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VANGUARD
FIXED INCOME
SECURITIES FUND
Annual Report - January 31, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 6,000 highly motivated
men and women--who form the cornerstone of our operations. As with any
cornerstone, we could not survive long--let alone prosper--without it. That's
why we chose this fiscal year's annual report to celebrate the spirit,
enthusiasm, and achievements of our crew. (We call those who work at Vanguard
crew members, not employees, because they operate as a team to accomplish our
mission of serving you, our clients.)
But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more
than 300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving you
in the years ahead.
[PHOTO]
JOHN J. BRENNAN
Chairman & CEO
JOHN C. BOGLE
Senior Chairman
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CONTENTS
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A MESSAGE TO OUR SHAREHOLDERS . . . . . . . . . . . . . . . . . 1
THE MARKETS IN PERSPECTIVE . . . . . . . . . . . . . . . . . . 6
REPORTS FROM THE ADVISERS . . . . . . . . . . . . . . . . . . . 8
PORTFOLIO PROFILES . . . . . . . . . . . . . . . . . . . . . . 13
PERFORMANCE SUMMARIES . . . . . . . . . . . . . . . . . . . . . 23
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . 33
REPORT OF INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . 52
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
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FELLOW SHAREHOLDER,
Our fiscal year ended January 31, 1998, provided a near-perfect environment for
fixed-income investments, and the nine Portfolios of Vanguard Fixed Income
Securities Fund earned returns ranging from +7.1% to +16.8%. What is more,
these fine absolute returns were also generally superior to those achieved by
our peers.
Returns from our Portfolios, of course, varied considerably according to
their maturities. Just as you would expect in a year when long-term interest
rates declined and prices of existing issues rose, our Long-Term U.S. Treasury
Portfolio provided the highest return and our Short-Term U.S. Treasury and
Short-Term Federal Portfolios provided the lowest.
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FISCAL YEAR ENDED JANUARY 31, 1998
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COMPONENTS
OF TOTAL RETURN
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TOTAL INCOME CAPITAL CURRENT
RETURN RETURN RETURN YIELD*
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<S> <C> <C> <C> <C>
SHORT-TERM PORTFOLIOS
U.S. Treasury + 7.1% +6.0% +1.1% 5.25%
Federal + 7.1 +6.3 +0.8 5.40
Corporate + 7.5 +6.4 +1.1 5.83
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INTERMEDIATE-TERM PORTFOLIOS
U.S. Treasury +10.8% +6.7% +4.1% 5.43%
Corporate +10.2 +6.9 +3.3 6.18
GNMA + 9.9 +7.4 +2.5 6.68
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LONG-TERM PORTFOLIOS
U.S. Treasury +16.8% +7.1% +9.7% 5.72%
Corporate +15.5 +7.6 +7.9 6.45
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HIGH YIELD CORPORATE +13.1% +9.3% +3.8% 8.03%
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</TABLE>
*SEC 30-day annualized yield.
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.
On September 30, 1997, we introduced Institutional Shares for our
Short-Term Corporate Portfolio, which are available for minimum investments of
$50 million. During the brief period from their inception through the end of the
fiscal year, the shares returned +2.8%; the Portfolio's benchmark index, the
Lehman Brothers 1-5 Year Investment Grade Debt Index, returned +3.6.
THE FINANCIAL MARKETS IN BRIEF
The rare mixture of solid economic growth, low unemployment, and decelerating
inflation was a tonic for U.S. financial markets during the fiscal year. While
this environment was especially kind to stock investors, bond investors also
earned solid returns thanks to the general decline in interest rates.
As the fiscal year began, long-term interest rates were rising because
many investors expected that the economy's robust growth would cause inflation
to accelerate. But the rate rise was short-lived. The yield on the benchmark
30-year U.S. Treasury bond peaked at 7.17% in mid-April, then headed lower as
the news on inflation got better rather than worse. Turmoil in Asia also gave a
boost to the U.S. bond market in late 1997 as many investors--both foreign and
domestic--sought the relative safety of bonds. On January 31, the 30-year bond's
yield stood at 5.80%, nearly 100 basis points below the 6.79% level at
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which it began the fiscal year. When all was said and done, the price of the
long bond was up about 9% for the twelve months.
For very short-term securities, interest rates rose slightly on balance.
The yield on three-month U.S. Treasury bills was 5.18% on January 31, 1998, up a
tiny bit from 5.15% a year earlier. The spread between yields on three-month
T-bills and 30-year Treasury bonds narrowed from 1.64 percentage points when the
fiscal year began to a slim 0.62 percentage point at fiscal year-end. Such a
"flattening" of the yield curve has more often than not been a precursor of a
slowing economy.
Overall, the U.S. bond market provided a return (as measured by the Lehman
Aggregate Bond Index) of +10.7% for the fiscal year, a sturdy performance that
was significantly higher than the fiscal 1997 return of +3.3%, but well shy of
the +17.0% gain in fiscal 1996. The Lehman Index includes both government and
high-grade corporate bonds, with maturities ranging from short to long.
While the past year was wonderful for the bond market, it was even better
for the stock market. U.S. stocks, as measured by the Wilshire 5000 Equity
Index, provided a total return of +25.2% for the twelve months ended January 31,
bringing the Index's three-year cumulative return to a remarkable +113.8%.
FISCAL 1998 PERFORMANCE OVERVIEW
Our Portfolios performed in line with the bond market segments in which they
invest, with our Long-Term Portfolios benefiting the most from the bond-friendly
interest-rate environment.
Our Short-Term Portfolios, which are the least sensitive to changes in
interest rates, received a slight boost from a rise in bond prices, but most of
their total return came from interest income. Among our Intermediate-Term
Portfolios, which are more than twice as sensitive to interest rate changes,
bond price increases were significantly higher. The capital returns of our
Long-Term Portfolios, which are twice again as sensitive as the Short-Term
Portfolios, were higher still. In fact, the +9.7% capital return on our
Long-Term U.S. Treasury Portfolio exceeded its +7.1% income return. Together,
the two components combined for an excellent total return of +16.8% for the
twelve months.
Mortgage-backed securities outperformed intermediate-term bonds for most
of the fiscal year, only to lag during the final two months, when falling
interest rates dramatically increased the possibility that home owners would
refinance their loans. These securities typically offer higher yields and have
more moderate interest rate fluctuations than other intermediate-term
securities, but are susceptible to the risk of prepayment when rates decline.
So, while mortgage-backed securities generally earned more interest income than
intermediate-term Treasury and corporate securities during the twelve months,
their capital returns and total returns were slightly lower.
The strength of the U.S. economy was helpful to high-yield bonds during
the fiscal year. Higher-yielding bonds are lower-quality securities issued by
companies whose finances are not strong enough to earn investment-grade credit
ratings. While a strong economy often has a negative effect on bonds--economic
growth can spur inflation, which drives down bond prices--it provides an
excellent climate for high-yield corporate debt by reducing the risk that these
"junk bond" issuers will default on their obligations.
Overall, our fiscal 1998 performance was excellent in comparison with our
competitors. Only one of our nine Portfolios failed to outperform its average
peer. Our relative superiority was based largely on two factors: an environment
that favored our policy of holding somewhat longer maturities than our peers,
and our substantial cost advantage,
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which enables us to deliver a significantly higher portion of our gross returns
to our shareholders. Over the past 14 years, our Portfolios have provided
superior annual returns relative to their competitors 81% of the time (in 74
comparisons out of 91--a total that reflects the varying lengths of time our
Portfolios have existed).
It's important to note the stark contrast between the returns on
longer-term bonds this year versus last year. In our annual report for fiscal
1997, we told you about the damage that rising interest rates inflicted on
long-term bonds. Our Long-Term U.S. Treasury Portfolio, which returned +16.8% in
fiscal 1998, had a negative return of -1.8% during fiscal 1997--a powerful
illustration of the short-term variability of bond returns. These returns
include net interest income earned by the Portfolio; excluding income, the
capital return of +9.7% in the past year compared with -8.2% a year earlier. As
we have explained in previous reports, while our typically longer average
maturities versus our peers lead to greater sensitivity to changes in interest
rates, we believe this strategy is in the best interest of our long-term
shareholders.
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TOTAL RETURNS
FISCAL YEAR ENDED JANUARY 31, 1998
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AVERAGE
VANGUARD COMPETING
PORTFOLIO FUND FUND DIFFERENCE
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<S> <C> <C> <C>
Short-Term U.S. Treasury + 7.1% + 7.0% +0.1%
Short-Term Federal + 7.1 + 6.9 +0.2
Short-Term Corporate + 7.5 + 7.0 +0.5
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Intermediate-Term U.S. Treasury +10.8% + 9.7% +1.1%
Intermediate-Term Corporate +10.2 + 9.6 +0.6
GNMA + 9.9 + 9.3 +0.6
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Long-Term U.S. Treasury +16.8% +13.1% +3.7%
Long-Term Corporate +15.5 +10.4 +5.1
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High Yield Corporate +13.1% +13.9% -0.8%
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</TABLE>
Our High Yield Corporate Portfolio was the only one to lag its average
competitor in fiscal 1998. As noted earlier, the continuing strong economy
provides the ideal environment for these securities. Our Portfolio's shortfall
was due in large part to our higher credit quality--a significant drawback
during a period when the risk of venturing down the credit-quality ladder was
rewarded. Also, we had an extremely light commitment (about 3% of the
Portfolio's assets) to bonds issued by telecommunications companies, a
top-performing sector during the twelve months. Though our commitment to
higher-quality, less-speculative bonds is a competitive handicap for our High
Yield Portfolio when the economy is strong, we believe our investment policies
are in the best interest of our long-term shareholders.
LONG-TERM PERFORMANCE OVERVIEW
The true measure of any mutual fund must be taken over many years. The
Performance Summaries on pages 23 through 32 present the long-term results for
our Portfolios, including charts 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 table on page 4 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 Portfolio would have grown over the periods involved.
With only one exception, each of our Portfolios has outperformed its
average competitor over these longer periods. For the Portfolios that have
bested their average peer, our average annual margins of superiority range from
+0.6% to +2.3%. These advantages
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amount to significant sums. As shown in the table, a hypothetical $10,000
investment made ten years ago in our Long-Term Corporate Portfolio would have
grown to $27,288, compared with $22,276 in our average peer mutual fund--an
advantage of $5,012, or more than half of the initial investment. We make no
apology for the tiny shortfall of our High Yield Portfolio. It succeeded in
providing competitive returns, all the while maintaining the highest-quality
portfolio among its high-yield peers.
We point out that for our Short-Term and Intermediate-Term U.S. Treasury
Portfolios, the period since inception covers a little more than six years; for
the Intermediate-Term Corporate Portfolio, just over four years.
Low costs are largely responsible for the consistent and commanding edge
we hold over our peers, and help us closely track our benchmark indexes. Our
Portfolios' expense ratio (annual expenses as a percentage of average net
assets) for the fiscal year averaged about 0.28%--$2.80 per $1,000 invested--a
small fraction of the 1.04% in expenses charged each year by the average
fixed-income mutual fund. While costs are a critical element in the long-term
performance of mutual funds in general, they matter especially for bond funds.
Because a fixed-income fund's operating costs come directly out of the income
that would otherwise flow to shareholders, differences in cost account for much
of the long-term difference in returns between bond funds of comparable credit
quality and maturity. While bond fund returns will fluctuate unpredictably year
to year as interest rates change, costs are a relatively predictable influence
on net return. The simple message of our comparative advantage is: Costs matter.
Though most of our Portfolios failed to keep up with their Indexes over
the decade, low costs helped to hold our shortfalls to a minimum. The Indexes
are notoriously tough standards for actively managed bond funds because such
benchmarks exist only on paper and are not burdened by the operating, advisory,
and securities-transaction costs that all mutual funds must incur.
Two other keys to our fine absolute and relative performance are the skill
of our investment advisers and our policy of maintaining the maturities of our
Portfolios within well-defined limits.
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TOTAL RETURNS
10 YEARS ENDED JANUARY 31, 1998
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AVERAGE ANNUAL RATE FINAL VALUE OF A $10,000 INITIAL INVESTMENT
--------------------------------------- -------------------------------------------
AVERAGE AVERAGE
VANGUARD COMPETING VANGUARD VANGUARD COMPETING VANGUARD
PORTFOLIO PORTFOLIO FUND ADVANTAGE PORTFOLIO FUND ADVANTAGE
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<S> <C> <C> <C> <C> <C> <C>
Short-Term U.S. Treasury* + 6.3% + 5.7% +0.6% $14,649 $14,129 $ 520
Short-Term Federal + 7.4 + 6.7 +0.7 20,375 19,093 1,282
Short-Term Corporate + 7.8 + 6.9 +0.9 21,218 19,528 1,690
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Intermediate-Term U.S. Treasury* + 8.4% + 7.2% +1.2% $16,551 $15,471 $1,080
Intermediate-Term Corporate* + 6.8 + 6.0 +0.8 13,237 12,797 440
GNMA + 8.9 + 8.0 +0.9 23,521 21,523 1,998
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Long-Term U.S. Treasury +10.3% + 8.2% +2.1% $26,573 $21,978 $4,595
Long-Term Corporate +10.6 + 8.3 +2.3 27,288 22,276 5,012
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High Yield Corporate +10.4% +10.4% 0.0% $26,808 $26,884 $ (76)
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</TABLE>
*Since inception: Short-Term U.S. Treasury and Intermediate-Term U.S. Treasury,
October 1991; Intermediate-Term Corporate, November 1993.
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We point out that future returns of the Portfolios of Vanguard Fixed
Income Securities Fund may be higher or lower than those shown. The period since
the inceptions of the Portfolios has been a generally good one for longer-term
bonds (with the notable exception of 1994), as interest rates have declined on
balance. With long-term bond yields now below 6%, it would be unrealistic to
expect future returns to be as high as those earned during the past decade.
IN SUMMARY
The stock market is now in the 16th year of a truly remarkable bull run. An
unfortunate side effect of this amazing performance is that some investors may
have become convinced that bonds serve only to dilute the returns from their
stocks. This is a dangerous notion. Bonds provide higher current income than
stocks. And the performance leadership among the asset classes shifts from time
to time, often unpredictably. We believe that constructing a balanced portfolio
that includes not just stock funds but also bond funds and money market funds is
a prudent course for long-term investors, no matter how powerful the allure of
the "hottest" asset class.
For the bond portion of your investment program, Vanguard Fixed Income
Securities Fund will continue to provide skillfully managed, clearly defined
Portfolios at the lowest costs in the industry. We will stay the course with our
proven strategy, and we suggest you do the same with a diversified, balanced
investment program.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
February 18, 1998
PORTFOLIO STATISTICS
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NET ASSET
VALUE PER SHARE TWELVE MONTHS
------------------------ ------------------------
JAN. 31, JAN. 31, INCOME CAPITAL CURRENT
PORTFOLIO 1997 1998 DIVIDENDS GAINS* YIELD**
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<S> <C> <C> <C> <C> <C>
Short-Term U.S. Treasury $10.16 $10.27 $0.590 $0.00 5.25%
Short-Term Federal 10.11 10.19 0.611 0.00 5.40
Short-Term Corporate 10.75 10.87 0.664 0.00 5.83
Short-Term Corporate (Institutional Shares) -- 10.87 0.229 0.00 5.95
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Intermediate-Term U.S. Treasury $10.37 $10.80 $0.647 $0.00 5.43%
Intermediate-Term Corporate 9.72 10.03 0.638 0.011 6.18
GNMA 10.23 10.48 0.718 0.003 6.68
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Long-Term U.S. Treasury $ 9.84 $10.79 $0.643 $0.00 5.72%
Long-Term Corporate 8.71 9.32 0.613 0.075 6.45
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High Yield Corporate $ 7.87 $ 8.17 $0.688 $0.00 8.03%
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</TABLE>
*Includes long-term and short-term capital gains distributions.
**SEC 30-day annualized yield.
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THE MARKETS IN PERSPECTIVE
Year Ended January 31, 1998
U.S. EQUITY MARKETS
Overall, the fiscal year that ended in January again provided U.S. equity
investors with exceptional returns, as illustrated by the 26.9% advance of the
S&P 500 Index. Investors' mettle was tested several times, however, and most
severely by the upheavals that devastated a number of Asian markets toward the
end of 1997. The region's turmoil created a high degree of uncertainty about
which countries and companies would be most affected. At a deeper level,
investors also were concerned about how local and global economic growth might
ultimately be affected by the Asian currency devaluations. As a result,
beginning in late October, the U.S. market grew increasingly volatile.
While the dust continued to settle, many investors sought the traditional
havens for periods of high uncertainty: large-capitalization issues and
particularly the "defensive" sectors of the stock market, such as utilities and
health care. The last four months of the fiscal year saw a broad advance in
these "safe" sectors, with utilities gaining 23.2% and health care 17.1%. By
contrast, concern regarding slowing economic activity in Asia had a pronounced
effect on oil prices and on the stocks of oil and oil-service companies. From
early October through mid-January, oil prices fell from nearly $23 a barrel to
less than $16, but ultimately recovered to $17.21. During this period,
integrated-oils stocks declined 8.8% and those of oil-service firms dropped
12.5%. The troubles in Asia also affected small-company stocks generally: After
posting strong results during the summer, these stocks fell 4.9% from September
through January.
Despite the recent changes in the investment environment, the fiscal year
that ended January 31 remained a stellar one for U.S. stock investors. The
best-performing sector, to the surprise of many analysts, was utilities, which
rose 38.6%. Utilities benefited from a number of factors, including the strength
of the economy, falling interest rates, and merger activity--plus, as noted, a
boost from investors hoping to avoid anything connected with Asia. In contrast,
the commodity-oriented materials & processing sector posted a gain of 9.1%.
Despite the late-year rockiness, small-cap stocks also fared well overall, as
illustrated by the 18.1% increase of the Russell 2000 Index. Small-company
technology issues were a glaring exception, falling 2.3%.
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AVERAGE ANNUALIZED RETURNS
PERIODS ENDED JANUARY 31, 1998
----------------------------------
1 YEAR 3 YEARS 5 YEARS
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<S> <C> <C> <C>
EQUITY
S&P 500 Index 26.9% 30.5% 20.3%
Russell 2000 Index 18.1 22.2 15.3
MSCI EAFE Index 10.6 9.6 12.7
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FIXED INCOME
Lehman Aggregate Bond Index 10.7% 10.2% 7.3%
Lehman 10-Year Municipal Bond Index 10.0 9.7 7.4
Salomon Brothers Three-Month
U.S. Treasury Bill Index 5.3 5.4 4.7
- ----------------------------------------------------------------------------
OTHER
Consumer Price Index 1.6% 2.4% 2.5%
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</TABLE>
U.S. FIXED-INCOME MARKETS
In a fiscal year characterized by exceptionally low inflation, interest rates
fell, providing investors with very attractive total returns. The Lehman
Aggregate Bond Index, for
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example, posted a total return of 10.7% for the period, comprising 7.2% in
income return and 3.5% in capital appreciation. The decline in rates can be
attributed largely to better-than-expected reports about the inflation rate.
Early in the year, economists were projecting a 2.9% increase in the Consumer
Price Index (CPI) during 1997. In March, the Federal Reserve grew sufficiently
concerned to boost interest rates by 0.25% in an effort to temper economic
growth and thereby ward off inflation. The worries seemed to have been
unnecessary, as the actual CPI increase for calendar 1997 was a mere 1.7%.
The bond market gradually gathered strength during the year as investors
grew more confident that four seemingly strange bedfellows--strong economic
growth, reasonable inflation, low unemployment, and stable wage growth--would
continue to coexist peace-fully. The market also was bolstered, in the final
months of 1997, by the drop in oil prices and by the "flight to quality" among
investors concerned about Asia's problems. Overall, the longest-maturity issues
benefited most from the decline in interest rates. The yield on the 30-year U.S.
Treasury bond closed the fiscal year at 5.80%, compared with 6.79% on January
31, 1997. Falling rates flattened the yield curve considerably: Only 0.62%
separated the yield on Treasury bills from that on the 30-year issue, down from
a spread of 1.64% one year ago. This "tighter spread" reflects expectations that
inflation will remain modest.
The best-performing sector in 1997 was long-term Treasuries, as
illustrated by the exceptional 15.1% return of the Lehman Long U.S. Treasury
Index. Investors in lower-quality securities also fared well, with the Lehman
High Yield Bond Index generating a 12.8% gain. The strength of the economy,
together with the lack of inflationary pressure, created an ideal environment
for junk bonds.
INTERNATIONAL EQUITY MARKETS
Arguably, investors' greatest disappointments were in international
markets--especially, of course, those in Asia. Despite improved returns during
January 1998, the Morgan Stanley Capital International (MSCI) Pacific Index
declined by 14.7% in U.S. dollar terms over the fiscal year. Among individual
markets, the 12-month period saw sharp declines (in U.S. dollar terms) in
Singapore, down 43.8%, and Malaysia, down 72.3%. Many Asian markets continued to
reel from the problems that began in midsummer with currency devaluations by a
number of countries. The key issue in the region's markets is whether price
levels now fairly, excessively, or insufficiently reflect the challenges these
economies face.
By contrast, the European markets continued to provide U.S. investors with
solid returns, although they, too, stumbled in late October and subsequently
recovered. The MSCI Europe Index posted a gain of 28.6% for the 12 months ended
January 31. The robust character of the European markets reflected strong
corporate earnings and optimism that the European Monetary Union would provide a
solid framework for future fiscal responsibility and economic growth.
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REPORT FROM VANGUARD FIXED INCOME GROUP
Short-Term U.S. Treasury, Federal, and Corporate Portfolios;
Intermediate-Term U.S. Treasury and Corporate Portfolios; and
Long-Term U.S. Treasury Portfolio
THE WINDS OF CHANGE
The fiscal year ended January 31, 1998, was a remarkable one from a number of
perspectives. It was a period of continued buoyancy in our capital markets, as
both stock and bond prices neared or surpassed record highs. It was a period of
dramatic growth in the domestic economy and of dramatic improvements in consumer
price inflation. It was a time when millions of new investors adopted mutual
funds as their savings and investment vehicles of choice, placing billions of
dollars into funds of all varieties. Lastly, it was a time of global economic
upheaval, particularly in Asia.
What made the last 12 months so fascinating was the way in which these
forces and events interacted, at times harmonizing to intensify their relative
effects, at other times opposing so as to nullify each other's impacts. Just as
the East and West Coasts were beset by storms spawned by "El Nino," the capital
markets were buffeted by winds blowing both domestically and from abroad. For
the most part the winds were at our backs. The Portfolios of Vanguard Fixed
Income Securities Fund not only weathered the economic turbulence but prospered
from these strong tailwinds.
PORTFOLIO REVIEWS
The seventh year of domestic economic expansion is behind us, making this period
of prosperity the third longest since World War II. Such expansions boost
earnings and strengthen the balance sheets of corporate America. These improving
financial conditions for corporate borrowers translate, for investors in
corporate bonds, into a diminished sensitivity to credit risk. In other words,
corporate bond holders enjoy expansions because they perceive a reduction in the
risks attached to those bonds, and the bonds' prices improve relative to
higher-quality U.S. Treasury and agency bonds.
This was certainly the case for most of the fiscal year just ended, and
what was good for corporate bonds was also good for shareholders of
corporate-bond mutual funds--particularly Vanguard's Short-Term,
Intermediate-Term, and Long-Term Corporate Portfolios (the first two of which we
manage). As perceived credit risk diminished over the last six years, these
Portfolios outperformed their higher-quality brethren: the Short-Term U.S.
Treasury and Federal Portfolios and the Intermediate-Term and Long-Term U.S.
Treasury Portfolios.
However, the improved creditworthiness of corporate borrowers was not the
only tailwind blowing steady and fair for our Portfolios. Indeed, strong impetus
was provided to all bond funds by two unrelated but powerful factors. The first
was a welcome, if somewhat puzzling, improvement in consumer price inflation
that occurred in fiscal 1998 despite robust strength in the economy and steadily
increasing employment and employment costs. The unemployment rate reached a
24-year low, and consumer prices rose a mere 1.6% during the 12 months
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ended January 31. Such a rare combination of good news on both the economy and
inflation is to be savored.
Given the rapid unwinding of both inflation and inflationary expectations
over the last nine months of the fiscal year, it is perhaps difficult to
remember that the year began on a much less sanguine note. In the winter of
1996-1997, people were expecting the Federal Reserve Board to tighten monetary
policy to slow economic growth and avert inflationary excesses. On March 25 the
Fed did raise the federal funds rate (at which banks lend to each other) from
5.25% to 5.50%. Over the subsequent four weeks, bond investment professionals
sold securities in quantities sufficient to raise long- and intermediate-term
interest rates by about 0.4 percentage point. The yield to maturity of the
"garden variety" long-term Treasury bond, which began the year at 6.8%, rose to
about 7.2% by mid-April. While it was not at all apparent at the time, April
would prove to be the bond market's "cruelest month." Thereafter, the market
experienced one pleasant surprise after another. During spring and summer, the
markets were blessed by continued (albeit moderate) growth in the economy and
good inflation news. The 30-year Treasury bond's yield descended from the
mid-April peak, hovering around 6.5% from June to October. In late October, Fed
policymakers again began to voice concern that the sustained rapid growth in
employment might cause labor costs to escalate.
The market's reaction, not surprisingly, produced an irregular decline in
bond prices and a rise in interest rates. However, this development was abruptly
halted by an astonishing, intense, and rapid deterioration in the Pacific Rim
economies.
NOTES (MOSTLY SOUR) FROM ABROAD
From October through January, financial markets were treated to a seemingly
unending stream of news reports detailing the "meltdown" of many Asian
economies. The apparently isolated popping in the summer of a real estate bubble
in Thailand had, by autumn, infected the economies and affected the currencies
of Malaysia, Indonesia, Hong Kong, South Korea, the Philippines, and even (to a
lesser degree) Japan. The world economic picture had changed strikingly.
Uncharacteristically, the U.S. bond market turned its attention away from our
own economy and focused on events across the Pacific.
The Portfolios of Vanguard Fixed Income Fund were major beneficiaries of
this shift in focus. First, the turmoil abroad prompted an almost knee-jerk
"flight to quality," as investors dumped risky securities and bought Treasury
bonds. As the bad news unfolded, long-term interest rates descended
progressively from 6.4% to 5.8%. At present, they appear to have stabilized
within a 5.7%-6.0% trading range.
The flight to quality would have been transitory were it not for some
sobering implications of the Asian crisis. Bond market participants understood
that the Fed would have to modulate its formerly militant monetary stance in
light of the weakness in Asian economies. The "Asian contagion," they realized,
would affect the U.S. economy by depressing exports, stimulating consumption of
imported goods, and further shrinking the already-small inflation rate. Those
prospects buoyed bond prices and thus also the net asset values of your
Portfolios' shares. In short, it was yet another good year to be a bondholder.
The dark lining to this silver cloud is that the bond market's gains over the
past three years make it that much harder for the new fiscal year to be as
rewarding as fiscal 1998.
9
<PAGE> 12
RISKS AHEAD
The markets now reflect very optimistic investor expectations. Inflation in
calendar-year 1997 was 1.7%. Corporate bond yields reflect negligible concern
over credit risk. Interest rates are at their lowest levels in decades. Can
things get better than this?
It's possible. The "real" rate of interest (the current interest rate
minus the inflation rate), at 4% or so, remains high by historic comparisons.
Bonds could gain either if the real rate shrinks while inflation is stable or if
inflation is reduced even further. That said, it's difficult to envision a
market environment that will produce bond returns near or above 10% in the
coming fiscal year, if only because the interest-income component of returns is
now below 6%. To replicate the returns of recent years, bond prices would have
to rise more than 4%, an outcome that is less likely, particularly with the
economy and employment still so strong.
In conclusion, we recommend caution and prudence. The Portfolios of
Vanguard Fixed Income Securities Fund offer investors low-cost investment
choices of varying risk/return characteristics that can be used with a fairly
high degree of precision to fine-tune an overall investment program. The future
is unknowable. Sticking to one's long-range plan is the best technique for
confronting the future's uncertainties.
Ian A. MacKinnon, Managing Director
Robert F. Auwaerter, Principal
John W. Hollyer, Principal
Stephen J. Mahoney, Assistant Portfolio Manager
February 9, 1998
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.
10
<PAGE> 13
REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
GNMA Portfolio, Long-Term Corporate Portfolio, and High Yield Corporate
Portfolio
The direction of interest rates is the most important factor in the absolute
performance of the GNMA, Long-Term Corporate, and High Yield Corporate
Portfolios. All three Portfolios are fixed-income investments with intermediate-
to long-term maturities. The degree to which changes in rates affect each
Portfolio varies.
During the second half of the fiscal year ended January 31, 1998,
intermediate- and long-term rates declined 50 basis points (0.50%), which
created a favorable environment for fixed-income securities. Long-term bonds
with call protection performed better than intermediate-term securities. One of
the pleasant surprises amidst the rate decline during the fiscal year was the
excellent behavior of the GNMA Portfolio, which could have stumbled as investors
became concerned that lower rates would lead to large prepayments of mortgages
as homeowners refinanced home loans. This concern surfaced in the mortgage
securities market only very late in the year. As rates fell in response to
Asia's economic crisis, investors in high-yield bonds might have become troubled
about the possibility of an economic slowdown. This concern did not overtly
surface either, however, and the popularity of high-yield bonds continued to
grow.
Since the Federal Reserve Board raised short-term rates last March,
fixed-income investors have generally believed that the Fed would continue to
fight inflation responsibly and that the market conditions for bonds would
remain sound. As the Asian crisis spread, the demand for U.S. bonds increased,
boosting prices across all sectors.
For long-term, investment-grade corporate bonds, risk premiums--the yields
in excess of those on risk-free U.S. Treasuries--rose slightly during the second
half of the fiscal year but should stabilize if the economy continues to grow
moderately. Mortgage-backed securities continue to offer a generous yield
premium to reward investors for the risks posed by interest-rate volatility. If
rates stay in a trading range over the next six months, as we expect, the extra
yields available from high-yield bonds, long-term corporate bonds, and GNMA
securities offer reasonable value.
GNMA PORTFOLIO
The GNMA Portfolio performed well during the 12 months ended January 31, 1998,
particularly in light of the year's substantial decline in interest rates.
Often, declining rates cause GNMA security prices to rise more slowly than the
prices of other fixed-income securities, as investors focus on the negative
aspects of mortgage refinancing. Although refinancing activity, as stated
earlier, rose during the last quarter of the fiscal year, the effect on GNMA
prices was less dramatic than many had expected, primarily because yields
remained attractive. Price performance is determined by the market's assessment
of the trade-off between refinancing risk on the one hand and incremental yield
on the other. For much of fiscal 1998, attractive yields won the tug of war.
Refinancing has accelerated and is likely to continue at a high level so
long as interest rates do not rise from current levels. However, the effects of
prepayments on the GNMA Portfolio should be much less dramatic than during prior
refinancing periods. We have taken steps to reduce the Portfolio's exposure to
the negatives associated with prepayments. In summary, we expect your GNMA
Portfolio to continue to do what it has done for many years: provide competitive
total return and a high level of current income. Prepayments are part of owning
a GNMA portfolio, a factor that comes and goes but has not diminished the
long-term attractiveness of GNMAs.
11
<PAGE> 14
LONG-TERM CORPORATE PORTFOLIO
The Long-Term Corporate Portfolio's average maturity is approximately 20 years,
in keeping with its charter as an investment-grade, long-term corporate bond
fund. The Portfolio's average duration is also long, at more than 9 years. The
Portfolio remains extremely sensitive to changes in long-term rates, and
shareholders should understand this sensitivity. For example, if interest rates
move up or down by 100 basis points (1 percentage point), the Portfolio's net
asset value would fluctuate by approximately 9%. Because rates fell over the
past 12 months, the Portfolio's return improved over that for fiscal 1997, when
rates were rising. The Portfolio has excellent call protection, which implies
that most of the higher-coupon securities we hold cannot be redeemed by their
issuers if interest rates decline. Thus, the Portfolio's income stream has some
protection from falling interest rates.
As always, the major risk to the Long-Term Corporate Portfolio is a rise
in long-term interest rates. Over half of the Portfolio is now invested (and is
intended always to be so) in corporate bonds with an average maturity longer
than 15 years. We hold minimal cash. The second risk ever present in this
Portfolio is deterioration in the creditworthiness of corporate issuers. To
mitigate this risk, the Portfolio is well-diversified by issuer and industry.
Over 80% of the value of the Portfolio is invested in high-quality issues, those
rated A or better. The Portfolio owns no below-investment-grade corporate bonds,
emerging market debt, or foreign bonds denominated in non-U.S. currencies. We
generally purchase bonds of well-established, larger companies with stable
operating histories.
HIGH YIELD CORPORATE PORTFOLIO
Bonds with credit ratings below investment-grade continue to be popular with
investors as the annual default rate by corporate issuers has fallen to
historically low levels. Below-investment-grade bonds usually outperform
higher-quality issues when investors are anticipating strong economic growth and
interest rates are rising moderately. Because rates have been falling recently,
the high-yield market has lagged noncallable, long-term, investment-grade bonds.
We expect economic growth to slow a bit this year, although not enough to
cause the default rate to rise sharply. Companies with stable cash flows should
outperform issuers that are more economically sensitive. We do not anticipate
any major economic problems that would cause the High Yield Corporate Portfolio
to suffer meaningful deterioration in credit quality.
We remain very selective when examining the large number of new issues.
With strong cash flows into high-yield mutual funds, the quality of the
companies coming to market is shifting. Companies in the early stages of
development, which previously had to rely exclusively on public or private
equity for financing, are now able to raise money by selling high-yield bonds.
We are avoiding the smaller start-up companies and continue to emphasize the
higher-quality segment of the below-investment-grade market.
We conduct in-depth credit research on a company-by-company basis and
emphasize diversification. The Portfolio owns bonds issued by a broad range of
industries and companies. Its holdings continue to be focused on cash-paying
issues rated B or better. We maintain a modest reserve of U.S. Treasury
securities in the event that liquidity is necessary.
Paul D. Kaplan, Senior Vice President and Portfolio Manager
Earl E. McEvoy, Senior Vice President and Portfolio Manager
February 9, 1998
12
<PAGE> 15
PORTFOLIO PROFILE
Short-Term U.S. Treasury Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
January 31, 1998, compared where appropriate to an unmanaged index. Key elements
of this Profile are defined on page 14.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- --------------------------------------------------
<S> <C>
Number of Issues 30
Yield 5.3%
Yield to Maturity 5.3%
Average Coupon 6.5%
Average Maturity 2.4 years
Average Quality U.S. Treasury
Average Duration 2.2 years
Expense Ratio 0.27%
Cash Reserves 1.7%
</TABLE>
INVESTMENT FOCUS
- --------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------------
SHORT-TERM LEHMAN
U.S. TREASURY INDEX*
- --------------------------------------------------
<S> <C> <C>
R-Squared 0.93 1.00
Beta 0.46 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
U.S. Treasury 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Under 1 Year 1.2%
1-3 Years 61.6
3-5 Years 29.7
Over 5 Years 7.5
- --------------------------------------------------
Total 100.0%
</TABLE>
13
<PAGE> 16
AVERAGE COUPON. The average interest rate paid on the securities held by a
portfolio. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the portfolio's 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 (or are called) 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 make their judgment after appraising an issuer's ability to meet
its obligations. U.S. Treasury securities are considered to have the highest
credit quality.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned 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%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing instruments. This
figure does not include cash invested in futures contracts to simulate bond
investment.
DISTRIBUTION BY COUPON. A breakdown of the securities in a portfolio according
to coupon rate--the interest rate that an issuer promises to pay, expressed as
an annual percentage of face value. Securities with unusually high coupon rates
may be subject to call risk, the possibility that they will be redeemed (or
"called") early by the issuer.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a portfolio's securities by
credit rating can help in gauging the risk that returns could be affected by
defaults or other credit problems.
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.
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).
NUMBER OF ISSUES. An indicator of diversification. The more separate issues a
portfolio holds, the less susceptible it is to a price decline stemming from the
problems of a particular issue.
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 income from interest and dividends. 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.
14
<PAGE> 17
PORTFOLIO PROFILE
Short-Term Federal Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
January 31, 1998, compared where appropriate to an unmanaged index. Key elements
of this Profile are defined on page 14.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- --------------------------------------------------
<S> <C>
Number of Issues 88
Yield 5.4%
Yield to Maturity 5.5%
Average Coupon 6.5%
Average Maturity 2.5 years
Average Quality Agency
Average Duration 2.2 years
Expense Ratio 0.27%
Cash Reserves 1.8%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------------
SHORT-TERM LEHMAN
FEDERAL INDEX*
- --------------------------------------------------
<S> <C> <C>
R-Squared 0.93 1.00
Beta 0.45 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Under 1 Year 14.3%
1-3 Years 44.9
3-5 Years 21.6
Over 5 Years 19.2
- --------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- --------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
U.S. TREASURY 14.8%
AGENCY 85.2
- --------------------------------------------------
Total 100.0%
</TABLE>
15
<PAGE> 18
PORTFOLIO PROFILE
Short-Term Corporate Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
January 31, 1998, compared where appropriate to an unmanaged index. Key elements
of this Profile are defined on page 14.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- --------------------------------------------------
<S> <C>
Number of Issues 260
Yield--Investor Shares 5.8%
Yield--Institutional Shares 6.0%
Yield to Maturity 5.9%
Average Coupon 6.8%
Average Maturity 2.6 years
Average Quality A1
Average Duration 2.1 years
Expense Ratio--Investor Shares 0.28%
Expense Ratio--Institutional Shares 0.15%*
Cash Reserves 1.3%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------------
SHORT-TERM LEHMAN
CORPORATE INDEX*
INVESTOR SHARES
- --------------------------------------------------
<S> <C> <C>
R-Squared 0.94 1.00
Beta 0.47 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Under 1 Year 9.0%
1-3 Years 46.9
3-5 Years 33.7
Over 5 Years 10.4
- --------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- --------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Aaa 20.9%
Aa 14.3
A 40.5
Baa 23.2
Ba 0.0
B 0.0
Not Rated 1.1
- --------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Asset-Backed 9.6%
Finance 49.3
Foreign 7.9
Industrial 18.0
Mortgage 5.9
U.S. Government and Agency 1.8
U.S. Treasury 0.1
Utilities 7.4
- --------------------------------------------------
Total 100.0%
</TABLE>
16
<PAGE> 19
PORTFOLIO PROFILE
Intermediate-Term U.S. Treasury Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
January 31, 1998, compared where appropriate to an unmanaged index. Key elements
of this Profile are defined on page 14.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- --------------------------------------------------
<S> <C>
Number of Issues 25
Yield 5.4%
Yield to Maturity 5.5%
Average Coupon 8.1%
Average Maturity 7.0 years
Average Quality U.S. Treasury
Average Duration 5.3 years
Expense Ratio 0.27%
Cash Reserves 2.4%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------------
INTERMEDIATE-TERM LEHMAN
U.S. TREASURY INDEX*
- --------------------------------------------------
<S> <C> <C>
R-Squared 0.99 1.00
Beta 1.23 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Under 1 Year 0.6%
1-5 Years 1.8
5-10 Years 75.5
10-20 Years 22.1
20-30 Years 0.0
Over 30 Years 0.0
- --------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- --------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
U.S. Treasury 100.0%
</TABLE>
17
<PAGE> 20
PORTFOLIO PROFILE
Intermediate-Term Corporate Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
January 31, 1998, compared where appropriate to an unmanaged index. Key elements
of this Profile are defined on page 14.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- --------------------------------------------------
<S> <C>
Number of Issues 164
Yield 6.2%
Yield to Maturity 6.3%
Average Coupon 7.2%
Average Maturity 7.0 years
Average Quality A2
Average Duration 5.3 years
Expense Ratio 0.26%
Cash Reserves 2.2%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------------
INTERMEDIATE-TERM LEHMAN
CORPORATE INDEX*
- --------------------------------------------------
<S> <C> <C>
R-Squared 0.99 1.00
Beta 1.21 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Under 1 Year 0.5%
1-5 Years 20.9
5-10 Years 70.0
10-20 Years 8.6
20-30 Years 0.0
Over 30 Years 0.0
- --------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- --------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Aaa 6.6%
Aa 15.3
A 54.0
Baa 23.0
Ba 0.0
B 0.0
Not Rated 1.1
- --------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Asset-Backed 4.3%
Finance 46.4
Foreign 14.1
Industrial 28.0
Mortgage 0.0
U.S. Government and Agency 0.0
U.S. Treasury 1.1
Utilities 6.1
- --------------------------------------------------
Total 100.0%
</TABLE>
18
<PAGE> 21
PORTFOLIO PROFILE
GNMA Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
January 31, 1998, compared where appropriate to an unmanaged index. Key elements
of this Profile are defined on page 14.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- --------------------------------------------------
<S> <C>
Number of Issues 25
Yield 6.7%
Yield to Maturity 6.6%
Average Coupon 7.3%
Average Maturity 6.3 years
Average Quality U.S. Treasury
Average Duration 3.5 years
Expense Ratio 0.31%
Cash Reserves 2.0%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------------
LEHMAN
GNMA INDEX*
- --------------------------------------------------
<S> <C> <C>
R-Squared 0.95 1.00
Beta 0.81 1.00
</TABLE>
*Lehman Aggregate Bond Index.
INVESTMENT FOCUS
- --------------------------------------------------
[GRAPH]
DISTRIBUTION BY COUPON (% OF PORTFOLIO)
- --------------------------------------------------
Under 6% 0.0%
6%-7% 18.5
7%-8% 57.5
8%-9% 18.3
9%-10% 5.6
Over 10% 0.1
- --------------------------------------------------
Total 100.0%
19
<PAGE> 22
PORTFOLIO PROFILE
Long-Term U.S. Treasury Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
January 31, 1998, compared where appropriate to an unmanaged index. Key elements
of this Profile are defined on page 14.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- --------------------------------------------------
<S> <C>
Number of Issues 12
Yield 5.7%
Yield to Maturity 5.8%
Average Coupon 8.0%
Average Maturity 20.4 years
Average Quality U.S. Treasury
Average Duration 10.3 years
Expense Ratio 0.27%
Cash Reserves 6.9%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------------
LONG-TERM LEHMAN
U.S. TREASURY INDEX*
- --------------------------------------------------
<S> <C> <C>
R-Squared 0.96 1.00
Beta 2.07 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Under 1 Year 4.7%
1-5 Years 0.0
5-10 Years 0.8
10-20 Years 29.5
20-30 Years 65.0
Over 30 Years 0.0
- --------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- --------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
U.S. Treasury 100.0%
</TABLE>
20
<PAGE> 23
PORTFOLIO PROFILE
Long-Term Corporate Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
January 31, 1998, compared where appropriate to an unmanaged index. Key elements
of this Profile are defined on page 14.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- --------------------------------------------------
<S> <C>
Number of Issues 154
Yield 6.5%
Yield to Maturity 6.7%
Average Coupon 7.5%
Average Maturity 19.4 years
Average Quality A1
Average Duration 9.4 years
Expense Ratio 0.32%
Cash Reserves 3.1%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------------
LONG-TERM LEHMAN
CORPORATE INDEX*
- --------------------------------------------------
<S> <C> <C>
R-Squared 0.95 1.00
Beta 1.75 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Under 1 Year 4.0%
1-5 Years 2.7
5-10 Years 20.9
10-20 Years 21.0
20-30 Years 48.4
Over 30 Years 3.0
- --------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- --------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Aaa 17.2%
Aa 17.9
A 47.6
Baa 17.3
Ba 0.0
B 0.0
Not Rated 0.0
- --------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Asset-Backed 0.0%
Finance 22.8
Foreign 8.2
Industrial 48.9
Mortgage 0.0
U.S. Government and Agency 0.0
U.S. Treasury 5.4
Utilities 14.7
- --------------------------------------------------
Total 100.0%
</TABLE>
21
<PAGE> 24
PORTFOLIO PROFILE
High Yield Corporate Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
January 31, 1998, compared where appropriate to an unmanaged index. Key elements
of this Profile are defined on page 14.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- --------------------------------------------------
<S> <C>
Number of Issues 216
Yield 8.0%
Yield to Maturity 8.2%
Average Coupon 9.2%
Average Maturity 6.3 years
Average Quality Ba3
Average Duration 4.5 years
Expense Ratio 0.28%
Cash Reserves 3.3%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------------
HIGH YIELD LEHMAN
CORPORATE INDEX*
- --------------------------------------------------
<S> <C> <C>
R-Squared 0.45 1.00
Beta 0.58 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Under 1 Year 1.2%
1-5 Years 30.4
5-10 Years 63.0
10-20 Years 5.4
20-30 Years 0.0
Over 30 Years 0.0
- --------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- --------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Aaa 5.6%
Aa 0.0
A 0.0
Baa 0.0
Ba 37.2
B 57.0
Not Rated 0.2
- --------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- --------------------------------------------------
<S> <C>
Asset-Backed 0.0%
Finance 3.7
Foreign 0.0
Industrial 85.1
Mortgage 0.0
U.S. Government & Agency 0.0
U.S. Treasury 5.2
Utilities 6.0
- --------------------------------------------------
Total 100.0%
</TABLE>
22
<PAGE> 25
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 an investment in the Portfolio
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: OCTOBER 28, 1991-JANUARY 31, 1998
- ------------------------------------------------------------
SHORT-TERM U.S. TREASURY PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
1992 1.2% 1.4% 2.6% 3.0%
1993 3.3 5.4 8.7 9.0
1994 0.8 4.7 5.5 6.1
1995 -4.8 5.2 0.4 -0.1
1996 4.8 6.6 11.4 12.0
1997 -1.9 5.8 3.9 4.1
1998 1.1 6.0 7.1 7.9
- ------------------------------------------------------------
</TABLE>
*Lehman 1-5 Year U.S. Treasury Index.
See Financial Highlights table on page 43 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: OCTOBER 28, 1991-JANUARY 31, 1998
- ---------------------------------------------------------
AVERAGE LEHMAN
SHORT-TERM SHORT-TERM 1-5 YEAR
U.S. TREASURY TREASURY U.S. TREASURY
PORTFOLIO FUND INDEX
- ---------------------------------------------------------
<S> <C> <C> <C>
10/28/91 10000 10000 10000
1991 10 10045 10045 10045
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 13194 13870
1997 04 13791 13287 13984
1997 07 14145 13633 14402
1997 10 14368 13823 14652
1998 01 14649 14129 14966
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1998
----------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term U.S. Treasury Portfolio 7.11% 5.60% 6.29% $14,649
Average Short-Term U.S. Treasury Fund 6.97 5.28 5.68 14,129
Lehman 1-5 Year U.S. Treasury Index 7.90 5.92 6.65 14,966
- -------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Short-Term U.S. Treasury Portfolio 10/28/1991 6.39% 5.67% 0.56% 5.63% 6.19%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
23
<PAGE> 26
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 an investment in the Portfolio
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: DECEMBER 31, 1987-JANUARY 31, 1998
- ----------------------------------------------------------
SHORT-TERM FEDERAL PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1988 0.5% 0.5% 1.0% 1.9
1989 -2.7 8.4 5.7 5.0
1990 1.1 9.0 10.1 10.5
1991 1.9 8.6 10.5 11.1
1992 3.1 7.5 10.6 11.3
1993 2.3 6.2 8.5 8.9
1994 1.1 5.1 6.2 6.1
1995 -5.6 5.4 -0.2 -0.1
1996 5.0 6.4 11.4 12.0
1997 -1.7 6.2 4.5 4.1
1998 0.8 6.3 7.1 7.9
- ----------------------------------------------------------
</TABLE>
*Lehman 1-5 Year U.S. Government Index.
See Financial Highlights table on page 43 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: JANUARY 31, 1988-JANUARY 31, 1998
- ---------------------------------------------------------
AVERAGE LEHMAN
SHORT-TERM SHORT-TERM 1-5 YEAR U.S.
FEDERAL GOVERNMENT GOVERNMENT
PORTFOLIO FUND INDEX
- ---------------------------------------------------------
<S> <C> <C> <C>
1988 01 10000 10000 10000
1988 04 10110 10089 10093
1988 07 10212 10194 10182
1988 10 10467 10453 10456
1989 01 10565 10518 10502
1989 04 10768 10698 10720
1989 07 11338 11187 11322
1989 10 11508 11343 11476
1990 01 11631 11462 11606
1990 04 11726 11563 11686
1990 07 12200 11992 12197
1990 10 12437 12223 12467
1991 01 12848 12618 12898
1991 04 13114 12874 13191
1991 07 13369 13100 13435
1991 10 13877 13570 14002
1992 01 14211 13844 14357
1992 04 14362 13969 14501
1992 07 14957 14438 15094
1992 10 15125 14561 15276
1993 01 15418 14862 15633
1993 04 15781 15136 15990
1993 07 15941 15301 16137
1993 10 16219 15524 16420
1994 01 16379 15647 16586
1994 04 15982 15251 16165
1994 07 16156 15348 16386
1994 10 16137 15325 16370
1995 01 16343 15488 16571
1995 04 16878 15928 17119
1995 07 17357 16350 17654
1995 10 17756 16713 18047
1996 01 18211 17140 18555
1996 04 18087 16935 18358
1996 07 18311 17118 18597
1996 10 18798 17547 19105
1997 01 19032 17742 19323
1997 04 19185 17875 19486
1997 07 19691 18345 20064
1997 10 19995 18620 20412
1998 01 20375 19093 20840
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1998
--------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term Federal Portfolio 7.06% 5.73% 7.38% $20,375
Average Short-Term Government Fund 6.89 5.02 6.68 19,093
Lehman 1-5 Year U.S. Government Index 7.85 5.92 7.62 20,840
- -------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Short-Term Federal Portfolio 12/31/1987 6.46% 5.83% 0.48% 6.89% 7.37%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
24
<PAGE> 27
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 an investment in the Portfolio
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: OCTOBER 29, 1982-JANUARY 31, 1998
- ----------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1983 0.5% 2.7% 3.2% 4.6%
1984 -1.1 10.6 9.5 10.9
1985 2.3 11.7 14.0 14.1
1986 3.7 10.5 14.2 14.6
1987 2.9 8.7 11.6 11.9
1988 -2.2 7.4 5.2 6.8
1989 -1.9 8.2 6.3 6.5
1990 1.1 9.1 10.2 10.7
1991 1.5 9.0 10.5 9.8
1992 3.6 8.1 11.7 13.4
1993 2.6 6.7 9.3 9.5
1994 0.4 5.7 6.1 7.9
1995 -4.9 5.5 0.6 0.3
1996 5.2 6.8 12.0 13.8
1997 -1.7 6.2 4.5 4.6
1998 1.1 6.4 7.5 8.0
- ----------------------------------------------------------
</TABLE>
*Lehman 1-5 Year Investment Grade Index.
See Financial Highlights table on page 44 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: JANUARY 31, 1988-JANUARY 31, 1998
- ---------------------------------------------------------
AVERAGE LEHMAN
SHORT-TERM SHORT-TERM 1-5 YEAR
CORPORATE CORPORATE INVESTMENT
PORTFOLIO FUND GRADE INDEX
- ---------------------------------------------------------
<S> <C> <C> <C>
1988 01 10000 10000 10000
1988 04 10142 10124 10152
1988 07 10249 10239 10296
1988 10 10511 10483 10572
1989 01 10631 10598 10652
1989 04 10852 10793 10855
1989 07 11416 11258 11469
1989 10 11577 11443 11662
1990 01 11713 11581 11792
1990 04 11832 11714 11900
1990 07 12309 12120 12437
1990 10 12538 12300 12553
1991 01 12939 12697 12947
1991 04 13297 13026 13434
1991 07 13544 13268 13723
1991 10 14083 13740 14297
1992 01 14453 14067 14686
1992 04 14606 14207 14874
1992 07 15246 14680 15532
1992 10 15381 14818 15660
1993 01 15796 15084 16074
1993 04 16137 15373 16525
1993 07 16258 15537 16753
1993 10 16556 15781 17087
1994 01 16761 15947 17342
1994 04 16397 15628 16867
1994 07 16628 15775 17165
1994 10 16641 15805 17165
1995 01 16863 15934 17389
1995 04 17438 16379 18058
1995 07 17967 16826 18691
1995 10 18370 17179 19160
1996 01 18878 17605 19780
1996 04 18725 17463 19543
1996 07 18965 17672 19817
1996 10 19480 18119 20421
1997 01 19731 18337 20682
1997 04 19900 18487 20856
1997 07 20477 18997 21574
1997 10 20795 19265 21889
1998 01 21218 19528 22338
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1998
--------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term Corporate Portfolio 7.53% 6.08% 7.81% $21,218
Average Short-Term Corporate Fund 6.97 5.45 6.92 19,528
Lehman 1-5 Year Investment Grade Index 8.01 6.80 8.37 22,338
- -------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Short-Term Corporate Portfolio 10/29/1982 6.95% 6.21% 0.70% 7.17% 7.87%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
25
<PAGE> 28
PERFORMANCE SUMMARY
Short-Term Corporate Portfolio
Institutional Shares
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 an investment in the Portfolio
could lose money.
TOTAL INVESTMENT RETURNS:
SEPTEMBER 30, 1997-JANUARY 31, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO-
INSTITUTIONAL SHARES LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
PERIOD RETURN RETURN RETURN RETURN
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
1998 0.6% 2.2% 2.8% 3.6%
- -----------------------------------------------------------
</TABLE>
*Lehman 1-5 Year Investment Grade Index.
See Financial Highlights table on page 44 for dividend and capital gains
information since the Portfolio's inception.
AVERAGE ANNUAL TOTAL RETURN: PERIOD ENDED DECEMBER 31, 1997*
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------------------
DATE CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term Corporate Portfolio-Institutional Shares 9/30/1997 0.09% 1.60% 1.69%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
26
<PAGE> 29
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 an investment in the
Portfolio could lose money.
TOTAL INVESTMENT RETURNS: OCTOBER 28, 1991-JANUARY 31, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------
INTERMEDIATE-TERM
U.S. TREASURY PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1992 1.9% 1.7% 3.6% 4.0%
1993 6.1 7.0 13.1 13.2
1994 4.1 6.0 10.1 10.6
1995 -9.6 5.7 -3.9 -4.5
1996 11.7 7.3 19.0 19.6
1997 -4.9 6.2 1.3 1.3
1998 4.1 6.7 10.8 11.7
- -----------------------------------------------------------
</TABLE>
*Lehman 5-10 Year U.S. Treasury Index.
See Financial Highlights table on page 45 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: OCTOBER 28, 1991-JANUARY 31, 1998
- ---------------------------------------------------------
AVERAGE
INTERMEDIATE- INTERMEDIATE- LEHMAN
TERM U.S. TERM 5-10 YEAR
TREASURY U.S. TREASURY U.S. TREASURY
PORTFOLIO FUND INDEX
- ---------------------------------------------------------
<S> <C> <C> <C>
10/28/91 10000 10000 10000
1991 10 10105 10105 10105
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 13995 15072
1997 04 14999 14010 15091
1997 07 15711 14635 15916
1997 10 16045 14919 16294
1998 01 16551 15471 16834
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1998
---------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Intermediate-Term U.S. Treasury Portfolio 10.78% 7.15% 8.38% $16,551
Average Intermediate-Term U.S. Treasury Fund 9.69 6.30 7.22 15,471
Lehman 5-10 Year U.S. Treasury Index 11.69 7.43 8.68 16,834
- ----------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Intermediate-Term U.S. Treasury Portfolio 10/28/1991 8.96% 7.35% 1.75% 6.45% 8.20%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
27
<PAGE> 30
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 an investment in the
Portfolio could lose money.
TOTAL INVESTMENT RETURNS: NOVEMBER 1, 1993-JANUARY 31, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------
INTERMEDIATE-TERM
CORPORATE PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1994 0.4% 1.3% 1.7% 2.4%
1995 -9.7 6.0 -3.7 -4.0
1996 12.1 7.8 19.9 21.1
1997 -4.2 6.5 2.3 2.7
1998 3.3 6.9 10.2 10.4
- ----------------------------------------------------------
</TABLE>
*Lehman 5-10 Year Investment Grade Index.
See Financial Highlights table on page 45 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
- ---------------------------------------------------------
CUMULATIVE PERFORMANCE: NOVEMBER 1, 1993-JANUARY 31, 1998
- ---------------------------------------------------------
AVERAGE LEHMAN
INTERMEDIATE- INTERMEDIATE- 5-10 YEAR
TERM U.S. TERM INVESTMENT
CORPORATE CORPORATE GRADE
FUND FUND INDEX
- ---------------------------------------------------------
<S> <C> <C> <C>
11/1/93 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
1997 04 12054 11740 12251
1997 07 12674 12282 12968
1997 10 12906 12481 13154
1998 01 13237 12797 13491
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1998 FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate-Term Corporate Portfolio 10.24% 6.82% $13,237
Average Intermediate-Term Corporate Fund 9.58 5.98 12,797
Lehman 5-10 Year Investment Grade Index 10.40 7.30 13,491
- -------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997*
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Intermediate-Term Corporate Portfolio 11/1/1993 8.93% -0.07% 6.67% 6.60%
- -----------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
28
<PAGE> 31
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 an investment in the
Portfolio could lose money.
TOTAL INVESTMENT RETURNS: JUNE 27, 1980-JANUARY 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------
GNMA PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
1981 -12.5% 6.2% -6.3% -8.8%
1982 -9.5 13.5 4.0 1.7
1983 16.3 15.8 32.1 39.6
1984 -0.1 12.3 12.2 12.0
1985 0.5 13.0 13.5 15.4
1986 7.2 12.4 19.6 22.6
1987 1.9 10.3 12.2 13.6
1988 -4.1 9.4 5.3 6.8
1989 -3.6 9.4 5.8 6.6
1990 2.1 9.9 12.0 12.9
1991 3.2 9.7 12.9 13.2
1992 4.1 8.9 13.0 12.9
1993 2.4 8.0 10.4 10.1
1994 -1.0 6.2 5.2 6.1
1995 -6.5 6.9 0.4 -0.3
1996 7.6 8.0 15.6 15.5
1997 -2.1 7.3 5.2 5.6
1998 2.5 7.4 9.9 9.8
- ---------------------------------------------------------
</TABLE>
*Lehman GNMA Index.
See Financial Highlights table on page 46 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: JANUARY 31, 1988-JANUARY 31, 1998
- ---------------------------------------------------------
AVERAGE LEHMAN
GNMA GNMA GNMA
PORTFOLIO FUND INDEX
- ---------------------------------------------------------
<S> <C> <C> <C>
1988 01 10000 10000 10000
1988 04 9968 10009 10003
1988 07 10140 10143 10192
1988 10 10610 10533 10698
1989 01 10580 10514 10662
1989 04 10729 10650 10840
1989 07 11559 11358 11722
1989 10 11755 11520 11920
1990 01 11848 11607 12036
1990 04 11814 11576 12026
1990 07 12557 12250 12826
1990 10 12668 12365 12910
1991 01 13370 12995 13621
1991 04 13684 13255 13963
1991 07 14030 13550 14345
1991 10 14823 14209 15115
1992 01 15108 14476 15382
1992 04 15289 14627 15597
1992 07 15983 15275 16206
1992 10 16187 15396 16445
1993 01 16680 15877 16941
1993 04 16955 16184 17268
1993 07 17262 16522 17601
1993 10 17325 16646 17691
1994 01 17545 16811 17970
1994 04 16932 16117 17277
1994 07 17281 16390 17639
1994 10 17068 16133 17419
1995 01 17608 16543 17925
1995 04 18398 17229 18760
1995 07 19089 17906 19505
1995 10 19702 18403 20065
1996 01 20362 18970 20700
1996 04 19972 18565 20437
1996 07 20254 18791 20712
1996 10 21055 19424 21499
1997 01 21411 19695 21861
1997 04 21587 19827 22078
1997 07 22487 20698 22976
1997 10 22989 21054 23479
1998 01 23521 21523 23993
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1998 FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA Portfolio 9.86% 7.12% 8.93% $23,521
Average GNMA Fund 9.28 6.27 7.97 21,523
Lehman GNMA Index 9.75 7.21 9.15 23,993
- -------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -----------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GNMA Portfolio 6/27/1980 9.47% 7.18% 1.11% 8.18% 9.29%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
29
<PAGE> 32
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 an investment in the
Portfolio could lose money.
TOTAL INVESTMENT RETURNS: MAY 19, 1986-JANUARY 31, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
1987 3.1% 5.5% 8.6% 11.9%
1988 -7.7 8.0 0.3 1.5
1989 -2.2 8.6 6.4 5.1
1990 2.7 8.6 11.3 12.3
1991 2.2 8.8 11.0 11.6
1992 4.1 8.3 12.4 13.4
1993 6.1 8.0 14.1 14.6
1994 8.9 7.2 16.1 16.7
1995 -13.0 6.3 -6.7 -7.5
1996 18.7 8.0 26.7 27.4
1997 -8.2 6.4 -1.8 -1.6
1998 9.7 7.1 16.8 18.3
- -----------------------------------------------------------
</TABLE>
*Lehman Long U.S. Treasury Index.
See Financial Highlights table on page 46 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: JANUARY 31, 1988-JANUARY 31, 1998
- ---------------------------------------------------------
AVERAGE LEHMAN
LONG-TERM U.S. LONG-TERM U.S. LONG U.S.
TREASURY TREASURY TREASURY
PORTFOLIO FUND INDEX
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
1988 01 10000 10000 10000
1988 04 9776 9740 9630
1988 07 9824 9821 9689
1988 10 10495 10202 10394
1989 01 10643 10299 10512
1989 04 10825 10469 10666
1989 07 12083 11392 11967
1989 10 12205 11517 12153
1990 01 11849 11292 11803
1990 04 11447 11047 11438
1990 07 12319 11747 12359
1990 10 12189 11701 12249
1991 01 13153 12415 13168
1991 04 13425 12635 13445
1991 07 13504 12723 13531
1991 10 14376 13499 14471
1992 01 14789 13861 14937
1992 04 14708 13828 14842
1992 07 15888 14627 16118
1992 10 15911 14640 16141
1993 01 16878 15298 17124
1993 04 17585 15820 17873
1993 07 18643 16471 18990
1993 10 19570 17089 19966
1994 01 19593 17189 19989
1994 04 17859 16044 18107
1994 07 18149 16232 18419
1994 10 17425 15803 17648
1995 01 18284 16235 18491
1995 04 19233 16871 19518
1995 07 20620 17680 20918
1995 10 22061 18503 22389
1996 01 23170 19409 23564
1996 04 21209 18361 21606
1996 07 21552 18567 21955
1996 10 22715 19320 23161
1997 01 22742 19454 23191
1997 04 22717 19431 23149
1997 07 24595 20661 25258
1997 10 25327 21146 26084
1998 01 26573 21978 27426
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1998
--------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-Term U.S. Treasury Portfolio 16.85% 9.50% 10.27% $26,573
Average Long-Term U.S. Treasury Fund 13.10 7.54 8.19 21,978
Lehman Long U.S. Treasury Index 18.26 9.88 10.62 27,426
- -------------------------------------------------------------------------------------------------
</TABLE>
Average Annual Total Returns: Periods Ended December 31, 1997*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long-Term U.S. Treasury Portfolio 5/19/1986 13.90% 9.70% 2.78% 7.78% 10.56%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
30
<PAGE> 33
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 an investment in the
Portfolio could lose money.
TOTAL INVESTMENT RETURNS: JANUARY 31, 1978-JANUARY 31, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------
LONG-TERM CORPORATE PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
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 0.7
1998 7.9 7.6 15.5 15.6
- ----------------------------------------------------------
</TABLE>
*Lehman Long Corporate AA or Better Bond Index.
See Financial Highlights table on page 47 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: JANUARY 31, 1988-JANUARY 31, 1998
- ---------------------------------------------------------
AVERAGE LEHMAN LONG
LONG-TERM CORPORATE
LONG-TERM CORPORATE AA OR
CORPORATE A-RATED BETTER BOND
PORTFOLIO FUND INDEX
- ---------------------------------------------------------
<S> <C> <C> <C>
1988 01 10000 10000 10000
1988 04 9892 10014 9817
1988 07 10002 10127 9962
1988 10 10571 10510 10581
1989 01 10713 10568 10659
1989 04 10854 10775 10844
1989 07 11893 11551 11846
1989 10 12032 11661 12038
1990 01 11856 11547 11850
1990 04 11612 11505 11629
1990 07 12508 12149 12465
1990 10 12170 12072 12390
1991 01 13019 12650 13172
1991 04 13588 13123 13640
1991 07 13820 13308 13903
1991 10 14697 13989 14760
1992 01 15244 14356 15218
1992 04 15374 14533 15308
1992 07 16633 15411 16455
1992 10 16621 15419 16455
1993 01 17540 15961 17311
1993 04 18302 16599 17889
1993 07 19043 17076 18612
1993 10 19816 17578 19338
1994 01 19966 17654 19499
1994 04 18559 16707 18053
1994 07 18813 16879 18349
1994 10 18218 16533 17697
1995 01 18944 16881 18460
1995 04 20005 17699 19562
1995 07 21173 18447 20709
1995 10 22399 19146 21858
1996 01 23421 19754 22876
1996 04 22014 19065 21471
1996 07 22335 19327 21826
1996 10 23479 20069 23006
1997 01 23622 20185 23042
1997 04 23637 20297 23083
1997 07 25766 21428 25078
1997 10 26350 21778 25569
1998 01 27288 22276 26637
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1998
--------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-Term Corporate Portfolio 15.52% 9.24% 10.56% $27,288
Average Long-Term Corporate A-Rated Fund 10.36 6.89 8.34 22,276
Lehman Long Corporate AA
or Better Bond Index 15.60 9.00 10.29 26,637
- -------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long-Term Corporate Portfolio 7/9/1973 13.79% 9.55% 2.48% 8.41% 10.89%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
31
<PAGE> 34
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 an investment in the
Portfolio could lose money.
TOTAL INVESTMENT RETURNS: DECEMBER 27, 1978-JANUARY 31, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------
HIGH YIELD CORPORATE PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
1979 3.3% 0.0% 3.3% 2.0%
1980 -10.4 11.9 1.5 -8.7
1981 -8.2 13.0 4.8 4.6
1982 -7.3 15.3 8.0 3.3
1983 13.7 18.6 32.3 39.7
1984 0.1 14.1 14.2 11.8
1985 -5.0 14.4 9.4 10.0
1986 3.8 14.6 18.4 22.6
1987 6.9 13.2 20.1 20.7
1988 -8.6 11.1 2.5 4.2
1989 -1.1 12.5 11.4 10.8
1990 -13.4 11.6 -1.8 -3.0
1991 -15.3 12.1 -3.2 -5.1
1992 17.4 13.9 31.3 47.3
1993 4.0 10.7 14.7 15.1
1994 7.7 9.8 17.5 16.3
1995 -11.1 8.6 -2.5 -1.8
1996 9.0 10.0 19.0 19.7
1997 -0.3 9.3 9.0 10.5
1998 3.8 9.3 13.1 13.7
- ------------------------------------------------------------
</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 47 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: JANUARY 31, 1988-JANUARY 31, 1998
- ---------------------------------------------------------
HIGH YIELD AVERAGE HIGH LEHMAN HIGH
CORPORATE YIELD BOND YIELD BOND
PORTFOLIO* FUND INDEX
- ---------------------------------------------------------
<S> <C> <C> <C>
1988 01 10000 10000 10000
1988 04 10321 10307 10294
1988 07 10628 10628 10529
1988 10 10847 10839 10775
1989 01 11144 11089 11081
1989 04 11103 11094 11065
1989 07 11531 11436 11405
1989 10 11199 10930 10985
1990 01 10939 10502 10744
1990 04 10940 10368 10780
1990 07 11597 10989 11557
1990 10 10147 9569 9573
1991 01 10588 9742 10200
1991 04 11906 11388 12474
1991 07 12485 12018 13278
1991 10 13219 12919 14232
1992 01 13899 13621 15023
1992 04 14317 14221 15644
1992 07 15035 14825 16255
1992 10 15015 14982 16402
1993 01 15940 15794 17287
1993 04 16691 16468 17973
1993 07 17441 17280 18749
1993 10 18162 17989 19338
1994 01 18736 18774 20099
1994 04 17456 17812 19158
1994 07 17766 17811 19390
1994 10 17935 17915 19574
1995 01 18264 17777 19733
1995 04 19417 18798 21156
1995 07 20304 19652 22163
1995 10 20945 20195 22589
1996 01 21736 20990 23621
1996 04 21510 21244 23669
1996 07 21857 21596 24118
1996 10 22794 22750 25096
1997 01 23695 23611 26098
1997 04 23837 23636 26405
1997 07 25333 25339 28092
1997 10 25789 26040 28539
1998 01 26808 26884 29669
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1998
-------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High Yield Corporate Portfolio* 13.14% 10.96% 10.36% $26,808
Average High Yield Bond Fund 13.86 11.22 10.39 26,884
Lehman High Yield Bond Index 13.68 11.41 11.49 29,669
- -------------------------------------------------------------------------------------------------
</TABLE>
*Total returns do not reflect the 1% fee assessed on redemptions of shares held
for less than 1 year.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
High Yield Corporate Portfolio** 12/27/1978 11.91% 11.16% -0.29% 10.84% 10.55%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**Total returns do not reflect the 1% fee assessed on redemptions of shares
held for less than 1 year.
32
<PAGE> 35
FINANCIAL STATEMENTS
January 31, 1998
The Statements of Net Assets, integral parts of the Financial Statements for
each of the Vanguard Fixed Income Securities Fund Portfolios, are included as
an insert to this report (except for the GNMA Portfolio, whose Statement of Net
Assets is provided below).
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each Portfolio's holdings, including
each security's market value on the last day of the reporting period.
Securities are grouped and subtotaled by bond type (U.S. government and agency
issues, corporate bonds, foreign bonds, etc.); corporate bonds are further
classified by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Portfolio's
Net Assets. Finally, Net Assets are divided by the outstanding shares of the
Portfolio to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets of each Portfolio, you will
find a table displaying the composition of the Portfolio's net assets on both a
dollar and per-share basis. Undistributed Net Investment Income is usually zero
because the Portfolio distributes its net income to shareholders as a dividend
each day. Any realized gains must be distributed annually, so the bulk of net
assets consists of Paid in Capital (money invested by shareholders). The
balance shown for Accumulated Net Realized Gains usually approximates the
amount available to distribute to shareholders as capital gains as of the
statement date, but may differ because certain investments or transactions may
be treated differently for financial statement and tax purposes. Any
Accumulated Net Realized Losses, and any cumulative excess of distributions
over net realized gains, will appear as negative balances. Unrealized
Appreciation (Depreciation) is the difference between the value of the
Portfolio's investments and their cost, and reflects the gains (losses) that
would be realized if the Portfolio were to sell all of its investments at their
statement-date values.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
GNMA PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OBLIGATIONS (98.0%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Assn. 6.00% 10/15/2023-12/15/2027 (1) $ 532,849 $ 521,514
Government National Mortgage Assn. 6.50% 7/15/2008-1/15/2028 (1) 1,086,578 1,088,531
Government National Mortgage Assn. 7.00% 5/15/2007-8/15/2027 (1) 2,444,535 2,490,199
Government National Mortgage Assn. 7.25% 12/15/2026-2/15/2027 (1) 4,833 4,953
Government National Mortgage Assn. 7.50% 12/15/2001-9/15/2027 (1) 2,417,752 2,501,110
Government National Mortgage Assn. 7.75% 2/15/2027 (1) 17,998 18,654
Government National Mortgage Assn. 8.00% 5/15/2001-9/15/2026 (1) 1,145,002 1,199,126
Government National Mortgage Assn. 8.25% 8/15/2004-7/15/2008 (1) 4,954 5,222
Government National Mortgage Assn. 8.50% 1/20/2005-5/15/2026 (1) 369,452 394,203
Government National Mortgage Assn. 9.00% 9/15/2001-2/15/2023 (1) 293,582 321,099
Government National Mortgage Assn. 9.25% 5/15/2016-6/15/2018 (1) 2,224 2,411
Government National Mortgage Assn. 9.50% 12/15/2000-12/15/2022 (1) 145,003 158,885
Government National Mortgage Assn. 10.00% 7/20/2014-8/20/2018 (1) 2,918 3,211
Government National Mortgage Assn. 11.00% 2/15/2010-2/20/2016 (1) 946 1,064
Government National Mortgage Assn. 11.25% 6/15/2013-2/20/2016 (1) 561 633
Government National Mortgage Assn. 11.50% 6/15/2010-11/20/2015 (1) 1,045 1,182
Government National Mortgage Assn. 12.00% 10/15/2010-1/20/2016 (1) 1,616 1,868
Government National Mortgage Assn. 12.50% 12/20/2013-7/20/2015 (1) 955 1,114
Government National Mortgage Assn. 12.75% 8/15/2014-12/15/2014 (1) 97 113
Government National Mortgage Assn. 13.00% 1/15/2011-1/20/2015 (1) 889 1,042
Government National Mortgage Assn. 13.25% 8/15/2014-10/15/2014 (1) 130 151
Government National Mortgage Assn. 13.50% 5/15/2010-12/15/2014 (1) 289 341
Government National Mortgage Assn. 13.75% 9/20/2014 (1) 9 11
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
GNMA PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government National Mortgage Assn. 14.00% 6/15/2011-9/15/2012 (1) $ 199 $ 236
Government National Mortgage Assn. 15.00% 9/15/2011-5/15/2012 (1) 140 166
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OBLIGATIONS
(COST $8,411,961) 8,717,039
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.3%)
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $291,655) 5.60% 2/2/1998 291,655 291,655
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.3%)
(COST $8,703,616) 9,008,694
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.3%)
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 177,556
Liabilities (292,184)
-----------
(114,628)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 848,524,213 outstanding $.001 par value shares
(authorized 2,100,000,000 shares) $8,894,066
================================================================================================================================
NET ASSET VALUE PER SHARE $10.48
================================================================================================================================
</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, 1998, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $8,587,318 $10.12
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 1,670 --
Unrealized Appreciation--Note F 305,078 .36
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS $8,894,066 $10.48
============================================================================================================================
</TABLE>
34
<PAGE> 37
STATEMENT OF OPERATIONS
This Statement shows interest earned by each Portfolio during the reporting
period, and details the operating expenses charged to each class of its shares.
These expenses directly reduce the amount of investment income available to pay
to shareholders as income dividends. This Statement also shows any Net Gain
(Loss) realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If a
Portfolio invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
SHORT-TERM SHORT-TERM SHORT-TERM INTERMEDIATE-TERM
U.S. TREASURY FEDERAL CORPORATE U.S. TREASURY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1998
-----------------------------------------------------------------------
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest $59,636 $86,693 $302,326 $ 87,701
-----------------------------------------------------------------------
Total Income 59,636 86,693 302,326 87,701
-----------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 147 205 698 199
The Vanguard Group--Note C
Management and Administrative 803 1,084 6,367 1,302
Shareholder Account Maintenance(1) 1,251 1,797 3,938 1,560
Marketing and Distribution(1) 300 364 1,456 373
Taxes (other than income taxes) 74 103 351 101
Custodian Fees 12 36 85 13
Legal Fees -- -- 36 --
Auditing Fees 6 7 10 7
Shareholders' Reports(1) 27 60 112 42
Annual Meeting and Proxy Costs(1) 10 15 32 14
Directors' Fees and Expenses 2 3 10 3
-----------------------------------------------------------------------
Total Expenses 2,632 3,674 13,095 3,614
- ----------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 57,004 83,019 289,231 84,087
- ----------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 3,904 5,665 8,202 (538)
Futures Contracts 79 -- (6,923) (4,921)
- ----------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 3,983 5,665 1,279 (5,459)
- ----------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 6,845 5,862 53,925 63,116
Futures Contracts -- -- (1,194) --
- ----------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 6,845 5,862 52,731 63,116
- ----------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $67,832 $94,546 $343,241 $141,744
======================================================================================================================
</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.
(1) Expenses of the Short-Term Corporate Portfolio by class of shares are:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(000)
-------------------------------------------------------
INVESTOR INSTITUTIONAL
SHARES SHARES TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class-Specific Expenses:
Shareholder Account Maintenance $ 3,938 $ -- $ 3,938
Marketing and Distribution 1,446 10 1,456
Shareholders' Reports 112 -- 112
Annual Meeting and Proxy Costs 32 -- 32
-------------------------------------------------------
Total Class-Specific Expenses 5,528 10 5,538
All Other Portfolio Expenses 7,435 122 7,557
- ------------------------------------------------------------------------------------------------------
Total Expenses $ 12,963 $ 132 $ 13,095
======================================================================================================
</TABLE>
See Note D in Notes to Financial Statements.
35
<PAGE> 38
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM LONG-TERM LONG-TERM
CORPORATE GNMA U.S. TREASURY CORPORATE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1998
----------------------------------------------------------------------
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest $48,441 $583,653 $ 61,448 $244,839
----------------------------------------------------------------------
Total Income 48,441 583,653 61,448 244,839
----------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 102 1,067 136 963
The Vanguard Group--Note C
Management and Administrative 954 11,076 635 4,497
Shareholder Account Maintenance 512 8,847 1,296 4,232
Marketing and Distribution 221 1,746 250 765
Taxes (other than income taxes) 53 597 69 254
Custodian Fees 16 839 24 41
Legal Fees -- -- -- 24
Auditing Fees 6 13 6 9
Shareholders' Reports 15 228 36 104
Annual Meeting and Proxy Costs 5 77 11 35
Directors' Fees and Expenses 1 19 2 8
----------------------------------------------------------------------
Total Expenses 1,885 24,509 2,465 10,932
- --------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 46,556 559,144 58,983 233,907
- --------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 2,817 1,871 2,646 61,205
Futures Contracts (1,734) -- (3,347) --
- --------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 1,083 1,871 (701) 61,205
- --------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities 24,555 202,766 88,314 204,284
Futures Contracts -- -- -- --
- --------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 24,555 202,766 88,314 204,284
- --------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $72,194 $763,781 $ 146,596 $499,396
==============================================================================================================
</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.
36
<PAGE> 39
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
HIGH YIELD
CORPORATE
PORTFOLIO
----------------
YEAR ENDED
JANUARY 31, 1998
----------------
(000)
- ------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Interest $367,616
----------------
Total Income 367,616
----------------
EXPENSES
Investment Advisory Fees--Note B 1,593
The Vanguard Group--Note C
Management and Administrative 4,529
Shareholder Account Maintenance 3,737
Marketing and Distribution 902
Taxes (other than income taxes) 306
Custodian Fees 30
Legal Fees 193
Auditing Fees 9
Shareholders' Reports 99
Annual Meeting and Proxy Costs 34
Directors' Fees and Expenses 9
----------------
Total Expenses 11,441
- ------------------------------------------------------------------------------------
NET INVESTMENT INCOME 356,175
- ------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 55,757
Futures Contracts --
- ------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 55,757
- ------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 105,470
Futures Contracts --
- ------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 105,470
- ------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $517,402
====================================================================================
</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.
37
<PAGE> 40
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 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.
Distributions, Capital Share Transactions, and Shares Issued and Redeemed are
shown separately for each class of shares.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
SHORT-TERM SHORT-TERM
U.S. TREASURY PORTFOLIO FEDERAL PORTFOLIO
-------------------------- -------------------------
YEAR ENDED JANUARY 31,
-----------------------------------------------------
1998 1997 1998 1997
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 57,004 $ 54,617 $ 83,019 $ 82,143
Realized Net Gain (Loss) 3,983 5,716 5,665 1,232
Change in Unrealized Appreciation
(Depreciation) 6,845 (23,065) 5,862 (25,088)
---------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 67,832 37,268 94,546 58,287
--------------------------------------------------
DISTRIBUTIONS
Net Investment Income (57,004) (54,617) (83,019) (82,143)
Realized Capital Gain -- -- -- --
--------------------------------------------------
Total Distributions (57,004) (54,617) (83,019) (82,143)
---------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 310,935 748,942 399,771 378,599
Issued in Lieu of Cash Distributions 50,737 48,587 71,077 69,751
Redeemed (332,999) (729,642) (369,801) (478,368)
---------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 28,673 67,887 101,047 (30,018)
- -----------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 39,501 50,538 112,574 (53,874)
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 969,742 919,204 1,347,862 1,401,736
--------------------------------------------------
End of Year $1,009,243 $969,742 $1,460,436 $1,347,862
================================================================================================================
(1)Shares Issued (Redeemed)
Issued 30,582 73,794 39,559 37,486
Issued in Lieu of Cash Distributions 4,990 4,793 7,036 6,914
Redeemed (32,757) (71,920) (36,610) (47,354)
--------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 2,815 6,667 9,985 (2,954)
=================================================================================================================
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
SHORT-TERM
CORPORATE PORTFOLIO
----------------------------------
YEAR ENDED JANUARY 31,
----------------------------------
1998 1997
(000) (000)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 289,231 $ 257,866
Realized Net Gain (Loss) 1,279 749
Change in Unrealized Appreciation (Depreciation) 52,731 (68,454)
----------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 343,241 190,161
----------------------------------
DISTRIBUTIONS
Net Investment Income
Investor Shares (283,686) (257,866)
Institutional Shares (5,545) --
Realized Capital Gain
Investor Shares -- --
Institutional Shares -- --
----------------------------------
Total Distributions (289,231) (257,866)
----------------------------------
CAPITAL SHARE TRANSACTIONS--INVESTOR SHARES(1)
Issued 1,761,294 1,951,629
Issued in Lieu of Cash Distributions 245,843 220,371
Redeemed (1,881,581) (1,446,570)
----------------------------------
Net Increase--Investor Shares 125,556 725,430
----------------------------------
CAPITAL SHARE TRANSACTIONS--INSTITUTIONAL SHARES(2)
Issued 273,772 --
Issued in Lieu of Cash Distributions 5,544 --
Redeemed (18,443) --
----------------------------------
Net Increase--Institutional Shares 260,873 --
- -----------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 440,439 657,725
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 4,530,738 3,873,013
----------------------------------
End of Year $4,971,177 $4,530,738
=================================================================================================================
(1)Shares Issued (Redeemed)--Investor Shares
Issued 163,623 181,913
Issued in Lieu of Cash Distributions 22,845 20,549
Redeemed (174,866) (134,781)
----------------------------------
Net Increase (Decrease) in Shares Outstanding 11,602 67,681
=================================================================================================================
(2)Shares Issued (Redeemed)--Institutional Shares
Issued 25,348 --
Issued in Lieu of Cash Distributions 512 --
Redeemed (1,706) --
---------------------------------
Net Increase (Decrease) in Shares Outstanding 24,154 --
================================================================================================================
</TABLE>
39
<PAGE> 42
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM INTERMEDIATE-TERM
U.S. TREASURY PORTFOLIO CORPORATE PORTFOLIO
--------------------------- ---------------------
YEAR ENDED JANUARY 31,
---------------------------------------------------
1998 1997 1998 1997
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 84,087 $ 77,367 $ 46,556 $ 34,252
Realized Net Gain (Loss) (5,459) (1,557) 1,083 (49)
Change in Unrealized Appreciation
(Depreciation) 63,116 (60,573) 24,555 (17,521)
----------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 141,744 15,237 72,194 16,682
----------------------------------------------------
DISTRIBUTIONS
Net Investment Income (84,087) (77,367) (46,556) (34,252)
Realized Capital Gain -- -- (952) (929)
----------------------------------------------------
Total Distributions (84,087) (77,367) (47,508) (35,181)
----------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 602,871 462,699 415,063 462,553
Issued in Lieu of Cash Distributions 61,945 57,839 39,277 28,621
Redeemed (406,226) (406,183) (171,911) (304,839)
----------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 258,590 114,355 282,429 186,335
- ------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 316,247 52,225 307,115 167,836
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 1,278,585 1,226,360 591,773 423,937
----------------------------------------------------
End of Year $1,594,832 $1,278,585 $898,888 $591,773
==================================================================================================================
(1)Shares Issued (Redeemed)
Issued 57,416 44,418 42,302 47,700
Issued in Lieu of Cash Distributions 5,919 5,590 4,003 2,960
Redeemed (38,931) (39,225) (17,547) (31,479)
---------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 24,404 10,783 28,758 19,181
==================================================================================================================
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
LONG-TERM
GNMA PORTFOLIO U.S. TREASURY PORTFOLIO
---------------------------- ------------------------------
YEAR ENDED JANUARY 31,
-------------------------------------------------------------
1998 1997 1998 1997
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 559,144 $ 510,249 $ 58,983 $ 59,745
Realized Net Gain (Loss) 1,871 7,036 (701) (7,503)
Change in Unrealized Appreciation
(Depreciation) 202,766 (151,270) 88,314 (66,655)
--------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 763,781 366,015 146,596 (14,413)
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (559,144) (510,249) (58,983) (59,745)
Realized Capital Gain (1,985) -- -- (1,178)
--------------------------------------------------------------
Total Distributions (561,129) (510,249) (58,983) (60,923)
--------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 2,326,765 1,577,178 389,064 341,995
Issued in Lieu of Cash Distributions 424,132 388,322 45,242 47,495
Redeemed (1,459,563) (1,419,326) (358,440) (331,974)
--------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 1,291,334 546,174 75,866 57,516
- --------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 1,493,986 401,940 163,479 (17,820)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 7,400,080 6,998,140 897,943 915,763
--------------------------------------------------------------
End of Year $8,894,066 $7,400,080 $1,061,422 $897,943
====================================================================================================================
(1)Shares Issued (Redeemed)
Issued 225,661 155,134 38,081 34,824
Issued in Lieu of Cash Distributions 41,195 38,301 4,478 4,844
Redeemed (141,703) (139,855) (35,474) (33,750)
---------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 125,153 53,580 7,085 5,918
====================================================================================================================
</TABLE>
41
<PAGE> 44
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
LONG-TERM HIGH YIELD
CORPORATE PORTFOLIO CORPORATE PORTFOLIO
---------------------------------- --------------------------
YEAR ENDED JANUARY 31,
--------------------------------------------------------------
1998 1997 1998 1997
(000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 233,907 $ 235,167 $ 356,175 $ 289,283
Realized Net Gain (Loss) 61,205 36,899 55,757 19,951
Change in Unrealized Appreciation
(Depreciation) 204,284 (242,281) 105,470 (20,017)
--------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 499,396 29,785 517,402 289,217
--------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (233,907) (235,167) (356,175) (289,283)
Realized Capital Gain (29,076) (58,376) -- --
--------------------------------------------------------------
Total Distributions (262,983) (293,543) (356,175) (289,283)
--------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 811,295 801,372 1,300,054 1,071,470
Issued in Lieu of Cash Distributions 216,458 241,994 249,424 200,065
Redeemed (867,427) (832,158) (637,696) (604,106)
--------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 160,326 211,208 911,782 667,429
- ---------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 396,739 (52,550) 1,073,009 667,363
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 3,323,539 3,376,089 3,673,942 3,006,579
--------------------------------------------------------------
End of Year $3,720,278 $3,323,539 $4,746,951 $3,673,942
=====================================================================================================================
(1)Shares Issued (Redeemed)
Issued 90,509 91,142 162,853 138,649
Issued in Lieu of Cash Distributions 24,157 27,646 31,269 25,903
Redeemed (97,058) (95,201) (80,332) (78,406)
--------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 17,608 23,587 113,790 86,146
=====================================================================================================================
</TABLE>
42
<PAGE> 45
FINANCIAL HIGHLIGHTS
This table summarizes each Portfolio's investment results and distributions to
shareholders on a per-share basis for each class of shares. It also presents
the 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 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.16 $10.36 $ 9.89 $10.41 $10.41
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .590 .586 .625 .532 .486
Net Realized and Unrealized Gain (Loss) on Investments .110 (.200) .470 (.500) .079
------------------------------------------------------
Total from Investment Operations .700 .386 1.095 .032 .565
------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.590) (.586) (.625) (.532) (.486)
Distributions from Realized Capital Gains -- -- -- (.020) (.079)
------------------------------------------------------
Total Distributions (.590) (.586) (.625) (.552) (.565)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.27 $10.16 $10.36 $ 9.89 $10.41
================================================================================================================================
TOTAL RETURN 7.11% 3.89% 11.37% 0.40% 5.54%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,009 $970 $919 $754 $729
Ratio of Total Expenses to Average Net Assets 0.27% 0.25% 0.27% 0.28% 0.26%
Ratio of Net Investment Income to Average Net Assets 5.80% 5.77% 6.14% 5.33% 4.64%
Portfolio Turnover Rate 83% 86% 93% 126% 86%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM FEDERAL PORTFOLIO
YEAR ENDED JANUARY 31,
------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.11 $10.28 $ 9.79 $10.38 $10.38
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .611 .615 .601 .550 .522
Net Realized and Unrealized Gain (Loss) on Investments .080 (.170) .490 (.580) .110
----------------------------------------------------
Total from Investment Operations .691 .445 1.091 (.030) .632
----------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.611) (.615) (.601) (.550) (.522)
Distributions from Realized Capital Gains -- -- -- (.010) (.110)
--------------------------------------------------
Total Distributions (.611) (.615) (.601) (.560) (.632)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.19 $10.11 $10.28 $ 9.79 $10.38
================================================================================================================================
TOTAL RETURN 7.06% 4.51% 11.43% -0.21% 6.23%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,460 $1,348 $1,402 $1,474 $1,936
Ratio of Total Expenses to Average Net Assets 0.27% 0.25% 0.27% 0.28% 0.26%
Ratio of Net Investment Income to Average Net Assets 6.04% 6.09% 5.93% 5.53% 4.98%
Portfolio Turnover Rate 94% 57% 74% 57% 49%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 46
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO-INVESTOR SHARES
YEAR ENDED JANUARY 31,
------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.75 $10.94 $10.40 $10.94 $10.99
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .664 .663 .671 .596 .605
Net Realized and Unrealized Gain (Loss) on Investments .120 (.190) .540 (.540) .049
------------------------------------------------------
Total from Investment Operations .784 .473 1.211 .056 .654
------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.664) (.663) (.671) (.596) (.605)
Distributions from Realized Capital Gains -- -- -- -- (.099)
------------------------------------------------------
Total Distributions (.664) (.663) (.671) (.596) (.704)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.87 $10.75 $10.94 $10.40 $10.94
================================================================================================================================
TOTAL RETURN 7.53% 4.52% 11.95% 0.60% 6.11%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $4,709 $4,531 $3,873 $2,924 $3,573
Ratio of Total Expenses to Average Net Assets 0.28% 0.25% 0.27% 0.28% 0.26%
Ratio of Net Investment Income to Average Net Assets 6.17% 6.18% 6.23% 5.66% 5.48%
Portfolio Turnover Rate 45% 45% 62% 69% 61%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO-INSTITUTIONAL SHARES
SEP. 30, 1997,* TO
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD JAN. 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.80
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .229
Net Realized and Unrealized Gain (Loss) on Investments .070
----------
Total from Investment Operations .299
----------
DISTRIBUTIONS
Dividends from Net Investment Income (.229)
Distributions from Realized Capital Gains --
----------
Total Distributions (.229)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.87
==============================================================================================================================
TOTAL RETURN 2.79%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $263
Ratio of Total Expenses to Average Net Assets 0.15%**
Ratio of Net Investment Income to Average Net Assets 6.28%**
Portfolio Turnover Rate 45%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Inception.
**Annualized.
44
<PAGE> 47
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
-------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.37 $10.90 $ 9.76 $10.82 $10.79
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .647 .649 .662 .603 .617
Net Realized and Unrealized Gain (Loss) on Investments .430 (.530) 1.140 (1.033) .443
-------------------------------------------------------
Total from Investment Operations 1.077 .119 1.802 (.430) 1.060
-------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.647) (.649) (.662) (.603) (.617)
Distributions from Realized Capital Gains -- -- -- (.027) (.413)
-------------------------------------------------------
Total Distributions (.647) (.649) (.662) (.630) (1.030)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.80 $10.37 $10.90 $ 9.76 $10.82
================================================================================================================================
TOTAL RETURN 10.78% 1.28% 18.96% -3.90% 10.09%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,595 $1,279 $1,226 $848 $1,007
Ratio of Total Expenses to Average Net Assets 0.27% 0.25% 0.28% 0.28% 0.26%
Ratio of Net Investment Income to Average Net Assets 6.19% 6.26% 6.34% 6.05% 5.55%
Portfolio Turnover Rate 30% 42% 56% 128% 118%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM CORPORATE PORTFOLIO
YEAR ENDED JANUARY 31,
------------------------------------------------ NOV. 1, 1993,* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1998 1997 1996 1995 JAN. 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.72 $10.17 $ 9.07 $10.04 $10.00
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .638 .639 .658 .587 .125
Net Realized and Unrealized Gain (Loss) on Investments .321 (.430) 1.100 (.970) .040
--------------------------------------------------------------------
Total from Investment Operations .959 .209 1.758 (.383) .165
--------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.638) (.639) (.658) (.587) (.125)
Distributions from Realized Capital Gains (.011) (.020) -- -- --
--------------------------------------------------------------------
Total Distributions (.649) (.659) (.658) (.587) (.125)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.03 $ 9.72 $10.17 $ 9.07 $10.04
====================================================================================================================================
TOTAL RETURN 10.24% 2.29% 19.94% -3.73% 1.66%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $899 $592 $424 $163 $85
Ratio of Total Expenses to Average Net Assets 0.26% 0.25% 0.28% 0.28% 0.25%**
Ratio of Net Investment Income to Average Net Assets 6.51% 6.61% 6.70% 6.46% 5.11%**
Portfolio Turnover Rate 69% 85% 78% 97% 74%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
45
<PAGE> 48
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
GNMA PORTFOLIO
YEAR ENDED JANUARY 31,
--------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.23 $10.45 $ 9.71 $10.39 $10.50
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .718 .727 .734 .693 .641
Net Realized and Unrealized Gain (Loss) on Investments .253 (.220) .740 (.673) (.110)
--------------------------------------------------------------
Total from Investment Operations .971 .507 1.474 .020 .531
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.718) (.727) (.734) (.693) (.641)
Distributions from Realized Capital Gains (.003) -- -- (.007) --
--------------------------------------------------------------
Total Distributions (.721) (.727) (.734) (.700) (.641)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.48 $10.23 $10.45 $ 9.71 $10.39
================================================================================================================================
TOTAL RETURN 9.86% 5.15% 15.64% 0.36% 5.18%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $8,894 $7,400 $6,998 $5,851 $7,043
Ratio of Total Expenses to Average Net Assets 0.31% 0.27% 0.29% 0.30% 0.28%
Ratio of Net Investment Income to Average Net Assets 6.97% 7.16% 7.22% 7.04% 6.19%
Portfolio Turnover Rate 3% 12% 7% 35% 2%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
---------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 9.84 $10.73 $ 9.23 $10.75 $10.04
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .643 .655 .669 .665 .685
Net Realized and Unrealized Gain (Loss) on Investments .950 (.877) 1.725 (1.401) .886
---------------------------------------------------------------
Total from Investment Operations 1.593 (.222) 2.394 (.736) 1.571
---------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.643) (.655) (.669) (.665) (.685)
Distributions from Realized Capital Gains -- (.013) (.225) (.119) (.176)
---------------------------------------------------------------
Total Distributions (.643) (.668) (.894) (.784) (.861)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.79 $ 9.84 $10.73 $ 9.23 $10.75
================================================================================================================================
TOTAL RETURN 16.85% -1.85 % 26.72% -6.68% 16.09%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,061 $898 $916 $671 $829
Ratio of Total Expenses to Average Net Assets 0.27% 0.25% 0.27% 0.28% 0.26%
Ratio of Net Investment Income to Average Net Assets 6.38% 6.66% 6.57% 7.02% 6.44%
Portfolio Turnover Rate 18% 31% 105% 85% 7%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE> 49
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
LONG-TERM CORPORATE PORTFOLIO
YEAR ENDED JANUARY 31,
---------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.71 $9.43 $8.18 $9.36 $9.04
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .613 .619 .627 .617 .632
Net Realized and Unrealized Gain (Loss) on Investments .685 (.566) 1.250 (1.108) .579
---------------------------------------------------------------
Total from Investment Operations 1.298 .053 1.877 (.491) 1.211
---------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.613) (.619) (.627) (.617) (.632)
Distributions from Realized Capital Gains (.075) (.154) -- (.072) (.259)
--------------------------------------------------------------
Total Distributions (.688) (.773) (.627) (.689) (.891)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $9.32 $8.71 $9.43 $8.18 $9.36
================================================================================================================================
TOTAL RETURN 15.52% 0.86% 23.64% -5.12% 13.83%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,720 $3,324 $3,376 $2,607 $3,166
Ratio of Total Expenses to Average Net Assets 0.32% 0.28% 0.31% 0.32% 0.30%
Ratio of Net Investment Income to Average Net Assets 6.87% 7.06% 7.03% 7.37% 6.71%
Portfolio Turnover Rate 33% 30% 49% 43% 77%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
HIGH YIELD CORPORATE PORTFOLIO
YEAR ENDED JANUARY 31,
--------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $7.87 $7.89 $7.24 $8.14 $7.56
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .688 .688 .678 .679 .695
Net Realized and Unrealized Gain (Loss) on Investments .300 (.020) .650 (.900) .580
--------------------------------------------------------------
Total from Investment Operations .988 .668 1.328 (.221) 1.275
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.688) (.688) (.678) (.679) (.695)
Distributions from Realized Capital Gains -- -- -- -- --
--------------------------------------------------------------
Total Distributions (.688) (.688) (.678) (.679) (.695)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $8.17 $7.87 $7.89 $7.24 $8.14
================================================================================================================================
TOTAL RETURN* 13.14% 9.01% 19.01% -2.52% 17.54%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $4,747 $3,674 $3,007 $2,162 $2,625
Ratio of Total Expenses to Average Net Assets 0.28% 0.29% 0.34% 0.34% 0.32%
Ratio of Net Investment Income to Average Net Assets 8.63% 8.92% 8.85% 9.13% 8.81%
Portfolio Turnover Rate 45% 23% 38% 33% 51%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total returns do not reflect the 1% fee assessed on redemptions of shares held
for less than one year.
47
<PAGE> 50
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 over
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.
48
<PAGE> 51
B. The Vanguard Group furnishes investment advisory services to the Short-Term
U.S. Treasury, Short-Term Federal, Short-Term Corporate, Intermediate-Term U.S.
Treasury, Intermediate-Term Corporate, and Long-Term U.S. Treasury Portfolios
on an at-cost basis.
Wellington Management Company, LLP provides investment advisory services to
the GNMA, Long-Term Corporate, and High Yield Corporate Portfolios for fees
calculated at an annual percentage rate of average net assets. For the year
ended January 31, 1998, the investment advisory fees of the GNMA, Long-Term
Corporate, and High Yield Corporate Portfolios represented effective annual
rates of 0.01%, 0.03%, and 0.04%, respectively, of average net assets.
C. The Vanguard Group furnishes at cost corporate management, administrative,
shareholder account maintenance, 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, 1998, the Fund had contributed capital
aggregating $1,802,000 to Vanguard (included in Other Assets), representing
9.0% of Vanguard's capitalization. The Fund's Directors and officers are also
Directors and officers of Vanguard.
D. Effective September 30, 1997, the Short-Term Corporate Portfolio offers two
classes of shares, Investor Shares and Institutional Shares. Institutional
Shares are designed primarily for institutional investors that meet certain
administrative and servicing criteria and have a minimum investment of $50
million. Investor Shares are offered to all other investors. Both classes of
shares have equal rights to assets and earnings, except that each class bears
certain class-specific expenses related to its shareholder activity.
Class-specific expenses for the period from September 30, 1997, through January
31, 1998, represented the following percentages of average net assets:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PORTFOLIO INVESTOR SHARES INSTITUTIONAL SHARES
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term Corporate 0.13%* 0.01%*
- -------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
Income, expenses not attributable to a specific class, and realized and
unrealized gains and losses on investments are allocated to each class of
shares based on its relative net assets.
E. During the year ended January 31, 1998, 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 $2,434,851 $1,719,995
Intermediate-Term Corporate 561,809 264,198
Long-Term Corporate 906,751 762,945
High Yield Corporate 2,502,848 1,593,600
- ------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE> 52
NOTES TO FINANCIAL STATEMENTS (continued)
Purchases and sales of U.S. government securities were:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
(000)
--------------------------------------
PORTFOLIO PURCHASES SALES
---------------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term U.S. Treasury $ 820,544 $ 791,946
Short-Term Federal 1,406,596 1,257,417
Short-Term Corporate 263,928 291,128
Intermediate-Term U.S. Treasury 641,880 396,072
Intermediate-Term Corporate 176,593 198,796
GNMA 2,336,442 270,903
Long-Term U.S. Treasury 213,343 154,330
Long-Term Corporate 282,927 313,226
High Yield Corporate 226,831 196,466
---------------------------------------------------------------------------------------------
</TABLE>
At January 31, 1998, the Portfolios had the following capital losses
available to offset future net capital gains:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
EXPIRATION
FISCAL YEAR(s) AMOUNT
PORTFOLIO ENDING JANUARY 31, (000)
---------------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term U.S. Treasury 2003-2004 $ 4,362
Short-Term Federal 2003-2004 25,371
Short-Term Corporate 2003-2004 27,840
Intermediate-Term U.S. Treasury 2003-2006 30,935
Long-Term U.S. Treasury 2005 4,788
High Yield Corporate 2000 25,958
---------------------------------------------------------------------------------------------
</TABLE>
F. At January 31, 1998, 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 $ 9,468 $ (248) $ 9,220
Short-Term Federal 14,635 (1,322) 13,313
Short-Term Corporate 68,070 (2,425) 65,645
Intermediate-Term U.S. Treasury 71,191 (79) 71,112
Intermediate-Term Corporate 27,567 (1,674) 25,893
GNMA 314,908 (9,830) 305,078
Long-Term U.S. Treasury 122,725 (46) 122,679
Long-Term Corporate 269,219 (1,681) 267,538
High Yield Corporate 198,540 (4,999) 193,541
- ----------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE> 53
At January 31, 1998, the aggregate settlement value of open futures
contracts expiring in March 1998 and the related unrealized depreciation were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(000)
-----------------------------------
NUMBER OF AGGREGATE
SHORT SETTLEMENT UNREALIZED
PORTFOLIO/FUTURES CONTRACTS CONTRACTS VALUE Depreciation
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Corporate/
5-Year U.S. Treasury Note 685 $75,329 $(1,194)
- ---------------------------------------------------------------------------------------------------
</TABLE>
G. The market values of securities on loan to brokers/dealers at January 31,
1998, 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 $ 78,977 $ 28,030 $ 53,873
Short-Term Corporate 23,601 23,988 --
Intermediate-Term
U.S. Treasury 97,321 -- 100,042
Intermediate-Term
Corporate 17,832 11,550 6,624
Long-Term U.S. Treasury 30,786 15,598 15,802
Long-Term Corporate 105,936 54,250 54,453
High Yield Corporate 216,607 223,687 --
- -----------------------------------------------------------------------------------------------------
</TABLE>
Cash collateral received is invested in repurchase agreements. 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.
51
<PAGE> 54
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,
hereafter referred to as the "Fund") at January 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the five years in the period then ended, 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, 1998 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where securities purchased had not been settled, 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, 1998, 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
March 6, 1998
SPECIAL 1998 TAX INFORMATION (UNAUDITED) VANGUARD FIXED INCOME SECURITIES FUND
This information for the fiscal year ended January 31, 1998, is included
pursuant to provisions of the Internal Revenue Code.
The GNMA Portfolio designates $1,736,000 as capital gain dividends (from net
long-term capital gains), which will be distributed in March 1998. All of the
capital gain dividend is designated as a 20% rate gain distribution.
The Intermediate-Term Corporate Portfolio designates $425,000 as capital
gain dividends (from net long-term capital gains), which will be distributed in
March 1998. Of the $425,000 capital gain dividends, the Portfolio designates
$405,000 as a 20% rate gain distribution.
The Long-Term Corporate Portfolio designates $56,724,000 as capital gain
dividends (from net long-term capital gains), of which $23,719,000 was
distributed to shareholders in December 1997 and $33,005,000 will be
distributed in March 1998. Of the $56,724,000 capital gain dividends, the
Portfolio designates $52,454,000 as a 20% rate gain distribution.
52
<PAGE> 55
DIRECTORS AND OFFICERS
JOHN C. BOGLE
Senior 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
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing Director
of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions,
Inc., Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance
Co., and Ladies Professional Golf Association; Trustee Emerita of Wellesley
College.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co., The
Jeffrey Co., and Southern New England Telecommunications 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. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director 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
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell
Company is the owner of trademarks and copyrights relating to the
Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are
trademarks of Wilshire Associates.
<PAGE> 56
VANGUARD FAMILY OF FUNDS
STOCK FUNDS
Convertible Securities Fund
Equity Income Fund
Explorer Fund
Growth and Income Portfolio
Horizon Fund
Aggressive Growth Portfolio
Capital Opportunity Portfolio
Global Equity Portfolio
Index Trust
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Small Capitalization Stock
Portfolio
Total Stock Market Portfolio
Value Portfolio
Institutional Index Fund
International Equity Index Fund
Emerging Markets Portfolio
European Portfolio
Pacific Portfolio
International Growth Portfolio
International Value Portfolio
Morgan Growth Fund
PRIMECAP Fund
Selected Value Portfolio
Specialized Portfolios
Energy Portfolio
Gold & Precious Metals
Portfolio
Health Care Portfolio
REIT Index Portfolio
Utilities Income Portfolio
Tax-Managed Fund
Capital Appreciation
Portfolio
Growth and Income Portfolio
Total International Portfolio
Trustees' Equity Fund
U.S. Portfolio
U.S. Growth Portfolio
Windsor Fund
Windsor II
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
Moderate Growth Portfolio
STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
Wellington Fund
BOND FUNDS
Admiral Funds
Intermediate-Term U.S.
Treasury Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term U.S. Treasury
Portfolio
Bond Index Fund
Intermediate-Term Bond
Portfolio
Long-Term Bond Portfolio
Short-Term Bond Portfolio
Total Bond Market Portfolio
Fixed Income Securities Fund
GNMA Portfolio
High Yield Corporate Portfolio
Intermediate-Term Corporate
Portfolio
Intermediate-Term U.S.
Treasury Portfolio
Long-Term Corporate
Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term Corporate
Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury
Portfolio
Municipal Bond Fund
High-Yield Portfolio
Insured Long-Term Portfolio
Intermediate-Term Portfolio
Limited-Term Portfolio
Long-Term Portfolio
Short-Term Portfolio
Preferred Stock Fund
State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
MONEY MARKET FUNDS
Admiral Funds
U.S. Treasury Money Market
Portfolio
Money Market Reserves
Federal Portfolio
Prime Portfolio
Municipal Bond Fund
Money Market Portfolio
Treasury Money Market Portfolio
State Tax-Free Funds
(CA, NJ, NY, OH, PA)
Q280-1/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor
[THE VANGUARD GROUP LOGO]
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
www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
<PAGE> 57
VANGUARD FIXED INCOME SECURITIES FUND FINANCIAL STATEMENTS
January 31, 1998
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 33 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. Undistributed
Net Investment Income is usually zero because the Portfolio distributes its net
income to shareholders as a dividend each day. Any realized gains must be
distributed annually, so the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The balance shown for Accumulated Net
Realized Gains usually approximates the amount available to distribute to
shareholders as capital gains as of the statement date, but may differ because
certain investments or transactions may be treated differently for financial
statement and tax purposes. Any Accumulated Net Realized Losses, and any
cumulative excess of distributions over net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the value of the Portfolio's investments and their cost, and reflects
the gains (losses) that would be realized if the Portfolio were to sell all of
its investments at their statement-date values.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Short-Term U.S. Treasury Portfolio . . . . . . . . . . . . . . . . . . . 1
Short-Term Federal Portfolio . . . . . . . . . . . . . . . . . . . . . . 3
Short-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . . 6
Intermediate-Term U.S. Treasury Portfolio . . . . . . . . . . . . . . . 12
Intermediate-Term Corporate Portfolio . . . . . . . . . . . . . . . . . 13
Long-Term U.S. Treasury Portfolio . . . . . . . . . . . . . . . . . . . 18
Long-Term Corporate Portfolio . . . . . . . . . . . . . . . . . . . . . 19
High Yield Corporate Portfolio . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (98.4%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Inflation-Indexed Note 3.625% 7/15/2002 $ 19,765 $ 19,685
U.S. Treasury Note 5.625% 2/28/2001 65,452 65,933
U.S. Treasury Note 5.75% 10/31/2002 71,700 72,666
U.S. Treasury Note 5.875% 8/31/1999 73,163 73,779
U.S. Treasury Note 5.875% 11/30/2001 29,900 30,376
U.S. Treasury Note 6.125% 12/31/2001 19,700 20,188
U.S. Treasury Note 6.25% 4/30/2001 4,000 4,103
U.S. Treasury Note 6.375% 4/30/1999 150,607 152,541
U.S. Treasury Note 6.50% 5/31/2001 13,200 13,643
U.S. Treasury Note 6.50% 8/31/2001 9,600 9,938
U.S. Treasury Note 6.75% 6/30/1999 116,700 118,975
U.S. Treasury Note 6.875% 8/31/1999 117,000 119,726
U.S. Treasury Note 7.125% 2/29/2000 5,300 5,482
U.S. Treasury Note 7.50% 11/15/2001 38,700 41,437
U.S. Treasury Note 7.75% 11/30/1999 77,900 81,117
</TABLE>
1
<PAGE> 58
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Note 7.75% 12/31/1999 $ 11,200 $ 11,683
U.S. Treasury Note 7.75% 1/31/2000 27,600 28,838
U.S. Treasury Note 7.875% 8/15/2001 4,500 4,853
U.S. Treasury Note 7.875% 11/15/2004 32,300 36,587
Bariven, SA Eximbank Guaranteed Export Financing
(U.S. Government Guaranteed) 6.277% 4/15/2001 (1)(3) 11,900 12,012
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 4.62% 10/15/1998 (1)(2) 4,000 3,990
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 6.475% 5/15/2000 (1) 6,500 6,556
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 6.82% 4/15/1999 (1)(2) 2,143 2,159
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 8.038% 1/15/2000 (1) 6,000 6,164
Government Export Trust (U.S. Government Guaranteed) 5.69% 2/1/1998 1,200 1,200
Government Export Trust (U.S. Government Guaranteed) 7.75% 1/1/2000 (1)(2) 5,333 5,431
Guaranteed Export Certificates (U.S. Government Guaranteed) 4.743% 9/15/1998 (1) 5,200 5,185
Guaranteed Trade Trust (U.S. Government Guaranteed) 6.104% 7/15/2003 (1) 24,292 24,520
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 5.696% 2/15/2005 (1) 8,000 7,950
Private Export Funding Corp. (U.S. Government Guaranteed) 5.65% 3/15/2003 (1) 5,848 5,869
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $983,366) 992,586
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (2.9%)
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.60% 2/2/1998 1,666 1,666
Collateralized By U.S. Government Obligations in a
Pooled Cash Account--Note G 5.60% 2/2/1998 28,030 28,030
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $29,696) 29,696
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.3%)
(COST $1,013,062) 1,022,282
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.3%)
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 18,084
Liabilities--Note G (31,123)
-----------
(13,039)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 98,239,553 outstanding $.001 par value shares
(authorized 1,250,000,000 shares) $1,009,243
================================================================================================================================
NET ASSET VALUE PER SHARE $10.27
================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At January 31,
1998, the aggregate value of these securities was $11,580,000,
representing 1.1% of net assets.
(3) Restricted security representing 1.2% of net assets at January 31, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,004,444 $10.23
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note E (4,421) (.05)
Unrealized Appreciation--Note F 9,220 .09
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,009,243 $10.27
================================================================================================================================
</TABLE>
2
<PAGE> 59
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM FEDERAL PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (98.2%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES (14.5%)
Agency For International Development
(U.S. Government Guaranteed) 7.75% 4/1/1998 (1) $ 4,120 $ 4,135
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 5.10% 4/15/1998 (1)(3) 1,151 1,149
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 6.82% 4/15/1999 (1)(3) 1,676 1,688
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 8.038% 1/15/2000 (1) 6,000 6,164
Government Export Trust (U.S. Government Guaranteed) 4.61% 9/1/1998 (1) 4,800 4,786
Government Export Trust (U.S. Government Guaranteed) 5.41% 3/1/1999 (1)(3) 2,659 2,657
Government Export Trust (U.S. Government Guaranteed) 5.69% 2/1/1998 (1) 3,262 3,262
Government Export Trust (U.S. Government Guaranteed) 6.61% 9/15/1999 (1) 8,774 8,834
Guaranteed Export Certificates (U.S. Government Guaranteed) 4.43% 6/15/1998 (1) 3,473 3,460
Guaranteed Export Certificates (U.S. Government Guaranteed) 4.743% 9/15/1998 (1) 751 749
Guaranteed Export Certificates (U.S. Government Guaranteed) 4.813% 12/15/1998 (1) 3,063 3,051
Guaranteed Export Certificates (U.S. Government Guaranteed) 5.23% 5/15/2005 (1) 17,234 16,952
Guaranteed Trade Trust (U.S. Government Guaranteed) 4.86% 4/1/1998 (1) 1,580 1,578
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 7.815% 11/15/2001 (1) 5,000 5,204
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 8.75 % 11/15/2001 (1) 7,500 7,939
Private Export Funding Corp. (U.S. Government Guaranteed) 5.75% 4/30/1998 9,800 9,805
Private Export Funding Corp. (U.S. Government Guaranteed) 6.31% 9/30/2004 10,000 10,317
Private Export Funding Corp. (U.S. Government Guaranteed) 7.03% 10/31/2003 5,000 5,340
Private Export Funding Corp. (U.S. Government Guaranteed) 9.45% 12/31/1999 33,580 35,972
U.S. Government Trust Certificates
(U.S. Government Guaranteed) 7.50% 8/15/2000 (1) 8,310 8,487
U.S. Government Trust Certificates
(U.S. Government Guaranteed) 8.00% 5/15/1998 (1) 1,545 1,554
U.S. Treasury Inflation-Indexed Note 3.625% 7/15/2002 69,077 68,796
-----------
211,879
-----------
AGENCY BONDS & NOTES (67.4%)
Federal Farm Credit Bank 5.70% 1/18/2005 20,000 19,800
Federal Farm Credit Bank 5.90% 1/10/2005 55,890 56,315
Federal Farm Credit Bank 6.10% 11/4/2004 5,000 5,101
Federal Home Loan Bank 5.20% 10/20/2000 31,000 30,959
Federal Home Loan Bank 5.37% 1/14/1999 73,000 72,992
Federal Home Loan Bank 5.37% 1/16/2003 15,000 14,813
Federal Home Loan Bank 5.402% 2/25/1998 (2) 25,000 24,771
Federal Home Loan Bank 5.43% 2/25/1999 10,000 9,997
Federal Home Loan Bank 5.97% 12/12/2000 10,000 10,126
Federal Home Loan Bank 9.30% 1/25/1999 40,050 41,495
Federal Home Loan Mortgage Corp. 5.875% 3/22/2000 15,000 15,115
Federal Home Loan Mortgage Corp. 6.43% 2/25/2012 (1) 48,000 48,367
Federal Home Loan Mortgage Corp. 6.505% 7/1/2004 8,645 9,009
Federal Home Loan Mortgage Corp. 6.53% 11/25/2010 (1) 16,733 16,906
Federal Home Loan Mortgage Corp. 6.59% 6/25/2012 (1) 40,000 40,331
Federal Home Loan Mortgage Corp. 6.747% 8/23/2001 19,350 19,665
Federal Home Loan Mortgage Corp. 6.92% 1/25/2012 (1) 15,000 15,206
Federal National Mortgage Assn. 5.72% 1/9/2001 10,000 10,052
Federal National Mortgage Assn. 5.72% 3/13/2001 9,000 9,048
Federal National Mortgage Assn. 5.83% 10/16/2000 15,000 15,127
Federal National Mortgage Assn. 5.90% 11/20/2000 2,800 2,829
Federal National Mortgage Assn. 5.94% 9/10/1999 40,000 40,288
Federal National Mortgage Assn. 5.97% 10/2/2000 11,000 11,129
Federal National Mortgage Assn. 6.14% 11/1/1999 19,000 19,212
Federal National Mortgage Assn. 6.14% 9/18/2000 15,000 15,236
Federal National Mortgage Assn. 6.18% 12/10/2001 10,000 10,070
Federal National Mortgage Assn. 6.26% 7/22/2002 15,000 15,401
Federal National Mortgage Assn. 6.29% 2/11/2002 31,400 32,212
</TABLE>
3
<PAGE> 60
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM FEDERAL PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage Assn. 6.375% 10/13/2000 $ 9,000 $ 9,062
Federal National Mortgage Assn. 6.40% 5/2/2001 18,630 19,103
Federal National Mortgage Assn. 6.43% 4/11/1999 23,500 23,756
Federal National Mortgage Assn. 6.44% 11/15/2001 28,635 28,983
Federal National Mortgage Assn. 6.45% 2/14/2002 10,000 10,162
Federal National Mortgage Assn. 6.58% 10/2/2001 13,000 13,440
Federal National Mortgage Assn. 6.59% 4/17/2000 10,000 10,226
Federal National Mortgage Assn. 6.60% 6/24/1999 30,000 30,450
Federal National Mortgage Assn. 6.70% 8/10/2001 30,000 30,457
Federal National Mortgage Assn. 6.74% 5/7/2001 10,000 10,142
Federal National Mortgage Assn. 7.23% 9/15/1999 15,000 15,404
Federal National Mortgage Assn. 7.375% 3/28/2005 15,650 17,103
Federal National Mortgage Assn. 7.50% 2/11/2002 8,590 9,182
Federal National Mortgage Assn. 8.25% 12/18/2000 32,755 35,132
Federal National Mortgage Assn. 8.35% 11/10/1999 10,270 10,764
Federal National Mortgage Assn. 8.45% 7/12/1999 17,845 18,576
Federal National Mortgage Assn. 9.05% 4/10/2000 8,955 9,604
Federal National Mortgage Assn. 11.50% 11/1/1999 46,000 50,566
-----------
983,684
-----------
MORTGAGE-BACKED SECURITIES (16.3%)
Federal Home Loan Mortgage Corp. 5.50% 2/5/1998 (1) 3,436 3,437
Federal Home Loan Mortgage Corp. 5.50% 5/1/1999 (1) 6,427 6,426
Federal Home Loan Mortgage Corp. 5.50% 11/1/2000 (1) 12,248 12,179
Federal Home Loan Mortgage Corp. 5.50% 1/1/2001 (1) 10,200 10,137
Federal Home Loan Mortgage Corp. 6.00% 7/1/1998 (1) 7,761 7,768
Federal Home Loan Mortgage Corp. 6.00% 9/1/1998 (1) 19,017 19,035
Federal Home Loan Mortgage Corp. 6.00% 10/1/1998 (1) 14,685 14,698
Federal Home Loan Mortgage Corp. 6.00% 1/1/1999 (1) 4,708 4,712
Federal Home Loan Mortgage Corp. 6.00% 3/1/1999 (1) 5,324 5,330
Federal Home Loan Mortgage Corp. 6.00% 5/1/2000 (1) 8,181 8,196
Federal Home Loan Mortgage Corp. 6.00% 9/1/2000 (1) 8,664 8,682
Federal Home Loan Mortgage Corp. 6.00% 11/1/2000 (1) 33,672 33,724
Federal Home Loan Mortgage Corp. 6.00% 6/1/2003 (1) 13,750 13,760
Federal Home Loan Mortgage Corp.
(Collateralized Mortgage Obligations) 6.50% 9/25/2000 (1) 20,630 20,741
Federal National Mortgage Assn. 6.00% 1/1/2001 (1) 36,078 36,116
Federal National Mortgage Assn. 6.00% 7/1/2002 (1) 17,733 17,733
Federal National Mortgage Assn. 6.00% 9/1/2002 (1) 5,121 5,119
Federal National Mortgage Assn. 6.00% 5/1/2004 (1) 3,231 3,237
Federal National Mortgage Assn.
(Collateralized Mortgage Obligations) 5.50% 9/25/2000 (1) 7,646 7,613
-----------
238,643
-----------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $1,420,893) 1,434,206
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.7%)
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $10,647) 5.60% 2/2/1998 10,647 10,647
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.9%)
(COST $1,431,540) 1,444,853
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 61
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.1%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Other Assets--Note C 18,780
Liabilities (3,197)
-----------
15,583
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 143,343,611 outstanding $.001 par value shares
(authorized 1,300,000,000 shares) $1,460,436
================================================================================================================================
NET ASSET VALUE PER SHARE $10.19
================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Floating Rate Note.
(3) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At January 31,
1998, the aggregate value of these securities was $5,495,000, representing
0.4% of net assets.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,472,619 $10.28
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note E (25,496) (.18)
Unrealized Appreciation--Note F 13,313 .09
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,460,436 $10.19
================================================================================================================================
</TABLE>
5
<PAGE> 62
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM CORPORATE PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (82.0%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET-BACKED SECURITIES (9.4%)
Banco Nacional de Mexico CCMT 6.23% 8/1/2002 (1)(4) $ 23,200 $ 23,325
CIT Home Equity Loan Trust 6.37% 3/15/2012 (1) 21,000 21,188
California Infrastructure & Economic Development
Bank SP Trust PG&E-1 6.15% 6/25/2002 (1) 10,150 10,235
California Infrastructure & Economic Development
Bank SP Trust PG&E-1 6.25% 6/25/2004 (1) 8,450 8,575
California Infrastructure SP SCE-1 6.14% 3/25/2002 (1) 14,600 14,678
California Infrastructure SP SCE-1 6.17% 3/25/2003 (1) 11,050 11,185
California Infrastructure SP SCE-1 6.22% 3/25/2004 (1) 9,675 9,817
California Infrastructure SP SCE-1 6.28% 9/25/2005 (1) 7,610 7,749
Chase Manhattan Auto Trust 6.65% 9/15/2003 (1) 17,576 17,998
The Chase Manhattan Corp. Grantor Trust 6.00% 9/17/2001 (1) 9,656 9,672
Citibank Credit Card Master Trust 6.70% 2/15/2004 (1) 13,000 13,331
Citicorp Credit Card Master Trust Series Class A 5.75% 1/15/2003 (1) 9,400 9,416
Contimortgage Home Equity Loan Trust 6.68% 5/15/2012 (1) 34,700 34,982
Ford Credit Auto Loan Master Trust 6.50% 8/15/2002 (1)(3) 35,000 35,668
Household Credit Card Master Trust 5.90% 5/15/2002 (1) 20,000 20,045
MBNA Master Credit Card Trust 6.20% 8/15/1999 (1) 833 833
Neiman Marcus Credit Card Master Trust 7.60% 6/15/2003 (1) 5,000 5,194
Premier Auto Trust 6.55% 9/6/2003 (1) 5,000 5,078
Providian Master Trust Series 6.25% 6/15/2007 (1) 40,000 40,674
Standard Credit Card Master Trust 5.90% 2/7/2001 (1) 25,000 25,050
Standard Credit Card Master Trust 6.75% 6/7/2000 (1) 21,000 21,064
Standard Credit Card Master Trust 7.875% 1/7/2000 (1) 16,100 16,348
Standard Credit Card Master Trust 8.875% 9/7/1999 (1) 26,131 26,461
Toyota Auto Grantor Trust 5.85% 3/15/2001 (1) 6,320 6,324
Toyota Auto Lease Trust 6.20% 9/27/2000 (1) 70,000 70,552
-----------
465,442
-----------
FINANCE (47.9%)
AUTO (3.4%)
Chrysler Financial Corp. 7.81% 2/23/1998 15,000 15,016
Ford Motor Credit Co. 5.37% 9/8/1998 14,475 14,450
Ford Motor Credit Co. 5.83% 6/29/1998 25,000 25,012
Ford Motor Credit Co. 6.55% 9/10/2002 25,000 25,545
General Motors Acceptance Corp. 6.00% 12/30/1998 5,000 5,014
General Motors Acceptance Corp. 6.21% 9/19/2000 35,000 35,302
General Motors Acceptance Corp. 7.25% 4/30/1999 21,100 21,480
General Motors Acceptance Corp. 8.40% 10/15/1999 5,000 5,210
General Motors Acceptance Corp. 8.50% 12/21/1998 20,000 20,478
BANKS (12.6%)
Bank South Inc. 10.20% 6/1/1999 12,500 13,205
Capital One Financial Corp. 6.58% 4/17/2001 15,000 15,122
Capital One Financial Corp. 6.66% 8/17/1998 5,000 5,019
Capital One Financial Corp. 8.67% 2/15/2000 5,000 5,230
Capital One Financial Corp. 8.93% 2/1/2000 5,000 5,250
The Chase Manhattan Corp. 8.00% 6/15/1999 19,450 20,011
The Chase Manhattan Corp. 10.00% 6/15/1999 20,840 21,969
CoreStates Capital Corp. 5.75% 1/15/2001 6,000 5,978
CoreStates Capital Corp. 6.186% 10/2/2000 35,000 35,301
First Bank System, Inc. 5.643% 2/18/1998 (2) 24,000 24,000
First Fidelity Bancorp 9.625% 8/15/1999 23,540 24,866
First National Bank of Commerce 6.50% 1/14/2000 25,000 25,311
First Union Corp. 9.45% 6/15/1999 6,649 6,970
Huntington Bancshares 5.68% 12/8/1998 10,000 10,003
Long Island Savings Bank 7.00% 6/13/2002 13,500 13,922
MBNA America Bank 5.898% 2/9/1998 (2) 40,650 40,622
MBNA America Bank 7.12% 4/12/1999 10,000 10,155
MBNA Corp. 7.49% 9/14/1999 6,600 6,761
Manufacturers Hanover Corp. 8.50% 2/15/1999 9,272 9,533
</TABLE>
6
<PAGE> 63
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Meridian Bancorp 6.625% 6/15/2000 $ 26,550 $ 27,023
J.P. Morgan & Co., Inc 6.125% 10/2/2000 35,000 35,361
National City Bank Cleveland 6.35% 3/15/2001 36,860 37,439
Norwest Corp. 6.125% 10/15/2000 6,000 6,058
PNC Funding Corp. 6.875% 3/1/2003 13,065 13,504
PNC Funding Corp. 9.875% 3/1/2001 5,565 6,172
Security Pacific Corp. 9.75% 5/15/1999 5,000 5,246
Security Pacific Corp. 11.00% 3/1/2001 20,907 23,859
Southern National Corp. 7.05% 5/23/2003 17,750 18,496
Summit Bancorp 8.625% 12/10/2002 21,725 24,010
U.S. Bancorp PATS 6.15% 2/18/1998 (2)(4) 55,700 55,740
U.S. Oregon PATS 5.975% 2/27/1998 (2)(4) 25,000 25,013
Wachovia Bank 5.35% 11/13/1998 20,000 19,971
Wachovia Bank 5.60% 3/8/1999 25,000 25,003
Wells Fargo & Co. 6.125% 11/1/2003 5,000 5,009
CONSUMERS (1.1%)
Norwest Financial, Inc. 6.68% 9/15/1999 46,000 46,695
Norwest Financial, Inc. 6.875% 12/15/1999 9,845 10,045
DIVERSIFIED (8.1%)
AT&T Capital Corp. 6.70% 2/15/2001 50,000 50,767
Associates Corp. of North America 6.375% 8/15/2000 25,000 25,348
Associates Corp. of North America 6.50% 9/9/1998 25,000 25,129
Associates Corp. of North America 8.37% 12/21/1999 19,000 19,890
Associates Corp. of North America 8.40% 11/29/1999 10,000 10,455
CIT Group Holdings 5.70% 12/15/1998 20,000 20,010
CIT Group Holdings 6.25% 10/25/1999 50,000 50,406
CIT Group Holdings 6.375% 8/1/2002 9,900 10,027
Caterpillar Financial Services 6.10% 6/17/1999 16,000 16,102
Comdisco Inc. 6.125% 1/15/2003 15,000 15,023
Comdisco Inc. 6.34% 6/25/1999 25,000 25,191
Comdisco Inc. 6.50% 4/30/1999 18,500 18,662
Comdisco Inc. 6.52% 3/24/1999 15,000 15,127
Finova Capital Corp. 6.05% 9/15/1999 25,000 25,100
Finova Capital Corp. 6.375% 4/15/1999 21,000 21,150
General Electric Capital Corp. 8.10% 1/26/1999 5,000 5,125
Sears Roebuck & Co. Acceptance Corp. 6.22% 11/8/2000 48,000 48,415
INSURANCE (5.0%)
Conseco Inc. 10.50% 12/15/2004 32,475 39,451
Orion Capital Corp. 9.125% 9/1/2002 15,225 17,001
SunAmerica Inc. 6.20% 10/31/1999 26,000 26,170
SunAmerica Inc. 6.58% 1/15/2002 5,000 5,098
Travelers Property Casualty Corp. 6.25% 10/1/1999 50,000 50,357
Travelers Property Casualty Corp. 6.75% 9/1/1999 30,000 30,408
Travelers Property Casualty Corp. 6.75% 4/15/2001 34,000 34,786
USAA Capital Corp. 6.60% 6/15/1998 (4) 25,000 25,098
USF&G Corp. 8.375% 6/15/2001 17,545 18,798
MORTGAGE-BACKED SECURITY (1.0%)
PNC Mortgage Securities Corp. 6.49% 10/25/2026 (1) 48,925 49,353
OTHER (16.7%)
Associated Estates Realty Corp. 6.88% 12/9/2004 5,000 5,060
Associated Estates Realty Corp. 8.375% 4/15/2000 15,680 16,362
Bay Apartment Communities 6.50% 1/15/2005 8,300 8,247
Bear Stearns & Co., Inc. 7.625% 9/15/1999 10,000 10,274
Bear Stearns & Co., Inc. 7.625% 4/15/2000 26,900 27,857
Bradley Operating LP 7.00% 11/15/2004 5,000 5,038
Camden Property Trust 6.097% 2/9/1998 (2) 20,000 20,000
Chelsea GCA Realty Partner 7.75% 1/26/2001 10,000 10,345
Colonial Realty LP 6.96% 7/26/2004 22,000 22,313
</TABLE>
7
<PAGE> 64
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM CORPORATE PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Donaldson Lufkin & Jenrette, Inc. 6.70% 6/30/2000 $ 15,000 $ 15,273
Equity Residential Properties Trust Operating LP 6.55% 11/15/2001 35,000 35,396
Equity Residential Properties Trust Operating LP 7.95% 4/15/2002 7,000 7,436
First Industrial PATS 7.375% 5/15/2004 (4) 12,000 12,414
Goldman Sachs Group 6.021% 1/25/1999 (2)(4) 14,000 14,049
Goldman Sachs Group 6.10% 4/15/1998 (4) 30,000 30,029
Goldman Sachs Group 6.625% 12/1/2004 (4) 20,000 20,200
Goldman Sachs Group 6.875% 9/15/1999 (4) 16,175 16,430
Health & Retirement Property Trust 6.75% 12/18/2002 (4) 25,000 25,276
Highwoods Forsyth LP 7.19% 6/15/2004 (4) 26,000 26,518
JDN Realty Corp. 6.80% 8/1/2004 10,500 10,590
Kimco Realty Corp. 6.50% 10/1/2003 4,920 4,982
Lehman Brothers Holdings 5.75% 2/15/1998 5,000 5,000
Lehman Brothers Holdings 5.944% 1/20/1998 (2) 10,000 9,990
Lehman Brothers Holdings 6.20% 1/15/2002 20,000 19,991
Lehman Brothers Holdings 6.84% 10/7/1999 11,000 11,148
Lehman Brothers Holdings 6.92% 10/1/1999 13,000 13,190
Lehman Brothers Holdings 6.94% 9/30/1999 11,000 11,164
Lehman Brothers Holdings 7.14% 9/24/1999 11,900 12,112
Lehman Brothers Holdings 8.375% 2/15/1999 5,000 5,120
Merrill Lynch & Co., Inc. 7.26% 3/25/2002 50,000 51,967
Merry Land & Investment Co., Inc. 7.25% 10/1/2002 9,325 9,684
Morgan Stanley Group 5.75% 2/15/2001 10,500 10,466
Morgan Stanley Group 6.425% 3/15/2000 15,000 15,177
Oasis Residential Inc. 6.75% 11/15/2001 21,050 21,392
PaineWebber Group 7.16% 6/15/1999 25,000 25,438
Post Apartment Homes LP 6.156% 3/3/1998 (2) 30,000 30,023
Post Apartment Homes LP 7.02% 4/2/2001 20,000 20,537
Post Apartment Homes LP 7.25% 10/1/2003 7,000 7,291
Salomon Smith Barney Holdings Inc. 5.50% 1/15/1999 11,000 10,982
Salomon Smith Barney Holdings Inc. 7.00% 5/15/2000 15,500 15,833
Salomon Smith Barney Holdings Inc. 7.30% 5/15/2002 25,000 26,093
Salomon Smith Barney Holdings Inc. 7.50% 5/1/2002 11,500 12,084
Salomon Smith Barney Holdings Inc. 7.98% 3/1/2000 17,500 18,177
Simon DeBartolo Group, Inc. 6.875% 10/27/2005 10,000 10,031
Simon DeBartolo PATS 6.75% 11/15/2003 (4) 23,000 22,954
Spieker Properties Inc. 6.875% 2/1/2005 7,375 7,422
Summit Properties Inc. 6.625% 12/15/2003 16,000 16,126
Summit Properties Inc. 6.80% 8/15/2002 20,000 20,328
Summit Properties Inc. 6.95% 8/15/2004 12,500 12,704
Topaz Ltd. 6.92% 3/10/2007 (1)(4) 15,432 15,917
Trinet Corp. Realty Trust 7.30% 5/15/2001 5,500 5,674
United Dominion Realty Trust, Inc. 7.02% 11/15/2005 8,000 8,191
Wellsford Residential Property Trust 9.375% 2/1/2002 5,175 5,746
-----------
2,381,867
-----------
INDUSTRIAL (17.5%)
Allied Corp. 0.00% 9/15/1998 7,500 7,249
CBI Industries 7.53% 8/26/1999 15,000 15,374
CSC Enterprises 6.50% 11/15/2001 (4) 25,000 25,501
CSC Enterprises 6.80% 4/15/1999 (4) 21,500 21,783
The Coca-Cola Co. 7.875% 9/15/1998 18,000 18,265
Continental Airlines Pass Through Trust 6.80% 1/2/2008 (1) 12,000 12,205
Cox Communications, Inc. 6.375% 6/15/2000 37,000 37,320
The Walt Disney Co. 6.375% 3/30/2001 18,000 18,350
R.R. Donnelley & Sons Co. 7.96% 11/8/1999 15,000 15,550
Electronic Data Systems Corp. 6.85% 5/15/2000 (4) 18,000 18,415
Federal Express Corp. 9.875% 4/1/2002 8,195 9,309
Federal Express Corp. 10.00% 4/15/1999 6,255 6,550
Federated Department Stores, Inc. 8.125% 10/15/2002 5,000 5,409
Federated Department Stores, Inc. 8.50% 6/15/2003 10,000 11,062
Food Lion, Inc. 8.41% 9/26/2001 5,000 5,438
General Electric Co. 7.875% 9/15/1998 15,000 15,215
</TABLE>
8
<PAGE> 65
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Halliburton Co. 6.30% 8/5/2002 $ 26,250 $ 26,737
Hertz Corp. 6.50% 4/1/2000 5,000 5,074
Hertz Corp. 8.30% 2/2/1998 19,500 19,501
James River Corp. 7.65% 12/26/2000 10,000 10,417
James River Corp. 8.375% 11/15/2001 12,220 13,142
Knight-Ridder, Inc. 8.50% 9/1/2001 17,025 17,904
Lockheed Martin Corp. 6.85% 5/15/2001 47,000 48,177
McDonald's Corp. 8.375% 10/29/1999 8,550 8,938
Minnesota Mining & Manufacturing Co. 6.25% 3/29/1999 22,275 22,459
Mobil Corp. ESOP 9.17% 2/29/2000 (1) 39,704 41,235
Norfolk Southern Corp. 6.875% 5/1/2001 100,000 102,760
Occidental Petroleum Corp. 6.75% 9/16/1999 6,000 6,088
Occidental Petroleum Corp. 8.50% 11/9/2001 10,000 10,845
PanAmSat Corp. 6.00% 1/15/2003 (4) 25,000 24,855
J.C. Penney & Co., Inc. 5.375% 11/15/1998 13,350 13,321
J.C. Penney & Co., Inc. 7.25% 4/1/2002 5,000 5,225
Phillips Petroleum Co. 8.00% 4/12/1999 4,000 4,107
Praxair, Inc. 6.70% 4/15/2001 50,000 51,099
Raytheon Co. 6.45% 8/15/2002 35,250 35,889
Rockwell International Corp. 8.875% 9/15/1999 33,860 35,501
Safeway Inc. 6.85% 9/15/2004 7,480 7,685
Sara Lee Corp. 5.70% 7/14/2000 5,000 5,005
Sara Lee Corp. 6.50% 5/16/2000 15,000 15,269
Sara Lee Corp. 6.70% 9/9/1999 10,000 10,168
Sara Lee Corp. 7.75% 2/3/2000 18,700 19,433
Seagate Technology Inc. 7.125% 3/1/2004 10,000 9,753
TCI Communications 6.375% 9/15/1999 25,000 25,128
Union Carbide Corp. 7.00% 8/1/1999 12,315 12,519
Union Oil of California 8.97% 3/6/1998 6,000 6,018
Union Pacific Corp. 7.00% 6/15/2000 10,000 10,256
Union Pacific Railroad Co. (Equipment Trust Certificate) 6.99% 12/24/1999 (1) 3,828 3,886
-----------
871,389
-----------
UTILITIES (7.2%)
Baltimore Gas & Electric Co. 6.68% 10/11/2001 16,000 16,458
Duquesne Light Co. 6.15% 2/12/1998 5,000 5,000
Edison Mission Energy Funding Corp. 6.77% 9/15/2003 (1)(4) 20,141 20,442
Florida Gas Transmission 8.14% 11/1/1999 (4) 10,000 10,399
Florida Power & Light Corp. 5.50% 7/1/1999 20,600 20,598
GTE North Inc. 5.50% 2/15/1999 18,175 18,160
GTE Southwest Inc. 5.82% 12/1/1999 18,650 18,670
Idaho Power Co. 5.33% 9/1/1998 4,500 4,490
Indiana Michigan Power Co. 6.40% 3/1/2000 20,000 20,241
Kansas City Power & Light Co. 6.50% 11/14/2001 5,000 5,107
Kern River Funding Corp. 6.42% 3/31/2001 (1)(4) 13,098 13,235
MCI Communications Corp. 6.25% 3/23/1999 12,000 12,059
MCN Investment Corp. 6.03% 2/1/2001 4,000 4,023
MCN Investment Corp. 6.82% 5/13/1999 28,000 28,381
Nevada Power Co. 7.06% 5/1/2000 12,000 12,325
NYNEX Corp. Capital Funding 8.10% 11/1/1999 5,070 5,276
NYNEX Corp. Capital Funding 8.11% 11/1/1999 15,000 15,611
NYNEX Credit Co. 6.50% 9/15/2000 (4) 30,000 30,553
PSE&G Capital Corp. 6.74% 10/23/2001 (4) 26,000 26,412
Progress Capital Holdings 6.88% 8/1/2001 (4) 20,000 20,643
Public Service Electric & Gas 6.50% 6/1/2000 28,000 28,435
Texas Utilities Co. 9.50% 8/1/1999 8,500 8,928
United Telecom 9.75% 4/1/2000 10,550 11,374
-----------
356,820
-----------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $4,017,131) 4,075,518
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 66
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM CORPORATE PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (7.5%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITY (0.1%)
U.S. Treasury Note 5.75% 10/31/2002 $ 5,000 $ 5,067
AGENCY BONDS & NOTES (1.7%)
Federal Home Loan Mortgage Corp. 6.43% 2/25/2012 (1) 15,000 15,115
Federal Home Loan Mortgage Corp. 6.92% 1/25/2012 (1) 15,000 15,206
Federal National Mortgage Assn. 6.70% 8/10/2001 50,140 50,904
Government Export Trust (U.S. Government Guaranteed) 6.61% 9/15/1999 (1) 3,375 3,398
-----------
84,623
-----------
MORTGAGE-BACKED SECURITIES (5.7%)
Federal Home Loan Mortgage Corp. 5.50% 10/1/2000 (1) 20,644 20,523
Federal Home Loan Mortgage Corp. 6.00% 9/1/1998 (1) 9,989 9,998
Federal Home Loan Mortgage Corp. 6.00% 12/1/1999 (1) 12,545 12,566
Federal Home Loan Mortgage Corp. 6.00% 1/1/2001 (1) 23,504 23,552
Federal Home Loan Mortgage Corp. 6.00% 2/1/2001 (1) 79,671 79,855
Federal Home Loan Mortgage Corp. 6.00% 7/1/2001 (1) 38,029 38,105
Federal Home Loan Mortgage Corp. 6.50% 10/1/1999 (1) 10,644 10,696
Federal Home Loan Mortgage Corp. 7.00% 2/1/2000 (1) 5,285 5,351
Federal Home Loan Mortgage Corp. 7.00% 3/1/2000 (1) 18,818 19,054
Federal Home Loan Mortgage Corp. 7.00% 5/1/2000 (1) 18,475 18,607
Federal Home Loan Mortgage Corp. 7.00% 6/1/2001 (1) 10,336 10,446
Federal National Mortgage Assn. 6.00% 1/1/2001 (1) 24,639 24,665
Federal National Mortgage Assn. 6.00% 6/1/2001 (1) 7,508 7,514
Federal National Mortgage Assn. 8.00% 6/1/1999 (1) 4,650 4,707
-----------
285,639
-----------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $375,385) 375,329
- --------------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLAR-DENOMINATED)(7.7%)
- --------------------------------------------------------------------------------------------------------------------------------
Australia & New Zealand Banking Group Ltd. 6.25% 2/1/2004 20,000 19,801
Bank of Nova Scotia 9.00% 10/1/1999 12,394 13,014
Bayerische Landesbank Girozentrale 5.625% 2/26/2001 16,000 15,949
Bayerische Landesbank Girozentrale 6.375% 8/31/2000 50,000 50,769
CIBC Capital Funding, L.P. 6.25% 12/17/2002 (4) 25,000 25,236
Canadian Imperial Bank of Commerce (NY Branch) 6.20% 8/1/2000 70,525 71,230
KFW International Finance, Inc. 9.125% 5/15/2001 7,995 8,799
Korea Development Bank 7.125% 9/17/2001 57,820 54,268
National Australia Bank (NY) 9.70% 10/15/1998 12,150 12,482
National Westminster Bancorp Inc. 9.45% 5/1/2001 8,881 9,808
Noranda, Inc. 8.00% 6/1/2003 20,000 21,600
Noranda, Inc. 8.625% 7/15/2002 15,000 16,440
Placer Dome Inc. 6.14% 1/29/2002 15,000 14,755
Province of Manitoba 7.75% 2/1/2002 7,310 7,797
Province of Manitoba 8.75% 5/15/2001 7,000 7,603
Province of Manitoba 9.50% 9/15/1998 10,000 10,229
Province of Manitoba 9.625% 3/15/1999 10,000 10,420
Westpac Banking 9.125% 8/15/2001 10,000 11,004
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $373,890) 381,204
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 67
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.7%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.60% 2/2/1998 $ 60,033 $ 60,033
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note G 5.60% 2/2/1998 23,988 23,988
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $84,021) 84,021
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.9%)
(COST $4,850,427) 4,916,072
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.1%)
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 101,316
Liabilities--Note G (46,211)
-----------
55,105
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%) $4,971,177
================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Floating Rate Notes.
(3) Securities with a value of $4,076,000 have been segregated as initial
margin for open futures contracts.
(4) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At January 31,
1998, the aggregate value of these securities was $550,437,000,
representing 11.1% of net assets.
PATS--Putable Asset Trust Securities.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------------
AMOUNT
(000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Paid in Capital $4,936,239
Undistributed Net Investment Income --
Accumulated Net Realized Losses--Note E (29,513)
Unrealized Appreciation (Depreciation)--Note F
Investment Securities 65,645
Futures Contracts (1,194)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $4,971,177
================================================================================================================================
Investor Shares--Net Assets applicable to 433,173,573 outstanding $.001 par value shares
(authorized 1,700,000,000 shares) $4,708,617
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--INVESTOR SHARES $10.87
================================================================================================================================
Institutional Shares--Net Assets applicable to 24,154,476 outstanding $.001 par value shares
(authorized 1,000,000,000 shares) $262,560
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--INSTITUTIONAL SHARES $10.87
================================================================================================================================
</TABLE>
11
<PAGE> 68
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (97.5%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bond 10.375% 11/15/2012 $ 234,850 $ 316,071
U.S. Treasury Bond 10.75% 5/15/2003 67,100 83,197
U.S. Treasury Bond 11.125% 8/15/2003 9,000 11,406
U.S. Treasury Bond 11.625% 11/15/2004 27,300 36,614
U.S. Treasury Bond 11.875% 11/15/2003 20,700 27,182
U.S. Treasury Inflation-Indexed Note 3.375% 1/15/2007 26,096 25,533
U.S. Treasury Inflation-Indexed Note 3.625% 7/15/2002 13,109 13,056
U.S. Treasury Note 6.625% 5/15/2007 43,000 46,274
U.S. Treasury Note 6.875% 5/15/2006 30,000 32,590
U.S. Treasury Note 7.25% 5/15/2004 205,184 224,412
U.S. Treasury Note 7.25% 8/15/2004 76,000 83,273
U.S. Treasury Note 7.50% 2/15/2005 218,100 242,977
U.S. Treasury Note 7.875% 11/15/2004 195,000 220,878
Export Funding Trust (U.S. Government Guaranteed) 8.21% 12/29/2006 (1) 26,476 29,276
Government Export Trust (U.S. Government Guaranteed) 6.00% 3/15/2005 (1) 15,104 15,236
Guaranteed Export Certificates (U.S. Government Guaranteed) 7.46% 12/15/2005 (1) 26,783 28,339
Guaranteed Export Trust (U.S. Government Guaranteed) 7.80% 8/15/2006 (1) 8,071 8,729
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.02% 9/1/2004 (1) 12,396 12,892
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.39% 6/26/2006 (1) 4,349 4,591
Guaranteed Trade Trust (U.S. Government Guaranteed) 8.17% 1/15/2007 (1) 6,750 7,446
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 5.735% 1/15/2002 (1) 15,200 15,216
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 5.94% 6/20/2006 (1) 17,895 17,978
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 6.08% 8/15/2004 (1) 22,050 22,286
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 6.726% 9/15/2010 (1) 17,000 17,745
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 6.75% 12/15/2008 (1) 12,192 12,665
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES (Cost $1,484,750) 1,555,862
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.1%)
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $16,819) 5.60% 2/2/1998 16,819 16,819
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.6%)(COST $1,501,569) 1,572,681
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.4%)
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 33,992
Liabilities (11,841)
-----------
22,151
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 147,650,868 outstanding $.001 par value shares
(authorized 1,250,000,000 shares) $1,594,832
================================================================================================================================
NET ASSET VALUE PER SHARE $10.80
================================================================================================================================
</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, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,559,568 $10.56
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note E (35,848) (.24)
Unrealized Appreciation--Note F 71,112 .48
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,594,832 $10.80
================================================================================================================================
</TABLE>
12
<PAGE> 69
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (82.8%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET-BACKED SECURITIES (4.3%)
California Infrastructure & Economic Development
Bank SP Trust PG&E 6.32% 9/25/2005 (1) $ 1,650 $ 1,684
California Infrastructure & Economic Development
Bank SP Trust PG&E 6.38% 9/25/2008 (1) 15,000 15,309
California Infrastructure & Economic Development
Bank SP Trust PG&E 6.42% 9/25/2008 (1) 1,800 1,849
Citibank Credit Card Master Trust 6.70% 2/15/2004 (1) 5,000 5,127
Ford Credit Auto Loan Master Trust 6.50% 8/15/2002 (1) 4,000 4,076
Providian Master Trust Series 6.25% 6/15/2007 (1) 10,000 10,169
-----------
38,214
-----------
FINANCE (45.2%)
AUTOMOBILE (0.8%)
Ford Motor Credit Co. 7.50% 1/15/2003 1,000 1,062
Ford Motor Credit Co. 7.75% 11/15/2002 1,000 1,072
General Motor Acceptance Corp. 6.125% 1/22/2008 5,000 4,925
BANKS (17.7%)
Banc One Corp. 9.875% 3/1/2009 3,690 4,679
Bankers Trust NY Corp. 7.625% 8/15/2005 8,000 8,568
The Bank of New York Co., Inc. 6.625% 6/15/2003 6,000 6,152
BankAmerica Corp. 7.20% 4/15/2006 10,000 10,548
The Chase Manhattan Corp. 7.125% 2/1/2007 5,000 5,241
The Chase Manhattan Corp. 8.625% 5/1/2002 5,000 5,490
Citicorp 6.75% 8/15/2005 5,000 5,127
Citicorp 7.00% 7/1/2007 10,000 10,440
CoreStates Capital Corp. 6.75% 11/15/2006 10,000 10,285
CoreStates Captial Corp. 9.625% 2/15/2001 2,500 2,758
First Bank N.A. 6.00% 10/15/2003 4,200 4,179
First Bank System, Inc. 6.875% 9/15/2007 5,000 5,186
First Interstate Bancorp 10.875% 4/15/2001 1,000 1,145
Mellon Bank Corp. 7.00% 3/15/2006 6,000 6,267
Mellon Bank Corp. 7.625% 9/15/2007 5,000 5,464
Meridian Bancorp, Inc. 6.625% 3/15/2003 3,000 3,075
J.P. Morgan & Co., Inc. 6.70% 11/1/2007 10,000 10,221
NationsBank Corp. 6.375% 2/15/2008 10,000 10,040
PNC Bank N.A. 7.875% 4/15/2005 5,000 5,449
PNC Funding Corp. 9.875% 3/1/2001 5,000 5,545
Southern National Corp. 7.05% 5/23/2003 10,000 10,420
Summit Bancorp 8.625% 12/10/2002 5,775 6,382
Summit Bank 6.75% 6/15/2003 5,510 5,655
Wells Fargo & Co. 6.875% 4/1/2006 10,000 10,348
CONSUMERS (2.9%)
Norwest Financial, Inc. 6.625% 7/15/2004 5,000 5,145
Norwest Financial, Inc. 7.20% 5/1/2007 5,000 5,340
Norwest Financial, Inc. 7.50% 4/15/2005 5,000 5,390
Sears Roebuck & Co. Acceptance Corp. 6.69% 4/30/2001 5,000 5,108
Sears Roebuck & Co. Acceptance Corp. 6.80% 10/9/2002 5,000 5,155
DIVERSIFIED (2.4%)
Associates Corp. of North America 5.75% 10/15/2003 5,000 4,932
Associates Corp. of North America 7.54% 4/14/2004 3,000 3,217
Associates Corp. of North America 7.875% 9/30/2001 2,000 2,131
Finova Capital Corp. 6.75% 11/15/2004 5,000 5,141
General Electric Capital Corp. 8.70% 2/15/2003 1,000 1,124
Pitney Bowes, Inc. Credit Corp. 6.625% 6/1/2002 5,000 5,157
INSURANCE (7.1%)
Conseco Inc. 10.50% 12/15/2004 5,000 6,074
Harleysville Group 6.75% 11/15/2003 7,500 7,701
</TABLE>
13
<PAGE> 70
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Horace Mann Educators Corp. 6.625% 1/15/2006 $ 6,250 $ 6,355
NAC Re Corp. 7.15% 11/15/2005 5,000 5,220
Orion Capital Corp. 9.125% 9/1/2002 10,000 11,167
RGA Reinsurance Group of America Inc. 7.25% 4/1/2006 (2) 10,000 10,455
Travelers Property Casualty Corp. 6.75% 4/15/2001 5,000 5,116
USF&G Corp. 7.125% 6/1/2005 5,000 5,217
USF&G Corp. 8.375% 6/15/2001 6,425 6,884
OTHER (14.3%)
Associated Estates Realty Corp. 6.88% 12/9/2004 2,000 2,024
BRE Properties, Inc. 7.20% 6/15/2007 2,000 2,073
Bear Stearns & Co., Inc. 7.00% 3/1/2007 5,000 5,166
Bradley Operating LP 7.20% 1/15/2008 4,000 4,036
Camden Property Trust 7.172% 6/20/2004 3,000 3,087
Colonial Realty LP 6.96% 7/26/2004 3,000 3,043
Donaldson Lufkin & Jenrette, Inc. 6.90% 10/1/2007 5,000 5,154
Equity Residental Properties Trust Operating LP 6.55% 11/15/2001 5,000 5,057
Evans Withycombe Residential, Inc. 7.50% 4/15/2004 3,000 3,164
First Industrial LP 7.60% 5/15/2007 3,000 3,180
Goldman Sachs Group 7.20% 3/1/2007 (2) 5,000 5,247
Goldman Sachs Group 7.80% 7/15/2002 (2) 5,000 5,322
Highwoods Forsyth LP 7.19% 6/15/2004 (2) 5,000 5,100
Irvine Apartment Communities Inc. 7.00% 10/1/2007 3,000 3,048
JDN Realty Corp. 6.80% 8/1/2004 3,500 3,530
Kimco Realty Corp. 6.50% 10/1/2003 5,000 5,063
Merry Land & Investment Co., Inc. REIT 6.875% 11/1/2004 2,000 2,034
Merry Land & Investment Co., Inc. REIT 6.90% 8/1/2007 5,000 5,062
Morgan Stanley Group 9.375% 6/15/2001 1,000 1,105
New Plan Realty Trust 7.35% 6/15/2007 3,000 3,172
Oasis Residential Inc. 6.75% 11/15/2001 2,500 2,541
Post Apartment Homes LP 7.25% 10/1/2003 2,000 2,083
Realty Income Corp. 7.75% 5/6/2007 3,000 3,178
Salomon Inc. 6.75% 2/15/2003 5,000 5,119
Salomon Smith Barney Holdings Inc. 6.875% 6/15/2005 5,000 5,131
Security Capital Pacific Trust 7.375% 10/15/2006 3,000 3,168
Shurgard Storage Centers, Inc. 7.50% 4/25/2004 3,000 3,141
Simon DeBartolo Group, Inc. 6.875% 11/15/2006 3,000 3,000
Simon DeBartolo PATS 6.75% 11/15/2003 (2) 3,000 2,994
Storage USA 7.00% 12/1/2027 4,000 4,050
Summit Properties Inc. 7.20% 8/15/2007 5,000 5,131
Topaz Ltd. 6.92% 3/10/2007 (1)(2) 11,285 11,639
United Dominion Realty Trust, Inc. 7.25% 1/15/2007 3,000 3,105
-----------
406,699
-----------
INDUSTRIAL (27.3%)
AEROSPACE & DEFENSE (2.4%)
Allied Signal Corp. 6.20% 2/1/2008 5,500 5,504
The Boeing Co. 8.10% 11/15/2006 2,000 2,269
Lockheed Martin Corp. 7.25% 5/15/2006 6,000 6,322
PanAmSat Corp. 6.375% 1/15/2008 (2) 5,000 4,947
Rockwell International Corp. 8.375% 2/15/2001 2,361 2,535
AUTOMOTIVE (0.6%)
General Motors Corp. 8.875% 6/11/2001 1,000 1,090
General Motors Corp. 9.22% 7/18/2001 1,000 1,103
General Motors Corp. 9.625% 12/1/2000 3,000 3,294
CABLE (2.5%)
Cox Communications, Inc. 6.50% 11/15/2002 2,000 2,034
Cox Communications, Inc. 6.69% 9/20/2004 8,430 8,608
TCI Communications 7.25% 8/1/2005 7,000 7,228
Time Warner Inc. 8.18% 8/15/2007 4,000 4,427
</TABLE>
14
<PAGE> 71
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHEMICALS (0.7%)
Eastman Chemical Co. 6.375% 1/15/2004 $ 1,500 $ 1,513
Praxair, Inc. 6.70% 4/15/2001 5,000 5,110
CONSUMER GOODS & SERVICES (2.9%)
American Stores Co. 9.125% 4/1/2002 4,000 4,443
Anheuser-Busch Cos., Inc. 6.75% 6/1/2005 2,000 2,044
Anheuser-Busch Cos., Inc. 7.10% 6/15/2007 10,000 10,436
The Walt Disney Co. 6.75% 3/30/2006 5,000 5,199
Levi Strauss & Co. 6.80% 11/1/2003 (2) 4,000 4,107
ENERGY & RELATED GOODS & SERVICES (2.1%)
Halliburton Co. 6.30% 8/5/2002 10,000 10,185
Phillips Petroleum Co. 9.00% 6/1/2001 1,000 1,096
Texaco Capital, Inc. 8.50% 2/15/2003 5,000 5,572
Western Atlas, Inc. 7.875% 6/15/2004 2,000 2,195
FOOD & LODGING (0.4%)
IBP, Inc. 6.125% 2/1/2006 4,000 3,964
GROCERY STORES (2.6%)
Food Lion, Inc. 7.55% 4/15/2007 7,000 7,567
Great Atlantic & Pacific Tea Co. 7.75% 4/15/2007 3,000 3,175
Kroger Co. 8.15% 7/15/2006 5,000 5,523
Safeway Inc. 6.85% 9/15/2004 7,000 7,192
HEALTH CARE (4.0%)
Cardinal Health, Inc. 6.00% 1/15/2006 8,845 8,697
Cardinal Health, Inc. 6.50% 2/15/2004 3,500 3,560
Eli Lilly & Co. 8.375% 12/1/2006 3,000 3,464
MedPartners Inc. 7.375% 10/1/2006 8,500 7,789
The Upjohn Co. Employee Stock Ownership Trust 9.79% 2/1/2004 (1) 6,695 7,648
Warner-Lambert Co. 6.00% 1/15/2008 5,000 4,969
RETAIL (0.7%)
Federated Department Stores, Inc. 8.50% 6/15/2003 5,000 5,531
Sears, Roebuck & Co. 8.52% 5/13/2002 1,000 1,098
TECHNOLOGY & RELATED (4.7%)
Applied Materials, Inc. 8.00% 9/1/2004 2,000 2,170
Electronic Data Systems Corp. 6.85% 5/15/2000 (2) 5,000 5,115
First Data Corp. 6.375% 12/15/2007 12,000 12,135
Lucent Technologies Inc. 7.25% 7/15/2006 10,000 10,763
Seagate Technology, Inc. 7.45% 3/1/2037 10,000 9,516
Tektronix 7.50% 8/1/2003 2,000 2,110
TRANSPORTATION (3.7%)
Burlington Northern Railroad Co. Equipment Trust 7.33% 6/23/2010 (1) 4,768 5,053
Delta Airlines, Inc. Pass-Through Trust 7.541% 10/11/2011 (1) 4,618 4,892
Delta Airlines, Inc. Pass-Through Trust 8.54% 1/2/2007 (1) 2,784 3,078
Norfolk Southern Corp. 7.35% 5/15/2007 5,000 5,353
Northwest Airlines Corp. Pass-Through Trust 8.07% 1/2/2015 (1) 11,311 12,437
Union Pacific Railroad Co. Equipment Trust 6.12% 2/1/2004 2,000 2,015
-----------
246,075
-----------
UTILITIES (6.0%)
Baltimore Gas & Electric Co. 6.25% 12/8/2005 5,000 5,052
Baltimore Gas & Electric Co. 6.70% 12/1/2006 9,000 9,351
Chesapeake & Potomac Telephone Co. (MD) 6.00% 5/1/2003 4,604 4,638
Kansas City Power & Light Co. 6.50% 11/14/2001 5,000 5,107
MCI Communications Corp. 7.50% 8/20/2004 1,500 1,590
Nipsco Capital Markets 7.39% 4/1/2004 6,000 6,403
</TABLE>
15
<PAGE> 72
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pennsylvania Power & Light Co. 6.875% 3/1/2004 $ 5,000 $ 5,205
Progress Capital Holdings 7.45% 9/1/2003 (2) 10,000 10,671
Southwestern Bell Telephone 5.77% 10/14/2003 6,000 5,973
-----------
53,990
-----------
- ----------------------------------------------------------------------------------------------- -------------------------------
TOTAL CORPORATE BONDS
(COST $722,372) 744,978
- ----------------------------------------------------------------------------------------------- -------------------------------
U.S. GOVERNMENT SECURITIES (1.1%)
- ----------------------------------------------------------------------------------------------- -------------------------------
U.S. Treasury Note 6.125% 8/15/2007 7,100 7,415
U.S. Treasury Note 6.25% 8/31/2002 2,500 2,582
- ----------------------------------------------------------------------------------------------- -------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $9,798) 9,997
- ----------------------------------------------------------------------------------------------- -------------------------------
FOREIGN BONDS (U.S. DOLLAR-DENOMINATED)(13.8%)
- ----------------------------------------------------------------------------------------------- -------------------------------
ABN AMRO Bank NV (Chicago Branch) 7.55% 6/28/2006 10,000 10,791
Aegon NV 8.00% 8/15/2006 4,150 4,592
Australia & New Zealand Banking Group 7.55% 9/15/2006 14,500 15,348
Bayer Corp. 6.50% 10/1/2002 (2) 6,000 6,154
Bayerische Landesbank-NY 6.375% 10/15/2005 5,000 5,082
Embotelladora Andina SA 7.00% 10/1/2007 4,000 3,832
Enersis SA 6.90% 12/1/2006 5,000 4,849
Korea Development Bank 7.125% 9/17/2001 9,830 9,226
Province of Manitoba 7.75% 2/1/2002 4,000 4,267
Province of Manitoba 8.75% 5/15/2001 3,000 3,258
National Westminster Bancorp Inc. 9.45% 5/1/2001 7,000 7,730
Province of Ontario 6.00% 2/21/2006 5,000 4,987
Province of Ontario 8.00% 10/17/2001 10,000 10,738
PacifiCorp Australia LLC 6.15% 1/15/2008 (2)(3) 5,000 4,991
Petrozuata Finance Inc. Series A 7.63% 4/1/2009 (1)(2) 7,000 7,330
Placer Dome, Inc. 7.125% 5/15/2003 5,000 5,080
Santander Financial Issuances Ltd. 7.00% 4/1/2006 5,000 5,140
Swiss Bank Corp. 6.75% 7/15/2005 5,000 5,141
Union Bank of Switzerland (NY Branch) 7.25% 7/15/2006 5,000 5,300
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $120,748) 123,836
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.7%)
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.60% 2/2/1998 3,442 3,442
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note G 5.60% 2/2/1998 11,550 11,550
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $14,992) 14,992
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.4%)
(COST $867,910) 893,803
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 73
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.6%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Other Assets--Note C $ 44,627
Liabilities--Note G (39,542)
-----------
5,085
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 89,625,168 outstanding $.001 par value shares
(authorized 1,250,000,000 shares) $898,888
================================================================================================================================
NET ASSET VALUE PER SHARE $10.03
================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At January 31,
1998, the aggregrate value of these securities was $84,072,000,
representing 9.4% of net assets.
(3) Scheduled principal and interest payments are guaranteed by Ambac Assurance
Corp.
PATS--Putable Asset Trust Securities.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $872,913 $ 9.74
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 82 .00
Unrealized Appreciation--Note F 25,893 .29
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $898,888 $10.03
================================================================================================================================
</TABLE>
17
<PAGE> 74
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (93.1%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bond 6.00% 2/15/2026 $ 6,350 $ 6,456
U.S. Treasury Bond 6.375% 8/15/2027 27,900 29,959
U.S. Treasury Bond 6.625% 2/15/2027 61,750 68,244
U.S. Treasury Bond 6.75% 8/15/2026 15,050 16,865
U.S. Treasury Bond 7.125% 2/15/2023 34,600 40,134
U.S. Treasury Bond 7.875% 2/15/2021 170,352 212,473
U.S. Treasury Bond 8.125% 8/15/2019 102,015 129,664
U.S. Treasury Bond 8.875% 8/15/2017 141,050 190,061
U.S. Treasury Bond 8.875% 2/15/2019 124,010 168,515
U.S. Treasury Bond 9.875% 11/15/2015 36,200 52,293
U.S. Treasury Bond 10.375% 11/15/2012 47,950 64,533
U.S. Treasury Inflation-Indexed Note 3.375% 1/15/2007 8,868 8,677
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $865,195) 987,874
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (5.8%)
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.60% 2/2/1998 45,968 45,968
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note G 5.60% 2/2/1998 15,598 15,598
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $61,566) 61,566
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.9%)
(COST $926,761) 1,049,440
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.1%)
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 35,078
Liabilities--Note G (23,096)
-----------
11,982
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 98,370,350 outstanding $.001 par value shares
(authorized 1,300,000,000 shares) $1,061,422
================================================================================================================================
NET ASSET VALUE PER SHARE $10.79
================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $ 946,946 $ 9.62
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note E (8,203) (.08)
Unrealized Appreciation--Note F 122,679 1.25
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,061,422 $10.79
================================================================================================================================
</TABLE>
18
<PAGE> 75
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM CORPORATE PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (83.7%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCE (22.1%)
Allstate Corp. 7.50% 6/15/2013 $ 10,000 $ 10,762
Ambac, Inc. 7.50% 5/1/2023 20,000 21,811
American Re Corp. 7.45% 12/15/2026 10,000 10,847
Banc One Corp. 7.75% 7/15/2025 30,000 32,937
Banc One Corp. 8.00% 4/29/2027 15,000 17,003
BankBoston Corp. 6.625% 12/1/2005 30,000 30,553
CIGNA Corp. 7.875% 5/15/2027 25,000 27,151
Citicorp 7.125% 9/1/2005 15,000 15,716
Citicorp 7.625% 5/1/2005 10,000 10,747
Comerica Bank 8.375% 7/15/2024 20,000 22,978
Fifth Third Bancorp 6.75% 7/15/2005 20,000 20,622
First Chicago Corp. 6.375% 1/30/2009 15,000 14,889
First Union Corp. 6.00% 10/30/2008 10,000 9,729
First Union Corp. 7.50% 4/15/2035 11,000 12,767
Fleet Financial Group, Inc. 6.875% 1/15/2028 25,000 24,495
General Electric Capital Corp. 8.125% 5/15/2012 42,000 49,186
General Electric Capital Services 7.50% 8/21/2035 10,960 12,413
General Electric Global Insurance Holdings Corp. 7.00% 2/15/2026 50,000 52,228
General Re Corp. 9.00% 9/12/2009 15,000 18,409
John Hancock 7.375% 2/15/2024 (2) 35,000 36,703
Liberty Mutual Insurance Co. 8.50% 5/15/2025 (2) 15,000 17,549
Lumbermens Mutual Casualty 9.15% 7/1/2026 (2) 35,000 41,033
MBIA Inc. 7.00% 12/15/2025 7,550 7,836
Massachusetts Mutual Life Insurance Co. 7.625% 11/15/2023 (2) 14,500 15,830
Metropolitan Life Insurance Co. 7.80% 11/1/2025 (2) 25,000 27,050
National City Bank Pennsylvania 7.25% 10/21/2011 14,000 14,850
National City Corp. 7.20% 5/15/2005 10,000 10,523
NationsBank Corp. 7.25% 10/15/2025 20,000 21,069
NationsBank Corp. 7.75% 8/15/2004 15,000 16,284
NationsBank Corp. 7.75% 8/15/2015 10,000 11,054
NationsBank Corp. 8.50% 1/15/2007 15,000 17,208
Republic New York Corp. 9.70% 2/1/2009 15,000 18,905
SunTrust Banks, Inc. 6.00% 2/15/2026 20,000 19,736
Transamerica Corp. 9.375% 3/1/2008 10,000 12,125
Travelers Property Casualty Corp. 7.75% 4/15/2026 25,000 27,631
Travelers Group Inc. 6.625% 1/15/2028 25,000 24,141
U S WEST Capital Funding, Inc. 7.30% 1/15/2007 25,000 26,305
Wachovia Corp. 6.605% 10/1/2025 30,000 31,375
Wachovia Corp. 6.80% 6/1/2005 10,000 10,365
-----------
822,815
-----------
INDUSTRIAL (47.3%)
AEROSPACE & DEFENSE (3.1%)
Lockheed Martin Corp. 7.65% 5/1/2016 35,000 38,092
Northrop Grumman Corp. 9.375% 10/15/2024 20,000 23,958
Raytheon Co. 7.20% 8/15/2027 25,000 26,144
Raytheon Co. 7.375% 7/15/2025 25,000 25,431
AUTOMOTIVE (4.9%)
Chrysler Corp. 7.45% 3/1/2027 25,000 26,789
Eaton Corp. 6.50% 6/1/2025 10,000 10,457
Eaton Corp. 7.625% 4/1/2024 15,000 16,806
Ford Motor Co. 8.875% 1/15/2022 40,000 49,536
General Motors Corp. 7.40% 9/1/2025 30,000 32,041
General Motors Corp. 7.70% 4/15/2016 10,000 10,966
General Motors Corp. 9.40% 7/15/2021 20,000 26,031
Johnson Controls, Inc. 8.20% 6/15/2024 10,000 10,995
BASIC INDUSTRIES (3.7%)
Fluor Corp. 6.95% 3/1/2007 20,000 21,070
Hubbell Inc. 6.625% 10/1/2005 10,000 10,353
</TABLE>
19
<PAGE> 76
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM CORPORATE PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Morton International, Inc. 9.25% 6/1/2020 $ 10,000 $ 13,147
PPG Industries, Inc. 6.875% 2/15/2012 10,200 10,770
PPG Industries, Inc. 9.00% 5/1/2021 9,750 12,403
Parker-Hannifin Corp. 7.30% 5/15/2011 20,000 21,647
Worthington Industries Inc. 6.70% 12/1/2009 20,500 21,123
Worthington Industries Inc. 7.125% 5/15/2006 24,525 26,137
CHEMICALS (5.9%)
Air Products & Chemicals, Inc. 7.375% 5/1/2005 15,000 16,121
Air Products & Chemicals, Inc. 8.75% 4/15/2021 12,550 15,647
E.I. du Pont de Nemours & Co. 6.50% 1/15/2028 25,000 24,523
E.I. du Pont de Nemours & Co. 6.75% 9/1/2007 25,000 26,090
Eastman Chemical Co. 7.25% 1/15/2024 20,000 20,846
Eastman Chemical Co. 7.60% 2/1/2027 20,000 21,673
Monsanto Co. 6.75% 12/15/2027 25,000 25,344
Monsanto Co. 8.20% 4/15/2025 20,000 22,376
Monsanto Co. 8.875% 12/15/2009 20,000 24,655
Rohm & Haas Co. 9.80% 4/15/2020 (1) 5,000 6,458
Witco Corp. 6.875% 2/1/2026 15,000 15,145
CONSUMER GOODS & SERVICES (4.5%)
The Walt Disney Co. 6.75% 3/30/2006 25,000 25,994
Johnson & Johnson 8.72% 11/1/2024 30,000 35,200
Procter & Gamble Co. 6.45% 1/15/2026 25,000 25,170
Procter & Gamble Co. 8.50% 8/10/2009 10,000 11,992
Procter & Gamble Co. ESOP 9.36% 1/1/2021 35,000 45,826
Whirlpool Corp. 9.10% 2/1/2008 20,000 23,827
ENERGY & RELATED GOODS & SERVICES (3.3%)
Exxon Capital Corp. 6.00% 7/1/2005 10,000 10,017
Mobil Corp. 8.625% 8/15/2021 22,000 27,961
Texaco Capital, Inc. 8.625% 11/15/2031 13,000 16,505
Texaco Capital, Inc. 9.75% 3/15/2020 17,000 23,414
Ultramar Diamond Shamrock 7.20% 10/15/2017 25,000 25,390
United Technologies Corp. 8.875% 11/15/2019 15,000 18,937
FOOD & LODGING (2.0%)
CPC International, Inc. 6.15% 1/15/2006 20,000 19,974
CPC International, Inc. 7.25% 12/15/2026 30,000 32,428
McDonald's Corp. 7.05% 11/15/2025 23,275 23,440
HEALTH CARE (3.8%)
Baxter International, Inc. 7.65% 2/1/2027 25,000 27,856
Bristol-Myers Squibb Co. 6.80% 11/15/2026 30,000 31,455
Eli Lilly & Co. 7.125% 6/1/2025 50,000 53,782
Merck & Co. 6.30% 1/1/2026 30,000 30,405
MEDIA & ENTERTAINMENT (2.9%)
New York Times Co. 8.25% 3/15/2025 30,000 34,134
News America Holdings Inc. 8.00% 10/17/2016 30,000 32,288
E.W. Scripps Co. 6.625% 10/15/2007 20,000 20,669
Tribune Co. 6.875% 11/1/2006 20,000 20,761
METAL (0.8%)
Aluminum Co. of America 6.75% 1/15/2028 15,000 15,096
Phelps Dodge Corp. 7.125% 11/1/2027 12,500 12,955
PAPER (5.0%)
Champion International Corp. 7.35% 11/1/2025 21,000 21,335
Georgia-Pacific Corp. 8.625% 4/30/2025 10,000 11,024
International Paper Co. 6.875% 11/1/2023 10,000 10,105
International Paper Co. 8.125% 6/15/2024 30,000 32,513
</TABLE>
20
<PAGE> 77
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM CORPORATE PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mead Corp. 7.35% 3/1/2017 $ 10,350 $ 11,164
Tenneco Inc. 7.625% 6/15/2017 20,000 21,696
Tenneco Inc. 7.875% 4/15/2027 20,000 22,413
Westvaco Corp. 9.75% 6/15/2020 15,000 20,160
Weyerhaeuser Co. 8.50% 1/15/2025 30,000 35,849
RETAIL (0.4%)
J.C. Penney Co., Inc. 7.95% 4/1/2017 15,000 16,578
TECHNOLOGY & RELATED (2.9%)
International Business Machines Corp. 7.00% 10/30/2025 50,000 52,411
Motorola, Inc. 7.50% 5/15/2025 50,000 55,466
TRANSPORTATION (4.1%)
Burlington Northern Santa Fe Corp. 6.375% 12/15/2005 12,500 12,502
Burlington Northern Santa Fe Corp. 6.875% 12/1/2027 25,000 24,991
CSX Corp. 7.95% 5/1/2027 35,000 39,317
Norfolk Southern Corp. 7.80% 5/15/2027 35,000 39,187
Union Pacific Corp. 7.00% 2/1/2016 20,000 19,925
Union Tank Car Co. 7.125% 2/1/2007 15,000 15,924
-----------
1,760,810
-----------
UTILITIES (14.3%)
BellSouth Telecommunications 7.00% 10/1/2025 10,000 10,521
BellSouth Telecommunications 7.50% 6/15/2033 35,000 36,579
Cincinnati Gas & Electric Co. 6.90% 6/1/2025 16,000 16,918
Coastal Corp. 7.75% 10/15/2035 20,000 21,509
Coastal Corp. 9.625% 5/15/2012 15,000 18,958
El Paso Natural Gas Co. 7.50% 11/15/2026 25,000 26,384
Enron Corp. 6.875% 10/15/2007 10,000 10,287
GTE California Inc. 6.70% 9/1/2009 25,000 25,564
GTE Southwest, Inc. 6.00% 1/15/2006 10,000 9,862
Illinois Bell Telephone Co. 6.625% 2/1/2025 10,700 10,320
Indiana Bell Telephone Co., Inc. 7.30% 8/15/2026 23,000 25,223
Michigan Bell Telephone Co. 7.85% 1/15/2022 20,000 22,994
New Jersey Bell Telephone Co. 8.00% 6/1/2022 25,000 29,558
New York Telephone Co. 7.25% 2/15/2024 15,000 15,360
Northern States Power Co. 7.125% 7/1/2025 25,000 26,661
Oklahoma Gas & Electric Co. 7.30% 10/15/2025 15,000 15,836
Pacific Bell 7.125% 3/15/2026 15,000 16,005
PacifiCorp 6.625% 6/1/2007 MTN 10,000 10,247
PacifiCorp 6.71% 1/15/2026 MTN 10,000 9,866
Southern California Gas Co. 7.50% 6/15/2023 20,000 20,581
Southwestern Bell Telephone Co. 7.20% 10/15/2026 32,500 33,430
Southwestern Bell Telephone Co. 7.25% 7/15/2025 7,500 7,683
Tennessee Gas Pipeline Co. 7.50% 4/1/2017 25,000 26,586
U S WEST Communications Group 6.875% 9/15/2033 50,000 48,878
Virginia Electric & Power Co. 8.25% 3/1/2025 20,000 21,981
Virginia Electric & Power Co. 8.625% 10/1/2024 11,000 12,420
-----------
530,211
-----------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $2,863,890) 3,113,836
- --------------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLAR-DENOMINATED)(8.0%)
- --------------------------------------------------------------------------------------------------------------------------------
Province of British Columbia 6.50% 1/15/2026 35,000 35,694
Husky Oil Ltd. 7.55% 11/15/2016 20,000 20,655
Inter-American Development Bank 6.125% 3/8/2006 25,000 25,499
Province of Manitoba 8.875% 9/15/2021 24,042 31,069
Province of Ontario 6.00% 2/21/2006 25,000 24,934
Petro-Canada 7.875% 6/15/2026 7,760 8,698
Province of Quebec 7.50% 7/15/2023 50,000 54,546
Saga Petroleum ASA 7.25% 9/23/2027 25,000 25,066
Province of Saskatchewan 8.50% 7/15/2022 19,000 23,493
</TABLE>
21
<PAGE> 78
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM CORPORATE PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> C> <C>
Talisman Energy, Inc. 7.125% 6/1/2007 $ 20,000 $ 20,833
Talisman Energy, Inc. 7.25% 10/15/2027 25,000 25,312
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $281,878) 295,799
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (5.3%)
- --------------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Assn. (Pooled Mortgage Notes) 15.50% 10/1/2012 8 10
U.S. Treasury Bond 7.25% 5/15/2016 10,000 11,571
U.S. Treasury Note 6.25% 8/31/2002 100,000 103,294
U.S. Treasury Note 6.875% 5/15/2006 75,000 81,476
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $192,680) 196,351
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (5.5%)
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.60% 2/2/1998 152,200 152,200
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note G 5.60% 2/2/1998 54,250 54,250
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $206,450) 206,450
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (102.5%)
(COST $3,544,898) 3,812,436
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.5%)
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 76,566
Liabilities--Note G (168,724)
-----------
(92,158)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 399,047,420 outstanding $.001 par value shares
(authorized 1,700,000,000 shares) $3,720,278
================================================================================================================================
NET ASSET VALUE PER SHARE $9.32
================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At January 31,
1998, the aggregate value of these securities was $138,165,000,
representing 3.7% of net assets.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $3,419,129 $8.57
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 33,611 .08
Unrealized Appreciation--Note F 267,538 .67
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $3,720,278 $9.32
================================================================================================================================
</TABLE>
22
<PAGE> 79
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH YIELD CORPORATE PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (91.7%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCE (3.6%)
Amresco, Inc. 10.00% 3/15/2004 $ 15,000 $ 15,600
Bank United Corp. 8.875% 5/1/2007 33,000 36,048
Chevy Chase Bank, F.S.B. 9.25% 12/1/2008 15,000 15,675
Coast Savings Financial, Inc. 10.00% 3/1/2000 4,600 4,853
FirstFed Financial Corp. 11.75% 10/1/2004 5,000 5,400
Imperial Credit Industries, Inc. 9.875% 1/15/2007 20,000 19,500
Navistar Financial Corp. 9.00% 6/1/2002 15,000 15,788
Olympic Financial Ltd. 11.50% 3/15/2007 22,160 22,271
Riggs National Corp. 8.50% 2/1/2006 5,000 5,290
Western Financial Savings Bank 8.50% 7/1/2003 17,000 16,575
Western Financial Savings Bank 8.875% 8/1/2007 15,000 14,625
-----------
171,625
-----------
INDUSTRIAL (82.3%)
AEROSPACE & DEFENSE (2.5%)
Argo-Tech Corp. 8.625% 10/1/2007 21,000 21,525
K & F Industries, Inc. 9.25% 10/15/2007 (1) 27,750 29,068
L-3 Communications Corp. 10.375% 5/1/2007 20,000 22,100
Newport News Shipbuilding Inc. 8.625% 12/1/2006 25,000 26,563
Newport News Shipbuilding Inc. 9.25% 12/1/2006 20,000 21,400
AUTOMOTIVE (5.6%)
Accuride Corp. 9.25% 2/1/2008 (1) 13,240 13,240
Collins & Aikman Products Co. 11.50% 4/15/2006 40,000 45,200
Delco Remy International Inc. 8.625% 12/15/2007 3,825 3,921
Delco Remy International Inc. 10.625% 8/1/2006 (1) 10,000 10,950
Exide Corp. 10.00% 4/15/2005 28,000 30,030
Federal-Mogul Corp. 8.80% 4/15/2007 18,750 19,872
Hayes Wheels International, Inc. 9.125% 7/15/2007 30,000 31,463
Hayes Wheels International, Inc. 11.00% 7/15/2006 25,000 28,250
Johnstown America Industries, Inc. 11.75% 8/15/2005 27,000 29,835
Key Plastics, Inc. 10.25% 3/15/2007 11,540 12,406
LDM Technologies Inc. 10.75% 1/15/2007 5,805 6,415
Lear Corp. 9.50% 7/15/2006 20,000 22,175
Walbro Corp. 9.875% 7/15/2005 10,000 10,200
BASIC INDUSTRIES (5.3%)
Anchor Glass Container Corp. 11.25% 4/1/2005 (1) 8,000 8,880
Cabot Safety Corp. 12.50% 7/15/2005 10,000 11,250
Cincinnati Milacron, Inc. 8.375% 3/15/2004 11,500 12,180
Clark-Schwebel Inc. 10.50% 4/15/2006 9,295 10,224
Consumers International 10.25% 4/1/2005 (1) 17,000 18,870
Day International Group Inc. 11.125% 6/1/2005 5,000 5,650
EnviroSource, Inc. 9.75% 6/15/2003 15,000 15,300
Goss Graphic Systems, Inc. 12.00% 10/15/2006 10,000 11,425
Great Lakes Carbon Corp. 10.00% 1/1/2006 6,000 6,540
International Wire Group, Inc. 11.75% 6/1/2005 15,000 16,650
Mastec Inc. 7.75% 2/1/2008 (1) 7,545 7,535
Navistar International Corp. 8.00% 2/1/2008 (1) 23,100 23,053
Neenah Corp. 11.125% 5/1/2007 22,100 24,531
Park-Ohio Industries 9.25% 12/1/2007 (1) 22,500 23,513
Roller Bearing Co. of America Inc. 9.625% 6/15/2007 21,465 22,125
Scotsman Group Inc. 8.625% 12/15/2007 8,260 8,312
Synthetic Industries, Inc. 9.25% 2/15/2007 15,000 15,975
UCAR Global Enterprises, Inc. 12.00% 1/15/2005 8,000 8,970
BUILDING MATERIALS (3.2%)
American Standard Cos. Inc. 7.375% 2/1/2008 50,000 49,875
Amtrol Inc. 10.625% 12/31/2006 7,885 8,240
Falcon Building Products, Inc. 9.50% 6/15/2007 21,750 22,620
</TABLE>
23
<PAGE> 80
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH YIELD CORPORATE PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Johns Manville International Group 10.875% 12/15/2004 $ 35,000 $ 38,981
Nortek, Inc. 9.25% 3/15/2007 17,500 18,156
Triangle Pacific Corp. 10.50% 8/1/2003 13,000 13,715
CABLE (9.1%)
Cablevision Systems Corp. 7.875% 12/15/2007 30,000 30,975
Cablevision Systems Corp. 8.125% 8/15/2009 25,000 26,125
Cablevision Systems Corp. 9.25% 11/1/2005 30,000 32,250
Cablevision Systems Corp. 9.875% 5/15/2006 3,000 3,307
Cablevision Systems Corp. 9.875% 2/15/2013 15,000 16,706
Comcast Corp. 9.125% 10/15/2006 25,000 26,812
Comcast Corp. 9.375% 5/15/2005 24,000 25,800
Comcast Corp. 9.50% 1/15/2008 20,000 21,300
Comcast Corp. 10.625% 7/15/2012 30,000 38,100
Lenfest Communications, Inc. 8.375% 11/1/2005 70,000 72,800
Rifkin Acquisition Partners LLLP 11.125% 1/15/2006 15,000 16,594
Rogers Cablesystems Ltd. 9.625% 8/1/2002 12,000 12,915
TCI Communications, Inc. 6.875% 2/15/2006 50,000 50,503
Tele-Communications, Inc. 8.75% 2/15/2023 21,000 22,916
Tele-Communications, Inc. 9.25% 1/15/2023 30,000 33,997
CHEMICALS (5.4%)
Acetex Corp. 9.75% 10/1/2003 20,000 20,700
Borden Chemicals & Plastics Operating LP 9.50% 5/1/2005 10,290 10,856
Buckeye Cellulose Corp. 8.50% 12/15/2005 15,000 15,450
Freedom Chemical Co. 10.625% 10/15/2006 18,000 21,060
General Chemical Corp. 9.25% 8/15/2003 5,000 5,212
Huntsman Corp. 9.50% 7/1/2007 (1) 16,590 17,420
Huntsman Polymers Corp. 11.75% 12/1/2004 17,500 19,513
LaRoche Industries Inc. 9.50% 9/15/2007 (1) 15,000 14,775
Lilly Industries, Inc. 7.75% 12/1/2007 15,000 15,339
PCI Chemicals Canada Inc. 9.25% 10/15/2007 (1) 22,500 22,781
Pioneer Americas Acquisition Corp. 9.25% 6/15/2007 20,000 20,450
Sifto Canada Inc. 8.50% 7/15/2000 10,000 10,425
Sovereign Specialty Chemicals Inc. 9.50% 8/1/2007 (1) 18,000 18,900
Sterling Chemicals, Inc. 11.25% 4/1/2007 10,000 10,150
Sterling Chemicals, Inc. 11.75% 8/15/2006 12,900 13,287
Texas Petrochemicals Corp. 11.125% 7/1/2006 17,500 19,425
CONSUMER GOODS & SERVICES (2.4%)
Muzak LP/Muzak Capital Corp. 10.00% 10/1/2003 10,000 10,350
Playtex Family Products Corp. 9.00% 12/15/2003 24,100 24,944
Playtex Products, Inc. 8.875% 7/15/2004 10,000 10,375
Rayovac Corp. 10.25% 11/1/2006 6,503 7,153
Revlon Consumer Products Corp. 8.625% 2/1/2008 (1) 40,000 40,150
Safelite Glass Corp. 9.875% 12/15/2006 (1) 10,000 10,550
Sealy Mattress Co. 9.875% 12/15/2007 (1) 7,995 8,435
CONTAINERS (2.6%)
BWAY Corp. 10.25% 4/15/2007 (1) 12,000 13,320
Owens-Illinois, Inc. 7.85% 5/15/2004 15,000 15,932
Owens-Illinois, Inc. 8.10% 5/15/2007 35,000 37,962
Silgan Corp. 9.00% 6/1/2009 41,000 42,435
Sweetheart Cup Co., Inc. 9.625% 9/1/2000 5,000 5,000
Sweetheart Cup Co., Inc. 10.50% 9/1/2003 11,000 10,725
ENERGY & RELATED GOODS & SERVICES (6.3%)
AmeriGas Partners LP 10.125% 4/15/2007 10,000 10,775
Clark USA Inc. 8.375% 11/15/2007 (1) 15,000 15,337
Cross Timbers Oil Co. 8.75% 11/1/2009 25,000 25,500
Cross Timbers Oil Co. 9.25% 4/1/2007 17,000 17,892
Energy Corp. of America 9.50% 5/15/2007 30,000 30,150
Falcon Drilling Co., Inc. 8.875% 3/15/2003 11,000 11,715
</TABLE>
24
<PAGE> 81
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Flores & Rucks, Inc. 9.75% 10/1/2006 $ 16,000 $ 17,520
J. Ray McDermott, SA 9.375% 7/15/2006 25,000 26,813
Newfield Exploration Co. 7.45% 10/15/2007 15,000 15,141
Newpark Resources Inc. 8.625% 12/15/2007 (1) 15,000 15,375
Ocean Energy, Inc. 8.875% 7/15/2007 10,000 10,525
Oryx Energy Co. 8.00% 10/15/2003 10,000 10,662
Oryx Energy Co. 8.125% 10/15/2005 15,000 16,201
Plains Resources, Inc. 10.25% 3/15/2006 19,000 20,473
Pride Petroleum Services, Inc. 9.375% 5/1/2007 32,000 34,800
Santa Fe Energy Resources, Inc. 11.00% 5/15/2004 10,000 10,775
Seagull Energy Corp. 8.625% 8/1/2005 10,000 10,392
FOOD & LODGING (1.1%)
ARA Group, Inc. 8.50% 6/1/2003 10,000 10,400
B & G Foods Inc. 9.625% 8/1/2007 (1) 15,000 15,300
CapStar Hotel Co. 8.75% 8/15/2007 20,000 20,800
John Q. Hammons Hotels LP 8.875% 2/15/2004 5,000 5,162
HEALTH CARE (7.0%)
Beverly Enterprises Inc. 9.00% 2/15/2006 18,000 18,990
Graham-Field Health Products, Inc. 9.75% 8/15/2007 (1) 5,075 5,354
Integrated Health Services, Inc. 9.50% 9/15/2007 30,000 31,800
Kinetic Concepts Inc. 9.625% 11/1/2007 (1) 30,000 31,200
Leiner Health Products Inc. 9.625% 7/1/2007 12,750 13,677
Owens & Minor, Inc. 10.875% 6/1/2006 15,000 16,800
Packard Bioscience Co. 9.375% 3/1/2007 20,000 19,400
Quorum Health Group, Inc. 8.75% 11/1/2005 6,000 6,360
Tenet Healthcare Corp. 8.625% 1/15/2007 45,000 47,250
Tenet Healthcare Corp. 10.125% 3/1/2005 84,000 92,610
Vencor Inc. 8.625% 7/15/2007 50,000 51,563
HOME BUILDING & REAL ESTATE (1.6%)
Continental Homes Holding Corp. 10.00% 4/15/2006 10,000 10,900
Kaufman & Broad Home Corp. 7.75% 10/15/2004 24,390 24,481
Standard Pacific Corp. 8.50% 6/15/2007 15,000 15,450
Toll Corp. 7.75% 9/15/2007 15,000 15,225
Del Webb Corp. 9.00% 2/15/2006 10,000 10,350
MEDIA & ENTERTAINMENT (6.7%)
American Radio Systems Corp. 9.00% 2/1/2006 10,000 10,650
Big Flower Holdings Inc. 8.875% 7/1/2007 (1) 15,000 15,637
Chancellor Media Corp. 8.125% 12/15/2007 (1) 20,000 20,225
Chancellor Media Corp 9.375% 10/1/2004 17,000 17,977
Fox/Liberty Networks LLC 8.875% 8/15/2007 60,000 61,350
JCAC, Inc. 10.125% 6/15/2006 10,000 11,050
Jacor Communications, Inc. 8.75% 6/15/2007 10,000 10,375
Outdoor Systems Inc. 9.375% 10/15/2006 13,040 14,018
Time Warner, Inc. 9.125% 1/15/2013 15,000 17,960
Viacom Inc. 8.00% 7/7/2006 45,150 46,166
Von Hoffman Press Inc. 10.375% 5/15/2007 (1) 15,000 16,200
Westinghouse Electric Corp. 6.875% 9/1/2003 13,000 13,028
Westinghouse Electric Corp. 8.375% 6/15/2002 15,000 15,911
Westinghouse Electric Corp. 8.875% 6/1/2001 15,000 15,990
World Color Press, Inc. 9.125% 3/15/2003 15,000 15,600
Young Broadcasting Inc. 9.00% 1/15/2006 10,000 10,425
Young Broadcasting Inc. 11.75% 11/15/2004 6,750 7,509
METAL (5.6%)
AK Steel Corp. 9.125% 12/15/2006 55,000 58,575
AK Steel Corp. 10.75% 4/1/2004 25,000 26,844
Algoma Steel Inc. 12.375% 7/15/2005 25,000 29,562
Armco, Inc. 9.00% 9/15/2007 22,525 22,750
</TABLE>
25
<PAGE> 82
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH YIELD CORPORATE PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Armco, Inc. 9.375% 11/1/2000 $ 9,120 $ 9,371
Bethlehem Steel Corp. 10.375% 9/1/2003 10,500 11,235
GS Technologies Operating Co., Inc. 12.25% 10/1/2005 12,500 14,062
LTV Corp. 8.20% 9/15/2007 (1) 45,000 44,438
NS Group Inc. 13.50% 7/15/2003 6,990 8,170
Oregon Steel Mills, Inc. 11.00% 6/15/2003 5,325 5,858
Ryerson Tull, Inc. 9.125% 7/15/2006 10,000 10,900
Weirton Steel Corp. 10.75% 6/1/2005 12,500 12,938
Wells Aluminum Corp. 10.125% 6/1/2005 10,500 11,207
PAPER & PACKAGING (6.2%)
Container Corp. of America 9.75% 4/1/2003 50,000 54,000
Doman Industries, Ltd. 8.75% 3/15/2004 30,000 28,950
Domtar Inc. 8.75% 8/1/2006 15,000 15,600
The Fonda Group Inc. 9.50% 3/1/2007 15,000 14,137
NoramPac Inc. 9.50% 2/1/2008 (1) 15,000 15,300
Paperboard Industries International Inc. 8.375% 9/15/2007 (1) 18,750 19,406
Riverwood International Corp. 10.25% 4/1/2006 15,000 15,263
SD Warren Co. 12.00% 12/15/2004 37,500 41,859
Stone Container Corp. 9.875% 2/1/2001 30,245 30,812
Tembec Finance Corp. 9.875% 9/30/2005 25,000 26,313
U.S. Timberlands LLC 9.625% 11/15/2007 32,000 33,400
TECHNOLOGY & RELATED (5.7%)
Advanced Micro Devices, Inc. 11.00% 8/1/2003 54,000 57,780
Amphenol Corp. 9.875% 5/15/2007 20,000 21,650
Fairchild Semiconductor Corp. 10.125% 3/15/2007 35,000 37,100
Fisher Scientific International 9.00% 2/1/2008 (1) 52,820 54,206
Iron Mountain, Inc. 8.75% 9/30/2009 33,000 33,996
Iron Mountain, Inc. 10.125% 10/1/2006 16,500 18,109
Pierce Leahy Corp. 9.125% 7/15/2007 15,000 15,863
Unisys Corp. 7.875% 4/1/2008 30,000 30,150
TELECOMMUNICATIONS (3.7%)
Comcast Cellular Holdings, Inc. 9.50% 5/1/2007 15,000 16,012
GCI, Inc. 9.75% 8/1/2007 18,000 19,125
ITC Deltacom Inc. 11.00% 6/1/2007 15,000 16,800
Intermedia Communications Inc. 8.50% 1/15/2008 (1) 45,000 46,575
Intermedia Communications Inc. 8.875% 11/1/2007 (1) 9,410 9,951
McLeodUSA Inc. 9.25% 7/15/2007 15,000 16,125
Paging Network, Inc. 8.875% 2/1/2006 10,000 9,875
Paging Network, Inc. 10.125% 8/1/2007 25,000 26,125
Rogers Cantel, Inc. 8.30% 10/1/2007 15,000 15,000
TEXTILES & RELATED (2.3%)
Dan River Inc. 10.125% 12/15/2003 5,000 5,319
Pillowtex Corp. 9.00% 12/15/2007 (1) 19,750 20,589
Tultex Corp. 9.625% 4/15/2007 10,000 10,125
Tultex Corp. 10.625% 3/15/2005 15,000 15,844
Westpoint Stevens, Inc. 8.75% 12/15/2001 30,000 31,350
Westpoint Stevens, Inc. 9.375% 12/15/2005 23,375 24,661
-----------
3,907,826
-----------
UTILITIES (5.8%)
AES Corp. 8.375% 8/15/2007 32,500 33,231
AES Corp. 8.50% 11/1/2007 (1) 25,000 25,812
CMS Energy Corp. 7.625% 11/15/2004 18,000 18,349
CMS Energy Corp. 8.125% 5/15/2002 30,000 31,035
CalEnergy Co., Inc. 9.50% 9/15/2006 16,000 17,280
Cleveland Electric Illuminating Co. 7.43% 11/1/2009 (1) 22,500 23,445
El Paso Electric Co. Series C 8.25% 2/1/2003 15,000 15,980
El Paso Electric Co. Series D 8.90% 2/1/2006 23,000 25,609
El Paso Electric Co. Series E 9.40% 5/1/2011 28,000 31,572
</TABLE>
26
<PAGE> 83
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Public Venture Funding 10.15% 1/15/2016 $ 7,449 $ 7,905
Midland Cogeneration Venture LP 11.75% 7/23/2005 25,000 29,593
Texas-New Mexico Power Co. 10.75% 9/15/2003 14,000 15,363
-----------
275,174
-----------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $4,166,857) 4,354,625
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (5.0%)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note 5.75% 8/15/2003 80,000 81,158
U.S. Treasury Note 6.50% 5/31/2001 70,000 72,348
U.S. Treasury Note 6.50% 5/31/2002 80,000 83,295
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $231,028) 236,801
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (5.2%)
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.60% 2/2/1998 23,931 23,931
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note G 5.60% 2/2/1998 223,687 223,687
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $247,618) 247,618
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.9%)
(COST $4,645,503) 4,839,044
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.9%)
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 252,218
Security Loan Collateral Payable to Brokers--Note G (223,687)
Other Liabilities (120,624)
-----------
(92,093)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 580,800,685 outstanding $.001 par value shares
(authorized 1,700,000,000 shares) $4,746,951
================================================================================================================================
NET ASSET VALUE PER SHARE $8.17
================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At January 31,
1998, the aggregate value of these securities was $675,790,000,
representing 14.2% of net assets.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $4,582,985 $7.89
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note E (29,575) (.05)
Unrealized Appreciation--Note F 193,541 .33
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $4,746,951 $8.17
================================================================================================================================
</TABLE>
27
<PAGE> 84
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
Portfolio, Short-Term Federal Portfolio, Short-Term Corporate Portfolio,
Intermediate-Term U.S. Treasury Portfolio, Intermediate-Term Corporate
Portfolio, Long-Term U.S. Treasury Portfolio, Long-Term Corporate Portfolio and
High Yield Corporate Portfolio (separate portfolios of Vanguard Fixed Income
Securities Fund, hereafter referred to as the "Fund") at January 31, 1998, the
results of each of their operations for the year then ended, the changes in
each of their net assets for each of the two years in the period then ended 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, 1998 by
correspondence with the custodian and the application of alternative auditing
procedures where securities purchased had not been settled, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
March 6, 1998
F280-1/1998
28