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[PHOTO]
VANGUARD
FIXED INCOME
SECURITIES FUND
Annual Report
January 31, 1997
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 (who is also shown, accepting a surrender, in a
detail from a nineteenth-century engraving); 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.
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[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged
market benchmark and a peer group of mutual funds with similar investment
policies. It also reviews the principal factors contributing to--and detracting
from--the returns earned by the Fund. To help you evaluate your Fund's
current-year performance, the Message includes a discussion of the Fund's
long-term investment results, as well as a look ahead to the prospects for the
coming year. A recap of the financial markets, which had been included as part
of the Chairman's letter, now appears in The Markets In Perspective. This
overview covers the world's financial markets, putting the results of the
Fund's strategy in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics.
The Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the
adviser to address--and we do our best to ensure that this Report is written in
the same simple and candid manner that characterizes all Vanguard
communications. Finally, each Adviser's Report will include an inset reminder
of the adviser's basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
6
Report From
The Advisers
7
Portfolio
Profiles
11
Performance
Summaries
21
Financial
Statements
30
Report Of
Independent
Accountants
48
Directors And
Officers
Inside Back Cover
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[PHOTO]
John C. Bogle
[PHOTO]
John J. Brennan
FELLOW SHAREHOLDER,
As if fatigued from its extraordinary climb the previous year, the bond
market slipped a notch in the twelve months ended January 31, 1997, the fiscal
year for Vanguard Fixed Income Securities Fund. Interest rates increased
substantially for all but the shortest maturities. As veteran fixed-income
investors would know to expect, the biggest damage done by the rate increase was
to the prices of long-term securities.
Returns from the nine Vanguard Portfolios varied considerably but, again as
you would expect, were right in line with the sectors of the bond market they
represent. Our High Yield Corporate Portfolio shrugged off the rise in rates to
post a solid absolute return. Seven of the eight other Portfolios also produced
positive returns for the fiscal year, although their performances were impeded
by the rise in interest rates. Only our Long-Term U.S. Treasury Portfolio, which
is the most sensitive to interest-rate changes, suffered a negative return for
fiscal 1997. The adjacent table presents the total return (capital change plus
reinvested dividends) for each Portfolio for the twelve months, broken down into
its capital and income components. It also shows each Portfolio's yield as of
January 31.
Per-share figures for each Portfolio, including net asset values, income
dividends, and any distributions from net realized capital gains, are presented
in the table following this letter.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 31, 1997
------------------------------------
COMPONENTS
OF TOTAL RETURN
----------------
TOTAL INCOME CAPITAL CURRENT
VANGUARD PORTFOLIO RETURN RETURN RETURN YIELD*
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term Portfolios
U.S. Treasury +3.9% +5.8% -1.9% 5.91%
Federal +4.5 +6.2 -1.7 5.93
Corporate +4.5 +6.2 -1.7 6.18
- -----------------------------------------------------------------------
Intermediate-Term Portfolios
U.S. Treasury +1.3% +6.2% -4.9% 6.42%
Corporate +2.3 +6.5 -4.2 6.84
GNMA +5.2 +7.3 -2.1 6.98
- -----------------------------------------------------------------------
Long-Term Portfolios
U.S. Treasury -1.8% +6.4% -8.2% 6.72%
Corporate +0.9 +6.9 -6.0 7.24
- -----------------------------------------------------------------------
High Yield Corporate +9.0% +9.3% -0.3% 8.69%
- -----------------------------------------------------------------------
</TABLE>
*30-day annualized yield.
FISCAL 1997 PERFORMANCE OVERVIEW
Conditions that proved ideal for a continuance of the bull market in
stocks--steady economic growth, rising corporate profits, low unemployment, and
a quiescent inflation rate--weren't quite good enough to suit fixed-income
investors in fiscal 1997. As a result, the bond market provided returns that
seemed downright paltry in comparison with the rich rewards bestowed by stocks.
The entire U.S. stock market (as measured by the Wilshire 5000 Equity Index)
provided a total return of +24.4% in the twelve months ended January 31, on top
of a +37.1% gain the previous fiscal year.
The U.S. bond market, on the other hand, provided a return of +3.3% for the
year (as measured by the Lehman Brothers Aggregate Bond Index), a far cry from
its powerful +17.0% gain a year earlier.
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Although it often gets credit or blame for bond-market movements, the
Federal Reserve Board maintained a hands-off monetary policy in fiscal 1997.
After cutting short-term interest rates by 0.25 percentage point (25 basis
points) at the end of January 1996, the Fed left them alone for the following
twelve months. As a result, short-term interest rates traded within a very
narrow band (0.45 percentage point) and ended the year a mere 10 basis points
higher than they were when fiscal 1997 began.
Investors in longer-term securities, however, worried with every positive
economic indicator that the economy was doing too well. The fear was that robust
growth in employment would put upward pressure on wages and, ultimately, on the
inflation rate. Although evidence of a general upsurge in the prices of goods
and services failed to materialize (the Consumer Price Index rose 3.1% during
the fiscal year), inflation anxiety did cause an upsurge in interest rates. From
January 31 to mid-June, the yield on the long-term U.S. Treasury bond rose from
6.03% to 7.19%, or more than one percentage point. Thereafter, the inflation
worries subsided a bit and the yield on the long Treasury bond followed suit,
declining to 6.79% by our fiscal year-end on January 31.
In this environment, our Portfolios performed just about as one would
expect. The net asset values of our Short-Term Portfolios were relatively
resistant to the increase in rates, owing to their average maturities of roughly
21/2 years. For our Intermediate-Term Portfolios, which are roughly twice as
sensitive as the short-term ones to changes in interest rates, the price
declines were proportionately greater, though their interest income was
sufficient to produce positive total returns. Finally, our two Long-Term
Portfolios, twice as sensitive again, experienced the greatest share-price
declines, pretty much offset by their interest income.
With somewhat more moderate interest-rate fluctuations and higher yields,
mortgage-backed securities performed favorably in comparison with other
intermediate-term securities. The narrowing of the yield spread between
mortgage-backed securities and intermediate-term Treasury and corporate
securities meant that the GNMA Portfolio's share-price decline was only about
half as severe as those of our two regular Intermediate-Term Portfolios.
As noted above, solid economic growth in fiscal 1997 tended to depress bond
prices because of fear of inflation. However, a strengthening economy has a
different implication for investors in high-yield bonds. These debt securities,
of course, are issued by companies whose finances are not strong enough to earn
investment-grade credit ratings. A stronger economy, which implies increasing
corporate sales and cash flow, reduces the risk that bond issuers will default
on their debts and, therefore, boosts the attractiveness of the securities. In
the market for high-yield corporate bonds, the positive and negative
implications
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED JANUARY 31, 1997
-------------------------------------
AVERAGE
VANGUARD COMPETITIVE
PORTFOLIO FUND FUND DIFFERENCE
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term U.S. Treasury +3.9% +3.4% +0.5%
Short-Term Federal +4.5 +3.6 +0.9
Short-Term Corporate +4.5 +4.1 +0.4
- ----------------------------------------------------------------------------
Intermediate-Term U.S. Treasury +1.3% +1.6% -0.3%
Intermediate-Term Corporate +2.3 +2.8 -0.5
GNMA +5.2 +3.8 +1.4
- ----------------------------------------------------------------------------
Long-Term U.S. Treasury -1.8% +0.2% -2.0%
Long-Term Corporate +0.9 +2.2 -1.3
- ----------------------------------------------------------------------------
High Yield Corporate +9.0% +12.5% -3.5%
- ----------------------------------------------------------------------------
</TABLE>
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of a stronger economy pretty much canceled each other out. The total return of
the bonds was essentially equal to the interest income they generated, leaving
high-yield bonds the year's highest-performing sector.
When our performance is compared with that of our competitors, fiscal 1997
was, frankly, a so-so year. Only four of our nine Portfolios provided higher
returns than their respective peers. Our results for the year were in sharp
contrast to our usual dominance over the competition. Over the past thirteen
years, out of 82 year-by-year comparisons (the figure reflects our Portfolios'
varied inception dates), we provided superior returns relative to competitive
norms in 66 cases, a success rate of 80%. The past year's results are shown in
the table on the facing page.
As we explained in the Annual Report for fiscal 1996, when each of our
Portfolios outperformed its peer group, our Portfolios carry somewhat longer
maturities than their average competitors in each maturity and quality category.
This means, as we said then, that "our net asset values may rise more when
interest rates fall (as in the past year), but decline more when interest rates
rise." This tendency is greatest, as you might expect, in the Intermediate- and
Long-Term Portfolios.
Our High Yield Portfolio, which shows the biggest lag, suffered relative to
competitors in fiscal 1997 because of the higher average credit quality of its
holdings (Ba2 versus B for the average high-yield fund). The lowest rungs on the
credit-quality ladder benefited more from the salutary effects of economic
growth than did the less-speculative securities in our Portfolio.
We note that the same factors that worked against us in fiscal 1997 have in
other years redounded to our benefit. We believe that our investment policies
are the soundest for the long pull.
LONG-TERM PERFORMANCE OVERVIEW
In sum, it takes time to test the mettle of any mutual fund. We believe that a
fund's long-term record is more significant than any one year's results. The
Performance Summaries on pages 21 through 29 present the long-term results for
our Portfolios, including charts
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURNS
10 YEARS ENDED JANUARY 31, 1997
------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE FINAL VALUE OF A $10,000 INITIAL INVESTMENT
------------------------------ -------------------------------------------
AVERAGE AVERAGE
VANGUARD COMPETITIVE VANGUARD VANGUARD COMPETITIVE VANGUARD
PORTFOLIO PORTFOLIO FUND ADVANTAGE PORTFOLIO FUND ADVANTAGE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Short-Term U.S. Treasury* +6.1% +5.4% +0.7% $13,677 $13,209 $ 468
Short-Term Federal* +7.5 +6.8 +0.7 19,223 18,202 1,021
Short-Term Corporate +7.6 +6.7 +0.9 20,749 19,178 1,571
- ------------------------------------------------------------------------------------------------------------------------
Intermediate-Term U.S. Treasury* +7.9% +6.8% +1.1% $14,941 $14,105 $ 836
Intermediate-Term Corporate* +5.8 +4.9 +0.9 12,007 11,686 321
GNMA +8.5 +7.5 +1.0 22,545 20,585 1,960
- ------------------------------------------------------------------------------------------------------------------------
Long-Term U.S. Treasury +8.6% +6.9% +1.7% $22,806 $19,454 $3,352
Long-Term Corporate +9.2 +7.6 +1.6 24,037 20,816 3,221
- ------------------------------------------------------------------------------------------------------------------------
High Yield Corporate +9.3% +9.1% +0.2% $24,296 $23,970 $ 326
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Since inception: Short-Term Federal, December 31, 1987; Short-Term U.S.
Treasury and Intermediate-Term U.S. Treasury, October 28, 1991;
Intermediate-Term Corporate, November 1, 1993.
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showing each Portfolio's cumulative returns for the past ten years (or its
lifetime) and year-by-year breakdowns of the income and capital returns earned
by each. The previous table summarizes the long-term total returns of each
Portfolio relative to the average return of comparable fixed-income mutual
funds during the same periods. It also shows how a $10,000 investment in each
fund would have grown over the periods involved.
As the table shows, each of our Portfolios, without exception, has
outperformed its average competitor over these longer-term periods. The annual
average margins of superiority range from a quite-modest 0.2 percentage point to
a quite-substantial 1.7 percentage points. Over the years, the "Vanguard
advantage" can amount to significant sums, ranging from 3% to 34% of the initial
amount invested ($300 to $3,400 on the initial $10,000 stake; i.e., "real
money"). We note that for three Portfolios, the periods since inception are not
truly long-term records: about five years for our Short-Term and
Intermediate-Term U.S. Treasury Portfolios; about three years for our
Intermediate-Term Corporate Portfolio.
We emphasize that future absolute returns from our Portfolios and competing
funds may be lower or higher than those shown in the table. In general, the
periods covered in the table were favorable for bond funds of all types because
of a downtrend in interest rates. At the same time, we firmly believe that our
Portfolios will continue to provide returns that are more than competitive with
industry norms. The principal reason for our confidence on this point is the
significant cost advantage we enjoy over our peers.
The expense ratios of the Portfolios of Vanguard Fixed Income Securities
Fund averaged but 0.26% of average net assets in fiscal 1997. These costs--which
directly reduce the income available to be passed through to bond fund
investors--are far lower than the 1.05% expense ratio for the average
fixed-income mutual fund. The difference of roughly 0.80% is equivalent to
nearly $8 for each $1,000 in assets. Our "head start" of that dimension is very
difficult for funds with similar maturity and quality characteristics to
overcome year after year. And unlike bond returns, which will change
unpredictably from year to year as interest rates fluctuate, low cost is a
relatively predictable factor in enhancing the net returns investors receive. We
believe our cost advantage is sustainable.
Low cost is not the only ingredient in our long-term success. Two other
critical factors are our advisers, who manage our Portfolios with outstanding
expertise and professionalism, and our policy of maintaining our Portfolios'
maturities and credit-quality standards within clearly defined limits.
The Performance Summary charts that follow also compare the returns of each
Portfolio with that of an unmanaged index benchmark. Over time, we have come
very close to matching these bond market indexes, which are very tough standards
for actively managed bond funds. The indexes exist only on paper and are not
burdened by the operating, advisory, and securities-transaction costs that all
actual mutual funds bear to one degree or another. Although our Portfolios
generally fell slightly short of the index benchmarks in the long-term
comparisons, we come far closer than our average competitors to keeping up with
these theoretical standards.
IN SUMMARY
The dazzling performance of the stock market during the past two years--the
Wilshire 5000 Index provided a cumulative return of about +70%--has made the
bond market's return of about +20% seem lackluster by comparison, especially in
light of bonds' subpar performance in fiscal 1997. But we believe that bond
funds remain a crucial element in a balanced investment program. Many equity
fund investors today have experienced only
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upside volatility--after all, the U.S. stock market has been rising for nearly
15 years, with only a few, relatively brief setbacks. But sooner or later, these
investors will become acquainted with the downside of stock-market volatility.
At such times, the income and relative stability of principal that bond funds
provide are extremely welcome, and investors are reminded of the reason a
fixed-income component belongs in most long-term investment programs.
We shall continue to operate Vanguard Fixed Income Securities Fund as we
have in the past, providing professionally managed, carefully structured,
high-quality bond funds at the lowest costs in the mutual fund industry. Just as
we will "stay the course" in managing our Portfolios, we suggest that investors
stay the course with diversified, balanced investment programs appropriate to
their financial goals and circumstances.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
Chairman of the Board President
February 19, 1997
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET
VALUE PER SHARE TWELVE-MONTHS
---------------------- -----------------------
JAN. 31, JAN. 31, INCOME CAPITAL CURRENT
PORTFOLIO 1996 1997 DIVIDENDS GAINS* YIELD**
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-Term U.S. Treasury $10.36 $10.16 $0.586 $0.00 5.91%
Short-Term Federal 10.28 10.11 0.615 0.00 5.93
Short-Term Corporate 10.94 10.75 0.663 0.00 6.18
- ----------------------------------------------------------------------------------------------------------------------
Intermediate-Term U.S. Treasury $10.90 $10.37 $0.649 $0.00 6.42%
Intermediate-Term Corporate 10.17 9.72 0.639 0.020 6.84
GNMA 10.45 10.23 0.727 0.00 6.98
- ----------------------------------------------------------------------------------------------------------------------
Long-Term U.S. Treasury $10.73 $ 9.84 $0.655 $0.013 6.72%
Long-Term Corporate 9.43 8.71 0.619 0.154 7.24
- ----------------------------------------------------------------------------------------------------------------------
High Yield Corporate $ 7.89 $ 7.87 $0.688 $0.00 8.69%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes both long-term and short-term capital gains distributions.
**SEC 30-day annualized yield.
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<PAGE> 8
THE MARKETS IN PERSPECTIVE: FISCAL YEAR ENDED JANUARY 31, 1997
U.S. EQUITY MARKETS
With investors' confidence backed by steady economic growth, low inflation, and
rising earnings, the stock market rose in fiscal 1997 by 26.3%, as measured by
the Standard & Poor's 500 Composite Stock Price Index.
Investors strongly favored larger companies, such as those that dominate
the S&P 500 Index. Smaller companies generally posted solid absolute results but
could not keep pace with the largest companies, with the 19.0% return of the
Russell 2000 Index of small stocks lagging the S&P 500 Index by 7.3 percentage
points.
U.S. FIXED-INCOME MARKETS
The fiscal year saw an overall rise in interest rates that reflected concern
about the prospects for increasing inflation, due to indications of greater than
expected strength in the economy. At January 31, 1997, the 30-year U.S. Treasury
yield was 6.79%, noticeably higher than its 6.03% level one year earlier.
A year ago, the general expectation was that modest economic growth and
benign inflation would continue. This complacent view was shattered by a
succession of economic reports indicating that the economy was growing at a much
faster--and potentially inflation-inducing--pace. The bond market reacted
swiftly: The 30-year Treasury bond's yield jumped from 6.03% on January 31,
1996, to 6.74% in mid-March. As it turned out, most of the worry was wasted:
Inflation, as measured by the Consumer Price Index, remained at an annualized
rate of 3.1%. But increasing signs of growth during the past three months
reignited inflation concerns and caused bonds to finish the fiscal year on a
sour note.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED JANUARY 31, 1997
--------------------------------
1 YEAR 3 YEARS 5 YEARS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 26.3% 20.8% 17.1%
Russell 2000 Index 19.0 13.3 14.3
MSCI-EAFE Index 2.2 4.5 8.2
- -----------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 3.3% 5.7% 7.4%
Lehman 10-Year Municipal
Bond Index 3.9 5.0 7.5
Salomon 90-Day U.S. Treasury Bills 5.2 5.1 4.4
- -----------------------------------------------------------------------------
Other
Consumer Price Index 3.1% 2.9% 2.9%
- -----------------------------------------------------------------------------
</TABLE>
There were three relatively bright spots in the bond market: corporate
bonds, mortgage-backed issues, and municipals. Corporate bonds, especially those
of lower credit quality, performed well relative to Treasuries, because of
general confidence in companies' ability to meet payments. The stable-to-rising
interest-rate environment throughout most of the year benefited mortgage-backed
securities as the threat of refinancings receded. Finally, municipal bonds
outpaced their U.S. Treasury counterparts.
INTERNATIONAL EQUITY MARKETS
The Morgan Stanley Capital International-Europe, Australasia, Far East Index
showed a 2.2% return for the year ended January 31--a result that conceals a
striking disparity between the European and Pacific markets. Europe's markets
provided U.S. investors with a gain of 20.8%, while the Pacific markets declined
- -16.0%.
6
<PAGE> 9
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
A "RODNEY DANGERFIELD" YEAR FOR BONDS
The bond markets were distinctly unfriendly, if not downright disrespectful, to
investors in the fiscal year ended January 31, 1997. Interest rates rose along
the entire spectrum of maturities familiarly known as the Treasury "yield
curve." As the table below shows, yields rose about 0.7% for 1-year securities,
about 1.0% for 5-year notes, and about 0.8% for 30-year bonds.
The upward movement in interest rates produced price declines for notes and
bonds that offset much, if not all, of the respective securities' interest
income. It will come as no surprise to observant investors, therefore, that
fiscal 1997 produced generally forgettable total returns in the low single
digits. Returns appeared all the more lackluster when compared with the
scorching performance of the stock market, which turned in yet another
spectacular year.
Looking forward, it's fair to say that the prevailing market conditions
(with their higher available yields) look appreciably more appealing than those
of 12 months ago. However, time will tell whether fiscal 1998 really turns out
better than last year.
<TABLE>
<CAPTION>
- ----------------------------------------------------
YIELDS ON TREASURY NOTES AND BONDS
- ----------------------------------------------------
MATURITY 1/31/98 1/31/97 CHANGE
- ----------------------------------------------------
<C> <C> <C> <C>
1 Year 4.89% 5.57% +0.68%
2 Years 4.92 5.92 +1.00
3 Years 5.03 6.04 +1.01
5 Years 5.23 6.25 +1.02
10 Years 5.58 6.49 +0.91
30 Years 6.03 6.79 +0.76
- ----------------------------------------------------
Source: Bloomberg
</TABLE>
The Portfolios of Vanguard Fixed Income Securities Fund performed pretty
much in line with the anemic bond market during the past 12 months. The
Short-Term Portfolios--U.S. Treasury, Federal, and Corporate--proved most
resistant to the rise in interest rates (a direct by-product of their
conservative two- to three-year average maturities), and generated total returns
of about 4.0% to 4.5%. These Portfolios, while much more volatile than money
market funds, are very attractive to investors with three- to five-year horizons
seeking higher income than that available from securities with very short-term
(one year or under) maturities. Over most past rolling two- and three-year
intervals, these Portfolios have provided relatively robust and consistent
performance.
The Intermediate-Term U.S. Treasury and Corporate Portfolios generated
lower total returns in fiscal 1997 than their shorter brethren, owing to their
longer average maturities. Their net asset values are about twice as sensitive
to changes in interest rates as are the net asset values of the Short-Term
Portfolios. Consequently, the Intermediate-Term Portfolios dropped
proportionately more in price during the market downturn. What these Portfolios
surrender in price stability, however, they pick up in income and dividend
durability. Simply put, the Intermediate-Term Portfolios "hang on" to their
dividends roughly twice as long as do the Short-Term Portfolios.
The "champion" of the dividend-durability contest is the Long-Term U.S.
Treasury Portfolio. In years like
INVESTMENT PHILOSOPHY
The Fund reflects a belief that no one bond portfolio is
right for all investors. The Fund offers an array of
Portfolios with specific maturity and quality
characteristics so investors can select the Portfolio or
combination of Portfolios appropriate to their needs.
7
<PAGE> 10
fiscal 1996, when interest rates fell sharply, this durability resulted in a
meaningful and beneficial increment to the Portfolio's total return.
Unfortunately, in fiscal 1997, it was akin to backing the heaviest contestant in
a flotation tournament. The Portfolio's extremely long (20+ years) average
maturity caused its net asset value to sink further than those of our other
Portfolios. Indeed, this Portfolio's price sensitivity to interest-rate changes
is twice that of the Intermediate-Term Portfolios and four times that of the
Short-Term Portfolios. Details of each Portfolio's returns relative to the broad
market and competing funds are given in the Message To Shareholders, which
begins on page 1. Suffice it to say, it's good to get this kind of year behind
us.
WHAT'S IN STORE FOR FISCAL 1998?
Accurate forecasts of the financial markets are difficult, if not impossible, to
achieve. The problem lies not only with predicting the economic variables that
influence interest rates, but also with predicting how market participants will
react to those changing variables. The economist John Maynard Keynes captured
the essence of this conundrum when he likened the financial markets to a contest
whose object is to predict the winner of a beauty pageant. The trick is not to
pick the most beautiful contestant, but to pick the one whom the judges will
select as most beautiful. The years 1995 and 1996 are vivid examples of this
"self-referential" kind of contest. As far as inflation measures are concerned,
the years were essentially identical, as the above table shows.
<TABLE>
<CAPTION>
- -----------------------------------------------------
INFLATION RATES AND BOND RETURNS 1995 1996
- -----------------------------------------------------
<C> <C>
GDP Implicit Price
Deflator* (change) 2.6% 2.0%
CPI (change) 2.6 3.3
Total Return: Lehman
Aggregate Bond Index 18.5 3.6
- -----------------------------------------------------
</TABLE>
*The broadest statistical measure of inflation in the U.S. economy.
In both years, inflation was effectively dormant. But what a difference a
year makes for the bond market. The perceptions of the judges (market
participants) as to the future were dramatically different in each year and were
the source of both the dazzling 1995 performance of the bond market and its
lackluster showing in 1996. In 1997, expectations will probably continue to be
just as important as reality, if not more so. What do we expect? Given the
current state of economic affairs, we anticipate relatively low volatility in
bond prices. With luck, this scenario will produce total returns for the
Portfolios close to their dividend distribution yields. Our Portfolios are
positioned (with respect to quality, sector, and maturity) to perform well under
these conditions.
On that note, it is appropriate to underscore the Vanguard expense
advantage. During periods of low price volatility, the main source of a bond
portfolio's total return is its coupon income, distributed to shareholders in
the form of dividends. With yields available on investment-grade bonds in the
mid-single digits, every basis point (1/100th of a percentage point) counts, and
investors should seek out the most efficient investments available. On this
score there are few, if any, serious competitors to Vanguard. At the risk of
preaching to the converted, we reiterate and reaffirm our enduring competitive
edge. All but a tiny sliver of the interest income earned by Vanguard's bond
portfolios goes directly to the shareholders' "bottom line." In the long run,
that's what counts.
Ian A. MacKinnon, Senior Vice President
Robert F. Auwaerter, Principal
John W. Hollyer, Principal
Stephen J. Mahoney, Assistant Portfolio Manager February 12, 1997
8
<PAGE> 11
REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
GNMA, LONG-TERM CORPORATE, AND HIGH YIELD CORPORATE PORTFOLIOS
Although economic statistics or interest-rate movements may affect the
GNMA, Long-Term Corporate, and High Yield Corporate Portfolios differently, all
three are influenced strongly by monetary policy. Since lowering short-term
interest rates on January 31, 1996, the Federal Reserve Board has left monetary
policy unchanged. Longer-term rates rose, however, and yields fluctuated within
roughly a one-percentage-point band. Inflation remained at an annual rate of
around 3%.
In this environment of steady inflation, moderate growth, stable short
rates, and rising long rates, high-yield bonds outperformed the two other
sectors. Long-term, investment-grade corporate bonds suffered the most because
of their sensitivity to rising long rates. Mortgage returns were between those
of long corporate bonds and high-yield securities. With long rates 80 basis
points (0.80%) higher now than a year ago, and with little change anticipated in
inflation or economic-growth rates, we expect long-term, investment-grade
corporate bonds and mortgage-backed securities to perform better in the coming
fiscal year than they did in fiscal 1997. High-yield bonds should again "earn
their coupons."
GNMA PORTFOLIO
Interest rates declined slightly during the second half of fiscal 1997, but the
change was minor compared with fluctuations since the great interest-rate
decline of 1993. The relative stability meant that GNMAs weren't buffeted by the
unsettling effects of either mortgage refinancing, which picks up during periods
of declining interest rates, or declining security prices, a by-product of
rising interest rates. The result was that investors began once again to
appreciate the benefits of the GNMA sector. With interest-rate volatility low
and refinancing stable, GNMAs capitalized on their yield advantage to provide
total returns exceeding those of comparable U.S. Treasury securities.
We continue to believe that the GNMA sector will provide attractive returns
relative to U.S. Treasuries or other very high-quality securities. The GNMA
yield advantage remains substantial, at roughly 1.10%, and we do not believe
that interest rates will fall far enough to generate large-scale mortgage
refinancing. As investors continue to be drawn to those areas of the
fixed-income market that offer competitive yield and high quality, GNMAs will
remain a logical choice. The Portfolio is invested solely in GNMA securities,
with a modest amount of cash. The Portfolio's average coupon is 7.6%.
LONG-TERM CORPORATE PORTFOLIO
This Portfolio's average maturity is over 20 years, in keeping with its charter
as a long-term, investment-grade corporate bond fund. Although long-term
interest rates fell approximately 20 basis points in the second half of the
fiscal year, they were still 80 basis points higher than when the fiscal year
began. The increase in yields hurt the Portfolio's net asset value, which is
extremely sensitive to changes in long-term rates. The Portfolio's duration was
raised modestly over the year as rates rose. With long-term corporate bonds now
offering a yield premium in excess of 3% over inflation, we are locking up these
attractive yields by extending the Portfolio's duration. The Portfolio has
excellent call protection so that a majority of the higher-coupon securities
cannot be redeemed by their issuers if rates decline. Thus the Portfolio's
income stream has protection from falling interest rates.
9
<PAGE> 12
The major risk to this Portfolio would be a rise in long-term interest
rates. More than half of the Portfolio is invested in corporate bonds with an
average maturity longer than 15 years. Cash is minimal. The Portfolio's duration
is slightly under nine years, which implies that the principal value of the
bonds could change 9% with a 1% change in market interest rates.
The second risk always present in this Portfolio is that the
creditworthiness of the corporate issuers may deteriorate. To mitigate this
risk, the Portfolio is well-diversified by issuer and industry, and more than
90% of assets are invested in issues rated A or better. We do not own
below-investment-grade corporate bonds, debt of emerging-market nations, or
bonds denominated in non-U.S. currencies. We will continue to emphasize
corporate bonds issued by well-established larger companies with stable
operating histories. Treasuries and mortgage-backed securities will not exceed
20% of assets.
HIGH YIELD CORPORATE PORTFOLIO
The below-investment-grade market had a relatively strong year even though
interest rates rose. Below-investment-grade bonds usually outperform
higher-quality bonds when investors are anticipating strong economic growth and
when interest rates are rising moderately.
Because the economy behaved so well in 1996, the default rate by companies
rated below investment grade was minimal. Since we expect similar economic
growth this year, the default rate should remain low, and we will continue to
emphasize large, economically sensitive issuers. We do not anticipate any major
problems in the economy that would cause the Portfolio to suffer meaningful
deterioration in credit quality.
We must be vigilant, however, in examining the large number of new issues.
With strong cash flows into high-yield bond funds, the quality of the new
companies coming to market could slip if bond investors lower their credit
standards. While the stock market is strong, which buoys the high-yield market,
and while liquidity in the banking system is ample, it remains critically
important to be selective in bond purchases. Individual investment mistakes in
the high-yield market are costly, since the value of the securities can erode
severely and very quickly.
We exercise in-depth credit research on each company and emphasize
diversification; the Portfolio owns more than 100 issuers, representing a broad
range of industries and companies. Our holdings continue to be focused on
cash-paying issues rated B or better. We maintain a modest U.S. Treasury reserve
in the event that liquidity is necessary. In short, we emphasize relatively
higher-quality bonds in the below-investment-grade sector.
Paul D. Kaplan, Senior Vice President and Portfolio Manager
Earl E. McEvoy, Senior Vice President and Portfolio Manager
February 10, 1997
10
<PAGE> 13
PORTFOLIO PROFILE: SHORT-TERM U.S. TREASURY PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on page 12.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ---------------------------------------------
<S> <C>
Number of Issues 27
Yield 5.9%
Yield to Maturity 6.0%
Average Coupon 6.8%
Average Maturity 2.3 years
Average Quality U.S. Treasury
Average Duration 2.1 years
Expense Ratio 0.25%
Cash Reserves 1.1%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ---------------------------------------------
SHORT-TERM LEHMAN
U.S. TREASURY INDEX*
- ---------------------------------------------
<S> <C> <C>
R-Squared 0.92 1.00
Beta 0.50 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- ---------------------------------------------
<S> <C>
Under 1 Year 2.1%
1-5 Years 95.7
5-10 Years 2.2
10-20 Years --
20-30 Years --
Over 30 Years --
- ---------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
U.S. Treasury 100.0%
</TABLE>
11
<PAGE> 14
[PHOTO]
AVERAGE COUPON. The average interest rate, expressed as a percentage of face
value, paid on the securities held by a portfolio.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To estimate the price
sensitivity of a portfolio, multiply its duration by the change in rates. If
interest rates rise by one percentage point, the share price of a portfolio with
an average duration of five years would decline by about 5%. If rates decrease
by a percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity and are repaid. In general, the longer the average maturity, the
more a portfolio's share price will fluctuate in response to changes in market
interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating agencies.
The agencies assign ratings after appraising an issuer's ability to meet its
obligations. Quality is graded on a scale, with Aaa indicating the most
creditworthy corporate bond issuers.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall market
rose or fell by 10%.
DISTRIBUTION BY COUPON. A breakdown of the securities in the portfolio according
to coupon rate, the interest rate that an issuer promises to pay, expressed as
an annual percentage of face value. Mortgage-backed securities, especially those
with unusually high coupon rates, are subject to prepayment risk, the
possibility that the principal of the underlying mortgage loans will be repaid
early as homeowners refinance with new, lower-rate mortgage loans.
DISTRIBUTION BY CREDIT QUALITY. An indicator of the risk of default or other
credit problems on securities held by a portfolio.
DISTRIBUTION BY ISSUER. A breakdown of a portfolio's holdings by type of issuer
or type of instrument.
DISTRIBUTION BY MATURITY. An indicator of interest-rate risk. In general, the
higher the concentration of longer-maturity issues, the more a portfolio's share
price will fluctuate in response to changes in interest rates. Callable
securities trading at prices above their par values are treated as if coming due
on their earliest redemption date.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: average maturity (short, medium, or long) and average credit quality
(high, medium, or low).
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
YIELD. A snapshot of a portfolio's interest income. The yield, expressed as a
percentage of the portfolio's net asset value, is based on income earned over
the past 30 days and is annualized, or projected forward for the coming year.
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a portfolio were held to their maturity dates.
12
<PAGE> 15
PORTFOLIO PROFILE: SHORT-TERM FEDERAL PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on page 12.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ---------------------------------------------
<S> <C>
Number of Issues 75
Yield 5.9%
Yield to Maturity 6.2%
Average Coupon 6.4%
Average Maturity 2.5 years
Average Quality Agency
Average Duration 2.1 years
Expense Ratio 0.25%
Cash Reserves 1.0%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ---------------------------------------------
SHORT-TERM LEHMAN
FEDERAL INDEX*
- ---------------------------------------------
<S> <C> <C>
R-Squared 0.91 1.00
Beta 0.50 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
Distribution by Maturity (% of Portfolio)
- ---------------------------------------------
<S> <C>
Under 1 Year 4.2%
1-5 Years 91.3
5-10 Years 4.5
10-20 Years --
20-30 Years --
Over 30 Years --
- ---------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- ---------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
U.S. Treasury 14.5%
Agency 85.5
- -----------------------------------------------
Total 100.0%
</TABLE>
13
<PAGE> 16
PORTFOLIO PROFILE: SHORT-TERM CORPORATE PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on page 12.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ---------------------------------------------
<S> <C>
Number of Issues 232
Yield 6.2%
Yield to Maturity 6.3%
Average Coupon 7.0%
Average Maturity 2.6 years
Average Quality Aa3
Average Duration 2.2 years
Expense Ratio 0.25%
Cash Reserves 3.6%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ---------------------------------------------
SHORT-TERM LEHMAN
CORPORATE INDEX*
- ---------------------------------------------
<S> <C> <C>
R-Squared 0.93 1.00
Beta 0.50 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- ---------------------------------------------
<S> <C>
Under 1 Year 15.0%
1-5 Years 74.5
5-10 Years 9.2
10-20 Years 1.3
20-30 Years --
Over 30 Years --
- ---------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- ---------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- ----------------------------------------------
<S> <C>
Aaa 23.0%
Aa 12.7
A 44.4
Baa 19.9
Ba --
B --
Not Rated --
- ----------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- ---------------------------------------------
<S> <C>
Finance 37.5%
Industrial 28.3
Asset-Backed 8.7
Mortgage 8.6
Utilities 7.3
Foreign 7.2
Agency 2.4
Treasury --
- ---------------------------------------------
Total 100.0%
</TABLE>
14
<PAGE> 17
PORTFOLIO PROFILE: INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on page 12.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ---------------------------------------------
<S> <C>
Number of Issues 26
Yield 6.4%
Yield to Maturity 6.5%
Average Coupon 8.4%
Average Maturity 7.4 years
Average Quality U.S. Treasury
Average Duration 5.3 years
Expense Ratio 0.25%
Cash Reserves 1.7%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ---------------------------------------------
INTERMEDIATE-TERM LEHMAN
U.S. TREASURY INDEX*
- ---------------------------------------------
<S> <C> <C>
R-Squared 0.98 1.00
Beta 1.19 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- ---------------------------------------------
<S> <C>
Under 1 Year 0.2%
1-5 Years 9.2
5-10 Years 65.8
10-20 Years 24.8
20-30 Years --
Over 30 Years --
- ---------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- ---------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
U.S. Treasury 100.0%
</TABLE>
15
<PAGE> 18
PORTFOLIO PROFILE: INTERMEDIATE-TERM CORPORATE PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on page 12.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ---------------------------------------------
<S> <C>
Number of Issues 139
Yield 6.8%
Yield to Maturity 7.0%
Average Coupon 7.3%
Average Maturity 7.4 years
Average Quality A1
Average Duration 5.3 years
Expense Ratio 0.25%
Cash Reserves 2.4%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ---------------------------------------------
INTERMEDIATE-TERM LEHMAN
CORPORATE INDEX*
- ---------------------------------------------
<S> <C> <C>
R-Squared 0.98 1.00
Beta 1.16 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- ---------------------------------------------
<S> <C>
Under 1 Year 1.3%
1-5 Years 14.0
5-10 Years 71.9
10-20 Years 12.8
20-30 Years --
Over 30 Years --
- ---------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- ---------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
Aaa 10.1%
Aa 11.9
A 45.4
Baa 31.6
Ba 1.0
B --
Not Rated --
- -----------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- ---------------------------------------------
<S> <C>
Finance 40.6%
Industrial 28.3
Foreign 11.8
Utilities 10.6
Agency 2.0
Asset-Backed 3.3
Treasury 1.7
Mortgage 1.7
- ---------------------------------------------
Total 100.0%
</TABLE>
16
<PAGE> 19
PORTFOLIO PROFILE: GNMA PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on page 12.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ---------------------------------------------
<S> <C>
Number of Issues 24
Yield 7.0%
Yield to Maturity 7.3%
Average Coupon 7.6%
Average Maturity 7.7 years
Average Quality U.S. Treasury
Average Duration 4.8 years
Expense Ratio 0.27%
Cash Reserves 1.2%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ---------------------------------------------
LEHMAN
GNMA INDEX*
- ---------------------------------------------
<S> <C> <C>
R-Squared 0.95 1.00
Beta 0.84 1.00
</TABLE>
*Lehman Aggregate Bond Index.
INVESTMENT FOCUS
- ---------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY COUPON (% OF PORTFOLIO)
- ---------------------------------------------
<S> <C>
Under 5% --
5%-6% 1.2%
6%-7% 10.2
7%-8% 53.7
8%-9% 26.7
9%-10% 8.0
Over 10% 0.2
- ---------------------------------------------
Total 100.0%
</TABLE>
17
<PAGE> 20
PORTFOLIO PROFILE: LONG-TERM U.S. TREASURY PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on page 12.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ---------------------------------------------
<S> <C>
Number of Issues 7
Yield 6.7%
Yield to Maturity 6.8%
Average Coupon 8.5%
Average Maturity 20.6 years
Average Quality U.S. Treasury
Average Duration 9.7 years
Expense Ratio 0.25%
Cash Reserves 6.5%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ---------------------------------------------
LONG-TERM LEHMAN
U.S. TREASURY INDEX*
- ---------------------------------------------
<S> <C> <C>
R-Squared 0.94 1.00
Beta 1.86 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- ---------------------------------------------
<S> <C>
Under 1 Year 4.0%
1-5 Years --
5-10 Years --
10-20 Years 14.3
20-25 Years 79.3
Over 25 Years 2.4
- ---------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- ---------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
U.S. Treasury 100.0%
</TABLE>
18
<PAGE> 21
PORTFOLIO PROFILE: LONG-TERM CORPORATE PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on page 12.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ---------------------------------------------
<S> <C>
Number of Issues 154
Yield 7.2%
Yield to Maturity 7.4%
Average Coupon 7.6%
Average Maturity 21.4 years
Average Quality A1
Average Duration 8.7 years
Expense Ratio 0.28%
Cash Reserves 2.9%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ---------------------------------------------
LONG-TERM LEHMAN
CORPORATE INDEX*
- ---------------------------------------------
<S> <C> <C>
R-Squared 0.95 1.00
Beta 1.53 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- ---------------------------------------------
<S> <C>
Under 1 Year 1.4%
1-5 Years --
5-10 Years 20.2
10-20 Years 17.5
20-25 Years 14.2
Over 25 Years 46.7
- ---------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- ---------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- ----------------------------------------------
<S> <C>
Aaa 16.0%
Aa 20.5
A 53.6
Baa 9.9
Ba --
B --
Not Rated --
- ---------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- --------------------------------------------
<S> <C>
Industrial 44.5%
Finance 20.9
Utilities 18.3
Foreign 9.5
Treasury 4.0
Mortgage 2.8
Agency --
Asset-Backed --
- --------------------------------------------
Total 100.0%
</TABLE>
19
<PAGE> 22
PORTFOLIO PROFILE: HIGH YIELD CORPORATE PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on page 12.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ---------------------------------------------
<S> <C>
Number of Issues 191
Yield 8.7%
Yield to Maturity 8.9%
Average Coupon 9.6%
Average Maturity 7.8 years
Average Quality Ba2
Average Duration 4.1 years
Expense Ratio 0.29%
Cash Reserves 4.9%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ---------------------------------------------
HIGH YIELD LEHMAN
CORPORATE INDEX*
- ---------------------------------------------
<S> <C> <C>
R-Squared 0.54 1.00
Beta 0.74 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- ---------------------------------------------
<S> <C>
Basic Industries 16.3%
Media & Communications 11.4
Paper 10.5
Cable 8.8
Metal 7.2
Health Care 6.9
Chemicals 6.2
Treasury 5.7
Utilities 5.1
Energy & Related Goods & Services 4.9
Grocery Stores 3.8
Consumer Goods & Services 3.3
Financial 3.1
Food & Lodging 2.2
Transportation 1.4
Home Building & Real Estate 1.3
Aerospace & Defense 1.0
Computers & Electronic Equipment 0.9
- ---------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- ---------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
Aaa 5.7%
Aa 0.3
A --
Baa 0.6
Ba 36.1
B 56.9
Caa 0.4
Not Rated --
- -----------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
Distribution by Maturity (% of Portfolio)
- ---------------------------------------------
<S> <C>
Under 1 Year 2.2%
1-5 Years 15.6
5-10 Years 72.5
10-20 Years 7.1
20-25 Years --
Over 25 Years 2.6
- ---------------------------------------------
Total 100.0%
</TABLE>
20
<PAGE> 23
PERFORMANCE SUMMARY: SHORT-TERM U.S. TREASURY PORTFOLIO
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 so that an investment in the Portfolio
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 10/28/91-1/31/97
- --------------------------------------------------------
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
- --------------------------------------------------------
</TABLE>
*Lehman Short-Term U.S. Treasury Index.
See Financial Highlights table on page 40 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 10/28/91-1/31/97
- ---------------------------------------------------------------------------------------------------
VFISF-ST LIPPER SHORT LEHMAN MF SHORT (1-5)
U.S. TREASURY U.S. TREASURY U.S. TREASURY
<S> <C> <C> <C>
1991 10 10000 10000 10000
1992 01 10260 10271 10302
1992 04 10357 10360 10404
1992 07 10767 10685 10834
1992 10 10893 10783 10965
1993 01 11157 10975 11225
1993 04 11425 11170 11481
1993 07 11473 11234 11587
1993 10 11650 11393 11793
1994 01 11775 11499 11912
1994 04 11513 11288 11607
1994 07 11662 11419 11764
1994 10 11681 11434 11751
1995 01 11822 11560 11897
1995 04 12199 11885 12291
1995 07 12550 12195 12677
1995 10 12820 12439 12958
1996 01 13165 12757 13327
1996 04 13019 12611 13182
1996 07 13182 12759 13350
1996 10 13520 13067 13715
1997 01 13677 13209 13870
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
-----------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM U.S. TREASURY PORTFOLIO 3.89% 5.92% 6.13% $13,677
AVERAGE SHORT-TERM U.S.
TREASURY FUND 3.36 5.29 5.43 13,209
LEHMAN SHORT-TERM U.S.
TREASURY INDEX 4.07 6.13 6.42 13,869
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
- --------------------------------------------------------------------------------------------------------------------
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 4.39% 5.74% 0.59% 5.57% 6.16%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Portfolio's fiscal
year-end.
21
<PAGE> 24
PERFORMANCE SUMMARY: SHORT-TERM FEDERAL PORTFOLIO
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 so that an investment in the Portfolio
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 12/31/87-1/31/97
- --------------------------------------------------------
SHORT-TERM FEDERAL PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------
<C> <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
- --------------------------------------------------------
</TABLE>
*Lehman Short-Term Government Index.
See Financial Highlights table on page 41 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 12/31/87-1/31/97
- --------------------------------------------------------------------------------------------
VFISF-ST LIPPER SHORT LEHMAN MF SHORT (1-5)
FEDERAL U.S. GOVERNMENT BLEND GOVERNMENT
<S> <C> <C> <C>
1987 12 10000 10000 10000
1988 01 10100 10212 10188
1988 04 10212 10303 10283
1988 07 10314 10410 10374
1988 10 10573 10674 10653
1989 01 10672 10741 10699
1989 04 10876 10924 10921
1989 07 11452 11425 11535
1989 10 11623 11583 11692
1990 01 11748 11705 11824
1990 04 11844 11808 11906
1990 07 12323 12246 12426
1990 10 12562 12482 12701
1991 01 12977 12886 13140
1991 04 13246 13147 13439
1991 07 13503 13377 13688
1991 10 14016 13858 14265
1992 01 14353 14138 14627
1992 04 14506 14265 14773
1992 07 15108 14744 15378
1992 10 15277 14869 15563
1993 01 15573 15177 15927
1993 04 15940 15456 16291
1993 07 16101 15625 16440
1993 10 16382 15853 16729
1994 01 16543 15978 16898
1994 04 16143 15574 16469
1994 07 16318 15674 16694
1994 10 16299 15650 16677
1995 01 16508 15816 16883
1995 04 17047 16265 17441
1995 07 17531 16696 17986
1995 10 17935 17067 18387
1996 01 18394 17504 18904
1996 04 18268 17294 18704
1996 07 18495 17481 18946
1996 10 18987 17919 19464
1997 01 19223 18202 19687
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
-----------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM FEDERAL PORTFOLIO 4.51% 6.02% 7.46% $19,223
AVERAGE SHORT-TERM
GOVERNMENT FUND 3.56 5.11 6.81 18,202
LEHMAN SHORT-TERM
GOVERNMENT INDEX 4.14 6.12 7.74 19,688
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
- --------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Short-Term Federal Portfolio 12/31/87 4.78% 5.77% 0.51% 6.96% 7.47%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Portfolio's fiscal
year-end.
22
<PAGE> 25
PERFORMANCE SUMMARY: SHORT-TERM CORPORATE PORTFOLIO
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 so that an investment in the Portfolio
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 10/29/82-1/31/97
- --------------------------------------------------------
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
- --------------------------------------------------------
</TABLE>
*Lehman Short-Term Corporate Index.
See Financial Highlights table on page 41 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 1/31/87-1/31/97
- ------------------------------------------------------------------------------------------------------------
VFISF-ST LIPPER SHORT INVESTMENT LEHMAN MF SHORT (1-5)
CORPORATE GRADE BLEND INVEST. GRADE
<S> <C> <C> <C>
1987 01 10000 10000 10000
1987 04 9925 10024 9971
1987 07 10048 10086 10152
1987 10 10187 10192 10267
1988 01 10516 10505 10677
1988 04 10666 10635 10840
1988 07 10778 10756 10993
1988 10 11054 11012 11288
1989 01 11180 11134 11373
1989 04 11412 11338 11589
1989 07 12005 11826 12246
1989 10 12174 12021 12452
1990 01 12317 12165 12590
1990 04 12443 12305 12705
1990 07 12945 12732 13279
1990 10 13185 12921 13403
1991 01 13607 13338 13824
1991 04 13983 13684 14343
1991 07 14243 13938 14652
1991 10 14810 14434 15265
1992 01 15199 14778 15680
1992 04 15360 14924 15881
1992 07 16033 15421 16583
1992 10 16175 15566 16720
1993 01 16611 15846 17162
1993 04 16970 16149 17644
1993 07 17097 16322 17887
1993 10 17410 16578 18243
1994 01 17626 16752 18516
1994 04 17243 16417 18009
1994 07 17486 16571 18327
1994 10 17500 16603 18327
1995 01 17733 16739 18566
1995 04 18338 17206 19281
1995 07 18894 17676 19957
1995 10 19318 18047 20457
1996 01 19852 18494 21119
1996 04 19692 18345 20866
1996 07 19944 18565 21158
1996 10 20485 19034 21803
1997 01 20749 19178 22082
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
----------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM CORPORATE PORTFOLIO 4.52% 6.42% 7.57% $20,749
AVERAGE SHORT-TERM CORPORATE FUND 4.11 5.55 6.73 19,178
LEHMAN SHORT-TERM CORPORATE INDEX 4.56 7.09 8.24 22,082
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
- --------------------------------------------------------------------------------------------------------------------
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 4.79% 6.26% 0.35% 7.27% 7.62%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Portfolio's fiscal
year-end.
23
<PAGE> 26
PERFORMANCE SUMMARY: INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
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>
TOTAL INVESTMENT RETURNS: 10/28/91-1/31/97
- --------------------------------------------------------
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
- --------------------------------------------------------
</TABLE>
*Lehman Intermediate-Term U.S. Treasury Index.
See Financial Highlights table on page 42 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 10/28/91-1/31/97
- -----------------------------------------------------------------------------------------------------
VFISF-IT LIPPER INTERMEDIATE LEHMAN MF INTER. (5-10)
U.S. TREASURY U.S. TREASURY U.S. TREASURY
<S> <C> <C> <C>
1991 10 10000 10000 10000
1992 01 10359 10359 10396
1992 04 10376 10381 10424
1992 07 11128 11025 11184
1992 10 11260 11127 11316
1993 01 11721 11497 11764
1993 04 12178 11856 12202
1993 07 12431 12066 12525
1993 10 12793 12426 12935
1994 01 12904 12496 13015
1994 04 12144 11907 12194
1994 07 12331 12047 12382
1994 10 12115 11934 12141
1995 01 12401 12100 12435
1995 04 12993 12503 13060
1995 07 13636 12928 13732
1995 10 14185 13337 14288
1996 01 14753 13806 14874
1996 04 14098 13313 14199
1996 07 14268 13446 14364
1996 10 14849 13900 14984
1997 01 14941 14105 15072
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
-----------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTERMEDIATE-TERM U.S. TREASURY
PORTFOLIO 1.28% 7.60% 7.93% $14,941
AVERAGE INTERMEDIATE-TERM
U.S. TREASURY FUND 1.63 6.61 6.76 14,105
LEHMAN INTERMEDIATE-TERM
U.S. TREASURY INDEX 1.33 7.71 8.11 15,074
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
- --------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Intermediate-Term U.S. Treasury
Portfolio 10/28/91 1.92% 7.12% 1.62% 6.44% 8.06%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Portfolio's fiscal
year-end.
24
<PAGE> 27
PERFORMANCE SUMMARY: INTERMEDIATE-TERM CORPORATE PORTFOLIO
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>
TOTAL INVESTMENT RETURNS: 11/1/93-1/31/97
- --------------------------------------------------------
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
- --------------------------------------------------------
</TABLE>
*Lehman Intermediate-Term Corporate Index.
See Financial Highlights table on page 42 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 11/1/93-1/31/97
- ---------------------------------------------------------------------------------------------
VFISF-IT LIPPER INTERMEDIATE LEHMAN MF INTER. (5-10)
CORPORATE INVEST. GRADE INV. GRADE
<S> <C> <C> <C>
1993 11 10000 10000 10000
1994 01 10166 10148 10244
1994 04 9583 9661 9576
1994 07 9718 9773 9782
1994 10 9563 9663 9605
1995 01 9787 9842 9831
1995 04 10300 10242 10401
1995 07 10834 10651 10953
1995 10 11267 10996 11398
1996 01 11738 11363 11903
1996 04 11246 11028 11421
1996 07 11388 11159 11565
1996 10 11884 11559 12099
1997 01 12007 11678 12220
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
----------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTERMEDIATE-TERM CORPORATE
PORTFOLIO 2.29% 5.79% $12,007
AVERAGE INTERMEDIATE-TERM
CORPORATE FUND 2.77 4.91 11,686
LEHMAN INTERMEDIATE-TERM
CORPORATE INDEX 2.66 6.37 12,221
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
- --------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Intermediate-Term Corporate
Portfolio 11/1/93 2.78% -0.73% 6.60% 5.87%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Portfolio's fiscal
year-end.
25
<PAGE> 28
PERFORMANCE SUMMARY: GNMA PORTFOLIO
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>
TOTAL INVESTMENT RETURNS: 6/27/80-1/31/97
- --------------------------------------------------------
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
- --------------------------------------------------------
</TABLE>
*Lehman GNMA Index.
See Financial Highlights table on page 43 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 1/31/87-1/31/97
- ----------------------------------------------------------------------------
VFISF-GNMA LEHMAN GNMA
PORTFOLIO LIPPER GNMA BOND INDEX
<S> <C> <C> <C>
1987 01 10000 10000 10000
1987 04 9709 9736 9798
1987 07 9864 9860 9992
1987 10 9860 9875 10042
1988 01 10530 10452 10678
1988 04 10496 10434 10681
1988 07 10677 10556 10883
1988 10 11172 10999 11424
1989 01 11140 10989 11385
1989 04 11298 11103 11575
1989 07 12171 11820 12517
1989 10 12378 12030 12728
1990 01 12475 12132 12853
1990 04 12439 12068 12842
1990 07 13222 12748 13697
1990 10 13339 12913 13786
1991 01 14079 13582 14545
1991 04 14409 13819 14910
1991 07 14773 14101 15319
1991 10 15608 14838 16141
1992 01 15908 15130 16425
1992 04 16099 15249 16655
1992 07 16830 15896 17306
1992 10 17044 16077 17561
1993 01 17564 16595 18090
1993 04 17853 16872 18439
1993 07 18176 17194 18796
1993 10 18242 17383 18892
1994 01 18474 17571 19189
1994 04 17829 16802 18450
1994 07 18196 17057 18836
1994 10 17972 16847 18601
1995 01 18540 17291 19141
1995 04 19372 17962 20033
1995 07 20100 18635 20828
1995 10 20745 19218 21426
1996 01 21440 19828 22104
1996 04 21030 19354 21824
1996 07 21326 19555 22118
1996 10 22170 20284 22958
1997 01 22545 20585 23344
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
----------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA PORTFOLIO 5.15% 7.22% 8.47% $22,545
AVERAGE GNMA FUND 3.82 6.35 7.49 20,585
LEHMAN GNMA INDEX 5.61 7.28 8.85 23,344
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
- --------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ----------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GNMA Portfolio 6/27/80 5.24% 6.66% 0.18% 8.36% 8.54%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Portfolio's fiscal
year-end.
26
<PAGE> 29
PERFORMANCE SUMMARY: LONG-TERM U.S. TREASURY PORTFOLIO
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>
TOTAL INVESTMENT RETURNS: 5/19/86-1/31/97
- --------------------------------------------------------
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
- --------------------------------------------------------
</TABLE>
*Lehman Long-Term Treasury Index.
See Financial Highlights table on page 43 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 1/31/87-1/31/97
- --------------------------------------------------------------------------------
VFISF-LT LIPPER GENERAL LEHMAN LONG-TERM
U.S. TREASURY U.S. TREASURY TREASURY
<S> <C> <C> <C>
1987 01 10000 10000 10000
1987 04 9470 9461 9466
1987 07 9358 9363 9293
1987 10 9387 9423 9373
1988 01 10029 10011 10145
1988 04 9804 9750 9767
1988 07 9852 9831 9827
1988 10 10525 10213 10545
1989 01 10674 10310 10664
1989 04 10855 10480 10820
1989 07 12117 11404 12140
1989 10 12240 11530 12329
1990 01 11883 11304 11974
1990 04 11479 11058 11604
1990 07 12354 11759 12538
1990 10 12223 11714 12427
1991 01 13190 12428 13359
1991 04 13463 12648 13640
1991 07 13542 12737 13727
1991 10 14417 13513 14681
1992 01 14831 13876 15154
1992 04 14750 13842 15057
1992 07 15933 14642 16352
1992 10 15957 14656 16375
1993 01 16926 15298 17372
1993 04 17635 15820 18132
1993 07 18696 16471 19265
1993 10 19626 17089 20256
1994 01 19649 17189 20278
1994 04 17910 16044 18370
1994 07 18201 16232 18686
1994 10 17475 15803 17904
1995 01 18336 16235 18760
1995 04 19288 16871 19801
1995 07 20679 17680 21221
1995 10 22124 18503 22713
1996 01 23236 19409 23905
1996 04 21269 18361 21919
1996 07 21613 18567 22274
1996 10 22780 19320 23497
1997 01 22806 19454 23528
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
----------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LONG-TERM U.S. TREASURY PORTFOLIO -1.85% 8.99% 8.59% $22,806
AVERAGE LONG-TERM TREASURY FUND 0.23 6.99 6.88 19,454
LEHMAN LONG-TERM TREASURY INDEX -1.58 9.20 8.93 23,528
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
- --------------------------------------------------------------------------------------------------------------------
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 -1.25% 8.42% 0.96% 7.85% 8.81%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Portfolio's fiscal
year-end.
27
<PAGE> 30
PERFORMANCE SUMMARY: LONG-TERM CORPORATE PORTFOLIO
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>
TOTAL INVESTMENT RETURNS: 1/31/77-1/31/97
- --------------------------------------------------
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
- -------------------------------------------------
</TABLE>
*Lehman Long-Term Corporate AA or Better Bond Index.
See Financial Highlights table on page 44 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: 1/31/87-1/31/97
- ---------------------------------------------------------------------------
Cumulative Performance 10 yr Graph - Portfolio/ Benchmark -
Vanguard Fixed Income Securities Fund Long-Term Corporate Bond Portfolio
<TABLE>
<CAPTION>
VFISF-LT Lipper Corporate Lehman LT Corporate
Corporate Debt A Rated AA or Better
<S> <C> <C> <C>
1987 01 10000 10000 10000
1987 04 9540 9787 9528
1987 07 9522 9843 9522
1987 10 9411 9810 9483
1988 01 10176 10313 10302
1988 04 10066 10364 10114
1988 07 10178 10500 10263
1988 10 10757 10920 10901
1989 01 10901 10899 10981
1989 04 11045 11151 11172
1989 07 12102 11976 12205
1989 10 12244 12116 12402
1990 01 12064 11908 12208
1990 04 11816 11907 11981
1990 07 12728 12597 12842
1990 10 12384 12544 12765
1991 01 13248 13046 13571
1991 04 13827 13582 14052
1991 07 14063 13798 14324
1991 10 14956 14536 15206
1992 01 15512 14805 15678
1992 04 15644 15042 15771
1992 07 16925 15978 16953
1992 10 16913 16021 16952
1993 01 17849 16460 17835
1993 04 18623 17179 18431
1993 07 19378 17704 19174
1993 10 20165 18264 19923
1994 01 20317 18207 20089
1994 04 18885 17291 18599
1994 07 19143 17500 18904
1994 10 18538 17179 18232
1995 01 19277 17409 19018
1995 04 20356 18318 20154
1995 07 21546 19126 21335
1995 10 22793 19894 22519
1996 01 23833 20372 23568
1996 04 22401 19732 22120
1996 07 22727 20039 22484
1996 10 23892 20853 23702
1997 01 24037 20816 23746
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
-------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 Investment
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LONG-TERM CORPORATE PORTFOLIO 0.86% 9.16% 9.17% $24,037
AVERAGE LONG-TERM CORPORATE
A-RATED FUND 2.18 7.05 7.61 20,816
LEHMAN LONG-TERM CORPORATE AA
OR BETTER BOND INDEX 0.76 8.66 9.03 23,746
- -----------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ----------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long-Term Corporate Portfolio 7/9/73 1.20% 8.77% 0.92% 8.57% 9.49%
- -----------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Portfolio's fiscal
year-end.
28
<PAGE> 31
PERFORMANCE SUMMARY: HIGH YIELD CORPORATE PORTFOLIO
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>
TOTAL INVESTMENT RETURNS: 12/27/78-1/31/97
- --------------------------------------------------------
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
- --------------------------------------------------------
</TABLE>
*Lehman Mutual Fund BBB Rated or Better Bond Index through January 1984; Lehman
High Yield Bond Index thereafter.
See Financial Highlights table on page 44 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 1/31/87-1/31/97
- ----------------------------------------------------------------------------------
HIGH YIELD AVERAGE HIGH YIELD LEHMAN HIGH YIELD
CORPORATE PORTFOLIO BOND FUND BOND FUND
<S> <C> <C> <C> <C>
1987 01 10000 10000 10000
1987 04 9954 10089 9925
1987 07 10051 10170 10151
1987 10 9401 9568 9569
1988 01 10254 10152 10419
1988 04 10583 10476 10725
1988 07 10898 10804 10970
1988 10 11123 11014 11226
1989 01 11427 11258 11545
1989 04 11385 11276 11528
1989 07 11823 11626 11882
1989 10 11484 11106 11444
1990 01 11217 10662 11194
1990 04 11218 10538 11231
1990 07 11891 11172 12041
1990 10 10404 9723 9974
1991 01 10857 9890 10627
1991 04 12209 11574 12996
1991 07 12803 12217 13834
1991 10 13555 13127 14828
1992 01 14252 13828 15652
1992 04 14680 14454 16299
1992 07 15416 15071 16936
1992 10 15397 15223 17088
1993 01 16345 16034 18010
1993 04 17115 16738 18725
1993 07 17884 17567 19534
1993 10 18623 18278 20148
1994 01 19212 19060 20940
1994 04 17900 18104 19960
1994 07 18217 18107 20202
1994 10 18390 18203 20394
1995 01 18728 18047 20559
1995 04 19910 19107 22042
1995 07 20819 19979 23091
1995 10 21477 20521 23534
1996 01 22288 21309 24609
1996 04 22056 21592 24660
1996 07 22413 21955 25127
1996 10 23373 23116 26147
1997 01 24296 23970 27191
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
----------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HIGH YIELD CORPORATE PORTFOLIO 9.01% 11.26% 9.28% $24,296
AVERAGE HIGH YIELD BOND FUND 12.49 11.63 9.14 23,970
LEHMAN HIGH YIELD BOND INDEX 10.49 11.68 10.52 27,191
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
- --------------------------------------------------------------------------------------------------------------------
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 9.54% 11.62% -1.43% 11.03% 9.60%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Portfolio's fiscal
year-end.
29
<PAGE> 32
[PHOTO[
FINANCIAL STATEMENTS
JANUARY 31, 1997
The Statements of Net Assets, integral parts of the Financial Statements for
each of the Vanguard Fixed Income Securities Fund Portfolios, and the Report Of
Independent Accountants are included as an insert to this Report (except for the
GNMA Portfolio, whose Statement of Net Assets is provided below; its Report Of
Independent Accountants can be found on page 48).
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 (98.8%)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Assn. 6.50% 7/15/08-5/15/25 $ 781,403 $ 751,147
Government National Mortgage Assn. 7.00% 4/15/07-1/15/27 1,758,603 1,734,646
Government National Mortgage Assn. 7.25% 12/15/26-2/1/27 5,009 4,967
Government National Mortgage Assn. 7.50% 12/15/01-8/15/26 2,198,819 2,217,846
Government National Mortgage Assn. 7.75% 1/15/27 20,000 20,200
Government National Mortgage Assn. 8.00% 1/15/02-9/15/26 1,319,643 1,360,459
Government National Mortgage Assn. 8.25% 8/15/04-7/15/08 5,956 6,212
Government National Mortgage Assn. 8.50% 1/20/05-5/15/26 582,764 611,375
Government National Mortgage Assn. 9.00% 9/15/01-2/15/23 360,380 387,115
Government National Mortgage Assn. 9.25% 5/15/16-6/15/18 2,709 2,898
Government National Mortgage Assn. 9.50% 12/15/00-12/15/22 184,266 200,367
Government National Mortgage Assn. 10.00% 7/20/14-8/20/18 3,704 4,054
Government National Mortgage Assn. 11.00% 2/15/10-2/20/16 1,204 1,338
Government National Mortgage Assn. 11.25% 6/15/13-2/20/16 700 781
Government National Mortgage Assn. 11.50% 6/15/10-11/20/15 1,310 1,468
Government National Mortgage Assn. 12.00% 10/15/10-1/20/16 2,317 2,637
Government National Mortgage Assn. 12.50% 11/20/13-7/20/15 1,281 1,470
Government National Mortgage Assn. 12.75% 6/15/14-12/15/14 148 170
Government National Mortgage Assn. 13.00% 1/15/11-1/20/15 1,047 1,208
Government National Mortgage Assn. 13.25% 8/15/14-10/15/14 132 152
Government National Mortgage Assn. 13.50% 5/15/10-12/15/14 323 377
Government National Mortgage Assn. 13.75% 9/20/14 9 11
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Assn. 14.00% 6/15/11-9/15/12 $ 265 $ 310
Government National Mortgage Assn. 15.00% 9/15/11-5/15/12 150 177
- ----------------------------------------------------------------------------------------------------------------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OBLIGATIONS
(COST $7,209,073) 7,311,385
- ----------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.2%)
- ----------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $88,869) 5.51% 2/3/97 88,869 88,869
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(COST $7,297,942) 7,400,254
- ----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- ----------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 166,470
Liabilities (166,644)
----------
(174)
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------------------------------------
Applicable to 723,370,843 outstanding $.001 par value shares
(authorized 1,100,000,000 shares) $7,400,080
======================================================================================================================
NET ASSET VALUE PER SHARE $10.23
======================================================================================================================
*See Note A in Statements.
- ----------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------------------------------------------
Paid in Capital--Note D $7,295,984 $10.09
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains--Note D 1,784 --
Unrealized Appreciation--Note E 102,312 .14
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS $7,400,080 $10.23
======================================================================================================================
</TABLE>
31
<PAGE> 34
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>
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1997
--------------------------------------------------------------------
SHORT-TERM SHORT-TERM SHORT-TERM INTERMEDIATE-TERM
U.S. TREASURY FEDERAL CORPORATE U.S. TREASURY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest $57,003 $85,548 $268,342 $80,485
--------------------------------------------------------------------
Total Income 57,003 85,548 268,342 80,485
--------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 123 185 543 165
The Vanguard Group--Note C
Management and Administrative 1,838 2,615 8,175 2,431
Marketing and Distribution 289 366 1,174 330
Taxes (other than income taxes) 67 90 295 84
Custodian Fees 10 24 57 14
Legal Fees -- -- -- --
Auditing Fees 6 7 10 7
Shareholders' Reports 43 99 180 71
Annual Meeting and Proxy Costs 7 15 30 13
Directors' Fees and Expenses 3 4 12 3
--------------------------------------------------------------------
Total Expenses 2,386 3,405 10,476 3,118
- ---------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 54,617 82,143 257,866 77,367
- ---------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 5,716 1,232 749 (1,633)
Futures Contracts -- -- -- 76
- ---------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 5,716 1,232 749 (1,557)
- ---------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities (23,065) (25,088) (68,454) (60,573)
Futures Contracts -- -- -- --
- ---------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) (23,065) (25,088) (68,454) (60,573)
- ---------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $37,268 $58,287 $190,161 $15,237
=========================================================================================================
</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, and the Report Of
Independent Accountants are included as an insert to this Report.
32
<PAGE> 35
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1997
--------------------------------------------------------------------
INTERMEDIATE-TERM LONG-TERM LONG-TERM
CORPORATE GNMA U.S. TREASURY CORPORATE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest $35,550 $529,200 $ 62,006 $244,521
-----------------------------------------------------------------
Total Income 35,550 529,200 62,006 244,521
-----------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 63 992 122 951
The Vanguard Group--Note C
Management and Administrative 1,006 14,604 1,741 7,101
Marketing and Distribution 150 1,465 243 720
Taxes (other than income taxes) 38 449 59 227
Custodian Fees 16 960 19 87
Legal Fees -- -- -- 60
Auditing Fees 6 13 6 9
Shareholders' Reports 14 381 57 162
Annual Meeting and Proxy Costs 4 65 11 27
Directors' Fees and Expenses 1 22 3 10
-----------------------------------------------------------------
Total Expenses 1,298 18,951 2,261 9,354
- -----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 34,252 510,249 59,745 235,167
- -----------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold (144) 7,036 (7,189) 36,899
Futures Contracts 95 -- (314) --
- -----------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (49) 7,036 (7,503) 36,899
- -----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities (17,521) (151,270) (66,655) (242,281)
Futures Contracts -- -- -- --
- -----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) (17,521) (151,270) (66,655) (242,281)
- -----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $16,682 $366,015 $(14,413) $ 29,785
=====================================================================================================
</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, and the Report Of Independent Accountants are
included as an insert to this Report.
33
<PAGE> 36
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS (continued)
- -----------------------------------------------------------------------------------------------------
YEAR ENDED
JANUARY 31, 1997
-------------------
HIGH YIELD
CORPORATE
PORTFOLIO
(000)
- -----------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Interest $298,799
------------
Total Income 298,799
------------
EXPENSES
Investment Advisory Fees--Note B 1,370
The Vanguard Group--Note C
Management and Administrative 6,958
Marketing and Distribution 676
Taxes (other than income taxes) 209
Custodian Fees 61
Legal Fees 44
Auditing Fees 9
Shareholders' Reports 151
Annual Meeting and Proxy Costs 29
Directors' Fees and Expenses 9
------------
Total Expenses 9,516
- -----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 289,283
- -----------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 19,951
Futures Contracts --
- -----------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 19,951
- -----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (20,017)
Futures Contracts --
- -----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (20,017)
- -----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $289,217
=====================================================================================================
</TABLE>
The Statement of Net Assets for the High Yield Corporate Portfolio, an integral
part of the Financial Statements for the Portfolio, and the Report Of
Independent Accountants are included as an insert to this Report.
34
<PAGE> 37
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
--------------------------------------------------------------------
YEAR ENDED JANUARY 31,
--------------------------------------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 54,617 $ 52,172 $ 82,143 $ 87,785
Realized Net Gain (Loss) 5,716 3,842 1,232 8,092
Change in Unrealized Appreciation (Depreciation) (23,065) 34,257 (25,088) 65,368
---------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 37,268 90,271 58,287 161,245
---------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (54,617) (52,172) (82,143) (87,785)
Realized Capital Gain -- -- -- --
---------------------------------------------------------------------
Total Distributions (54,617) (52,172) (82,143) (87,785)
---------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 748,942 452,796 378,599 361,203
Issued in Lieu of Cash Distributions 48,587 46,819 69,751 75,104
Redeemed (729,642) (372,829) (478,368) (582,196)
---------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions 67,887 126,786 (30,018) (145,889)
- ---------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 50,538 164,885 (53,874) (72,429)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 919,204 754,319 1,401,736 1,474,165
---------------------------------------------------------------------
End of Year $969,742 $919,204 $1,347,862 $1,401,736
=====================================================================================================================
(1)Shares Issued (Redeemed)
Issued 73,794 44,543 37,486 35,818
Issued in Lieu of Cash Distributions 4,793 4,595 6,914 7,436
Redeemed (71,920) (36,661) (47,354) (57,585)
---------------------------------------------------------------------
Net Increase (Decrease)
in Shares Outstanding 6,667 12,477 (2,954) (14,331)
=====================================================================================================================
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS (continued)
- ---------------------------------------------------------------------------------------------------------------
SHORT-TERM INTERMEDIATE-TERM
CORPORATE PORTFOLIO U.S. TREASURY PORTFOLIO
------------------------ -----------------------
YEAR ENDED JANUARY 31,
------------------------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 257,866 $ 211,583 $ 77,367 $ 68,116
Realized Net Gain (Loss) 749 14,027 (1,557) 14,242
Change in Unrealized Appreciation (Depreciation) (68,454) 152,638 (60,573) 100,191
------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 190,161 378,248 15,237 182,549
------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (257,866) (211,583) (77,367) (68,116)
Realized Capital Gain -- -- -- --
------------------------------------------------------
Total Distributions (257,866) (211,583) (77,367) (68,116)
------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 1,951,629 1,654,390 462,699 519,871
Issued in Lieu of Cash Distributions 220,371 178,724 57,839 51,396
Redeemed (1,446,570) (1,050,814) (406,183) (307,504)
------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions 725,430 782,300 114,355 263,763
- ---------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 657,725 948,965 52,225 378,196
- ---------------------------------------------------------------------------------------------------------------
Net Assets
Beginning of Year 3,873,013 2,924,048 1,226,360 848,164
------------------------------------------------------
End of Year $4,530,738 $3,873,013 $1,278,585 $1,226,360
===============================================================================================================
(1)Shares Issued (Redeemed)
Issued 181,913 154,147 44,418 50,081
Issued in Lieu of Cash Distributions 20,549 16,618 5,590 4,907
Redeemed (134,781) (97,915) (39,225) (29,390)
------------------------------------------------------
Net Increase (Decrease)
in Shares Outstanding 67,681 72,850 10,783 25,598
===============================================================================================================
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM
CORPORATE PORTFOLIO GNMA PORTFOLIO
----------------------------- ------------------------
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 34,252 $ 18,139 $ 510,249 $ 463,022
Realized Net Gain (Loss) (49) 4,200 7,036 6,713
Change in Unrealized Appreciation (Depreciation) (17,521) 24,499 (151,270) 454,491
-----------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 16,682 46,838 366,015 924,226
-----------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (34,252) (18,139) (510,249) (463,022)
Realized Capital Gain (929) -- -- --
-----------------------------------------------------------------
Total Distributions (35,181) (18,139) (510,249) (463,022)
-----------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 462,553 293,732 1,577,178 1,289,384
Issued in Lieu of Cash Distributions 28,621 14,306 388,322 353,323
Redeemed (304,839) (75,601) (1,419,326) (956,606)
-----------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions 186,335 232,437 546,174 686,101
- -------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 167,836 261,136 401,940 1,147,305
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 423,937 162,801 6,998,140 5,850,835
-----------------------------------------------------------------
End of Year $591,773 $423,937 $7,400,080 $6,998,140
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 47,700 30,043 155,134 126,652
Issued in Lieu of Cash Distributions 2,960 1,458 38,301 34,673
Redeemed (31,479) (7,765) (139,855) (94,085)
-----------------------------------------------------------------
Net Increase (Decrease)
in Shares Outstanding 19,181 23,736 53,580 67,240
=========================================================================================================================
</TABLE>
37
<PAGE> 40
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
LONG-TERM LONG-TERM
U.S. TREASURY PORTFOLIO CORPORATE PORTFOLIO
--------------------------------- ----------------------------
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 59,745 $ 52,488 $ 235,167 $ 212,653
Realized Net Gain (Loss) (7,503) 20,938 36,899 46,604
Change in Unrealized Appreciation (Depreciation) (66,655) 114,653 (242,281) 376,449
---------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (14,413) 188,079 29,785 635,706
---------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (59,745) (52,488) (235,167) (212,653)
Realized Capital Gain (1,178) (18,723) (58,376) --
---------------------------------------------------------------------
Total Distributions (60,923) (71,211) (293,543) (212,653)
---------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 341,995 424,319 801,372 755,503
Issued in Lieu of Cash Distributions 47,495 56,537 241,994 170,653
Redeemed (331,974) (353,407) (832,158) (580,447)
---------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions 57,516 127,449 211,208 345,709
- --------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) (17,820) 244,317 (52,550) 768,762
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 915,763 671,446 3,376,089 2,607,327
---------------------------------------------------------------------
End of Year $897,943 $915,763 $3,323,539 $3,376,089
==========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 34,824 41,863 91,142 85,001
Issued in Lieu of Cash Distributions 4,844 5,454 27,646 19,078
Redeemed (33,750) (34,704) (95,201) (64,930)
---------------------------------------------------------------------
Net Increase (Decrease)
in Shares Outstanding 5,918 12,613 23,587 39,149
==========================================================================================================================
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
HIGH YIELD
CORPORATE PORTFOLIO
-----------------------------
YEAR ENDED JANUARY 31,
-----------------------------
1997 1996
(000) (000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 289,283 $ 228,831
Realized Net Gain (Loss) 19,951 21,161
Change in Unrealized Appreciation (Depreciation) (20,017) 194,421
-----------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 289,217 444,413
-----------------------------
DISTRIBUTIONS
Net Investment Income (289,283) (228,831)
Realized Capital Gain -- --
-----------------------------
Total Distributions (289,283) (228,831)
-----------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 1,071,470 857,541
Issued in Lieu of Cash Distributions 200,065 160,148
Redeemed (604,106) (388,992)
-----------------------------
Net Increase (Decrease) from Capital Share Transactions 667,429 628,697
- ----------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 667,363 844,279
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 3,006,579 2,162,300
-----------------------------
End of Year $3,673,942 $3,006,579
======================================================================================================================
(1)Shares Issued (Redeemed)
Issued 138,649 112,052
Issued in Lieu of Cash Distributions 25,903 20,855
Redeemed (78,406) (50,868)
-----------------------------
Net Increase (Decrease) in Shares Outstanding 86,146 82,039
======================================================================================================================
</TABLE>
39
<PAGE> 42
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 THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.36 $ 9.89 $10.41 $10.41 $10.12
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .586 .625 .532 .486 .528
Net Realized and Unrealized Gain (Loss) on Investments (.200) .470 (.500) .079 .332
----------------------------------------------------------
Total from Investment Operations .386 1.095 .032 .565 .860
----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.586) (.625) (.532) (.486) (.528)
Distributions from Realized Capital Gains -- -- (.020) (.079) (.042)
----------------------------------------------------------
Total Distributions (.586) (.625) (.552) (.565) (.570)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.16 $10.36 $ 9.89 $10.41 $10.41
==========================================================================================================================
TOTAL RETURN 3.89% 11.37% 0.40% 5.54% 8.74%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $970 $919 $754 $729 $526
Ratio of Total Expenses to Average Net Assets 0.25% 0.27% 0.28% 0.26% 0.26%
Ratio of Net Investment Income to Average Net Assets 5.77% 6.14% 5.33% 4.64% 5.12%
Portfolio Turnover Rate 86% 93% 126% 86% 71%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
SHORT-TERM FEDERAL PORTFOLIO
YEAR ENDED JANUARY 31,
----------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.28 $ 9.79 $10.38 $10.38 $10.31
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .615 .601 .550 .522 .609
Net Realized and Unrealized Gain (Loss) on Investments (.170) .490 (.580) .110 .232
----------------------------------------------------------
Total from Investment Operations .445 1.091 (.030) .632 .841
----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.615) (.601) (.550) (.522) (.609)
Distributions from Realized Capital Gains -- -- (.010) (.110) (.162)
----------------------------------------------------------
Total Distributions (.615) (.601) (.560) (.632) (.771)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.11 $10.28 $ 9.79 $10.38 $10.38
============================================================================================================================
TOTAL RETURN 4.51% 11.43% -0.21% 6.23% 8.49%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,348 $1,402 $1,474 $1,936 $1,688
Ratio of Total Expenses to Average Net Assets 0.25% 0.27% 0.28% 0.26% 0.27%
Ratio of Net Investment Income to Average Net Assets 6.09% 5.93% 5.53% 4.98% 5.88%
Portfolio Turnover Rate 57% 74% 57% 49% 70%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO
YEAR ENDED JANUARY 31,
----------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.94 $10.40 $10.94 $10.99 $10.88
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .663 .671 .596 .605 .695
Net Realized and Unrealized Gain (Loss) on Investments (.190) .540 (.540) .049 .275
----------------------------------------------------------
Total from Investment Operations .473 1.211 .056 .654 .970
----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.663) (.671) (.596) (.605) (.695)
Distributions from Realized Capital Gains -- -- -- (.099) (.165)
----------------------------------------------------------
Total Distributions (.663) (.671) (.596) (.704) (.860)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.75 $10.94 $10.40 $10.94 $10.99
============================================================================================================================
TOTAL RETURN 4.52% 11.95% 0.60% 6.11% 9.29%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $4,531 $3,873 $2,924 $3,573 $2,811
Ratio of Total Expenses to Average Net Assets 0.25% 0.27% 0.28% 0.26% 0.27%
Ratio of Net Investment Income to Average Net Assets 6.18% 6.23% 5.66% 5.48% 6.33%
Portfolio Turnover Rate 45% 62% 69% 61% 71%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 44
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
----------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.90 $ 9.76 $10.82 $10.79 $10.19
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .649 .662 .603 .617 .676
Net Realized and Unrealized Gain (Loss) on Investments (.530) 1.140 (1.033) .443 .617
----------------------------------------------------------
Total from Investment Operations .119 1.802 (.430) 1.060 1.293
----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.649) (.662) (.603) (.617) (.676)
Distributions from Realized Capital Gains -- -- (.027) (.413) (.017)
----------------------------------------------------------
Total Distributions (.649) (.662) (.630) (1.030) (.693)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.37 $10.90 $ 9.76 $10.82 $10.79
============================================================================================================================
TOTAL RETURN 1.28% 18.96% -3.90% 10.09% 13.14%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,279 $1,226 $848 $1,007 $673
Ratio of Total Expenses to Average Net Assets 0.25% 0.28% 0.28% 0.26% 0.26%
Ratio of Net Investment Income to Average Net Assets 6.26% 6.34% 6.05% 5.55% 6.44%
Portfolio Turnover Rate 42% 56% 128% 118% 123%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM CORPORATE PORTFOLIO
YEAR ENDED JANUARY 31,
----------------------------------- NOV. 1, 1993,* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 1995 JAN. 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.17 $ 9.07 $10.04 $10.00
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .639 .658 .587 .125
Net Realized and Unrealized Gain (Loss) on Investments (.430) 1.100 (.970) .040
----------------------------------------------------------
Total from Investment Operations .209 1.758 (.383) .165
----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.639) (.658) (.587) (.125)
Distributions from Realized Capital Gains (.020) -- -- --
----------------------------------------------------------
Total Distributions (.659) (.658) (.587) (.125)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.72 $10.17 $ 9.07 $10.04
============================================================================================================================
TOTAL RETURN 2.29% 19.94% -3.73% 1.66%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $592 $424 $163 $85
Ratio of Total Expenses to Average Net Assets 0.25% 0.28% 0.28% 0.25%**
Ratio of Net Investment Income to Average Net Assets 6.61% 6.70% 6.46% 5.11%**
Portfolio Turnover Rate 85% 78% 97% 74%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
42
<PAGE> 45
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
GNMA PORTFOLIO
YEAR ENDED JANUARY 31,
----------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.45 $ 9.71 $10.39 $10.50 $10.25
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .727 .734 .693 .641 .778
Net Realized and Unrealized Gain (Loss) on Investments (.220) .740 (.673) (.110) .250
----------------------------------------------------------
Total from Investment Operations .507 1.474 .020 .531 1.028
----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.727) (.734) (.693) (.641) (.778)
Distributions from Realized Capital Gains -- -- (.007) -- --
----------------------------------------------------------
Total Distributions (.727) (.734) (.700) (.641) (.778)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.23 $10.45 $ 9.71 $10.39 $10.50
============================================================================================================================
TOTAL RETURN 5.15% 15.64% 0.36% 5.18% 10.40%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $7,400 $6,998 $5,851 $7,043 $7,167
Ratio of Total Expenses to Average Net Assets 0.27% 0.29% 0.30% 0.28% 0.29%
Ratio of Net Investment Income to Average Net Assets 7.16% 7.22% 7.04% 6.19% 7.38%
Portfolio Turnover Rate 12% 7% 35% 2% 7%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
----------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.73 $ 9.23 $10.75 $10.04 $10.14
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .655 .669 .665 .685 .733
Net Realized and Unrealized Gain (Loss) on Investments (.877) 1.725 (1.401) .886 .600
----------------------------------------------------------
Total from Investment Operations (.222) 2.394 (.736) 1.571 1.333
----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.655) (.669) (.665) (.685) (.733)
Distributions from Realized Capital Gains (.013) (.225) (.119) (.176) (.700)
----------------------------------------------------------
Total Distributions (.668) (.894) (.784) (.861) (1.433)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.84 $10.73 $ 9.23 $10.75 $10.04
============================================================================================================================
TOTAL RETURN -1.85% 26.72% -6.68% 16.09% 14.12%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $898 $916 $671 $829 $874
Ratio of Total Expenses to Average Net Assets 0.25% 0.27% 0.28% 0.26% 0.27%
Ratio of Net Investment Income to Average Net Assets 6.66% 6.57% 7.02% 6.44% 7.26%
Portfolio Turnover Rate 31% 105% 85% 7% 170%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (continued)
- ---------------------------------------------------------------------------------------------------------------
LONG-TERM CORPORATE PORTFOLIO
YEAR ENDED JANUARY 31,
----------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $9.43 $8.18 $9.36 $9.04 $8.63
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .619 .627 .617 .632 .680
Net Realized and Unrealized Gain (Loss) on Investments (.566) 1.250 (1.108) .579 .561
----------------------------------------------
Total from Investment Operations .053 1.877 (.491) 1.211 1.241
----------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.619) (.627) (.617) (.632) (.680)
Distributions from Realized Capital Gains (.154) -- (.072) (.259) (.151)
----------------------------------------------
Total Distributions (.773) (.627) (.689) (.891) (.831)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $8.71 $9.43 $8.18 $9.36 $9.04
===============================================================================================================
TOTAL RETURN 0.86% 23.64% -5.12% 13.83% 15.06%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,324 $3,376 $2,607 $3,166 $2,763
Ratio of Total Expenses to Average Net Assets 0.28% 0.31% 0.32% 0.30% 0.31%
Ratio of Net Investment Income to Average Net Assets 7.06% 7.03% 7.37% 6.71% 7.68%
Portfolio Turnover Rate 30% 49% 43% 77% 50%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
HIGH YIELD CORPORATE PORTFOLIO
YEAR ENDED JANUARY 31,
------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $7.89 $7.24 $8.14 $7.56 $7.27
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .688 .678 .679 .695 .727
Net Realized and Unrealized Gain (Loss) on Investments (.020) .650 (.900) .580 .290
-----------------------------------------------
Total from Investment Operations .668 1.328 (.221) 1.275 1.017
-----------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.688) (.678) (.679) (.695) (.727)
Distributions from Realized Capital Gains -- -- -- -- --
-----------------------------------------------
Total Distributions (.688) (.678) (.679) (.695) (.727)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $7.87 $7.89 $7.24 $8.14 $7.56
===============================================================================================================
TOTAL RETURN 9.01% 19.01% -2.52% 17.54% 14.68%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,674 $3,007 $2,162 $2,625 $2,184
Ratio of Total Expenses to Average Net Assets 0.29% 0.34% 0.34% 0.32% 0.34%
Ratio of Net Investment Income to Average Net Assets 8.92% 8.85% 9.13% 8.81% 9.82%
Portfolio Turnover Rate 23% 38% 33% 51% 83%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 47
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.
45
<PAGE> 48
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.
Under a contract that expires April 30, 1998, the GNMA, Long-Term
Corporate, and High Yield Corporate Portfolios pay Wellington Management
Company, LLP, an advisory fee calculated at an annual percentage rate of average
net assets. For the year ended January 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. The basic fees reflect fee waivers of $97,000, $84,000, and $120,000,
respectively, for the period February 1, 1996, to April 30, 1996.
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
January 31, 1997, the Fund had contributed capital aggregating $2,133,000 to
Vanguard (included in Other Assets), representing 10.7% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
D. During the year ended January 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 $1,895,426 $1,336,299
Intermediate-Term Corporate 483,043 301,951
Long-Term Corporate 772,502 460,524
High Yield Corporate 1,346,046 718,520
----------------------------------------------------------------------------------
</TABLE>
Purchases and sales of U.S. government securities were:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
(000)
---------------------------------
PORTFOLIO PURCHASES SALES
----------------------------------------------------------------------------------
<S> <C> <C>
Short-Term U.S. Treasury $ 981,430 $780,013
Short-Term Federal 785,136 756,317
Short-Term Corporate 675,026 456,726
Intermediate-Term U.S. Treasury 657,374 505,574
Intermediate-Term Corporate 134,750 127,443
GNMA 2,229,253 873,421
Long-Term U.S. Treasury 333,881 266,253
Long-Term Corporate 361,798 493,467
High Yield Corporate 59,780 10,080
----------------------------------------------------------------------------------
</TABLE>
During the year ended January 31, 1997, the GNMA and Long-Term
Corporate Portfolios realized $1,779,000, and $4,733,000, respectively, of net
capital gains resulting from in-kind redemptions--in which shareholders
exchanged Portfolio shares for securities held by the Portfolios rather than for
cash. Because such gains are not taxable to the Portfolios, and are not
distributed to shareholders, they have been reclassified from accumulated net
realized gains to paid in capital.
The GNMA Portfolio used a capital loss carryforward of $3,310,000 to offset
taxable capital gains realized during the year ended January 31, 1997, reducing
the amount of capital gains that would otherwise be available to distribute to
shareholders.
46
<PAGE> 49
At January 31, 1997, the Portfolios had the following capital losses
available to offset future net capital gains:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
EXPIRATION
FISCAL YEAR(S)
ENDING AMOUNT
PORTFOLIO JANUARY 31, (000)
-------------------------------------------------------------------------------------
<S> <C> <C>
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 January 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 $ 3,441 $ (1,066) $ 2,375
Short-Term Federal 11,034 (3,583) 7,451
Short-Term Corporate 25,267 (13,547) 11,720
Intermediate-Term U.S. Treasury 21,839 (13,843) 7,996
Intermediate-Term Corporate 6,316 (4,978) 1,338
GNMA 171,339 (69,027) 102,312
Long-Term U.S. Treasury 35,250 (885) 34,365
Long-Term Corporate 108,962 (45,708) 63,254
High Yield Corporate 108,026 (19,955) 88,071
-------------------------------------------------------------------------------------
</TABLE>
F. The market values of securities on loan to broker/dealers at
January 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 U.S. Treasury $ 54,624 -- $57,743
Short-Term Corporate 1,669 $ 1,721 --
Intermediate-Term U.S. Treasury 300,001 211,438 94,139
Intermediate-Term Corporate 9,733 7,983 2,152
Long-Term U.S. Treasury 2,302 2,388 --
Long-Term Corporate 11,817 -- 12,086
High Yield Corporate 128,443 95,416 36,490
-------------------------------------------------------------------------------------
</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.
47
<PAGE> 50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard Fixed Income Securities Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
GNMA Portfolio (a separate portfolio of Vanguard Fixed Income Securities Fund,
the "Fund") at January 31, 1997, and the results of its operations, the changes
in its net assets and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at January
31, 1997 by correspondence with the custodian and, with respect to unsettled
securities transactions, the application of alternative auditing procedures,
provide a reasonable basis for the opinion expressed above.
We have also audited the financial statements of the other portfolios included
in the Fund at January 31, 1997, and we have issued our report thereon. An
insert to this Annual Report containing our report on the financial statements
of the other portfolios is available from the Fund.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 28, 1997
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD FIXED INCOME SECURITIES FUND
This information for the fiscal year ended January 31, 1997, is included
pursuant to provisions of the Internal Revenue Code.
The GNMA Portfolio designates $1,948,000 as capital gain dividends (from
net long-term capital gains), which will be distributed in March 1997.
The Long-Term Corporate Portfolio designates $32,166,000 as capital gain
dividends (from net long-term capital gains), of which $30,697,000 was
distributed to shareholders in December 1996 and $1,469,000 will be
distributed in March 1997.
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
48
<PAGE> 51
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.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President 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.
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
[email protected] http://www.vanguard.com
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> 52
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard 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/Trustees' Equity-International
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)
Q280-1/97
[PHOTO]
<PAGE> 53
[PHOTO]
VANGUARD FIXED INCOME SECURITIES FUND
FINANCIAL STATEMENTS
JANUARY 31, 1997
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 30 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.
CONTENTS
<TABLE>
<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
Report Of Independent Accountants . . . . . . . . . . . . . . . . . . 26
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES (98.9%)
- ----------------------------------------------------------------------------------------------------------
U.S. Treasury Notes 4.75% 8/31/98 $ 64,000 $ 62,970
U.S. Treasury Notes 5.625% 10/31/97 7,000 7,003
U.S. Treasury Notes 5.875% 3/31/99 14,000 13,980
U.S. Treasury Notes 6.25% 7/31/98 152,200 153,151
U.S. Treasury Notes 6.25% 8/31/00 15,500 15,539
U.S. Treasury Notes 6.75% 6/30/99 124,000 126,054
U.S. Treasury Notes 6.875% 8/31/99 82,500 84,124
U.S. Treasury Notes 6.875% 3/31/00 20,300 20,735
U.S. Treasury Notes 7.125% 9/30/99 82,600 84,755
U.S. Treasury Notes 7.75% 11/30/99 77,900 81,235
U.S. Treasury Notes 7.75% 12/31/99 181,800 189,783
U.S. Treasury Notes 7.75% 1/31/00 14,200 14,835
U.S. Treasury Notes 7.875% 4/15/98 20,000 20,485
</TABLE>
1
<PAGE> 54
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bariven, SA Eximbank Guaranteed Export Financing
(U.S. Government Guaranteed) 6.277% 4/15/01 (1)(2) $15,300 $ 15,291
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 4.62% 10/15/98 (1) 8,000 7,900
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 5.95% 4/15/97 (1) 1,080 1,081
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 6.475% 5/15/00 (1) 9,100 9,133
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 6.82% 4/15/99 (1) 3,571 3,607
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 8.038% 1/15/00 (1) 9,000 9,266
Government Export Trust
(U.S. Government Guaranteed) 4.85% 11/1/97 (1) 2,400 2,393
Government Export Trust
(U.S. Government Guaranteed) 5.69% 2/1/98 (1) 3,600 3,602
Government Export Trust
(U.S. Government Guaranteed) 7.75% 1/1/00 (1) 8,000 8,195
Government Trust Certificate
(Israel)(U.S. Government Guaranteed) 8.55% 11/15/97 (1) 393 398
Guaranteed Export Certificates
(U.S. Government Guaranteed) 4.743% 9/15/98 (1) 10,400 10,310
Guaranteed Trade Trust
(U.S. Government Guaranteed) 4.77% 11/1/97 (1) 3,340 3,324
Private Export Funding Corp.
(U.S. Government Guaranteed) 5.65% 3/15/03 (1) 6,911 6,784
Small Business Administration
(U.S. Government Guaranteed) 6.95% 6/1/97 3,000 3,013
- -----------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $956,571) 958,946
- -----------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.8%)
- -----------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $7,612) 5.51% 2/3/97 7,612 7,612
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(COST $964,183) 966,558
- -----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.3%)
- -----------------------------------------------------------------------------------------------------------------------
Other Assets--Notes C and F 12,482
Liabilities--Note F (9,298)
---------
3,184
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------------------------
Applicable to 95,424,543 outstanding $.001 par value shares
(authorized 250,000,000 shares) $969,742
=======================================================================================================================
NET ASSET VALUE PER SHARE $10.16
=======================================================================================================================
</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) Restricted security representing 1.6% of Net Assets at January 31, 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $975,771 $10.23
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note D (8,404) (.09)
Unrealized Appreciation--Note E 2,375 .02
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS $969,742 $10.16
=======================================================================================================================
</TABLE>
2
<PAGE> 55
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM FEDERAL PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (99.0%)
- ------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (14.4%)
Agency For International Development
(U.S. Government Guaranteed) 7.75% 4/1/98 (1) $ 11,905 $ 12,049
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 5.10% 4/15/98 (1) 3,453 3,436
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 5.295% 10/15/97 (1) 5,310 5,300
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 5.48% 10/15/97 (1) 2,700 2,697
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 5.95% 4/15/97 (1) 1,700 1,701
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 6.82% 4/15/99 (1) 2,793 2,821
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 8.038% 1/15/00 (1) 9,000 9,266
Government Export Trust
(U.S. Government Guaranteed) 4.61% 9/1/98 (1) 9,600 9,508
Government Export Trust
(U.S. Government Guaranteed) 5.41% 3/1/99 (1) 4,431 4,409
Government Export Trust
(U.S. Government Guaranteed) 5.69% 2/1/98 (1) 9,785 9,790
Guaranteed Export Certificates
(U.S. Government Guaranteed) 4.43% 6/15/98 (1) 10,420 10,301
Guaranteed Export Certificates
(U.S. Government Guaranteed) 4.743% 9/15/98 (1) 1,502 1,489
Guaranteed Export Certificates
(U.S. Government Guaranteed) 4.813% 12/15/98 (1) 7,422 7,345
Guaranteed Export Certificates
(U.S. Government Guaranteed) 6.61% 9/15/99 (1) 13,974 14,078
Guaranteed Trade Trust
(U.S. Government Guaranteed) 4.86% 4/1/98 (1) 4,740 4,709
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 7.815% 11/15/01 (1) 6,250 6,458
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 8.75% 11/15/01 (1) 9,375 9,889
Private Export Funding Corp.
(U.S. Government Guaranteed)
Private Export Funding Corp.
(U.S. Government Guaranteed) 5.75% 4/30/98 9,800 9,793
Private Export Funding Corp.
(U.S. Government Guaranteed) 8.95% 10/31/97 7,575 7,758
Private Export Funding Corp.
(U.S. Government Guaranteed) 9.45% 12/31/99 33,580 36,406
U.S. Exim Trust
(U.S. Government Guaranteed) 5.20% 8/25/97 (1) 7,200 7,192
U.S. Government Trust Certificates
(U.S. Government Guaranteed) 7.50% 8/15/00 (1) 9,601 9,821
U.S. Government Trust Certificates
(U.S. Government Guaranteed) 8.00% 5/15/98 (1) 7,352 7,457
---------
193,673
---------
AGENCY BONDS AND NOTES (64.1%)
Federal Farm Credit Bank 6.33% 12/24/01 10,000 9,952
Federal Home Loan Bank 5.20% 10/20/00 31,000 30,147
Federal Home Loan Bank 5.215% 7/8/98 4,750 4,706
Federal Home Loan Bank 5.237% 2/25/97 (2) 25,000 24,938
Federal Home Loan Bank 5.43% 2/25/99 10,000 9,881
Federal Home Loan Bank 5.93% 3/7/03 5,000 4,861
Federal Home Loan Bank 6.10% 10/7/98 25,000 25,039
Federal Home Loan Bank 6.10% 3/13/03 5,000 4,890
Federal Home Loan Mortgage Corp. 6.50% 6/8/00 10,200 10,197
Federal Home Loan Mortgage Corp. 6.52% 1/2/02 25,000 25,086
Federal Home Loan Mortgage Corp. 6.747% 8/23/01 19,350 19,386
Federal National Mortgage Assn. 4.70% 9/10/98 36,200 35,478
Federal National Mortgage Assn. 4.94% 10/30/98 20,000 19,672
Federal National Mortgage Assn. 5.23% 11/25/98 67,535 66,648
Federal National Mortgage Assn. 5.33% 6/26/98 17,535 17,421
Federal National Mortgage Assn. 5.40% 3/12/99 13,000 12,844
Federal National Mortgage Assn. 5.45% 10/10/03 10,000 9,392
Federal National Mortgage Assn. 6.07% 3/15/01 44,800 43,904
Federal National Mortgage Assn. 6.13% 7/9/98 23,000 23,089
Federal National Mortgage Assn. 6.14% 11/1/99 19,000 18,997
Federal National Mortgage Assn. 6.18% 12/10/01 25,000 24,606
Federal National Mortgage Assn. 6.25% 8/3/98 17,080 17,165
Federal National Mortgage Assn. 6.29% 7/8/98 59,000 59,332
Federal National Mortgage Assn. 6.375% 10/13/00 9,000 8,944
Federal National Mortgage Assn. 6.41% 7/17/98 22,000 22,169
Federal National Mortgage Assn. 6.44% 11/15/01 28,635 28,451
Federal National Mortgage Assn. 6.45% 4/23/01 10,000 10,028
Federal National Mortgage Assn. 6.60% 6/24/99 30,000 30,314
Federal National Mortgage Assn. 6.70% 8/10/01 30,000 30,038
Federal National Mortgage Assn. 6.71% 7/24/01 10,000 10,130
Federal National Mortgage Assn. 6.74% 5/7/01 10,000 10,024
Federal National Mortgage Assn. 7.00% 7/13/98 82,150 83,464
</TABLE>
3
<PAGE> 56
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM FEDERAL PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage Assn. 7.23% 9/15/99 $ 15,000 $ 15,399
Federal National Mortgage Assn. 7.40% 7/1/04 15,000 15,649
Federal National Mortgage Assn. 8.35% 11/10/99 10,270 10,833
Federal National Mortgage Assn. 8.45% 7/12/99 17,845 18,779
Federal National Mortgage Assn. 11.50% 11/1/99 46,000 52,095
----------
863,948
----------
MORTGAGE OBLIGATIONS (20.5%)
Federal Home Loan Mortgage Corp.
(Collateralized Mortgage Obligations) 6.50% 3/15/00 (1) 24,017 23,995
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 5.50% 2/5/98 4,227 4,200
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 5.50% 5/1/99 8,192 8,121
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 5.50% 11/1/00 14,704 14,350
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 5.50% 1/1/01 11,712 11,430
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 7/1/98 10,196 10,183
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 9/1/98 25,929 25,894
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 10/1/98 20,109 20,084
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 1/1/99 5,790 5,780
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 3/1/99 6,663 6,650
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 5/1/00 9,723 9,629
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 9/1/00 10,450 10,348
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 11/1/00 43,336 43,119
Federal National Mortgage Assn.
(Collateralized Mortgage Obligations) 5.50% 9/25/00 (1) 15,544 15,376
Federal National Mortgage Assn.
(Collateralized Mortgage Obligations) 7.50% 3/25/05 (1) 6 6
Federal National Mortgage Assn. (Pooled Mortgage Notes) 6.00% 1/1/01 43,209 42,750
Federal National Mortgage Assn. (Pooled Mortgage Notes) 6.00% 7/1/02 20,827 20,489
Federal National Mortgage Assn. (Pooled Mortgage Notes) 6.00% 5/1/04 4,691 4,622
----------
277,026
----------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $1,327,196) 1,334,647
- ------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $1,266) 5.51% 2/3/97 1,266 1,266
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.1%)
(COST $1,328,462) 1,335,913
- ------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.9%)
- ------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 32,284
Liabilities (20,335)
----------
11,949
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------------------------------------
Applicable to 133,358,898 outstanding $.001 par value shares
(authorized 300,000,000 shares) $1,347,862
==============================================================================================================================
NET ASSET VALUE PER SHARE $10.11
==============================================================================================================================
</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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,371,572 $10.28
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note D (31,161) (.23)
Unrealized Appreciation--Note E 7,451 .06
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,347,862 $10.11
==============================================================================================================================
</TABLE>
4
<PAGE> 57
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS** AMOUNT VALUE*
SHORT-TERM CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS (78.9%)
- -----------------------------------------------------------------------------------------------------------------------------------
ASSET BACKED SECURITIES (8.4%)
Carco Auto Loan Master Trust 7.875% 7/15/99 (1) Aaa $ 57,000 $ 57,588
The Chase Manhattan Corp. Grantor Trust 6.00% 9/17/01 (1) Aaa 20,099 20,096
Citibank Credit Card Master Trust 6.70% 2/15/04 (1) A2 13,000 12,996
Discover Card Master Trust 6.70% 2/16/00 (1) Aaa 5,000 5,023
Ford Credit Auto Loan Master Trust 6.50% 8/15/02 (1) Aaa 35,000 35,065
Household Credit Card Master Trust 5.90% 5/15/02 (1) A2 20,000 19,519
Household Credit Card Master Trust 7.00% 12/15/99 (1) Aaa 79,775 80,398
MBNA Credit Card Master Trust 6.20% 8/15/99 (1) Aaa 10,000 10,000
NationsBank Credit Card Master Trust 6.45% 4/15/03 (1) Aaa 55,690 55,829
Neiman Marcus Credit Card Master Trust 7.60% 6/15/03 (1) Aaa 5,000 5,173
Standard Credit Card Master Trust 6.75% 6/7/00 (1) Aaa 21,000 21,177
Standard Credit Card Master Trust 7.875% 1/7/00 (1) Aaa 16,100 16,538
Standard Credit Card Master Trust 8.875% 9/7/99 (1) Aaa 26,131 27,103
Toyota Auto Grantor Trust 5.85% 3/15/01 (1) Aaa 14,852 14,842
----------
381,347
----------
FINANCE (36.2%)
AUTOMOBILE (3.3%)
Chrysler Financial Corp. 7.81% 2/23/98 A3 15,000 15,273
Ford Motor Credit Corp. 5.37% 9/8/98 A1 14,475 14,290
Ford Motor Credit Corp. 5.742% 11/1/97 (2) A1 30,000 30,024
Ford Motor Credit Corp. 5.83% 6/29/98 A1 25,000 24,925
Ford Motor Credit Corp. 7.47% 7/29/99 A1 11,800 12,095
General Motors Acceptance Corp. 6.00% 12/30/98 A3 5,000 4,985
General Motors Acceptance Corp. 7.25% 4/30/99 A3 21,100 21,501
General Motors Acceptance Corp. 8.40% 10/15/99 A3 5,000 5,243
General Motors Acceptance Corp. 8.50% 12/21/98 A3 20,000 20,791
BANKS (9.6%)
Bank of New York 7.625% 7/15/02 A2 6,750 6,993
Bank South Inc. 10.20% 6/1/99 A3 12,500 13,509
Barnett Banks Inc. 6.25% 7/28/98 A2 36,800 36,875
Capital One Bank 6.49% 8/15/97 Baa3 9,000 9,026
Capital One Bank 6.66% 8/17/98 Baa3 5,000 5,027
The Chase Manhattan Corp. 8.00% 6/15/99 A2 19,450 20,112
The Chase Manhattan Corp. 8.625% 5/1/02 A2 7,500 8,117
The Chase Manhattan Corp. 10.00% 6/15/99 A2 20,840 22,463
First Fidelity Bancorp 9.625% 8/15/99 A2 23,540 25,333
First National Bank of Commerce 6.50% 1/14/00 A2 25,000 25,029
First Union Corp. 9.45% 6/15/99 A2 6,649 7,087
Huntington Bancshares 5.68% 12/8/98 A3 10,000 9,923
MBNA America Bank 7.12% 4/12/99 A2 10,000 10,180
MBNA Corp. 6.875% 10/1/99 A3 15,785 15,965
MBNA Corp. 7.49% 9/14/99 A3 6,600 6,769
Manufacturers Hanover Corp. 8.50% 2/15/99 A2 9,272 9,655
Meridian Bancorp 6.625% 6/15/00 A1 26,550 26,609
Meridian Bancorp 7.875% 7/15/02 A2 5,650 5,937
National City Bank Cleveland 6.35% 3/15/01 A1 36,860 36,545
Norwest Corp. 6.125% 10/15/00 Aa3 6,000 5,934
Norwest Corp. 6.75% 5/12/00 Aa3 15,000 15,154
PNC Funding Corp. 9.875% 3/1/01 A3 5,565 6,183
Security Pacific Corp. 9.75% 5/15/99 A2 5,000 5,350
Southern National Corp. 7.05% 5/23/03 A3 17,750 17,908
Summit Bancorp 8.625% 12/10/02 Baa1 21,725 23,457
Wachovia Bank 5.35% 11/13/98 Aa2 20,000 19,762
Wachovia Bank 5.60% 3/8/99 Aa2 25,000 24,717
Wachovia Corp. 7.00% 12/15/99 A1 9,900 10,068
Wells Fargo & Co. 8.75% 5/1/02 A2 5,000 5,439
</TABLE>
5
<PAGE> 58
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS** AMOUNT VALUE*
SHORT-TERM CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSUMERS (2.2%)
Countrywide Funding 7.85% 3/3/97 A3 $ 9,800 $ 9,815
Norwest Financial, Inc. 6.68% 9/15/99 Aa3 46,000 46,293
Norwest Financial, Inc. 6.875% 12/15/99 Aa3 9,845 9,975
Sears Roebuck Acceptance Corp. 6.25% 10/6/98 A2 35,000 35,061
DIVERSIFIED (8.7%)
AT&T Capital Corp. 6.70% 2/15/01 Baa3 50,000 50,000
Associates Corp. of North America 6.50% 9/9/98 Aa3 25,000 25,138
Associates Corp. of North America 7.55% 9/1/99 Aa3 10,000 10,271
Associates Corp. of North America 8.37% 12/21/99 Aa3 19,000 19,989
Associates Corp. of North America 8.40% 11/29/99 Aa3 10,000 10,521
Associates Corp. of North America 8.625% 6/15/97 Aa3 6,000 6,062
CIT Group Holdings 5.70% 12/15/98 Aa3 20,000 19,849
CIT Group Holdings 6.00% 2/15/97 (1) Aa3 14,210 14,211
CIT Group Holdings 6.25% 10/25/99 Aa3 50,000 49,876
Caterpillar Financial Services 5.70% 5/9/97 (2) A2 21,000 21,004
Comdisco Inc. 5.75% 2/15/01 Baa1 33,500 32,383
Comdisco Inc. 6.10% 1/8/99 Baa1 15,000 14,951
Comdisco Inc. 6.83% 7/30/99 Baa1 15,000 15,160
Finova Capital Corp. 6.375% 4/15/99 Baa1 21,000 21,004
Finova Capital Corp. 6.38% 4/15/99 Baa1 25,000 25,006
Finova Capital Corp. 9.125% 2/27/02 Baa1 8,000 8,745
General Electric Capital Corp. 6.20% 3/15/97 (1) Aaa 16,565 16,576
General Electric Capital Corp. 8.10% 1/26/99 Aaa 5,000 5,193
Pitney Bowes Credit Corp. 6.80% 10/1/01 Aa3 16,300 16,419
Pitney Bowes Credit Corp. 7.43% 4/15/97 Aa3 14,000 14,055
INSURANCE (5.0%)
Conseco Inc. 10.50% 12/15/04 BBB (3) 5,000 5,898
Sunamerica Inc. 6.20% 10/31/99 Baa1 26,000 25,864
Travelers/Aetna Property Casualty Corp. 6.25% 10/1/99 A2 50,000 49,896
Travelers/Aetna Property Casualty Corp. 6.75% 9/1/99 A2 30,000 30,249
Travelers/Aetna Property Casualty Corp. 6.75% 4/15/01 A2 34,000 34,140
USAA Capital Corp. 6.51% 9/30/99 Aa1 10,000 10,034
USAA Capital Corp. 6.57% 9/20/99 Aa1 25,000 25,123
USAA Capital Corp. 6.60% 6/15/98 Aa1 25,000 25,175
USF&G Corp. 8.375% 6/15/01 Baa2 17,545 18,575
OTHER (7.4%)
Associated Estates Realty Corp. 6.88% 12/9/04 Baa3 5,000 4,944
Associated Estates Realty Corp. 8.375% 4/15/00 Baa3 15,680 16,360
Bear Stearns Co. 7.625% 9/15/99 A2 10,000 10,278
Bear Stearns Co. 7.625% 4/15/00 A2 26,900 27,666
Colonial Realty 7.16% 1/17/03 Baa3 22,000 22,038
Dean Witter Discover & Co. 6.00% 3/1/98 A2 11,000 11,005
Dean Witter Discover & Co. 6.25% 3/15/00 A2 7,000 6,956
Dean Witter Discover & Co. 6.75% 8/15/00 A2 15,000 15,079
Donaldson Lufkin & Jenrette, Inc. 5.625% 2/15/16 Baa1 12,000 11,572
Goldman Sachs Group 5.962% 1/25/99 (2) A1 14,000 14,010
Goldman Sachs Group 6.10% 4/15/98 A1 30,000 30,031
Goldman Sachs Group 6.875% 9/15/99 A1 16,175 16,352
Lehman Brothers Holdings 5.75% 2/15/98 Baa1 5,000 4,976
Lehman Brothers Holdings 8.375% 2/15/99 Baa1 5,000 5,181
Morgan Stanley Group 5.75% 2/15/01 A1 10,500 10,164
Morgan Stanley Group 6.425% 3/15/00 A1 15,000 14,967
Morgan Stanley Group 6.93% 3/12/97 (1) A1 8,000 8,013
Oasis Residential Inc. 6.75% 11/15/01 Baa3 4,000 3,947
PaineWebber Group 7.16% 6/15/99 Baa1 25,000 25,314
</TABLE>
6
<PAGE> 59
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS** AMOUNT VALUE*
COUPON DATE (MOODY'S) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Post Apartment Homes 7.25% 10/1/03 Baa1 $ 7,000 $ 7,048
Simon DeBartolo PATS 6.75% 11/15/03 Baa1 23,000 22,554
Smith Barney Holdings 5.50% 1/15/99 A2 11,000 10,855
Smith Barney Holdings 7.00% 5/15/00 A2 15,500 15,721
Smith Barney Holdings 7.98% 3/1/00 A2 17,500 18,220
----------
1,640,015
----------
INDUSTRIAL (27.3%)
AEROSPACE & DEFENSE (4.6%)
Lockheed Martin Corp. 5.65% 4/1/97 A3 36,150 36,153
Lockheed Martin Corp. 6.85% 5/15/01 A3 47,000 47,386
McDonnell Douglas Corp. 8.625% 4/1/97 Baa1 32,141 32,277
Rockwell International 7.625% 2/17/98 A1 55,000 55,875
Rockwell International 8.875% 9/15/99 A1 33,860 35,954
BASIC INDUSTRIES (0.2%)
Allied Corp. 0.00% 9/15/98 A2 7,500 6,800
CABLE (0.8%)
Cox Communications, Inc. 6.375% 6/15/00 Baa2 37,000 36,720
CHEMICALS (1.4%)
Praxair, Inc. 6.70% 4/15/01 A3 50,000 50,053
Union Carbide Corp. 7.00% 8/1/99 Baa2 12,315 12,470
COMPUTERS & ELECTRIC EQUIPMENT (3.3%)
CSC Enterprises 6.50% 11/15/01 A3 25,000 24,852
CSC Enterprises 6.80% 4/15/99 A3 21,500 21,715
Compaq Computer Corp. 6.50% 3/15/99 Baa2 40,600 40,673
Electronic Data Systems Corp. 6.85% 5/15/00 A1 18,000 18,194
Lucent Technologies 6.90% 7/15/01 A2 45,000 45,601
CONSUMER GOODS & SERVICES (2.2%)
The Coca-Cola Co. 7.875% 9/15/98 Aa3 18,000 18,490
The Walt Disney Co. 6.375% 3/30/01 A2 33,000 32,833
Sara Lee Corp. 5.70% 7/14/00 A1 5,000 4,886
Sara Lee Corp. 6.50% 5/16/00 A1 15,000 15,001
Sara Lee Corp. 6.70% 9/9/99 A1 10,000 10,096
Sara Lee Corp. 7.75% 2/3/00 A1 18,700 19,349
ENERGY & RELATED GOODS & SERVICES (4.7%)
Mobil Oil Corp. 9.17% 2/29/00 (1) Aa2 52,888 55,381
Occidental Petroleum Corp. 6.75% 9/16/99 Baa2 6,000 6,030
Occidental Petroleum Corp. 8.50% 11/9/01 Baa2 10,000 10,683
Occidental Petroleum Corp. 10.125% 11/15/01 Baa2 2,000 2,272
Phillips Petroleum Co. 7.66% 4/9/97 A3 5,000 5,019
Phillips Petroleum Co. 8.00% 4/12/99 A3 4,000 4,142
Texaco Capital Corp. 6.87% 6/30/97 A1 30,000 30,158
Texaco Capital Corp. 8.22% 2/12/97 A1 15,000 15,011
Texaco Capital Corp. 8.65% 1/30/98 A1 16,750 17,173
Texaco Capital Corp. 9.00% 11/15/97 A1 8,000 8,186
Union Oil of California 6.33% 2/28/97 Baa2 20,000 20,011
Union Oil of California 6.38% 2/18/97 Baa2 15,000 15,005
Union Oil of California 6.625% 2/28/97 Baa2 15,000 15,011
Union Oil of California 8.97% 3/6/98 Baa2 6,000 6,182
FOOD & LODGING (1.6%)
Kellogg Co. 5.90% 7/15/97 Aa1 30,565 30,612
McDonald's Corp. 8.375% 10/29/99 Aa2 8,550 8,986
PepsiCo, Inc. 5.00% 2/24/97 A1 32,000 31,992
</TABLE>
7
<PAGE> 60
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS** AMOUNT VALUE*
SHORT-TERM CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEALTH CARE (0.3%)
Allegiance Corp. 7.00% 10/15/26 Baa3 $ 12,000 $ 12,137
MEDIA & COMMUNICATIONS (3.8%)
R.R. Donnelley & Sons Co. 7.27% 10/20/97 A1 15,000 15,157
R.R. Donnelley & Sons Co. 7.96% 11/8/99 A1 40,000 41,638
Gannett Co. 5.25% 3/1/98 A2 40,000 39,716
Knight-Ridder, Inc. 8.50% 9/1/01 (1) A1 17,025 17,957
News America Holdings 7.50% 3/1/00 Baa3 30,000 30,710
News America Holdings 9.125% 10/15/99 Baa3 23,095 24,596
METAL (0.3%)
CBI Industries 7.53% 8/26/99 A3 15,000 15,368
PAPER (0.3%)
International Paper Co. 7.40% 3/4/97 A3 10,000 10,017
International Paper Co. 9.50% 5/30/97 A3 5,000 5,057
RETAIL (0.8%)
J.C. Penney & Co., Inc. 5.375% 11/15/98 A2 13,350 13,158
Sears, Roebuck & Co. 5.25% 2/24/97 A2 10,000 10,000
Sears, Roebuck & Co. 9.25% 4/15/98 A2 13,100 13,572
TRANSPORTATION (2.2%)
CSX Corp. 9.04% 2/28/97 A3 8,500 8,518
Federal Express Co. 9.875% 4/1/02 Baa2 8,195 9,259
Federal Express Co. 10.00% 9/1/98 Baa2 24,875 26,254
Federal Express Co. 10.00% 4/15/99 Baa2 6,255 6,706
Hertz Corp. 6.50% 4/1/00 A3 5,000 4,995
Hertz Corp. 8.30% 2/2/98 A3 19,500 19,918
Union Pacific Railroad Co. (Equipment Trust Certificate) 6.99% 12/24/99 (1) Aa3 6,028 6,096
Union Pacific Railroad Co. (Equipment Trust Certificate) 9.625% 3/15/02 Aa3 18,350 18,425
OTHER (0.8%)
General Electric Co. 7.875% 9/15/98 Aaa 15,000 15,415
Minnesota Mining & Manufacturing Co. 6.25% 3/29/99 Aaa 22,275 22,313
----------
1,234,214
----------
UTILITIES (7.0%)
Delmarva Power & Light 6.40% 7/1/03 A2 14,000 13,672
Duquesne Light Co. 6.15% 2/12/98 Baa1 5,000 4,998
Edison Mission Energy Funding Corp. 6.77% 9/15/03 (1) Baa1 17,500 17,419
Enron Corp. 8.50% 2/1/00 Baa2 20,000 20,000
Florida Gas Transmission 7.75% 11/1/97 Baa2 6,000 6,076
Florida Gas Transmission 8.14% 11/1/99 Baa2 10,000 10,407
Florida Power & Light 5.50% 7/1/99 Aa3 20,600 20,227
GTE North Inc. 5.50% 2/15/99 A1 18,175 17,939
GTE Northwest Inc. 7.375% 5/1/01 A2 4,000 4,104
GTE Southwest Inc. 5.82% 12/1/99 A2 18,650 18,341
Idaho Power Co. 5.33% 9/1/98 A2 4,500 4,446
Kansas City Power & Light Co. 6.50% 11/14/01 A1 5,000 4,944
Kern River Funding Corp. 6.42% 3/31/01 (1) A2 15,794 15,784
MCI Communications Corp. 6.25% 3/23/99 A2 12,000 11,991
MCN Investment Corp. 6.03% 2/1/01 Baa2 4,000 3,901
MCN Investment Corp. 6.82% 5/13/99 Baa2 28,000 28,224
NYNEX Credit Co. 6.50% 9/15/00 A3 30,000 29,912
NYNEX Corp. Capital Funding 8.10% 11/1/99 A3 5,070 5,279
NYNEX Corp. Capital Funding 8.11% 11/1/99 A3 15,000 15,623
Progress Capital Holdings 6.88% 8/1/01 A2 20,000 20,138
Texas Utilities Co. 6.375% 8/1/97 Baa1 5,000 5,012
Texas Utilities Co. 9.50% 8/1/99 Baa1 8,500 9,096
</TABLE>
8
<PAGE> 61
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS** AMOUNT VALUE*
COUPON DATE (MOODY'S) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U S WEST Capital Funding, Inc. 6.95% 1/15/37 Baa1 $ 14,000 $ 13,986
United Telecom 9.75% 4/1/00 A3 10,550 11,454
Wisconsin Power & Light 6.125% 7/15/97 Aa2 5,000 5,010
----------
317,983
----------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $3,558,412) 3,573,559
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (10.6%)
- -----------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp. 7.935% 9/13/06 31,950 32,564
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 5.50% 10/1/00 (1) 29,933 23,357
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 9/1/98 (1) 13,246 13,230
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 12/1/99 (1) 15,417 15,309
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 2/1/01 (1) 92,932 92,032
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 7/1/01 (1) 45,205 44,682
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.00% 1/1/25 (1) 30,376 30,154
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 6.50% 10/1/99 (1) 12,894 12,918
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 7.00% 2/1/00 (1) 6,325 6,401
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 7.00% 3/1/00 (1) 22,132 22,397
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 7.00% 5/1/00 (1) 25,837 26,114
Federal Home Loan Mortgage Corp. (Pooled Mortgage Notes) 7.00% 6/1/01 (1) 29,492 29,670
Federal National Mortgage Assn. 6.70% 8/10/01 50,140 50,203
Federal National Mortgage Assn. 7.94% 9/13/06 10,000 10,209
Federal National Mortgage Assn. (Pooled Mortgage Notes) 6.00% 1/1/01 (1) 29,517 29,203
Federal National Mortgage Assn. (Pooled Mortgage Notes) 6.00% 6/1/01 (1) 9,068 8,955
Federal National Mortgage Assn. (Pooled Mortgage Notes) 6.834% 7/1/03 (1) 14,927 14,997
Federal National Mortgage Assn. (Pooled Mortgage Notes) 8.00% 6/1/99 (1) 6,188 6,337
Government Export Trust (U.S. Government Guaranteed) 4.85% 11/1/97 (1) 4,400 4,386
Government Export Trust (U.S. Government Guaranteed) 6.61% 9/15/99 (1) 5,375 5,415
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $482,666) 478,533
- -----------------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLAR DENOMINATED) (6.9%)
- -----------------------------------------------------------------------------------------------------------------------------------
Province of Alberta 9.20% 11/1/97 Aa2 23,000 23,569
Bank of Nova Scotia 9.00% 10/1/99 A1 12,394 13,181
Bayerische Landesbank Girozentrale 5.625% 2/26/01 Aaa 16,000 15,497
Bayerische Landesbank Girozentrale 6.375% 8/31/00 Aaa 50,000 49,989
British Telecom Finance Inc. 9.375% 2/15/99 Aaa 32,425 34,381
Enersis 6.60% 12/1/26 Baa1 20,000 19,550
KFW International Finance 9.125% 5/15/01 Aaa 7,995 8,767
Province of Manitoba 6.00% 10/15/97 A1 30,000 30,045
Province of Manitoba 6.125% 5/28/98 A1 20,000 20,054
Province of Manitoba 7.75% 2/1/02 A1 7,310 7,653
Province of Manitoba 8.75% 5/15/01 A1 7,000 7,557
Province of Manitoba 9.50% 9/15/98 A1 10,000 10,521
Province of Manitoba 9.625% 3/15/99 A1 10,000 10,667
National Australia Bank 9.70% 10/15/98 A1 12,150 12,840
Noranda, Inc. 8.00% 6/1/03 Baa2 20,000 20,931
Noranda, Inc. 8.625% 7/15/02 Baa2 15,000 16,124
Placer Dome Inc. 6.14% 1/29/02 Baa2 15,000 14,550
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $315,170) 315,876
- -----------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.3%)
- -----------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $56,808) 5.51% 2/3/97 56,808 56,808
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.7%)
(COST $4,413,056) 4,424,776
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 62
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
SHORT-TERM CORPORATE PORTFOLIO (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (2.3%)
- -----------------------------------------------------------------------------------------------------------------------------------
Other Assets--Notes C and F $ 180,952
Liabilities--Note F (74,990)
----------
105,962
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------------------------------------
Applicable to 421,571,751 outstanding $.001 par value shares
(authorized 700,000,000 shares) $4,530,738
===================================================================================================================================
NET ASSET VALUE PER SHARE $10.75
===================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
**Unaudited.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Floating Rate Notes.
(3) Rated by Standard & Poor's.
PATS--Putable Asset Trust Securities.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $4,549,810 $10.79
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note D (30,792) (.07)
Unrealized Appreciation--Note E 11,720 .03
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $4,530,738 $10.75
===================================================================================================================================
</TABLE>
10
<PAGE> 63
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES (98.3%)
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds 10.375% 11/15/12 $221,250 $ 282,578
U.S. Treasury Bonds 10.75% 2/15/03 4,000 4,868
U.S. Treasury Bonds 10.75% 5/15/03 87,100 106,521
U.S. Treasury Bonds 11.125% 8/15/03 9,000 11,243
U.S. Treasury Bonds 11.625% 11/15/04 27,300 35,793
U.S. Treasury Bonds 11.875% 11/15/03 20,700 26,839
U.S. Treasury Notes 5.875% 2/15/04 12,600 12,230
U.S. Treasury Notes 6.25% 4/30/01 16,000 16,005
U.S. Treasury Notes 6.625% 7/31/01 21,700 22,008
U.S. Treasury Notes 7.25% 5/15/04 196,665 206,038
U.S. Treasury Notes 7.25% 8/15/04 35,500 37,197
U.S. Treasury Notes 7.50% 2/15/05 71,500 76,069
U.S. Treasury Notes 7.75% 12/31/99 57,000 59,503
U.S. Treasury Notes 7.875% 11/15/04 143,400 155,701
Government Export Trust (U.S. Government Guaranteed) 6.00% 3/15/05 (1) 17,188 16,821
Government Export Trust (U.S. Government Guaranteed) 7.46% 12/15/05 (1) 30,130 31,072
Government Export Trust (U.S. Government Guaranteed) 8.21% 12/29/06 (1) 28,402 30,074
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.02% 9/1/04 (1) 14,167 14,464
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.39% 6/26/06 (1) 4,861 4,988
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.80% 8/15/06 (1) 8,968 9,376
Guaranteed Trade Trust (U.S. Government Guaranteed) 8.17% 1/15/07 (1) 7,500 7,973
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 5.735% 1/15/02 (1) 19,000 18,726
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 5.94% 6/20/06 (1) 20,000 19,398
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 6.08% 8/15/04 (1) 22,500 21,976
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 6.726% 9/15/10 (1) 17,000 16,796
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 6.75% 12/15/08 (1) 13,300 13,274
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $1,249,535) 1,257,531
- -----------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.2%)
- -----------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $2,070) 5.51% 2/3/97 2,070 2,070
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.5%)
(COST $1,251,605) 1,259,601
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.5%)
- -----------------------------------------------------------------------------------------------------------------------------------
Other Assets--Notes C and F 238,432
Liabilities--Note F (219,448)
----------
18,984
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------------------------------------
Applicable to 123,246,962 outstanding $.001 par value shares
(authorized 250,000,000 shares) $1,278,585
===================================================================================================================================
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 JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,300,978 $10.56
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note D (30,389) (.25)
Unrealized Appreciation--Note E 7,996 .06
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,278,585 $10.37
===================================================================================================================================
</TABLE>
11
<PAGE> 64
<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 (80.8%)
- -----------------------------------------------------------------------------------------------------------------------------------
ASSET BACKED SECURITIES (3.2%)
Chase Manhattan Credit Card Master Trust 7.04% 2/15/05 (1) Aaa $ 5,000 $ 5,106
Citibank Credit Card Master Trust 6.70% 2/15/04 (1) A2 5,000 4,998
Ford Credit Auto Loan Master Trust 6.50% 8/15/02 (1) Aaa 4,000 4,007
NationsBank Credit Card Master Trust Series 6.45% 4/15/03 (1) Aaa 5,000 5,013
---------
19,124
---------
FINANCE (39.7%)
AUTOMOBILE (1.0%)
Ford Motor Credit Corp. 5.742% 11/1/97 (2) A1 1,000 1,001
Ford Motor Credit Corp. 6.25% 12/8/05 A1 3,000 2,827
Ford Motor Credit Corp. 7.50% 1/15/03 A1 1,000 1,030
Ford Motor Credit Corp. 7.75% 11/15/02 A1 1,000 1,048
BANKS (16.0%)
Banc One Corp. 9.875% 3/1/09 A1 3,690 4,441
Bank of New York Co. 6.625% 6/15/03 A2 5,000 4,951
Chase Manhattan Corp. 8.625% 5/1/02 A2 5,000 5,411
CoreStates Capital Corp. 6.75% 11/15/06 A2 5,000 4,867
CoreStates Capital Corp. 9.625% 2/15/01 A2 2,500 2,757
First Bank N.A. 6.00% 10/15/03 A2 4,200 4,001
First Bank System 6.875% 9/15/07 A3 5,000 4,883
First Interstate Bancorp 10.875% 4/15/01 A2 1,000 1,148
MBNA Corp. 6.875% 6/1/05 A3 6,000 5,874
Meridian Bancorp 6.625% 3/15/03 A2 3,000 2,960
PNC Funding Corp. 9.875% 3/1/01 A3 5,000 5,555
Southern National Corp. 7.05% 5/23/03 A3 10,000 10,089
Sovereign Bancorp 6.75% 7/1/00 BBB- (3) 5,755 5,728
Summit Bancorp 8.625% 12/10/02 Baa1 5,775 6,236
Summit Bank 6.75% 6/15/03 A3 5,510 5,445
U.S. Bancorp 7.50% 6/1/26 A3 10,000 10,386
Wells Fargo & Co. 6.875% 4/1/06 A2 5,000 4,905
Wells Fargo & Co. 7.125% 8/15/06 A2 5,000 4,995
CONSUMERS (1.7%)
Norwest Financial, Inc. 7.50% 4/15/05 Aa3 5,000 5,165
Sears Roebuck Acceptance Corp. 6.80% 10/9/02 A2 5,000 5,000
DIVERSIFIED (4.9%)
Associates Corp. of North America 7.54% 4/14/04 Aa3 3,000 3,090
Associates Corp. of North America 5.75% 10/15/03 Aa3 5,000 4,718
Associates Corp. of North America 7.875% 9/30/01 Aa3 2,000 2,098
Caterpillar Financial Services 5.70% 5/9/97 (2) A2 1,000 1,000
Finova Capital Corp. 6.75% 11/15/04 Baa1 5,000 4,897
General Electric Capital Corp. 8.50% 7/24/08 Aaa 6,100 6,805
General Electric Capital Corp. 8.70% 2/15/03 Aaa 1,000 1,098
Pitney Bowes Credit Corp. 6.625% 6/1/02 Aa3 5,000 4,998
INSURANCE (8.0%)
Conseco Inc. 10.50% 12/15/04 BBB (3) 5,000 5,898
Harleysville Group 6.75% 11/15/03 Baa2 7,500 7,270
Horace Mann Educators Corp. 6.625% 1/15/06 Baa2 3,500 3,334
NAC Re Corp. 7.15% 11/15/05 Baa2 5,000 4,964
Orion Capital 9.125% 9/1/02 Baa2 5,000 5,498
Reinsurance Group of America Inc. 7.25% 4/1/06 A (3) 5,000 4,953
Travelers/Aetna Property & Casualty Corp. 6.75% 4/15/01 A2 5,000 5,021
USF&G Corp. 7.125% 6/1/05 Baa2 5,000 5,004
USF&G Corp. 8.375% 6/15/01 Baa2 5,000 5,294
</TABLE>
12
<PAGE> 65
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS** AMOUNT VALUE*
COUPON DATE (MOODY'S) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OTHER (8.1%)
Associated Estates Realty Corp. 6.88% 12/9/04 Baa3 $ 2,000 $ 1,978
Bear Stearns Cos., Inc. 7.25% 10/15/06 A2 5,000 5,003
Camden Property Trust 7.00% 11/15/06 Baa3 3,000 2,914
Colonial Realty 7.16% 1/17/03 Baa3 3,000 3,005
Dean Witter Discover & Co. 6.30% 1/15/06 A2 5,000 4,720
Donaldson, Lufkin & Jenrette, Inc. 5.625% 2/15/16 Baa1 3,000 2,893
Goldman Sachs Group 7.80% 7/15/02 A1 5,000 5,217
Merrill Lynch & Co. 6.64% 9/19/02 Aa3 5,000 4,985
Morgan Stanley Group 9.375% 6/15/01 A1 1,000 1,102
Post Apartment Homes 7.25% 10/1/03 Baa1 2,000 2,014
Security Capital Pacific Trust 7.375% 10/15/06 Baa2 3,000 3,023
Simon DeBartolo PATS 6.75% 11/15/03 Baa1 3,000 2,942
Smith Barney Holdings 6.875% 6/15/05 A2 5,000 4,895
United Dominion Realty Trust, Inc. 7.25% 1/15/07 Baa1 3,000 2,990
--------
234,324
--------
INDUSTRIAL (27.6%)
AEROSPACE & DEFENSE (2.5%)
The Boeing Co. 8.10% 11/15/06 A1 2,000 2,163
Lockheed Martin Corp. 7.25% 5/15/06 A3 5,000 5,070
Northrop Grumman Corp. 7.00% 3/1/06 Baa3 5,000 4,907
Rockwell International 8.375% 2/15/01 A1 2,361 2,509
AUTOMOTIVE (0.9%)
General Motors Corp. 8.875% 6/11/01 A3 1,000 1,078
General Motors Corp. 9.22% 7/18/01 A3 1,000 1,093
General Motors Corp. 9.625% 12/1/00 A3 3,000 3,298
CABLE (0.3%)
Cox Communications, Inc. 6.50% 11/15/02 Baa2 2,000 1,961
CHEMICALS (1.6%)
Eastman Chemical Co. 6.375% 1/15/04 A3 1,500 1,454
Hoechst-Celanese 6.125% 2/1/04 A2 2,000 1,912
Praxair Inc. 6.70% 4/15/01 A3 5,000 5,005
Praxair Inc. 6.85% 6/15/05 A3 1,000 987
COMPUTERS & ELECTRONIC EQUIPMENT (3.0%)
Applied Materials 8.00% 9/1/04 Baa2 2,000 2,098
Compaq Computer Corp. 7.25% 3/15/04 Baa2 3,500 3,535
Electronic Data Systems Corp. 6.85% 5/15/00 A1 5,000 5,054
Lucent Technologies 6.90% 7/15/01 A2 5,000 5,067
Tektronix Global Notes 7.50% 8/1/03 Baa3 2,000 2,032
CONSUMER GOODS & SERVICES (3.9%)
American Stores 7.40% 5/15/05 Baa2 3,000 3,034
American Stores 9.125% 4/1/02 Baa2 4,000 4,391
Anheuser Busch Co. 6.75% 6/1/05 A1 2,000 1,961
The Walt Disney Co. 6.375% 3/30/01 A2 5,000 4,975
Levi Strauss & Co. 6.80% 11/1/03 Baa2 4,000 3,961
Sara Lee Corp. 5.70% 7/14/00 A1 5,000 4,886
ENERGY & RELATED GOODS & SERVICES (1.5%)
Occidental Petroleum Corp. 10.125% 11/15/01 Baa2 3,000 3,408
Phillips Petroleum Co. 9.00% 6/1/01 A3 1,000 1,089
Quaker State 6.625% 10/15/05 Baa1 2,000 1,922
Western Atlas, Inc. 7.875% 6/15/04 A3 2,000 2,107
</TABLE>
13
<PAGE> 66
<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 (0.6%)
IBP Inc. 6.125% 2/1/06 A3 $ 4,000 $ 3,749
HEALTH CARE (6.1%)
Allegiance Corp. 7.00% 10/15/26 Baa3 5,000 5,057
C.R. Bard, Inc. 6.70% 12/1/26 Baa2 7,000 6,800
Cardinal Health Inc. 6.00% 1/15/06 A3 8,845 8,259
Cardinal Health Inc. 6.50% 2/15/04 A3 1,000 977
Eli Lilly & Co. 8.375% 12/1/06 Aa3 2,000 2,204
MedPartners 7.375% 10/1/06 Baa3 5,000 5,029
Upjohn Co. Employee Stock Ownership Trust 9.79% 2/1/04 (1) A1 6,996 7,740
MEDIA & COMMUNICATIONS (0.9%)
News America Holdings 8.50% 2/23/25 Baa3 5,000 5,458
METAL (0.4%)
Timken Co. 7.30% 8/13/02 A3 2,500 2,556
RETAIL (0.2%)
Sears, Roebuck & Co. 8.52% 5/13/02 A2 1,000 1,076
TRANSPORTATION (5.7%)
Burlington Northern Railroad Co. 7.33% 6/23/10 (1) Aa3 5,000 5,109
CSX Corp. 9.50% 8/1/00 A3 1,000 1,086
Delta Airlines Inc. 7.541% 10/11/11 (1) Baa1 4,793 4,797
Delta Airlines Inc. 8.54% 1/2/07 (1) Baa1 2,922 3,095
Federal Express 10.125% 7/15/03 Baa2 2,000 2,313
Jet Equipment Trust 7.63% 8/15/12 (1) A1 2,918 2,997
Northwest Airlines 8.07% 1/2/15 (1) Baa1 11,409 12,065
Union Pacific Railroad Co. Equipment Trust 6.12% 2/1/04 Aa3 2,000 1,887
--------
163,211
--------
UTILITIES (10.3%)
Arizona Public Service 8.125% 3/15/02 Baa1 4,000 4,222
Chesapeake & Potomac Telephone Co. (MD) 6.00% 5/1/03 Aa2 4,604 4,423
Colorado Interstate Gas 10.00% 6/15/05 Baa2 5,000 5,895
Delmarva Power & Light 6.40% 7/1/03 A2 5,000 4,883
Enron Corp. 7.625% 9/10/04 Baa2 5,000 5,187
GTE Northwest Inc. 7.375% 5/1/01 A2 4,000 4,104
Kansas City Power & Light Co. 6.50% 11/14/01 A1 5,000 4,944
MCI Communications Corp. 7.50% 8/20/04 A2 1,500 1,557
Panhandle Eastern Corp. 7.25% 5/15/05 Baa2 5,000 5,076
Pennsylvania Power & Light Co. 6.875% 3/1/04 A3 5,000 4,974
Progress Capital Holdings 7.45% 9/1/03 A2 10,000 10,291
Southwestern Bell Telephone 5.77% 10/14/03 Aa3 6,000 5,673
--------
61,229
--------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $477,694) 477,888
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (5.2%)
- -----------------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Assn. 5.82% 11/4/03 2,900 2,745
Federal National Mortgage Assn. (Pooled Mortgage Notes) 6.834% 7/1/03 9,952 9,998
Federal Home Loan Mortgage Corp. 7.935% 9/13/06 8,500 8,663
Guaranteed Trade Trust (U.S. Government Guaranteed) 8.17% 1/15/07 (1) 4,167 4,430
U.S. Treasury Notes 5.875% 2/15/04 3,400 3,300
U.S. Treasury Notes 6.125% 12/31/01 2,000 1,988
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $30,641) 31,124
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 67
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS** AMOUNT VALUE*
COUPON DATE (MOODY'S) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOREIGN BONDS (U.S. DOLLAR DENOMINATED) (11.5%)
- -----------------------------------------------------------------------------------------------------------------------------------
ABN AMRO Bank NV 7.55% 6/28/06 Aa2 $ 5,000 $ 5,167
Australia & New Zealand Banking Group 7.55% 9/15/06 A1 9,500 9,741
Bangkok Bank 7.25% 9/15/05 A3 5,000 4,908
Bank of Nova Scotia 6.25% 9/15/08 A1 1,000 928
Bayer Corp. 6.50% 10/1/02 Aa2 6,000 5,952
Enersis SA 6.90% 12/1/06 Baa1 5,000 4,862
Japan Finance Corp. For Municipal Enterprises 6.85% 4/15/06 Aaa 5,000 5,013
Province of Manitoba 7.75% 2/1/02 A1 4,000 4,188
Province of Manitoba 8.75% 5/15/01 A1 3,000 3,239
Noranda, Inc. 8.625% 7/15/02 Baa2 1,000 1,075
Placer Dome Inc. 7.125% 5/15/03 Baa2 5,000 4,995
Santander Financial Issuances Ltd. 7.00% 4/1/06 A1 5,000 4,940
Societe Generale 7.40% 6/1/06 Aa3 5,000 5,067
Swiss Bank Corp. 6.75% 7/15/05 Aa2 4,000 3,933
Toronto Dominion Bank 6.45% 1/15/09 Aa3 2,500 2,353
Westdeutsche Landesbank 6.75% 6/15/05 Aa1 2,000 1,973
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $67,673) 68,334
- -----------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.0%)
- -----------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $11,589) 5.51% 2/3/97 11,589 11,589
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(COST $587,597) 588,935
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.5%)
- -----------------------------------------------------------------------------------------------------------------------------------
Other Assets--Notes C and F 21,568
Liabilities--Note F (18,730)
--------
2,838
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------------------------------------
Applicable to 60,866,937 outstanding $.001 par value shares
(authorized 250,000,000 shares) $591,773
===================================================================================================================================
NET ASSET VALUE PER SHARE $9.72
===================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
**Unaudited.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Floating Rate Notes.
(3) Rated by Standard & Poor's.
PATS--Putable Asset Trust Securities.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $590,484 $9.70
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note D (49) --
Unrealized Appreciation--Note E 1,338 .02
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS $591,773 $9.72
======================================================================================================================
</TABLE>
15
<PAGE> 68
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES (93.5%)
- ----------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds 7.50% 11/15/24 $ 20,000 $ 21,531
U.S. Treasury Bonds 7.875% 2/15/21 215,502 240,082
U.S. Treasury Bonds 8.125% 8/15/19 102,715 117,112
U.S. Treasury Bonds 8.875% 8/15/17 141,450 172,546
U.S. Treasury Bonds 8.875% 2/15/19 132,610 162,385
U.S. Treasury Bonds 9.875% 11/15/15 31,500 41,595
U.S. Treasury Bonds 10.375% 11/15/12 66,150 84,486
- ----------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $805,372) 839,737
- ----------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.4%)
- ----------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $30,509) 5.51% 2/3/97 30,509 30,509
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (96.9%)
(COST $835,881) 870,246
- ----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (3.1%)
- ----------------------------------------------------------------------------------------------------------------------
Other Assets--Notes C and F 40,244
Liabilities--Note F (12,547)
--------
27,697
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------------------------------------
Applicable to 91,285,030 outstanding $.001 par value shares
(authorized 300,000,000 shares) $897,943
======================================================================================================================
NET ASSET VALUE PER SHARE $9.84
======================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $871,080 $9.54
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note D (7,502) (.08)
Unrealized Appreciation--Note E 34,365 .38
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS $897,943 $9.84
======================================================================================================================
</TABLE>
16
<PAGE> 69
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS** AMOUNT VALUE*
LONG-TERM CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS (81.3%)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCE (20.3%)
AUTO (0.3%)
General Motors Acceptance Corp. MTN 8.50% 1/1/03 A3 $ 10,000 $ 10,769
BANKS (13.0%)
Banc One Corp. 7.75% 7/15/25 A1 30,000 30,178
Bank of Boston Corp. 6.625% 12/1/05 Baa1 30,000 28,904
BankAmerica Corp. 10.00% 2/1/03 A2 20,000 22,982
Barnett Banks, Inc. 8.50% 1/15/07 A3 15,000 16,291
Citicorp 7.125% 9/1/05 A2 15,000 15,031
Citicorp 7.625% 5/1/05 A2 10,000 10,283
Comerica, Inc. 7.125% 12/1/13 A2 5,000 4,773
Comerica, Inc. 8.375% 7/15/24 A2 20,000 20,785
Fifth Third Bancorp 6.75% 7/15/05 A1 20,000 19,521
First Bank N.A. 7.55% 6/15/04 A2 13,000 13,456
First Bank System 7.625% 5/1/05 A3 2,500 2,579
First Chicago Corp. 6.375% 1/30/09 A2 20,000 18,375
First Union Corp. 6.00% 10/30/08 A2 10,000 9,030
First Union Corp. 7.50% 4/15/35 A2 11,000 11,433
Golden West Financial Corp. 6.00% 10/1/03 A3 25,000 23,733
National City Bank Pennsylvania 7.25% 10/21/11 A1 14,000 13,899
National City Corp. 7.20% 5/15/05 A2 15,000 15,080
NationsBank Corp. 7.25% 10/15/25 A2 20,000 19,100
NationsBank Corp. 7.75% 8/15/04 A2 15,000 15,584
NationsBank Corp. 7.75% 8/15/15 A2 10,000 10,158
Republic New York Corp. 9.70% 2/1/09 A1 15,000 18,027
SunTrust Banks, Inc. 6.00% 2/15/26 A2 25,000 23,380
SunTrust Banks, Inc. 7.375% 7/1/02 A1 5,000 5,145
Wachovia Corp. 6.605% 10/1/25 A1 30,000 29,597
Wachovia Corp. 6.80% 6/1/05 A1 15,000 14,828
Wells Fargo & Co. 6.125% 11/1/03 A2 20,000 19,110
DIVERSIFIED (2.3%)
Exxon Capital Corp. 6.00% 7/1/05 Aaa 10,000 9,457
General Electric Capital Corp. 8.125% 5/15/12 Aaa 42,000 46,026
Texaco Capital, Inc. 9.75% 3/15/20 A1 17,000 21,325
INSURANCE (3.9%)
Allstate Corp. 7.50% 6/15/13 A2 10,000 10,022
AMBAC, Inc. 7.50% 5/1/23 Aa2 20,000 19,600
General Electric Global Insurance Holdings Corp. 7.00% 2/15/26 Aa1 50,000 47,473
General Re Corp. 9.00% 9/12/09 Aa1 15,000 17,058
TransAmerica Corp. 9.375% 3/1/08 A2 10,000 11,628
Travelers/Aetna Property Casualty Corp. 7.75% 4/15/26 A2 25,000 25,297
OTHER (0.8%)
U S WEST Capital Funding, Inc. 7.30% 1/15/07 Baa1 25,000 25,040
---------
674,957
---------
INDUSTRIAL (43.2%)
AEROSPACE & DEFENSE (2.7%)
Lockheed Martin Corp. 7.65% 5/1/16 A3 35,000 35,825
Northrop Grumman Corp. 9.375% 10/15/24 Baa3 20,000 21,794
Raytheon Co. 7.375% 7/15/25 A3 35,000 32,565
AUTOMOTIVE (4.0%)
Eaton Corp. 6.50% 6/1/25 A2 10,000 9,680
Eaton Corp. 7.625% 4/1/24 A2 15,000 14,886
Ford Motor Co. 8.875% 1/15/22 A1 40,000 45,743
</TABLE>
17
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<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS** AMOUNT VALUE*
LONG-TERM CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General Motors Corp. 7.40% 9/1/25 A3 $ 20,000 $ 19,654
General Motors Corp. 7.70% 4/15/16 A3 10,000 10,245
General Motors Corp. 9.40% 7/15/21 A3 20,000 23,783
Johnson Controls 8.20% 6/15/24 A2 10,000 10,275
BASIC INDUSTRIES (4.0%)
Browning-Ferris Industries, Inc. 6.375% 1/15/08 A2 15,000 14,117
Browning-Ferris Industries, Inc. 7.40% 9/15/35 A2 30,000 28,651
General Electric Capital Services 7.50% 8/21/35 Aaa 10,960 11,187
Hubbell Inc. 6.625% 10/1/05 A2 10,000 9,783
Morton International, Inc. 9.25% 6/1/20 A1 10,000 12,002
PPG Industries, Inc. 9.00% 5/1/21 A1 9,750 11,432
Parker-Hannifin Corp. 7.30% 5/15/11 A2 20,000 20,193
Worthington Industries Inc. 7.125% 5/15/06 A3 24,525 24,679
CHEMICALS (6.4%)
ARCO Chemical Co. 9.80% 2/1/20 A3 25,000 30,965
Air Products & Chemicals, Inc. 7.375% 5/1/05 A2 15,000 15,382
Air Products & Chemicals, Inc. 8.75% 4/15/21 A2 12,550 14,199
E.I. du Pont de Nemours & Co. 8.25% 1/15/22 Aa3 35,000 36,578
Eastman Chemical Co. 7.25% 1/15/24 A3 20,000 19,231
Eastman Chemical Co. 7.60% 2/1/27 A3 20,000 19,776
Monsanto Co. 8.20% 4/15/25 A1 20,000 20,264
Monsanto Co. 8.875% 12/15/09 A1 20,000 22,579
Rohm & Haas Co. 9.80% 4/15/20 (1) A1 5,000 6,027
Union Tank Car 7.125% 2/1/07 A3 15,000 15,018
Witco Chemical Corp. 6.875% 2/1/26 A3 15,000 13,756
COMPUTERS & ELECTRONIC EQUIPMENT (2.5%)
International Business Machines Corp. 7.00% 10/30/25 A1 33,000 31,179
Motorola, Inc. 7.50% 5/15/25 Aa3 50,000 51,007
CONSUMER GOODS & SERVICES (4.7%)
Bristol-Myers Squibb 6.80% 11/15/26 Aaa 15,000 14,294
The Coca-Cola Co. 6.00% 7/15/03 Aa3 15,000 14,448
Johnson & Johnson 8.72% 11/1/24 Aaa 30,000 32,873
Philips Electronics NV 7.75% 5/15/25 A3 18,275 18,212
Procter & Gamble Co. 8.50% 8/10/09 Aa2 10,000 11,251
Procter & Gamble Co. ESOP 9.36% 1/1/21 (1) Aa2 35,000 42,108
Whirlpool Corp. 9.10% 2/1/08 A3 20,000 22,829
ENERGY & RELATED GOODS & SERVICES (4.1%)
Husky Oil Ltd. 7.55% 11/15/16 Baa3 20,000 19,766
Mobil Corp. 8.625% 8/15/21 Aa2 22,000 25,391
Petro-Canada 7.875% 6/15/26 A3 12,760 13,313
Phillips Petroleum Co. 9.18% 9/15/21 A3 25,000 27,138
Talisman Energy 7.125% 6/1/07 Baa1 20,000 19,730
Texaco Capital, Inc. 8.625% 11/15/31 A1 13,000 14,943
United Technologies Corp. 8.875% 11/15/19 A2 15,000 17,342
FOOD & LODGING (1.9%)
CPC International, Inc. 6.15% 1/15/06 A2 20,000 18,871
CPC International, Inc. 7.25% 12/15/26 A2 13,000 12,728
McDonald's Corp. 7.05% 11/15/25 Aa2 23,275 21,997
McDonald's Corp. 7.375% 7/15/33 Aa2 8,500 8,299
HEALTH CARE (2.9%)
Baxter International Inc. 7.65% 2/1/27 A3 25,000 25,312
Eli Lilly & Co. 7.125% 6/1/25 Aa3 45,000 43,859
Merck & Co. 6.30% 1/1/26 Aaa 30,000 26,600
</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>
MEDIA & COMMUNICATIONS (2.9%)
The Walt Disney Co. 6.75% 3/30/06 A2 $ 25,000 $ 24,667
New York Times Co. 8.25% 3/15/25 A1 30,000 31,060
News America Holdings 8.00% 10/17/16 Baa3 20,000 19,639
Tribune Co. 6.875% 11/1/06 A3 20,000 19,730
PAPER (4.8%)
Georgia-Pacific Corp. 8.625% 4/30/25 Baa2 10,000 10,181
Georgia-Pacific Corp. 9.50% 5/15/22 Baa2 10,000 10,668
Georgia-Pacific Corp. 9.875% 11/1/21 Baa2 30,000 33,304
International Paper Co. 6.875% 11/1/23 A3 10,000 8,912
International Paper Co. 8.125% 6/15/24 A3 30,000 30,495
The Mead Corp. 8.125% 2/1/23 A3 15,000 15,080
Westvaco Corp. 9.75% 6/15/20 A1 15,000 18,536
Weyerhaeuser Co. 8.50% 1/15/25 A2 30,000 33,183
TRANSPORTATION (2.3%)
Burlington Northern Santa Fe Corp. 6.375% 12/15/05 Baa2 12,500 11,909
Union Pacific Corp. 7.00% 2/1/16 Baa2 20,000 18,906
United Parcel Service 8.375% 4/1/20 Aaa 40,000 44,818
----------
1,434,847
----------
UTILITIES (17.8%)
AT&T Corp. 8.625% 12/1/31 Aa3 40,000 42,076
BellSouth Telecommunications 7.00% 10/1/25 Aaa 10,000 9,713
BellSouth Telecommunications 7.50% 6/15/33 Aaa 35,000 34,290
Cincinnati Gas & Electric Co. 6.90% 6/1/25 Baa1 16,000 15,986
Cincinnati Gas & Electric Co. 7.20% 10/1/23 A3 5,100 4,722
Consolidated Edison Co. of New York, Inc. 6.375% 4/1/03 A1 15,000 14,659
Coastal Corp. 7.75% 10/15/35 Baa3 20,000 20,027
Coastal Corp. 9.625% 5/15/12 Baa3 20,000 23,536
Duke Power Co. 7.00% 7/1/33 Aa2 10,000 9,118
El Paso Natural Gas 7.50% 11/15/26 Baa2 17,820 17,558
Enron Corp. 6.875% 10/15/07 Baa2 15,000 14,735
Enron Corp. 7.00% 8/15/23 Baa2 8,000 7,189
GTE Florida, Inc. 6.31% 12/15/02 A2 5,000 4,909
GTE Southwest Inc. 6.00% 1/15/06 A2 10,000 9,337
Houston Lighting & Power Co. 9.15% 3/15/21 A3 20,000 23,271
Illinois Bell Telephone Co. 6.625% 2/1/25 Aa1 10,700 9,525
Indiana Bell Telephone Co. 7.30% 8/15/26 Aaa 20,000 19,973
Michigan Bell Telephone Co. 7.85% 1/15/22 Aa1 20,000 21,023
New Jersey Bell Telephone Co. 8.00% 6/1/22 Aaa 20,000 21,605
New York Telephone Co. 7.25% 2/15/24 A2 15,000 14,162
Northern States Power Corp. 7.125% 7/1/25 A1 25,000 24,367
Oklahoma Gas & Electric Co. 7.30% 10/15/25 A1 15,000 14,086
Pacific Bell Telephone Co. 7.125% 3/15/26 A1 15,000 14,381
Pacific Bell Telephone Co. 7.375% 6/15/25 A1 10,000 9,576
PacifiCorp 6.625% 6/1/07 A2 10,000 9,626
PacifiCorp MTN 6.71% 1/15/26 A2 10,000 8,970
Pacific Gas & Electric Co. 8.25% 11/1/22 A2 25,000 25,652
Pacific Gas & Electric Co. 8.375% 5/1/25 A2 5,000 5,150
Southern California Gas Co. 7.50% 6/15/23 A2 20,000 19,065
Southwestern Bell Telephone Co. 7.20% 10/15/26 Aa3 32,500 30,943
Southwestern Bell Telephone Co. 7.25% 7/15/25 Aa3 7,500 7,140
Southwestern Public Service Co. 8.20% 12/1/22 Aa2 12,500 13,053
Virginia Electric Power Co. 8.25% 3/1/25 A2 20,000 20,717
Virginia Electric Power Co. 8.625% 10/1/24 A2 11,000 11,594
U S WEST Communications Group 6.875% 9/15/33 Aa3 45,000 40,246
----------
591,980
----------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $2,637,769) 2,701,784
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<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) (9.2%)
- -----------------------------------------------------------------------------------------------------------------------------------
Banque Nationale Paris-NY 7.20% 1/15/07 A1 $ 15,000 $ 14,961
BHP Finance USA 6.69% 3/1/06 A2 20,000 19,445
Province of British Columbia 6.50% 1/15/26 Aa2 30,000 27,301
Credit National Euro-Dollar 7.00% 11/14/05 A3 15,000 14,430
Inter-American Development Bank 6.125% 3/8/06 Aaa 25,000 24,003
Italy Global Bond 6.875% 9/27/23 Aa3 60,000 56,638
Province of Manitoba 6.125% 1/19/04 A1 2,000 1,930
Province of Manitoba 8.875% 9/15/21 A1 10,000 11,672
Province of Ontario 6.00% 2/21/06 Aa3 25,000 23,508
Province of Ontario 7.75% 6/4/02 Aa3 15,000 15,806
Province of Quebec 7.50% 7/15/23 A2 50,000 49,289
Province of Saskatchewan 8.50% 7/15/22 A3 19,000 21,239
Societe Generale 7.40% 6/1/06 Aa3 25,000 25,333
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $308,903) 305,555
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (6.6%)
- -----------------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Assn. 15.50% 10/1/12 10 12
Government National Mortgage Assn. 6.50% 11/15/23-
3/15/26 94,567 90,757
U.S. Treasury Bond 7.25% 5/15/16 125,000 130,371
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $218,553) 221,140
- -----------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.4%)
- -----------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $79,713) 5.51% 2/3/97 79,713 79,713
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(COST $3,244,938) 3,308,192
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.5%)
- -----------------------------------------------------------------------------------------------------------------------------------
Other Assets--Notes C and F 80,664
Liabilities--Note F (65,317)
-----------
15,347
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------------------------------------
Applicable to 381,438,901 outstanding $.001 par value shares
(authorized 700,000,000 shares) $3,323,539
===================================================================================================================================
NET ASSET VALUE PER SHARE $8.71
===================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
**Unaudited.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital--Note D $3,258,803 $8.54
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains--Note D 1,482 --
Unrealized Appreciation--Note E 63,254 .17
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS $3,323,539 $8.71
======================================================================================================================
</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>
CORPORATE BONDS (89.6%)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL (3.0%)
American Reinsurance 10.875% 9/15/04 Aa2 $10,000 $ 10,739
Anchor Bancorp Inc. 8.938% 7/9/03 Ba3 10,000 10,250
Chevy Chase Savings Bank 9.25% 12/1/08 B1 10,000 10,200
Coast Federal Bank 13.00% 12/31/02 Ba2 5,700 6,270
Coast Savings Financial, Inc. 10.00% 3/1/00 Ba2 4,600 4,784
ContiFinancial Corp. 8.375% 8/15/03 Ba1 9,875 10,072
Dime Bancorp, Inc. 10.50% 11/15/05 Ba3 10,000 10,900
First Federal Financial 11.75% 10/1/04 B2 5,000 5,100
Imperial Credit Industries, Inc. 9.875% 1/15/07 B1 20,000 20,500
Riggs National Corp. 8.50% 2/1/06 Ba1 10,000 10,500
Western Financial Savings 8.50% 7/1/03 Ba3 10,000 10,071
---------
109,386
---------
INDUSTRIAL (81.8%)
AEROSPACE & DEFENSE (1.0%)
K & F Industries 10.375% 9/1/04 B2 4,285 4,521
Northrop Grumman Corp. 9.375% 10/15/24 Baa3 20,000 21,794
Wyman-Gordon Co. 10.75% 3/15/03 Ba3 9,000 9,720
BASIC INDUSTRIES (15.7%)
American Standard Inc. 9.875% 6/1/01 B1 20,000 21,100
American Standard Inc. 11.375% 5/15/04 Ba3 20,000 21,400
Bell & Howell Co. 9.25% 7/15/00 B1 8,000 8,140
Cincinnati Milacron, Inc. 8.375% 3/15/04 Ba1 11,500 11,730
Collins & Aikman Products Co. 11.50% 4/15/06 B3 40,000 44,000
Dan River Inc. 10.125% 12/15/03 B3 11,835 12,160
Day International Group Inc. 11.125% 6/1/05 B3 5,000 5,275
Dominion Textile (USA) Inc. 8.875% 11/1/03 Ba2 15,000 15,150
Dominion Textile (USA) Inc. 9.25% 4/1/06 Ba2 10,000 10,200
Envirosource, Inc. 9.75% 6/15/03 B3 15,000 14,250
Essex Group 10.00% 5/1/03 B1 18,000 18,720
Exide Corp. 10.00% 4/15/05 B1 28,000 28,945
Exide Corp. 10.75% 12/15/02 B1 15,000 15,750
Goss Graphic Systems, Inc. 12.00% 10/15/06 B2 20,000 20,950
Great Lakes Carbon Corp. 10.00% 1/1/06 Ba3 6,000 6,360
Hayes Wheels International, Inc. 11.00% 7/15/06 B3 25,000 27,375
Howmet Corp. 10.00% 12/1/03 B2 4,320 4,709
Iron Mountain, Inc. 10.125% 10/1/06 B3 16,500 17,490
Koppers Industries, Inc. 8.50% 2/1/04 B1 10,000 9,700
Lear Corp. 9.50% 7/15/06 B1 15,000 15,750
Lear Seating Corp. 8.25% 2/1/02 B1 13,000 13,130
Lear Seating Corp. 11.25% 7/15/00 Ba3 10,730 10,958
Mark IV Industries, Inc. 8.75% 4/1/03 Ba3 15,000 15,300
Mettler Toledo, Inc. 9.75% 10/1/06 B2 13,500 14,175
Owens-Illinois, Inc. 10.00% 8/1/02 B2 22,000 23,100
Owens-Illinois, Inc. 10.25% 4/1/99 B2 23,000 23,086
Owens-Illinois, Inc. 11.00% 12/1/03 Ba3 40,000 44,500
Penda Industries 10.75% 3/1/04 B2 5,200 5,109
Schuller International Group, Inc. 10.875% 12/15/04 Ba3 35,000 38,675
Specialty Equipment Cos., Inc. 11.375% 12/1/03 B3 16,500 17,985
Tultex Corp. 10.625% 3/15/05 Ba3 11,000 11,797
UCAR Global Enterprises, Inc. 12.00% 1/15/05 B1 8,000 9,160
Walbro Corp. 9.875% 7/15/05 B1 10,000 10,250
Wolverine Tube, Inc. 10.125% 9/1/02 Ba2 9,000 9,540
</TABLE>
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<CAPTION>
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FACE MARKET
MATURITY RATINGS** AMOUNT VALUE*
HIGH YIELD CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CABLE (8.4%)
Cablevision Systems Corp. 9.25% 11/1/05 B2 $ 30,000 $ 29,663
Cablevision Systems Corp. 9.875% 5/15/06 B2 3,000 3,068
Cablevision Systems Corp. 9.875% 2/15/13 B2 15,000 14,700
Comcast Corp. 9.125% 10/15/06 B1 25,000 25,125
Comcast Corp. 9.375% 5/15/05 B1 24,000 24,600
Comcast Corp. 9.50% 1/15/08 B1 20,000 20,500
Comcast Corp. 10.625% 7/15/12 B1 30,000 33,150
Galaxy Telecom LP 12.375% 10/1/05 B3 4,890 5,208
Lenfest Communications, Inc. 8.375% 11/1/05 Ba3 35,000 33,600
Rifkin Acquisition Partners LLLP 11.125% 1/15/06 B3 10,000 10,525
Rogers Cablesystem Ltd. 9.625% 8/1/02 Ba3 12,000 12,480
TCI Communications, Inc. 6.875% 2/15/06 Ba1 40,000 37,074
Tele-Communications, Inc. 8.75% 2/15/23 Ba1 21,000 20,063
Tele-Communications, Inc. 9.25% 1/15/23 Ba1 40,000 39,902
CHEMICALS (5.9%)
Acetex Corp. 9.75% 10/1/03 B1 10,000 9,950
Agricultural Minerals & Chemicals 10.75% 9/30/03 Ba3 15,000 16,200
Arcadian Partners LP 10.75% 5/1/05 B2 30,000 32,775
Borden Chemicals & Plastics LP 9.50% 5/1/05 Ba2 20,000 20,500
Buckeye Cellulose Corp. 8.50% 12/15/05 Ba3 12,000 12,060
General Chemical Inc. 9.25% 8/15/03 B2 10,000 10,300
Harris Chemical North America, Inc. 10.75% 10/15/03 B3 32,000 33,360
Rexene Corp. 11.75% 12/1/04 B1 17,500 19,644
Sifto Canada Inc. 8.50% 7/15/00 B1 5,775 5,717
Sterling Chemicals, Inc. 11.75% 8/15/06 B3 27,500 29,219
UCC Investors Holdings 11.00% 5/1/03 B3 27,000 28,755
COMPUTERS & ELECTRONIC EQUIPMENT (0.9%)
Advanced Micro Devices, Inc. 11.00% 8/1/03 Ba1 30,000 33,000
CONSUMER GOODS & SERVICES (3.2%)
American Safety Razor Co. 9.875% 8/1/05 B1 10,000 10,500
Dr. Pepper Bottling Co. of Texas 10.25% 2/15/00 B3 5,650 5,904
Playtex Family Products Corp. 9.00% 12/15/03 B2 15,000 14,925
Sweetheart Cup Co. Inc. 9.625% 9/1/00 B1 19,000 19,712
Sweetheart Cup Co. Inc. 10.50% 9/1/03 B3 11,000 11,550
Westpoint Stevens, Inc. 8.75% 12/15/01 Ba3 30,000 30,675
Westpoint Stevens, Inc. 9.375% 12/15/05 B2 23,375 24,252
ENERGY & RELATED GOODS & SERVICES (4.7%)
Energy Ventures Inc. 10.25% 3/15/04 B1 8,000 8,620
Falcon Drilling Co., Inc. 8.875% 3/15/03 B1 11,000 11,495
Flores & Rucks, Inc. 9.75% 10/1/06 B3 10,000 10,625
Maxus Energy Corp. 9.375% 11/1/03 B1 15,000 15,637
J. Ray McDermott, S.A. 9.375% 7/15/06 B1 25,000 26,125
Mesa Operating Co. 10.625% 7/1/06 B2 30,000 32,475
Noble Drilling Corp. 9.125% 7/1/06 Ba2 6,000 6,390
Oryx Energy Co. 8.00% 10/15/03 Ba2 10,000 10,250
Oryx Energy Co. 8.125% 10/15/05 Ba2 15,000 15,375
Plains Resources, Inc. 10.25% 3/15/06 B2 12,000 12,960
Santa Fe Energy Resources, Inc. 11.00% 5/15/04 B1 10,000 10,950
Seagull Energy Corp. 8.625% 8/1/05 B1 10,000 10,150
FOOD & LODGING (2.1%)
ARA Group, Inc. 8.50% 6/1/03 Ba3 10,000 10,225
ARA Services, Inc. 10.625% 8/1/00 Ba1 10,000 11,000
</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>
Foodbrands America, Inc. 10.75% 5/15/06 B3 $ 8,000 $ 8,440
John Q. Hammons Hotels, Inc. 8.875% 2/15/04 B1 5,000 4,950
La Quinta Inns Inc. 9.25% 5/15/03 Ba3 12,000 12,480
PMI Acquisition Corp. 10.25% 9/1/03 B2 20,000 20,600
Red Roof Inns, Inc. 9.625% 12/15/03 B2 9,000 9,135
GROCERY STORES (3.6%)
Bruno's 10.50% 8/1/05 B3 13,965 14,559
Dominick's Finer Foods, Inc. 10.875% 5/1/05 B2 19,000 20,948
Grand Union Co. 12.00% 9/1/04 B3 55,000 55,137
Kroger Co. 8.50% 6/15/03 Ba1 15,000 15,600
Smith's Food & Drug Centers, Inc. 11.25% 5/15/07 B3 25,000 27,844
HEALTH CARE (5.9%)
Abbey Healthcare Group, Inc. 9.50% 11/1/02 B1 8,000 8,340
Beverly Enterprises Inc. 9.00% 2/15/06 B1 18,000 18,045
Genesis Health Ventures Inc. 9.75% 6/15/05 B1 5,000 5,250
Grancare Inc. 9.375% 9/15/05 B2 10,000 10,900
HEALTHSOUTH Corp. 9.50% 4/1/01 Ba3 10,000 10,650
Integrated Health Services, Inc. 9.625% 5/31/02 B1 10,000 10,300
Manor Care, Inc. 9.50% 11/15/02 Ba1 8,000 8,440
Owens & Minor, Inc. 10.875% 6/1/06 B1 15,000 16,256
Quorum Health Group, Inc. 8.75% 11/1/05 B1 6,000 6,135
Tenet Healthcare Corp. 8.625% 1/15/07 Ba3 30,000 30,450
Tenet Healthcare Corp. 10.125% 3/1/05 Ba3 84,000 92,190
HOME BUILDING & REAL ESTATE (1.2%)
Continental Homes Holdings Corp. 10.00% 4/15/06 Ba3 10,000 10,325
Triangle Pacific Corp. 10.50% 8/1/03 B1 13,000 13,942
Del E. Webb Corp. 9.00% 2/15/06 B2 10,000 9,800
Del E. Webb Corp. 10.875% 3/31/00 Ba3 10,000 10,062
MEDIA & COMMUNICATIONS (10.9%)
American Radio Systems Corp. 9.00% 2/1/06 B2 10,000 9,900
CBS Inc. 7.625% 1/1/02 Ba1 15,000 15,021
Chancellor Radio Broadcasting Co. 9.375% 10/1/04 B3 17,000 17,128
Infinity Broadcasting Corp. 10.375% 3/15/02 Ba3 15,000 15,825
JCAC, Inc. 10.125% 6/15/06 B2 10,000 10,450
Muzak LP Capital Corp. 10.00% 10/1/03 Ba3 10,000 10,350
Outdoor Systems Inc. 9.375% 10/15/06 B1 15,000 15,300
Paging Network, Inc. 8.875% 2/1/06 B2 19,000 17,765
Paging Network, Inc. 10.125% 8/1/07 B2 25,000 24,937
Rogers Cantel Mobile 11.125% 7/15/02 B2 20,000 21,050
Time Warner Inc. 7.48% 1/15/08 Ba1 16,000 15,277
Time Warner Inc. 9.125% 1/15/13 Ba1 25,000 27,096
Turner Broadcasting System, Inc. 8.375% 7/1/13 Ba1 15,000 15,321
Universal Outdoor Holdings, Inc. 9.75% 10/15/06 B1 19,000 19,475
Viacom International Inc. 8.00% 7/7/06 B1 90,000 87,300
Westinghouse Electric Corp. 6.875% 9/1/03 Ba1 13,000 12,057
Westinghouse Electric Corp. 8.375% 6/15/02 Ba1 20,000 20,422
Westinghouse Electric Corp. 8.875% 6/1/01 Ba1 15,000 15,672
World Color Press 9.125% 3/15/03 B1 15,000 15,000
Young Broadcasting Corp. 9.00% 1/15/06 B2 6,750 6,581
Young Broadcasting Corp. 11.75% 11/15/04 B2 6,750 7,391
METAL (6.9%)
AK Steel Holding Corp. 9.125% 12/15/06 Ba2 55,000 56,238
AK Steel Holding Corp. 10.75% 4/1/04 Ba2 32,000 34,720
</TABLE>
23
<PAGE> 76
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY RATINGS** AMOUNT VALUE*
HIGH YIELD CORPORATE PORTFOLIO COUPON DATE (MOODY'S) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Acme Metals Inc. 12.50% 8/1/02 B1 $ 10,000 $ 10,900
Algoma Steel Inc. 12.375% 7/15/05 B1 20,000 22,050
Armco, Inc. 9.375% 11/1/00 B2 12,000 12,180
Armco, Inc. 11.375% 10/15/99 B2 10,000 10,500
Bethlehem Steel Corp. 10.375% 9/1/03 B1 10,500 11,130
GS Technologies Operating Co., Inc. 12.25% 10/1/05 B2 12,500 13,281
Kaiser Aluminum & Chemical Corp. 9.875% 2/15/02 B1 8,235 8,441
NS Group Inc. 13.50% 7/15/03 B3 10,000 10,950
Northwestern Steel & Wire Co. 9.50% 6/15/01 B1 11,500 11,385
Oregon Steel Mills, Inc. 11.00% 6/15/03 B1 15,000 16,200
Ryerson Tull, Inc. 9.125% 7/15/06 Ba1 10,000 10,450
Weirton Steel Corp. 10.75% 6/1/05 B2 12,500 12,500
Weirton Steel Corp. 11.50% 3/1/98 B2 2,707 2,788
Wheeling-Pittsburgh Corp. 9.375% 11/15/03 B1 8,440 8,419
PAPER (10.1%)
Container Corp. of America 9.75% 4/1/03 B1 50,000 52,750
Container Corp. of America 10.75% 5/1/02 B1 3,000 3,270
Doman Industries, Ltd. 8.75% 3/15/04 Ba3 22,000 20,790
Domtar Inc. 8.75% 8/1/06 Ba1 15,000 15,713
Fort Howard Corp. 8.25% 2/1/02 B1 10,000 9,975
Fort Howard Corp. 9.00% 2/1/06 B2 25,000 25,500
Fort Howard Corp. 9.25% 3/15/01 B1 45,000 46,913
Quno Corp. 9.125% 5/15/05 Ba2 15,000 15,300
Rainy River Forest Products 10.75% 10/15/01 Ba1 11,000 11,907
Riverwood International Corp. 10.25% 4/1/06 B3 20,000 19,100
Riverwood International Corp. 10.875% 4/1/08 Caa 17,000 14,705
SD Warren Co. 12.00% 12/15/04 B1 37,500 40,875
Stone Consolidated Corp. 10.25% 12/15/00 Ba1 10,000 10,575
Stone Container Corp. 9.875% 2/1/01 B1 65,000 64,350
Tembec Finance Corp. 9.875% 9/30/05 B1 20,000 19,050
TRANSPORTATION (1.3%)
Johnstown America Industries, Inc. 11.75% 8/15/05 B3 7,650 7,459
Newport News Shipbuilding Inc. 8.625% 12/1/06 Ba2 20,000 20,600
Newport News Shipbuilding Inc. 9.25% 12/1/06 B1 20,000 20,800
----------
3,004,747
----------
UTILITIES (4.8%)
AmeriGas Partners LP Series B 10.125% 4/15/07 Ba2 10,000 10,538
Cleveland Electrical Illumination 9.50% 5/15/05 Ba2 24,225 26,098
El Paso Electric Co. Series C 8.25% 2/1/03 Ba3 15,000 15,413
El Paso Electric Co. Series D 8.90% 2/1/06 Ba3 23,000 24,026
El Paso Electric Co. Series E 9.40% 5/1/11 Ba3 28,000 29,960
First Public Venture Funding 10.15% 1/15/16 Ba3 9,583 10,158
Long Island Lighting Co. 9.00% 11/1/22 Ba3 10,000 10,677
Midland Cogeneration Venture 11.75% 7/23/05 B2 25,000 27,897
Niagara Mohawk Power Corp. 6.875% 4/1/03 Ba3 10,000 9,129
Texas-New Mexico Power Co. 10.75% 9/15/03 Ba3 14,000 14,910
----------
178,806
----------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $3,205,528) 3,292,939
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (5.5%)
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Notes 4.75% 9/30/98 50,000 49,148
U.S. Treasury Notes 6.25% 5/31/00 50,000 50,163
U.S. Treasury Notes 6.50% 5/31/01 50,000 50,476
U.S. Treasury Notes 6.75% 5/31/99 50,000 50,805
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $199,932) 200,592
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 77
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEMPORARY CASH INVESTMENT (2.7%)
- -----------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $98,267) 5.51% 2/3/97 $98,267 $ 98,267
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.8%)
(COST $3,503,727) 3,591,798
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.2%)
- -----------------------------------------------------------------------------------------------------------------------------------
Other Assets--Notes C and F 228,842
Liabilities--Note F (146,698)
----------
82,144
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------------------------------------
Applicable to 467,011,054 outstanding $.001 par value shares
(authorized 700,000,000 shares) $3,673,942
===================================================================================================================================
NET ASSET VALUE PER SHARE $7.87
===================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
**Unaudited.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $3,671,203 $7.86
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note D (85,332) (.18)
Unrealized Appreciation--Note E 88,071 .19
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $3,673,942 $7.87
===================================================================================================================================
</TABLE>
25
<PAGE> 78
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard Fixed Income Securities Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights appearing in the Annual Report to Shareholders present fairly, in
all material respects, the financial position of Short-Term U.S. Treasury,
Short-Term Federal, Short-Term Corporate, Intermediate-Term U.S. Treasury,
Intermediate-Term Corporate, Long-Term U.S. Treasury, Long-Term Corporate, and
High Yield Corporate Portfolios (separate portfolios of Vanguard Fixed Income
Securities Fund, the "Fund") at January 31, 1997, and the results of each of
their operations, the changes in each of their net assets and the financial
highlights for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at January 31, 1997 by
correspondence with the custodian and, with respect to unsettled securities
transactions, the application of alternative auditing procedures, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 28, 1997
26
<PAGE> 79
F280-1/97
