranda, Inc. 8.625% 7/15/02 Baa2 15,000 16,359
Placer Dome Inc. 6.14% 1/29/02 Baa2 15,000 14,760
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $304,882) 308,970
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.1%)
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $96,423) 5.82% 8/1/97 96,423 96,423
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(COST $4,590,938) 4,635,006
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 47
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
SHORT-TERM CORPORATE PORTFOLIO (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (0.3%)
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets--Notes C and F $ 139,952
Liabilities--Note F (126,135)
-----------
13,817
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 429,846,628 outstanding $.001 par value shares
(authorized 1,700,000,000 shares) $4,648,823
================================================================================================================================
NET ASSET VALUE PER SHARE $10.82
================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Floating Rate Notes.
(3) Securities with a value of $4,034,000 have been segregated as initial
margin for open futures contracts.
(4) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At July 31, 1997,
the aggregate value of these securities was $490,948,000 representing 10.6%
of net assets.
PATS--Putable Asset Trust Securities.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $4,639,137 $10.79
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note D (29,634) (.06)
Unrealized Appreciation (Depreciation)--Note E
Investment Securities 44,068 .10
Futures Contracts (4,748) (.01)
================================================================================================================================
NET ASSETS $4,648,823 $10.82
================================================================================================================================
</TABLE>
10
<PAGE> 48
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (95.0%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bonds 10.375% 11/15/12 (2) $ 209,650 $ 275,525
U.S. Treasury Bonds 10.75% 5/15/03 67,100 82,719
U.S. Treasury Bonds 11.125% 8/15/03 9,000 11,334
U.S. Treasury Bonds 11.625% 11/15/04 27,300 36,235
U.S. Treasury Bonds 11.875% 11/15/03 20,700 27,035
U.S. Treasury Inflation-Indexed Note 3.375% 1/15/07 25,869 25,457
U.S. Treasury Inflation-Indexed Note 3.625% 7/15/02 12,996 13,008
U.S. Treasury Notes 6.625% 7/31/01 59,700 61,296
U.S. Treasury Notes 7.25% 5/15/04 205,184 219,710
U.S. Treasury Notes 7.25% 8/15/04 76,000 81,463
U.S. Treasury Notes 7.50% 2/15/05 61,500 66,986
U.S. Treasury Notes 7.75% 12/31/99 7,506 7,839
U.S. Treasury Notes 7.875% 11/15/04 150,200 166,643
Government Export Trust (U.S. Government Guaranteed) 6.00% 3/15/05 (1) 16,146 16,021
Government Export Trust (U.S. Government Guaranteed) 7.46% 12/15/05 (1) 28,457 29,707
Government Export Trust (U.S. Government Guaranteed) 8.21% 12/29/06 (1) 27,458 29,874
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.02% 9/1/04 (1) 13,281 13,629
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.39% 6/26/06 (1) 4,605 4,798
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.80% 8/15/06 (1) 8,520 9,068
Guaranteed Trade Trust (U.S. Government Guaranteed) 8.17% 1/15/07 (1) 7,125 7,737
Overseas Private Investment Corp. (U.S. Government Guaranteed) 5.735% 1/15/02 (1) 17,100 16,971
Overseas Private Investment Corp. (U.S. Government Guaranteed) 5.94% 6/20/06 (1) 18,947 18,675
Overseas Private Investment Corp. (U.S. Government Guaranteed) 6.08% 8/15/04 (1) 22,500 22,376
Overseas Private Investment Corp. (U.S. Government Guaranteed) 6.726% 9/15/10 (1) 17,000 17,257
Overseas Private Investment Corp. (U.S. Government Guaranteed) 6.75% 12/15/08 (1) 12,746 12,976
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $1,234,003) 1,274,339
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.6%)
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $48,148) 5.82% 8/1/97 48,148 48,148
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.6%)
(COST $1,282,151) 1,322,487
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.4%)
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets--Notes C and F 88,302
Liabilities--Note F (68,963)
---------
19,339
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 126,938,722 outstanding $.001 par value shares
(authorized 1,250,000,000 shares) $1,341,826
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.57
================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Securities with a value of $2,628,000 have been segregated as initial
margin for open futures contracts.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,339,282 $10.55
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note D (33,571) (.26)
Unrealized Appreciation (Depreciation)--Note E
Investment Securities 40,336 .31
Futures Contracts (4,221) (.03)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,341,826 $10.57
================================================================================================================================
</TABLE>
11
<PAGE> 49
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
INTERMEDIATE-TERM CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS (78.5%)
- --------------------------------------------------------------------------------------------------------------------------------
ASSET BACKED SECURITIES (1.3%)
Citibank Credit Card Master Trust 6.70% 2/15/04 (1) A2 $ 5,000 $ 5,058
Ford Credit Auto Loan Master Trust 6.50% 8/15/02 (1) Aaa 4,000 4,042
----------
9,100
----------
FINANCE (40.8%)
AUTOMOBILE (0.5%)
Ford Motor Credit Corp. 5.898% 11/1/97 (2) A1 1,000 1,000
Ford Motor Credit Corp. 7.50% 1/15/03 A1 1,000 1,051
Ford Motor Credit Corp. 7.75% 11/15/02 A1 1,000 1,061
BANKS (11.3%)
Banc One Corp. 9.875% 3/1/09 A1 3,690 4,591
The Bank of New York Co., Inc. 6.625% 6/15/03 A2 5,000 5,046
Chase Manhattan Corp. 8.625% 5/1/02 A1 5,000 5,457
CoreStates Capital Corp. 6.75% 11/15/06 A2 10,000 10,044
CoreStates Captial Corp. 9.625% 2/15/01 A2 2,500 2,763
First Bank N.A. 6.00% 10/15/03 A1 4,200 4,101
First Bank System, Inc. 6.875% 9/15/07 A2 5,000 5,077
First Interstate Bancorp 10.875% 4/15/01 A2 1,000 1,149
Meridian Bancorp, Inc. 6.625% 3/15/03 A2 3,000 3,029
PNC Funding Corp. 9.875% 3/1/01 A3 5,000 5,566
Southern National Corp. 7.05% 5/23/03 A3 10,000 10,246
Summit Bancorp 8.625% 12/10/02 Baa1 5,775 6,326
Summit Bank 6.75% 6/15/03 A3 5,510 5,567
Wells Fargo & Co. 6.875% 4/1/06 A2 10,000 10,143
CONSUMERS (2.9%)
Norwest Financial, Inc. 6.625% 7/15/04 Aa3 5,000 5,054
Norwest Financial, Inc. 7.20% 5/1/07 Aa3 5,000 5,226
Norwest Financial, Inc. 7.50% 4/15/05 Aa3 5,000 5,301
Sears Roebuck & Co. Acceptance Corp. 6.80% 10/9/02 A2 5,000 5,092
DIVERSIFIED (4.0%)
Associates Corp. of North America 5.75% 10/15/03 Aa3 5,000 4,834
Associates Corp. of North America 7.54% 4/14/04 Aa3 3,000 3,172
Associates Corp. of North America 7.875% 9/30/01 Aa3 2,000 2,117
Finova Capital Corp. 6.75% 11/15/04 Baa1 5,000 5,061
General Electric Capital Corp. 8.50% 7/24/08 Aaa 6,100 7,050
General Electric Capital Corp. 8.70% 2/15/03 Aaa 1,000 1,111
Pitney Bowes, Inc. Credit Corp. 6.625% 6/1/02 Aa3 5,000 5,079
INSURANCE (7.8%)
Conseco Inc. 10.50% 12/15/04 Ba1 5,000 6,035
Harleysville Group 6.75% 11/15/03 Baa2 7,500 7,537
Horace Mann Educators Corp. 6.625% 1/15/06 Baa2 3,500 3,447
NAC Re Corp. 7.15% 11/15/05 Baa1 5,000 5,126
Orion Capital Corp. 9.125% 9/1/02 Baa2 6,500 7,212
RGA Reinsurance Group of America Inc. 7.25% 4/1/06 (4) A3 10,000 10,290
Travelers/Aetna Property Casualty Corp. 6.75% 4/15/01 A1 5,000 5,086
USF&G Corp. 7.125% 6/1/05 Baa2 5,000 5,114
USF&G Corp. 8.375% 6/15/01 Baa2 5,000 5,323
OTHER (14.3%)
Alex Brown, Inc. 7.625% 8/15/05 Baa2 8,000 8,436
Associated Estates Realty Corp. 6.88% 12/9/04 Baa3 2,000 2,028
BRE Properties, Inc. 7.20% 6/15/07 Baa2 2,000 2,049
Bear Stearns Cos., Inc. 7.00% 3/1/07 A2 5,000 5,068
Camden Property Trust 7.172% 6/20/04 Baa3 3,000 3,073
Colonial Realty LP 6.96% 7/26/04 Baa3 3,000 3,030
</TABLE>
12
<PAGE> 50
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
COUPON DATE (MOODY'S) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Evans Withycombe Residential, Inc. 7.50% 4/15/04 Baa3 $ 3,000 $ 3,108
First Industrial LP 7.60% 5/15/07 Baa2 3,000 3,149
Goldman Sachs Group 7.20% 3/1/07 (4) A1 5,000 5,179
Goldman Sachs Group 7.80% 7/15/02 (4) A1 5,000 5,294
JDN Realty Corp. 6.80% 8/1/04 Baa3 3,500 3,498
Kimco Realty Corp. 6.50% 10/1/03 A3 5,000 4,988
Merry Land & Investment Co., Inc. 6.875% 11/1/04 Baa2 2,000 2,018
Merry Land & Investment Co., Inc. 6.90% 8/1/07 Baa2 5,000 5,032
Morgan Stanley Group 9.375% 6/15/01 A1 1,000 1,105
New Plan Realty Trust 7.35% 6/15/07 A2 3,000 3,147
Oasis Residential, Inc. 7.25% 11/15/06 Baa3 2,500 2,565
Post Apartment Homes LP 7.25% 10/1/03 Baa1 2,000 2,067
Realty Income Corp. 7.75% 5/6/07 Baa3 3,000 3,154
Security Capital Pacific Trust 7.375% 10/15/06 Baa2 3,000 3,124
Shurgard Storage Centers, Inc. 7.50% 4/25/04 Baa2 3,000 3,131
Simon DeBartolo Group, Inc. 6.875% 11/15/06 Baa1 3,000 3,016
Simon DeBartolo PATS 6.75% 11/15/03 (4) Baa1 3,000 3,007
Smith Barney Holdings, Inc. 6.875% 6/15/05 A2 5,000 5,064
Topaz Ltd. 6.92% 3/10/07 (1)(4) A1 11,700 11,878
United Dominion Realty Trust, Inc. 7.25% 1/15/07 Baa1 3,000 3,101
----------
286,793
----------
INDUSTRIAL (28.4%)
AEROSPACE & DEFENSE (1.4%)
The Boeing Co. 8.10% 11/15/06 Aa3 2,000 2,236
Lockheed Martin Corp. 7.25% 5/15/06 A3 5,000 5,250
Rockwell International Corp. 8.375% 2/15/01 A1 2,361 2,526
AUTOMOTIVE (0.8%)
General Motors Corp. 8.875% 6/11/01 A3 1,000 1,088
General Motors Corp. 9.22% 7/18/01 A3 1,000 1,102
General Motors Corp. 9.625% 12/1/00 A3 3,000 3,307
CABLE (0.3%)
Cox Communications, Inc. 6.50% 11/15/02 Baa2 2,000 2,011
CHEMICALS (1.2%)
Eastman Chemical Co. 6.375% 1/15/04 A3 1,500 1,493
Hoechst-Celanese 6.125% 2/1/04 A2 2,000 1,970
Praxair, Inc. 6.70% 4/15/01 A3 5,000 5,069
COMPUTERS & ELECTRONIC EQUIPMENT (3.6%)
Applied Materials, Inc. 8.00% 9/1/04 A3 2,000 2,160
Electronic Data Systems Corp. 6.85% 5/15/00 (4) A1 5,000 5,090
Lucent Technologies Inc. 7.25% 7/15/06 A2 5,000 5,274
Seagate Technology, Inc. 7.45% 3/1/37 Baa3 10,000 10,463
Tektronix 7.50% 8/1/03 Baa3 2,000 2,079
CONSUMER GOODS & SERVICES (4.4%)
American Stores Co. 9.125% 4/1/02 Baa2 4,000 4,427
Anheuser-Busch Cos., Inc. 6.75% 6/1/05 A1 2,000 2,022
Anheuser-Busch Cos., Inc. 7.10% 6/15/07 A1 10,000 10,384
The Walt Disney Co. 6.375% 3/30/01 A2 5,000 5,043
Levi Strauss & Co. 6.80% 11/1/03 (4) Baa2 4,000 4,068
Sara Lee Corp. 5.70% 7/14/00 A1 5,000 4,952
ENERGY & RELATED GOODS & SERVICES (2.7%)
Halliburton Co. 6.30% 8/5/02 A2 10,000 10,000
Phillips Petroleum Co. 9.00% 6/1/01 A3 1,000 1,094
Texaco Capital, Inc. 8.50% 2/15/03 A1 5,000 5,514
Western Atlas, Inc. 7.875% 6/15/04 A3 2,000 2,158
</TABLE>
13
<PAGE> 51
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
INTERMEDIATE-TERM CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOOD & LODGING (0.5%)
IBP, Inc. 6.125% 2/1/06 A3 $ 4,000 $ 3,875
GROCERY STORES (3.7%)
Food Lion, Inc. 7.55% 4/15/07 A3 7,000 7,422
Great Atlantic & Pacific Tea Co. 7.75% 4/15/07 Baa3 3,000 3,176
Kroger Co. 8.15% 7/15/06 Baa3 5,000 5,459
Safeway, Inc. 9.61% 6/1/03 Baa2 9,000 10,298
HEALTH CARE (4.0%)
Cardinal Health, Inc. 6.00% 1/15/06 A3 8,845 8,548
Cardinal Health, Inc. 6.50% 2/15/04 A3 3,500 3,514
MedPartners Inc. 7.375% 10/1/06 Baa3 8,500 8,768
The Upjohn Co. Employee Stock Ownership Trust 9.79% 2/1/04 (1) A1 6,695 7,556
METAL (0.4%)
The Timken Co. 7.30% 8/13/02 A3 2,500 2,604
RETAIL (0.2%)
Sears, Roebuck & Co. 8.52% 5/13/02 A2 1,000 1,091
TRANSPORTATION (5.2%)
Burlington Northern Railroad Co. Equipment Trust 7.33% 6/23/10 (1) Aa3 4,905 5,152
CSX Corp. 9.50% 8/1/00 Baa2 1,000 1,087
Delta Airlines, Inc. Pass-Through Trust 7.541% 10/11/11 (1) Baa1 4,793 4,952
Delta Airlines, Inc. Pass-Through Trust 8.54% 1/2/07 Baa1 2,922 3,169
Jet Equipment Trust 7.63% 8/15/12 (1)(4) A1 2,877 3,048
Norfolk Southern Corp. 6.875% 5/1/01 Baa1 5,000 5,115
Northwest Airlines Corp. Pass-Through Trust 8.07% 1/2/15 (1) Baa1 11,402 12,426
Union Pacific Railroad Co. Equipment Trust 6.12% 2/1/04 Aa3 2,000 1,964
------------
200,004
------------
UTILITIES (8.0%)
Baltimore Gas & Electric Co. 6.25% 12/8/05 A2 5,000 4,921
Baltimore Gas & Electric Co. 6.70% 12/1/06 A2 4,000 4,043
Chesapeake & Potomac Telephone Co. (MD) 6.00% 5/1/03 Aa2 4,604 4,534
Cleveland Electric/Toledo Edison 7.13% 7/1/07 (4) Aaa 4,000 4,163
GTE Northwest, Inc. 7.375% 5/1/01 A2 4,000 4,151
Kansas City Power & Light Co. 6.50% 11/14/01 A1 5,000 5,033
MCI Communications Corp. 7.50% 8/20/04 A2 1,500 1,594
Nipsco Capital Markets 7.39% 4/1/04 Baa1 6,000 6,263
Pennsylvania Power & Light Co. 6.875% 3/1/04 A3 5,000 5,122
Progress Capital Holdings 7.45% 9/1/03 (4) A2 10,000 10,455
Southwestern Bell Telephone 5.77% 10/14/03 Aa3 6,000 5,846
------------
56,125
------------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $537,253) 552,022
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITY (1.4%)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note
(COST $9,805) 6.25% 2/28/02 10,000 10,141
- --------------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLAR DENOMINATED)(11.8%)
- --------------------------------------------------------------------------------------------------------------------------------
ABN AMRO Bank NV (Chicago Branch) 7.55% 6/28/06 Aa2 10,000 10,635
Aegon NV 8.00% 8/15/06 A1 4,150 4,531
Australia & New Zealand Banking Group 7.55% 9/15/06 A1 9,500 10,030
Bayer Corp. 6.50% 10/1/02 (4) Aa2 6,000 6,077
Bayerische Landesbank-NY 6.375% 10/15/05 Aaa 5,000 4,993
CEZ Finance B. V. 7.125% 7/15/07 Baa1 6,000 6,079
Enersis SA 6.90% 12/1/06 Baa1 5,000 5,036
Hutchison Whampoa Finance Ltd. 6.95% 8/1/07 (4) A3 3,000 3,038
Korean Development Bank 7.25% 5/15/06 A1 5,000 5,109
</TABLE>
14
<PAGE> 52
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
COUPON DATE (MOODY'S) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Province of Manitoba 7.75% 2/1/02 (3) A1 $ 4,000 $ 4,238
Province of Manitoba 8.75% 5/15/01 A1 3,000 3,260
Placer Dome, Inc. 7.125% 5/15/03 Baa2 5,000 5,122
Santander Financial Issuances Ltd. 7.00% 4/1/06 A1 5,000 5,089
Swiss Bank Corp. 6.75% 7/15/05 Aa2 5,000 5,057
Union Bank of Switzerland (NY Branch) 7.25% 7/15/06 Aa1 5,000 5,229
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $81,222) 83,523
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (8.9%)
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $62,465) 5.82% 8/1/97 62,465 62,465
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.6%)
(COST $690,745) 708,151
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.6%)
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets--Notes C and F 29,664
Liabilities--Note F (34,192)
--------
(4,528)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 70,892,263 outstanding $.001 par value shares
(authorized 1,250,000,000 shares) $703,623
================================================================================================================================
NET ASSET VALUE PER SHARE $9.93
================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Floating Rate Notes.
(3) Securities with a value of $2,119,000 have been segregated as initial
margin for open futures contracts.
(4) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At July 31, 1997,
the aggregate value of these securities was $71,587,000, representing 10.2%
of net assets.
PATS--Putable Asset Trust Securities.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $687,698 $9.70
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 101 --
Unrealized Appreciation (Depreciation)--Note E
Investment Securities 17,406 .25
Futures Contracts (1,582) (.02)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $703,623 $9.93
================================================================================================================================
</TABLE>
15
<PAGE> 53
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (93.3%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bonds 6.625% 2/15/27 $ 7,000 $ 7,303
U.S. Treasury Bonds 6.75% 8/15/26 15,050 15,875
U.S. Treasury Bonds 7.125% 2/15/23 21,700 23,740
U.S. Treasury Bonds 7.875% 2/15/21 204,152 241,073
U.S. Treasury Bonds 8.125% 8/15/19 97,515 117,583
U.S. Treasury Bonds 8.875% 8/15/17 135,750 174,226
U.S. Treasury Bonds 8.875% 2/15/19 122,110 157,745
U.S. Treasury Bonds 9.875% 11/15/15 33,800 46,674
U.S. Treasury Bonds 10.375% 11/15/12 (1) 51,250 67,353
U.S. Treasury Inflation-Indexed Note 3.375% 1/15/07 8,792 8,651
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $781,377) 860,223
- -------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.2%)
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $39,109) 5.82% 8/1/97 39,109 39,109
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.5%)
(COST $820,486) 899,332
- -------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.5%)
- -------------------------------------------------------------------------------------------------------------------------------
Other Assets--Notes C and F 35,240
Liabilities--Note F (12,016)
-----------
23,224
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------------------
Applicable to 89,597,389 outstanding $.001 par value shares
(authorized 1,300,000,000 shares) $922,556
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.30
===============================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) Securities with a value of $2,628,000 have been segregated as initial
margin for open futures contracts.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $854,649 $ 9.54
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note D (8,013) (.09)
Unrealized Appreciation (Depreciation)--Note E
Investment Securities 78,846 .88
Futures Contracts (2,926) (.03)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $922,556 $10.30
===============================================================================================================================
</TABLE>
16
<PAGE> 54
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
LONG-TERM CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (84.7%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCE (20.2%)
BANKS (10.0%)
Banc One Corp. 7.75% 7/15/25 A1 $ 30,000 $ 32,164
Banc One Corp. 8.00% 4/29/27 A1 15,000 16,521
BankBoston Corp. 6.625% 12/1/05 Baa1 30,000 29,962
Barnett Banks, Inc. 8.50% 1/15/07 A3 15,000 16,829
Citicorp 7.125% 9/1/05 A1 15,000 15,529
Citicorp 7.625% 5/1/05 A1 10,000 10,643
Comerica Bank 8.375% 7/15/24 A2 20,000 22,216
Fifth Third Bancorp 6.75% 7/15/05 A1 20,000 20,191
First Chicago Corp. 6.375% 1/30/09 A2 15,000 14,517
First Union Corp. 6.00% 10/30/08 A2 10,000 9,420
First Union Corp. 7.50% 4/15/35 A2 11,000 12,072
National City Bank Pennsylvania 7.25% 10/21/11 A1 14,000 14,510
National City Corp. 7.20% 5/15/05 A2 10,000 10,365
NationsBank Corp. 7.25% 10/15/25 A2 20,000 20,312
NationsBank Corp. 7.75% 8/15/04 A2 15,000 16,016
NationsBank Corp. 7.75% 8/15/15 A2 10,000 10,751
Republic New York Corp. 9.70% 2/1/09 A1 15,000 18,617
SunTrust Banks, Inc. 6.00% 2/15/26 A2 20,000 19,273
Wachovia Corp. 6.605% 10/1/25 A1 30,000 30,297
Wachovia Corp. 6.80% 6/1/05 A1 10,000 10,216
DIVERSIFIED (2.0%)
Exxon Capital Corp. 6.00% 7/1/05 Aaa 10,000 9,789
General Electric Capital Corp. 8.125% 5/15/12 Aaa 42,000 47,924
General Electric Capital Services 7.50% 8/21/35 Aaa 10,960 11,952
INSURANCE (7.5%)
Allstate Corp. 7.50% 6/15/13 A2 10,000 10,542
AMBAC, Inc. 7.50% 5/1/23 Aa2 20,000 20,986
American Re Corp. 7.45% 12/15/26 Aa1 10,000 10,492
CIGNA Corp. 7.875% 5/15/27 A3 25,000 26,765
General Electric Global Insurance Holdings 7.00% 2/15/26 Aa1 50,000 50,496
General Re Corp. 9.00% 9/12/09 Aa1 15,000 17,949
John Hancock 7.375% 2/15/24 (2) A1 15,250 15,384
Liberty Mutual Group 8.50% 5/15/25 (2) A2 15,000 17,023
Lumbermans Mutual Casualty 9.15% 7/1/26 (2) Baa1 25,000 29,100
MBIA Inc. 7.00% 12/15/25 Aa2 7,550 7,596
Metopolitan Life Insurance Co. 7.80% 11/1/25 (2) A1 15,000 15,815
Transamerica Corp. 9.375% 3/1/08 A2 10,000 11,949
Travelers Property Casualty Corp. 7.75% 4/15/26 A1 25,000 26,816
OTHER (0.7%)
U S WEST Capital Funding, Inc. 7.30% 1/15/07 Baa1 25,000 25,995
------------
706,994
------------
INDUSTRIAL (47.9%)
AEROSPACE & DEFENSE (2.7%)
Lockheed Martin Corp. 7.65% 5/1/16 A3 35,000 37,618
Northrop Grumman Corp. 9.375% 10/15/24 Baa3 20,000 23,583
Raytheon Co. 7.375% 7/15/25 Baa1 35,000 35,186
AUTOMOTIVE (5.1%)
Chrysler Corp. 7.45% 3/1/27 A3 25,000 25,980
Eaton Corp. 6.50% 6/1/25 A2 10,000 10,172
Eaton Corp. 7.625% 4/1/24 A2 15,000 16,086
Ford Motor Co. 8.875% 1/15/22 A1 40,000 48,396
General Motors Corp. 7.40% 9/1/25 A3 30,000 31,125
General Motors Corp. 7.70% 4/15/16 A3 10,000 10,799
General Motors Corp. 9.40% 7/15/21 A3 20,000 25,259
Johnson Controls, Inc. 8.20% 6/15/24 A2 10,000 10,828
</TABLE>
17
<PAGE> 55
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
LONG-TERM CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BASIC INDUSTRIES (3.6%)
Browning-Ferris Industries, Inc. 6.375% 1/15/08 A3 $ 15,000 $ 14,645
Fluor Corp. 6.95% 3/1/07 A2 20,000 20,686
Hubbell Inc. 6.625% 10/1/05 A2 10,000 10,132
Morton International, Inc. 9.25% 6/1/20 A1 10,000 12,722
PPG Industries, Inc. 6.875% 2/15/12 A1 10,200 10,418
PPG Industries, Inc. 9.00% 5/1/21 A1 9,750 12,017
Parker-Hannifin Corp. 7.30% 5/15/11 A2 20,000 21,208
Worthington Industries Inc. 7.125% 5/15/06 A3 24,525 25,513
CHEMICALS (6.4%)
ARCO Chemical Co. 9.80% 2/1/20 A3 25,000 32,769
Air Products & Chemicals, Inc. 7.375% 5/1/05 A2 15,000 15,867
Air Products & Chemicals, Inc. 8.75% 4/15/21 A2 12,550 15,055
E.I. du Pont de Nemours & Co. 8.25% 1/15/22 Aa3 35,000 38,129
Eastman Chemical Co. 7.25% 1/15/24 A3 20,000 20,284
Eastman Chemical Co. 7.60% 2/1/27 A3 20,000 21,126
Monsanto Co. 8.20% 4/15/25 A1 20,000 21,547
Monsanto Co. 8.875% 12/15/09 A1 20,000 23,871
Rohm & Haas Co. 9.80% 4/15/20 (1) A1 5,000 6,271
Union Tank Car Co. 7.125% 2/1/07 A2 15,000 15,538
Witco Corp. 6.875% 2/1/26 A3 15,000 14,537
COMPUTERS & ELECTRONIC EQUIPMENT (2.7%)
International Business Machines Corp. 7.00% 10/30/25 A1 40,000 40,192
Motorola, Inc. 7.50% 5/15/25 Aa3 50,000 54,009
CONSUMER GOODS & SERVICES (4.0%)
Johnson & Johnson 8.72% 11/1/24 Aaa 30,000 34,568
Philips Electronics NV 7.75% 5/15/25 A3 18,275 19,359
Procter & Gamble Co. 6.45% 1/15/26 Aa2 7,500 7,144
Procter & Gamble Co. 8.50% 8/10/09 Aa2 10,000 11,638
Procter & Gamble Co. ESOP 9.36% 1/1/21 (1) Aa2 35,000 44,104
Whirlpool Corp. 9.10% 2/1/08 Baa1 20,000 23,587
ENERGY & RELATED GOODS & SERVICES (4.6%)
Husky Oil Ltd. 7.55% 11/15/16 Baa3 20,000 20,849
Mobil Corp. 8.625% 8/15/21 Aa2 22,000 26,916
Petro-Canada 7.875% 6/15/26 A3 7,760 8,544
Phillips Petroleum Co. 9.18% 9/15/21 A3 25,000 28,452
Talisman Energy, Inc. 7.125% 6/1/07 Baa1 20,000 20,296
Texaco Capital, Inc. 8.625% 11/15/31 A1 13,000 15,870
Texaco Capital, Inc. 9.75% 3/15/20 A1 17,000 22,482
United Technologies Corp. 8.875% 11/15/19 A2 15,000 18,207
FOOD & LODGING (1.9%)
CPC International, Inc. 6.15% 1/15/06 A2 20,000 19,685
CPC International, Inc. 7.25% 12/15/26 A2 13,000 13,518
McDonald's Corp. 7.05% 11/15/25 Aa2 23,275 23,188
McDonald's Corp. 7.375% 7/15/33 Aa2 8,500 8,825
HEALTH CARE (3.8%)
Baxter International, Inc. 7.65% 2/1/27 A3 25,000 26,820
Bristol-Myers Squibb Co. 6.80% 11/15/26 Aaa 30,000 30,264
Eli Lilly & Co. 7.125% 6/1/25 Aa3 45,000 46,928
Merck & Co. 6.30% 1/1/26 Aaa 30,000 28,556
MEDIA & ENTERTAINMENT (3.2%)
The Walt Disney Co. 6.75% 3/30/06 A2 25,000 25,500
New York Times Co. 8.25% 3/15/25 A1 30,000 33,056
News America Holdings Inc. 8.00% 10/17/16 Baa3 30,000 31,478
Tribune Co. 6.875% 11/1/06 A3 20,000 20,461
</TABLE>
18
<PAGE> 56
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
COUPON DATE (MOODY'S) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PAPER (6.3%)
Georgia-Pacific Corp. 8.625% 4/30/25 Baa2 $ 10,000 $ 10,775
Georgia-Pacific Corp. 9.50% 5/15/22 Baa2 10,000 11,164
Georgia-Pacific Corp. 9.875% 11/1/21 Baa2 30,000 33,964
International Paper Co. 6.875% 11/1/23 A3 10,000 9,756
International Paper Co. 8.125% 6/15/24 A3 30,000 32,151
Mead Corp. 8.125% 2/1/23 A3 15,000 15,882
Mead Corp. 7.35% 3/1/17 A3 10,350 10,766
Tenneco Inc. 7.625% 6/15/17 Baa1 20,000 21,020
Tenneco Inc. 7.875% 4/15/27 Baa1 20,000 21,566
Westvaco Corp. 9.75% 6/15/20 A1 15,000 19,502
Weyerhaeuser Co. 8.50% 1/15/25 A2 30,000 35,084
RETAIL (0.5%)
J.C. Penney Co., Inc. 7.95% 4/1/17 A2 15,000 16,322
TRANSPORTATION (3.1%)
Burlington Northern Santa Fe Corp. 6.375% 12/15/05 Baa2 12,500 12,267
CSX Corp. 7.95% 5/1/27 (2) Baa2 25,750 28,272
Union Pacific Corp. 7.00% 2/1/16 Baa2 20,000 19,939
United Parcel Service 8.375% 4/1/20 Aaa 40,000 47,328
------------
1,677,621
------------
UTILITIES (16.6%)
AT&T Corp. 8.625% 12/1/31 Aa3 30,000 33,173
BellSouth Telecommunications 7.00% 10/1/25 Aaa 10,000 10,274
BellSouth Telecommunications 7.50% 6/15/33 Aaa 35,000 36,202
Cincinnati Gas & Electric Co. 6.90% 6/1/25 Baa1 16,000 16,481
Coastal Corp. 7.75% 10/15/35 Baa3 20,000 21,286
Coastal Corp. 9.625% 5/15/12 Baa3 15,000 18,678
Duke Energy Corp. 7.00% 7/1/33 Aa3 10,000 9,807
El Paso Natural Gas Co. 7.50% 11/15/26 Baa2 25,000 26,033
Enron Corp. 6.875% 10/15/07 Baa2 10,000 10,183
Enron Corp. 7.00% 8/15/23 Baa2 8,000 7,722
GTE Southwest Inc. 6.00% 1/15/06 A2 10,000 9,695
Illinois Bell Telephone Co. 6.625% 2/1/25 Aa1 10,700 10,102
Indiana Bell Telephone Co. Inc. 7.30% 8/15/26 Aaa 20,000 21,340
Michigan Bell Telephone Co. 7.85% 1/15/22 Aa1 20,000 22,486
New Jersey Bell Telephone Co. 8.00% 6/1/22 Aaa 20,000 22,830
New York Telephone Co. 7.25% 2/15/24 A2 15,000 15,035
Northern States Power Co. 7.125% 7/1/25 Aa3 25,000 25,755
Oklahoma Gas & Electric Co. 7.30% 10/15/25 Aa3 15,000 15,233
Pacific Bell Telephone Co. 7.125% 3/15/26 A1 15,000 15,437
Pacific Bell Telephone Co. 7.375% 6/15/25 A1 10,000 10,172
Pacific Gas & Electric Co. 8.25% 11/1/22 A1 20,000 21,710
PacifiCorp MTN 6.625% 6/1/07 A2 10,000 9,929
PacifiCorp 6.71% 1/15/26 A2 10,000 9,491
Southern California Gas Co. 7.50% 6/15/23 A2 20,000 20,674
Southwestern Bell Telephone Co. 7.20% 10/15/26 Aa3 32,500 32,655
Southwestern Bell Telephone Co. 7.25% 7/15/25 Aa3 7,500 7,608
Southwestern Public Service Co. 8.20% 12/1/22 Aa2 12,500 13,544
Tennessee Gas Pipeline Co. 7.50% 4/1/17 Baa3 25,000 26,211
U S WEST Communications Group 6.875% 9/15/33 Aa3 50,000 47,305
Virginia Electric & Power Co. 8.25% 3/1/25 A2 20,000 21,811
Virginia Electric & Power Co. 8.625% 10/1/24 A2 11,000 12,369
------------
581,231
------------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $2,751,455) 2,965,846
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 57
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
LONG-TERM CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOREIGN BONDS (U.S. DOLLAR DENOMINATED)(8.6%)
- --------------------------------------------------------------------------------------------------------------------------------
BHP Finance USA 6.69% 3/1/06 A2 $ 20,000 $ 20,124
Banque Nationale de Paris-NY 7.20% 1/15/07 A1 15,000 15,367
Province of British Columbia 6.50% 1/15/26 Aa2 35,000 33,857
Credit National Euro-Dollar 7.00% 11/14/05 A3 15,000 14,880
Inter-American Development Bank 6.125% 3/8/06 Aaa 25,000 24,870
Republic of Italy Global Bond 6.875% 9/27/23 Aa3 40,000 39,973
Province of Manitoba 8.875% 9/15/21 A1 20,000 24,773
Province of Ontario 6.00% 2/21/06 Aa3 25,000 24,312
Province of Quebec 7.50% 7/15/23 A2 50,000 52,478
Province of Saskatchewan 8.50% 7/15/22 A3 19,000 22,543
Societe Generale-NY 7.40% 6/1/06 A1 25,000 26,042
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $289,671) 299,219
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (3.1%)
- --------------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Assn. (Pooled Mortgage Notes) 15.50% 10/1/12 (1) 9 11
U.S. Treasury Bond 7.25% 5/15/16 100,000 109,947
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $102,530) 109,958
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.1%)
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $74,268) 5.82% 8/1/97 74,268 74,268
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.5%)
(COST $3,217,924) 3,449,291
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.5%)
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets--Notes C and F 63,373
Liabilities--Note F (10,791)
------------
52,582
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 381,810,488 outstanding $.001 par value shares
(authorized 1,700,000,000 shares) $3,501,873
================================================================================================================================
NET ASSET VALUE PER SHARE $9.17
================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At July 31, 1997,
the aggregate value of these securities was $105,594,000, representing 3.0%
of net assets.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $3,261,557 $8.54
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 8,949 .02
Unrealized Appreciation--Note E 231,367 .61
================================================================================================================================
NET ASSETS $3,501,873 $9.17
================================================================================================================================
</TABLE>
20
<PAGE> 58
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
HIGH YIELD CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS (92.7%)
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL (4.8%)
Amresco, Inc. 10.00% 3/15/04 B2 $ 15,000 $ 15,862
Anchor Bancorp Inc. 8.938% 7/9/03 Ba2 10,000 10,409
Bank United Corp. 8.875% 5/1/07 Ba3 33,000 35,123
Chevy Chase Savings Bank 9.25% 12/1/08 B1 15,000 15,075
Coast Federal Bank 13.00% 12/31/02 Ba2 5,700 6,070
Coast Savings Financial, Inc. 10.00% 3/1/00 Ba2 4,600 4,863
FirstFed Financial Corp. 11.75% 10/1/04 B2 5,000 5,100
Imperial Credit Industries, Inc. 9.875% 1/15/07 (1) B2 20,000 19,800
Navistar Financial Corp. 9.00% 6/1/02 (1) B1 15,000 15,450
Olympic Financial Ltd. 11.50% 3/15/07 B2 30,000 30,450
Riggs National Corp. 8.50% 2/1/06 Ba1 10,000 10,566
Western Financial Savings Bank 8.50% 7/1/03 B1 15,000 15,310
Western Financial Savings Bank 8.875% 8/1/07 B1 15,000 14,944
-----------
199,022
-----------
INDUSTRIAL (82.6%)
AEROSPACE & DEFENSE (2.4%)
Howmet Corp. 10.00% 12/1/03 B2 12,500 13,547
K & F Industries Inc. 10.375% 9/1/04 B2 12,000 12,900
L-3 Communications Corp. 10.375% 5/1/07 (1) B2 20,000 21,525
Newport News Shipbuilding Inc. 8.625% 12/1/06 Ba2 20,000 21,000
Newport News Shipbuilding Inc. 9.25% 12/1/06 B1 20,000 21,200
Wyman-Gordon Co. 10.75% 3/15/03 Ba3 9,000 9,608
AUTOMOTIVE (6.5%)
Collins & Aikman Products Co. 11.50% 4/15/06 B3 40,000 45,800
Delco-Remy International Inc. 10.625% 8/1/06 (1) B2 10,000 10,700
Exide Corp. 10.00% 4/15/05 B1 28,000 29,505
Exide Corp. 10.75% 12/15/02 B1 15,000 15,900
Federal-Mogul Corp. 8.80% 4/15/07 (1) Ba2 18,750 20,120
Hayes Wheels International, Inc. 9.125% 7/15/07 (1) B3 30,000 30,663
Hayes Wheels International, Inc. 11.00% 7/15/06 B3 25,000 27,844
Johnstown America Industries, Inc. 11.75% 8/15/05 B3 10,000 10,550
Key Plastics, Inc. 10.25% 3/15/07 (1) B3 12,500 13,125
LDM Technologies Inc. 10.75% 1/15/07 B3 2,375 2,565
Lear Corp. 9.50% 7/15/06 B1 20,000 21,850
Lear Seating Corp. 8.25% 2/1/02 B1 14,500 14,663
Mark IV Industries, Inc. 8.75% 4/1/03 Ba2 15,000 15,563
Walbro Corp. 9.875% 7/15/05 B1 10,000 10,400
BASIC INDUSTRIES (5.7%)
Anchor Glass Container Corp. 11.25% 4/1/05 (1) B2 8,000 8,640
Cabot Safety Corp. 12.50% 7/15/05 B3 10,000 11,000
Cincinnati Milacron, Inc. 8.375% 3/15/04 Ba1 11,500 12,067
Consumers International 10.25% 4/1/05 (1) Ba3 15,000 16,088
Day International Group Inc. 11.125% 6/1/05 B3 5,000 5,350
EnviroSource, Inc. 9.75% 6/15/03 B3 15,000 15,000
Essex Group, Inc. 10.00% 5/1/03 B1 18,000 18,945
Goss Graphic Systems, Inc. 12.00% 10/15/06 B2 20,000 22,100
Great Lakes Carbon Corp. 10.00% 1/1/06 Ba3 6,000 6,442
International Wire Group 11.75% 6/1/05 (1) B3 20,000 21,900
Mettler-Toledo, Inc. 9.75% 10/1/06 B2 18,000 19,080
Neenah Corp. 11.125% 5/1/07 (1) B3 21,000 22,575
Roller Bearing Co. of America Inc. 9.625% 6/15/07 (1) B3 15,000 15,450
Specialty Equipment Cos., Inc. 11.375% 12/1/03 B3 16,500 17,902
Synthetic Industries, Inc. 9.25% 2/15/07 (1) B2 15,000 15,525
UCAR Global Enterprises, Inc. 12.00% 1/15/05 B1 8,000 9,120
</TABLE>
21
<PAGE> 59
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
HIGH YIELD CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BUILDING MATERIALS (3.0%)
American Standard Cos., Inc. 9.875% 6/1/01 B1 $20,000 $ 21,100
Amtrol Inc. 10.625% 12/31/06 B3 11,005 11,665
Falcon Building Products, Inc. 9.50% 6/15/07 (1) B3 21,750 22,511
Johns Manville International Group 10.875% 12/15/04 Ba3 35,000 39,112
Nortek, Inc. 9.25% 3/15/07 (1) Ba3 17,500 17,719
Triangle Pacific Corp. 10.50% 8/1/03 Ba3 13,000 13,910
CABLE (8.7%)
Cablevision Systems Corp. 9.25% 11/1/05 B2 30,000 31,313
Cablevision Systems Corp. 9.875% 5/15/06 B2 3,000 3,225
Cablevision Systems Corp. 9.875% 2/15/13 B2 15,000 15,900
Comcast Corp. 9.125% 10/15/06 Ba3 25,000 26,688
Comcast Corp. 9.375% 5/15/05 Ba3 24,000 25,680
Comcast Corp. 9.50% 1/15/08 Ba3 20,000 21,450
Comcast Corp. 10.625% 7/15/12 Ba3 30,000 36,975
Lenfest Communications, Inc. 8.375% 11/1/05 Ba3 70,000 70,875
Rifkin Acquisition Partners LLLP 11.125% 1/15/06 B3 12,500 13,500
Rogers Cablesystems Ltd. 9.625% 8/1/02 Ba3 12,000 12,900
TCI Communications, Inc. 6.875% 2/15/06 Ba1 40,000 39,273
Tele-Communications, Inc. 8.75% 2/15/23 Ba1 21,000 22,042
Tele-Communications, Inc. 9.25% 1/15/23 Ba1 40,000 43,817
CHEMICALS (7.3%)
Acetex Corp. 9.75% 10/1/03 B1 20,000 20,400
Agricultural Minerals & Chemicals Inc. 10.75% 9/30/03 Ba3 15,000 16,275
Astor Corp. 10.50% 10/15/06 B3 11,000 11,770
Borden Chemicals & Plastics Operating LP 9.50% 5/1/05 Ba2 20,000 21,500
Buckeye Cellulose Corp. 8.50% 12/15/05 Ba3 12,000 12,240
Freedom Chemical Co. 10.625% 10/15/06 B3 18,000 18,900
General Chemical Corp. 9.25% 8/15/03 B2 10,000 10,300
Harris Chemical North America, Inc. 10.75% 10/15/03 B3 32,000 33,040
Huntsman Corp. 9.50% 7/1/07 (1) B2 14,790 15,234
Pioneer Americas Acquistion Corp. 9.25% 6/15/07 (1) B1 20,000 20,050
Rexene Corp. 11.75% 12/1/04 B1 17,500 19,862
Sifto Canada Inc. 8.50% 7/15/00 B1 10,000 10,125
Sovereign Specialty Chemical 9.50% 8/1/07 B3 1,735 1,735
Sterling Chemicals, Inc. 11.25% 4/1/07 (1) N/R 15,000 16,200
Sterling Chemicals, Inc. 11.75% 8/15/06 B3 27,500 30,112
Texas Petrochemicals Corp. 11.125% 7/1/06 B3 17,500 18,856
UCC Investors Holdings 11.00% 5/1/03 B3 27,000 29,145
CONSUMER GOODS & SERVICES (2.4%)
Dr. Pepper Bottling Co. of Texas 10.25% 2/15/00 B3 5,000 5,169
Kinder-Care Learning Centers Inc. 9.50% 2/15/09 B3 30,000 29,400
Muzak LP/Muzak Capital Corp. 10.00% 10/1/03 Ba3 10,000 10,562
Playtex Family Products Corp. 9.00% 12/15/03 B2 22,450 22,534
Playtex Products, Inc. 8.875% 7/15/04 (1) B1 10,000 10,024
Rayovac Corp. 10.25% 11/1/06 B3 10,000 10,650
Safelite Glass 9.875% 12/15/06 (1) B3 10,000 10,600
CONTAINERS (3.7%)
BWAY Corp. 10.25% 4/15/07 (1) B2 10,000 10,800
Owens-Illinois, Inc. 7.85% 5/15/04 Ba1 15,000 15,617
Owens-Illinois, Inc. 8.10% 5/15/07 Ba1 29,980 31,710
Owens-Illinois, Inc. 10.00% 8/1/02 Ba3 22,000 23,100
Silgan Corp. 9.00% 6/1/09 (1) B1 40,000 40,900
Sweetheart Cup Co., Inc. 9.625% 9/1/00 B1 19,000 19,332
Sweetheart Cup Co., Inc. 10.50% 9/1/03 B3 11,000 11,151
</TABLE>
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
COUPON DATE (MOODY'S) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ENERGY & RELATED GOODS & SERVICES (6.1%)
Cross Timbers Oil Co. 9.25% 4/1/07 (1) B2 $ 15,000 $ 15,638
Energy Corp. of America 9.50% 5/15/07 (1) B2 20,000 20,050
Energy Ventures Inc. 10.25% 3/15/04 Ba2 8,000 8,640
Falcon Drilling Co., Inc. 8.875% 3/15/03 B1 11,000 11,660
Flores & Rucks, Inc. 9.75% 10/1/06 B3 16,000 17,040
Maxus Energy Corp. 9.375% 11/1/03 B1 10,000 10,825
J. Ray McDermott, SA 9.375% 7/15/06 B1 25,000 26,125
Mesa Operating Co. 10.625% 7/1/06 Ba2 30,000 34,275
Ocean Energy, Inc. 8.875% 7/15/07 B3 9,320 9,576
Oryx Energy Co. 8.00% 10/15/03 Ba1 10,000 10,547
Oryx Energy Co. 8.125% 10/15/05 Ba1 15,000 15,944
Plains Resources, Inc. 10.25% 3/15/06 B2 15,000 16,275
Pride Petroleum Services, Inc. 9.375% 5/1/07 Ba3 32,000 34,080
Santa Fe Energy Resources, Inc. 11.00% 5/15/04 B1 10,000 10,912
Seagull Energy Corp. 8.625% 8/1/05 B1 10,000 10,518
FOOD & LODGING (1.1%)
ARA Group, Inc. 8.50% 6/1/03 Ba2 10,000 10,300
ARA Services, Inc. 10.625% 8/1/00 Baa3 10,000 10,968
John Q. Hammons Hotels LP 8.875% 2/15/04 B1 5,000 5,113
PMI Acquisition Corp. 10.25% 9/1/03 B2 20,000 21,350
HEALTH CARE (7.2%)
Beverly Enterprises Inc. 9.00% 2/15/06 B1 18,000 18,788
Genesis Health Ventures Inc. 9.75% 6/15/05 B2 5,000 5,238
Graham-Field Health Products, Inc. 9.75% 8/15/07 (1) B3 3,250 3,250
HEALTHSOUTH Corp. 9.50% 4/1/01 Ba3 10,000 10,613
Integrated Health Services, Inc. 9.50% 9/15/07 (1) B1 30,000 31,650
Leiner Health Products 9.625% 7/10/07 (1) B3 12,750 13,260
Manor Care, Inc. 9.50% 11/15/02 Ba1 8,000 8,400
Owens & Minor, Inc. 10.875% 6/1/06 B1 15,000 16,650
Packard Bioscience Co. 9.375% 3/1/07 (1) B3 20,000 20,700
Quorum Health Group, Inc. 8.75% 11/1/05 Ba3 6,000 6,292
Tenet Healthcare Corp. 8.625% 1/15/07 Ba3 45,000 47,081
Tenet Healthcare Corp. 10.125% 3/1/05 Ba3 84,000 92,610
Vencor Inc. 8.625% 7/15/07 (1) B1 22,970 23,458
HOME BUILDING & REAL ESTATE (0.8%)
Continental Homes Holdings Corp. 10.00% 4/15/06 Ba3 10,000 10,300
Del Webb Corp. 9.00% 2/15/06 B2 10,000 10,037
Standard Pacific Corp. 8.50% 6/15/07 Ba2 15,000 15,000
MEDIA & ENTERTAINMENT (6.7%)
American Radio Systems Corp. 9.00% 2/1/06 B2 10,000 10,450
Chancellor Radio Broadcasting Co. 9.375% 10/1/04 B3 17,000 17,765
JCAC, Inc. 10.125% 6/15/06 B2 10,000 11,000
Jacor Communications, Inc. 8.75% 6/15/07 (1) B2 7,905 8,122
Outdoor Systems Inc. 9.375% 10/15/06 B1 15,000 15,900
Time Warner, Inc. 9.125% 1/15/13 Ba1 15,000 17,403
Universal Outdoor Holdings, Inc. 9.75% 10/15/06 B1 19,000 20,330
Viacom Inc. 8.00% 7/7/06 B1 90,000 88,650
Von Hoffman Press Inc. 10.375% 5/15/07 (1) B3 15,000 15,862
Westinghouse Electric Corp. 6.875% 9/1/03 Ba1 13,000 12,799
Westinghouse Electric Corp. 8.375% 6/15/02 Ba1 15,000 15,810
Westinghouse Electric Corp. 8.875% 6/1/01 Ba1 15,000 15,979
World Color Press, Inc. 9.125% 3/15/03 B1 15,000 15,488
Young Broadcasting Inc. 9.00% 1/15/06 B2 7,250 7,304
Young Broadcasting Inc. 11.75% 11/15/04 B2 6,750 7,577
</TABLE>
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
HIGH YIELD CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
METAL (6.1%)
AK Steel Corp. 9.125% 12/15/06 Ba2 $ 55,000 $ 58,025
AK Steel Corp. 10.75% 4/1/04 Ba2 32,000 34,840
Acme Metals, Inc. 12.50% 8/1/02 B1 10,000 11,000
Algoma Steel Inc. 12.375% 7/15/05 B1 25,000 28,875
Armco, Inc. 9.375% 11/1/00 B2 12,000 12,405
Armco, Inc. 11.375% 10/15/99 B2 10,000 10,300
Bethlehem Steel Corp. 10.375% 9/1/03 B1 10,500 11,156
Commonwealth Aluminum Corp. 10.75% 10/1/06 B2 340 361
GS Technologies Operating Co., Inc. 12.25% 10/1/05 B2 12,500 13,859
Kaiser Aluminum & Chemical Corp. 9.875% 2/15/02 B1 8,235 8,523
NS Group Inc. 13.50% 7/15/03 B3 11,650 13,339
Oregon Steel Mills, Inc. 11.00% 6/15/03 B1 15,000 16,350
Ryerson Tull, Inc. 9.125% 7/15/06 Ba1 10,000 10,775
Weirton Steel Corp. 10.75% 6/1/05 B2 12,500 13,188
Wells Aluminum Corp. 10.125% 6/1/05 (1) B2 10,500 10,946
PAPER & PACKAGING (5.6%)
Container Corp. of America 9.75% 4/1/03 B1 50,000 54,125
Doman Industries, Ltd. 8.75% 3/15/04 B1 30,000 29,775
Domtar Inc. 8.75% 8/1/06 Ba1 15,000 15,900
Fonda Group Inc. 9.50% 3/1/07 (1) B3 15,000 14,663
Riverwood International Corp. 10.25% 4/1/06 B3 20,000 20,000
SD Warren Co. 12.00% 12/15/04 B1 37,500 42,187
Stone Container Corp. 9.875% 2/1/01 B2 30,245 31,077
Tembec Finance Corp. 9.875% 9/30/05 B1 21,870 23,182
TECHNOLOGY & RELATED (4.0%)
Advanced Micro Devices 11.00% 8/1/03 Ba1 54,000 60,750
Amphenol Corp. 9.875% 5/15/07 B2 20,000 21,300
Bell & Howell Co. 9.25% 7/15/00 B1 8,000 8,160
Clark-Schwebel Inc. 10.50% 4/15/06 B2 9,295 10,132
Fairchild Semiconductor Corp. 10.125% 3/15/07 (1) B2 35,000 37,188
Iron Mountain, Inc. 10.125% 10/1/06 B3 16,500 17,985
Pierce Leahy Corp. 9.125% 7/15/07 B3 11,520 11,866
TELECOMMUNICATIONS (2.5%)
Comcast Cellular Holdings, Inc. 9.50% 5/1/07 (1) Ba3 15,000 15,788
GCI, Inc. 9.75% 8/1/07 B2 15,000 15,469
Paging Network, Inc. 8.875% 2/1/06 B2 19,000 18,382
Paging Network, Inc. 10.125% 8/1/07 B2 25,000 25,687
Teleport Communications Group Inc. 9.875% 7/1/06 B1 25,000 27,375
TEXTILES & RELATED (2.8%)
Dan River Inc. 10.125% 12/15/03 B3 12,000 12,510
Dominion Textile (USA) Inc. 8.875% 11/1/03 Ba2 15,000 15,413
Dominion Textile (USA) Inc. 9.25% 4/1/06 Ba2 10,000 10,475
Tultex Corp. 9.625% 4/15/07 (1) Ba3 10,000 10,700
Tultex Corp. 10.625% 3/15/05 Ba3 11,960 13,096
Westpoint Stevens, Inc. 8.75% 12/15/01 Ba3 30,000 31,088
Westpoint Stevens, Inc. 9.375% 12/15/05 B2 23,375 24,544
------------
3,439,521
------------
Utilities (5.3%)
AES Corp. 8.375% 8/15/07 Ba1 32,500 32,906
AmeriGas Partners, LP Series B 10.125% 4/15/07 Ba2 10,000 10,600
CalEnergy Co. 9.50% 9/15/06 Ba2 18,500 19,888
CMS Energy Corp. 8.125% 5/15/02 Ba3 30,000 30,930
El Paso Electric Co. Series C 8.25% 2/1/03 Ba3 15,000 15,726
El Paso Electric Co. Series D 8.90% 2/1/06 Ba3 23,000 24,997
El Paso Electric Co. Series E 9.40% 5/1/11 Ba3 28,000 31,193
</TABLE>
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS AMOUNT VALUE*
COUPON DATE (MOODY'S) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First Public Venture Funding 10.15% 1/15/16 Ba3 $ 9,401 $ 9,965
Midland Cogeneration Venture LP 11.75% 7/23/05 B2 25,000 29,493
Texas-New Mexico Power Co. 10.75% 9/15/03 Ba3 14,000 15,179
-----------
220,877
-----------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $3,696,519) 3,859,420
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (5.2%)
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note 6.25% 5/31/00 60,000 60,726
U.S. Treasury Note 6.50% 5/31/01 60,000 61,309
U.S. Treasury Note 6.50% 5/31/02 60,000 61,465
U.S. Treasury Note 6.75% 5/31/99 30,000 30,535
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $210,006) 214,035
- ---------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.0%)
- ---------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $40,606) 5.82% 8/1/97 40,606 40,606
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.9%)
(COST $3,947,131) 4,114,061
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.1%)
- ---------------------------------------------------------------------------------------------------------------------------------
Other Assets--Notes C and F 274,273
Liabilities--Note F (226,620)
-----------
47,653
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------------------------------------------------------
Applicable to 516,076,857 outstanding $.001 par value shares
(authorized 1,700,000,000 shares) $4,161,714
=================================================================================================================================
NET ASSET VALUE PER SHARE $8.06
=================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
N/R--Not Rated.
(1) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At July 31, 1997,
the aggregate value of these securities was $636,874,000, representing
15.3% of net assets.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $4,060,402 $7.87
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note D (65,618) (.13)
Unrealized Appreciation--Note E 166,930 .32
=================================================================================================================================
NET ASSETS $4,161,714 $8.06
=================================================================================================================================
</TABLE>
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F282--7/97
