<PAGE> 1
[PHOTO]
VANGUARD
BOND INDEX
FUND
Annual Report
December 31, 1996
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future. The montage includes
a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord Nelson's
flagship at The Battle of the Nile); a clock built circa 1816 in Scotland,
featuring a portrait of Nelson (who is also shown, accepting a surrender, in a
detail from a nineteenth-century engraving); and several views of our recently
completed campus, which is steeped in nautical imagery--from our buildings
named after Nelson's warships (Victory, Majestic, and Goliath are three shown),
to our artwork and ornamental compass rose.
<PAGE> 2
[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John
C. Bogle and President John J. Brennan. This Message continues to provide a
candid assessment of the Fund's performance relative to an appropriate
unmanaged market benchmark and a peer group of mutual funds with similar
investment policies. It also reviews the principal factors contributing to--and
detracting from--the returns earned by the Fund. To help you evaluate your
Fund's current-year performance, the Message includes a discussion of the
Fund's long-term investment results, as well as a look ahead to the prospects
for the coming year. A recap of the financial markets, which had been included
as part of the Chairman's letter, now appears in The Markets In Perspective.
This overview covers the world's financial markets, putting the results of the
Fund's strategy in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics.
The Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the
adviser to address--and we do our best to ensure that this Report is written in
the same simple and candid manner that characterizes all Vanguard
communications. Finally, each Adviser's Report will include an inset reminder
of the adviser's basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
7
Performance
Summaries
9
Portfolio
Profiles
14
Financial
Statements
19
Report Of
Independent
Accountants
48
Directors And
Officers
INSIDE BACK COVER
<PAGE> 3
[PHOTO]
John C. Bogle
[PHOTO]
John J. Brennan
FELLOW SHAREHOLDER,
The Total Bond Market Portfolio of Vanguard Bond Index Fund provided a
return of +3.6% in 1996--the year of its tenth anniversary--as rising interest
rates dampened bond returns across the board. While our Portfolio's return was
modest on an absolute basis, its relative return was excellent, precisely
matching that of its Index benchmark and outpacing that of its average bond
mutual fund competitor.
The returns of our other Portfolios varied with their average maturities,
ranging from +4.5% on our Short-Term Bond Portfolio to -0.3% on our Long-Term
Bond Portfolio.
The adjacent table presents the total return (capital change plus
reinvested dividends) for each Portfolio during the past twelve months. Each is
compared with its respective mutual fund competitive group and the unmanaged
bond market index it emulates. Because they are calculated "on paper," without
the real-world expenses of fund operations, advisory fees, and transaction
costs, and without the impact of cash reserves, these Indexes are tough
standards for mutual funds to match.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
TOTAL RETURNS
YEAR ENDED
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<S> <C>
Total Bond Market Portfolio-
Individual Class +3.6%
Total Bond Market Portfolio-
Institutional Class +3.7
Average Intermediate U.S.
Gov't. Fund +2.7
Lehman Aggregate Bond Index +3.6
- -------------------------------------------------------------------------------
Short-Term Bond Portfolio +4.5%
Average Short U.S. Gov't. Fund +3.8
Lehman Short-Term
(1-5) Gov't./Corp. Index +4.7
- -------------------------------------------------------------------------------
Intermediate-Term Bond Portfolio +2.6%
Average Intermediate U.S.
Gov't. Fund +2.7
Lehman Intermediate-Term
(5-10) Gov't./Corp. Index +2.7
- -------------------------------------------------------------------------------
Long-Term Bond Portfolio -0.3%
Average General U.S. Gov't. Fund +1.7
Lehman Long-Term
(10+) Gov't./Corp. Index +0.1
- -------------------------------------------------------------------------------
</TABLE>
Our 1996 results offer a crystal-clear illustration of the relationship
between interest rates and bond returns. When interest rates rise as they did
in 1996, returns decline with the length of bond maturities. For the year, the
return of our Total Bond Market Portfolio matched its Index benchmark, and the
return of our Total Bond Market Portfolio-Institutional Shares actually
slightly outpaced it. Returns of our Intermediate-Term Bond Portfolio and
Short-Term Bond Portfolio fell a hair behind those of their respective Indexes.
Our Long-Term Bond Portfolio finished in negative territory, below the scant
+0.1% return of the Index and two percentage points behind the return of the
average competitive fund. However, we point out that our Long-Term Portfolio
(like its Index) has consistently maintained a longer average maturity than our
average competitor, a factor that impedes its relative performance when
interest rates are rising, as in 1996, and boosts its relative returns when
rates are falling. In 1995, for example, our Long-Term Portfolio's gain was
fully +29.7%, compared to just +17.4% for the average competitive fund.
Detailed per-share figures for each Portfolio, including net asset values,
income dividends, and any capital gains distributions, are presented in the
table that follows this letter.
1
<PAGE> 4
1996 PERFORMANCE OVERVIEW
Though the U.S. stock market flourished in 1996 in a nearly ideal environment
of moderate economic growth, rising corporate profits, and continued low
inflation, the bond market was not so fortunate. Interest rates fluctuated
substantially during the year, rising rapidly early in 1996 along with
estimates of the economy's strength, then declining in the autumn as estimates
of economic growth abated--and with them, inflation anxieties. However,
interest rates closed the year with a sharp upward spike in December.
The yield on the benchmark 30-year U.S. Treasury bond finished the year at
6.6%--up six-tenths of one percent from 6.0% at the end of 1995--driving the
price of the long bond down by nearly -8%. The yield on intermediate-term
(10-year) U.S. Treasury bonds rose to 6.4% at the end of 1996, up from 5.6% a
year before; and the yield on short-term (3-year) U.S. Treasury notes ended
1996 at 6.0%, up from 5.2% a year earlier.
The following table, which shows the components of return for each of our
Portfolios, should remind our shareholders that price volatility increases with
bond maturities, while also illustrating that interest income is a critical
component of total return. These points hold true whether the bond market is
rising or falling.
Our Short-Term, Intermediate-Term, and Long-Term Portfolios are composed
largely of U.S. Treasury and agency obligations and high-grade corporate bonds.
The Total Bond Market Portfolio also includes GNMAs and other mortgage-backed
securities. This distinction was significant in 1996, when higher interest
rates suppressed mortgage refinancings and thus lowered the prepayment risk
associated with mortgage-backed issues. Consequently, mortgages returned +5.4%,
well above the +4.0% return of intermediate-term U.S. Treasury securities.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
TOTAL RETURNS
YEAR-END YEAR ENDED
YIELDS DECEMBER 31, 1996
-------------------- ----------------------------
INCOME CAPITAL TOTAL
PORTFOLIO 1995 1996 RETURN RETURN RETURN
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Bond Market-
Individual Class 6.12% 6.46% +6.6% -3.0% +3.6%
Total Bond Market-
Institutional Class 6.22 6.56 +6.7 -3.0 +3.7
Short-Term Bond 5.49 5.85 +6.0 -1.5 +4.5
Intermediate-Term
Bond 5.87 6.47 +6.5 -3.9 +2.6
Long-Term Bond 6.27 6.80 +6.5 -6.8 -0.3
- -------------------------------------------------------------------------------------
</TABLE>
The Portfolio Profile pages in this Report include figures for each
Portfolio's average "duration," an estimate of the sensitivity of a bond
portfolio's price to a change in interest rates. Duration, if a bit complex, is
very important to understand, for it drives the relative volatility of bond
prices. For example, if a bond portfolio's average duration were ten years, a
one-percentage-point increase in interest rates would cause its share price to
decline by about -10%; a one-percentage-point decrease in rates would raise its
share price by about +10%. A long-term bond with a duration of ten years is
twice as volatile as an intermediate-term bond with an average duration of five
years, and five times as volatile as a short-term bond with an average duration
of two years.
LONG-TERM PERFORMANCE OVERVIEW
Our Total Bond Market Portfolio celebrated its tenth anniversary in 1996 by
bolstering its long-term advantage over its average mutual fund competitor. As
the table on page 3 shows, this performance edge has provided a significant
monetary advantage over time for our shareholders. A $10,000 investment made in
our Total Bond Market Portfolio ten years ago would, with reinvestment of
dividends and capital gains distributions, have
2
<PAGE> 5
grown to $21,635--$1,896 more than the $19,739 that would have accumulated in
the average intermediate-term bond mutual fund. This advantage equates to 19%
of the original investment, truly a remarkable edge for bond investors,
holding, as it does, quality and maturity constant.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
TOTAL RETURN
10 YEARS ENDED
DECEMBER 31, 1996
-----------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- --------------------------------------------------------------------------------------
<S> <C> <C>
Total Bond Market Portfolio-
Individual Class +8.0% $21,635
Average Intermediate U.S.
Gov't. Fund +7.0 19,739
Lehman Aggregate Bond Index +8.5 22,547
- --------------------------------------------------------------------------------------
</TABLE>
There is, of course, no assurance that future bond returns will match
those of the past. The interest rates prevailing today are below the returns
shown in the table, and we know that future long-term returns bear a strong
relationship to current interest rates; thus, there is good reason to expect
somewhat more modest returns in the years ahead.
Though our other portfolios are mere fledglings in comparison with our
Total Bond Market Portfolio, each one has met the lofty goals we set: Each has
closely tracked its Index over its life span and has comfortably outperformed
its average mutual fund competitor. Of course, there is no guarantee that a
record established over such a brief period will continue. However, we believe
that, over time, the power of low-cost indexed investing will become even more
apparent.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
TOTAL RETURNS
SINCE INCEPTION THROUGH
DECEMBER 31, 1996
---------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- --------------------------------------------------------------------------------------
<S> <C> <C>
Total Bond Market Portfolio-
Institutional Class (9/18/95) +6.5% $10,838
Average Intermediate U.S.
Gov't. Fund +5.1 10,662
Lehman Aggregate Bond Index +6.3 10,816
- --------------------------------------------------------------------------------------
Short-Term Bond (3/1/94) +5.9% $11,758
Average Short U.S. Gov't. Fund +4.8 11,423
Lehman Short-Term Bond Index +6.0 11,790
- --------------------------------------------------------------------------------------
Intermediate-Term Bond (3/1/94) +6.8% $12,059
Average Intermediate U.S.
Gov't. Fund +5.1 11,504
Lehman Intermediate-Term
Bond Index +7.0 12,104
- --------------------------------------------------------------------------------------
Long-Term Bond (3/1/94) +7.7% $12,352
Average General U.S. Gov't. Fund +4.8 11,410
Lehman Long-Term Bond Index +7.9 12,408
- --------------------------------------------------------------------------------------
</TABLE>
The adjacent table presents the average annual return of our other
Portfolios since inception, along with the growth of hypothetical $10,000
investments in our Portfolios, their respective mutual fund competitors, and
their Index benchmarks.
The impact of our wide cost advantage over our average competitor shines
through in this table. Our Portfolios pay no advisory fees and are administered
on an at-cost basis, as are all of the mutual funds in The Vanguard Group. The
Portfolios of Vanguard Bond Index Fund operated at an expense ratio (expenses
as a percentage of average net assets) of 0.20% in 1996, compared with an
expense ratio of about 1.00% for the average fixed-income mutual fund. (The
Institutional Shares class of Total Bond Market Portfolio, which requires a
minimum investment of $10 million, operates at an expense ratio of 0.10%.) This
cost advantage of about 0.80% leads to a solid increase in yield to
shareholders without the assumption of any additional risk. For example, our
cost saving effectively raises a 6% yield
3
<PAGE> 6
to 6.8%--an edge that if extended over the years and decades, dramatically
enhances cumulative total returns.
As mentioned at the outset of this letter, it is difficult for any mutual
fund to match the performance of an index, a theoretical construct that incurs
none of the expenses that a real fund must bear. For the most part, this
handicap accounts for any difference between the performance of our Portfolios
and those of their Index standards.
IN SUMMARY
The bond market returned to earth in 1996 after its remarkable 1995
performance, providing investors with a not-so-subtle reminder of the
unpredictable nature of interest rates and of the variability of bond returns.
These are reasons why caution should always play a role in your investment
planning.
For their part, the Portfolios of Vanguard Bond Index Fund can provide a
dose of predictability to your investment program, at least in relative terms.
Our shareholders--whether in our Short-Term Portfolio, through which lower
yields are available in return for lower price volatility; or in our Long-Term
Portfolio, through which higher and more durable yields are available in return
for potentially high price volatility; or in our Total Bond Market and
Intermediate-Term Portfolios, which strike a balance between the two--can rest
assured that each Portfolio will closely parallel the bond market segment it
targets. This attribute, combined with our rock-bottom costs, gives each
Portfolio an important advantage in its quest to exceed the return of its peer
group over the long term.
On balance, after three years of fairly extreme swings in interest rates,
the coming year may witness less volatile markets. But over an extended number
of years, there are sure to be both rough and calm seas. We believe that
investors who maintain a balanced portfolio of stock funds, bond funds, and
money market funds will be able to withstand the volatility of the financial
markets and reap their rewards. "Stay the course" has proved wise counsel in
the past, and we see no reason why it should not continue to be in the future.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
Chairman of the Board President
January 20, 1997
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
TOTAL PER SHARE 12 MONTHS SEC
NET ASSETS -------------------- -------------------- CURRENT
(MILLIONS) AVERAGE AVERAGE DEC. 31, DEC. 31, INCOME TOTAL ANNUALIZED
PORTFOLIO DEC. 31, 1996 MATURITY QUALITY 1995 1996 DIVIDENDS RETURN YIELD
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Bond Market-
Individual Class $2,962 8.8 years Aaa $10.14 $9.84 $0.640 +3.6% 6.46%
Total Bond Market-
Institutional Class 1,024 8.8 years Aaa 10.14 9.84 0.650 +3.7 6.56
Short-Term Bond 328 2.4 years Aaa 10.07 9.92 0.587 +4.5* 5.85
Intermediate-Term
Bond 460 7.5 years Aa1 10.37 9.96 0.648 +2.6* 6.47
Long-Term Bond 44 21.7 years Aaa 10.82 10.08 0.674 -0.3** 6.80
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes capital gains distribution of $0.004.
**Includes capital gains distribution of $0.009.
4
<PAGE> 7
VANGUARD BOND INDEX FUND--A TEN-YEAR RETROSPECTIVE
Ten years ago, in December 1986, Vanguard pioneered the first bond index
fund for individual investors, just as it had pioneered the first stock index
fund a decade earlier. At the outset, the new entity was named Vanguard Bond
Market Fund. In 1994, the name was changed to Vanguard Bond Index Fund, as
three new portfolios--Short-Term Bond, Intermediate-Term Bond, and Long-Term
Bond--were added to the original one, now known as the Total Bond Market
Portfolio.
From an initial asset base of just $100,000, the assets of the Total Bond
Market Portfolio have grown to $4.0 billion. It is now the ninth largest
taxable bond fund in the field. With our three maturity-specific Portfolios
added in, the Fund's total assets are $4.8 billion.
Equally imposing, the four Portfolios are part of a burgeoning family of
Vanguard index funds, now numbering 21, plus five more funds whose asset
allocation strategies are implemented through the use of market indexing. The
assets of these other (largely stock) index funds now total $57 billion,
bringing total index assets in the Vanguard complex to $62 billion.
A few excerpts from our earlier Annual Reports give a good picture of this
exciting decade. (Year-end assets are shown for our Total Bond Market
Portfolio.)
1987: ASSETS $43 MILLION
ON OUR PIONEERING CONCEPT: A passive investment approach aimed at matching
the total return of the bond market is "An idea whose time has come."
1989: ASSETS $139 MILLION
ON BOND RETURNS IN THE 1990S: The average annual return on long-term bonds
during the past six decades (1930s-1980s, inclusive) was +4.5%
annually--from a low during the 1950s of -0.1% to a high during the decade
of the 1980s of +12.7%. What might we expect of the decade ahead? Perhaps
the best reference point is the current yield of long-term U.S. Treasury
bonds of 8.0%. [In fact, their annual return for the decade through 1996
has been +9.2%.]
1991: ASSETS $849 MILLION
ON OUR FIRST FIVE YEARS: With an annual rate of return of +9.1%, the Fund
outpaced eight of nine bond fund groups, making investments in the market
segments that comprise our Portfolio . . . nearly "the head of the class."
1994: ASSETS $1.73 BILLION
ON OUR THREE NEW PORTFOLIOS: We recently began offering three additional
"custom made" Bond Index Portfolios--Short-Term, Intermediate-Term, and
Long-Term. We restate our enthusiasm for all bond indexing.
1995: ASSETS $2.82 BILLION
ON SUCCESS: During 1995, our Total Bond Market Portfolio again exceeded
industry norms (for the eighth straight year). We began our Fund in 1986,
at a time when Forbes magazine plaintively pleaded that we start the first
bond index fund for individual investors. "Vanguard, what are you waiting
for?" the magazine asked.
5
<PAGE> 8
Bond indexing has yet to hit the remarkable stride of stock indexing in
the United States. There are but sixteen bond index funds available to
individual investors--four of which are Vanguard funds. Yet the advantages of
such low-cost bond funds (our cost advantage over our competitors stands at
0.80%) remain both obvious and compelling. Costs matter--enormously. Put
another way, it's hard to imagine selecting a bond that yields 6% when another
bond with the same quality and maturity that yields 6.8% is available at the
identical price; in other words, 13% more return with no increase in risk. So
long as so many bond funds operate at high expense ratios, bond index funds
will become the investment of choice for fixed-income investors.
6
<PAGE> 9
THE MARKETS IN PERSPECTIVE: YEAR ENDED DECEMBER 31, 1996
[PHOTO]
U.S. EQUITY MARKETS
The stock market in 1996 could not match its astonishing 37.6% return of the
previous year--but it made a good run, with the Standard & Poor's 500 Composite
Stock Price Index up by 23.0%. When the two years are considered cumulatively,
the S&P 500 Index has risen 69.2%. Not surprisingly, many of the factors that
drove the market higher in 1995 were still at work: Once again, steady economic
growth, low inflation, and solid earnings growth were powerful motivators.
The market's gains, however, were far from evenly distributed. Investors
strongly favored larger companies, such as those that dominate the S&P 500
Index. In fact, even within the Index, it was the largest companies that
prevailed: The 50 biggest (which account for roughly half the Index's market
value) gained 26.7% in 1996, compared with an increase of 23.0% for the entire
Index. Looking at the S&P 500 Index's performance by sector, technology stocks
were strongest, closing the year with a 42.5% gain. Financial stocks were a
close second, gaining 35.5%. Utilities, plagued early in the year by higher
interest rates and a rapidly changing competitive landscape, eked out a meager
1.8% return, the lowest within the Index.
With the largest companies performing so well, most smaller issues could
not keep pace. This was evidenced in the considerable difference between the
23.0% return of the S&P 500 Index and the 16.5% return of the Russell 2000
Index of small stocks. Even for the smaller companies, there was a significant
range of performance among sectors. Energy stocks led the Russell 2000 Index
with a 62.0% gain for the year. Here, rising prices, limited exposure to the
cyclical refining business, and a reduced number of competitors created a
favorable environment for the stocks. At the other end of the spectrum were
health-care stocks, which showed a loss of -3.3%.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1996
-------------------------------
1 YEAR 3 YEARS 5 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 23.0% 19.7% 15.2%
Russell 2000 Index 16.5 13.7 15.6
MSCI-EAFE Index 6.4 8.6 8.5
- --------------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 3.6% 6.0% 7.0%
Lehman 10-Year Municipal
Bond Index 4.5 5.3 7.5
Salomon 90-Day U.S. Treasury Bills 5.3 5.1 4.4
- --------------------------------------------------------------------------------
Other
Consumer Price Index 3.3% 2.8% 2.8%
- --------------------------------------------------------------------------------
</TABLE>
U.S. FIXED-INCOME MARKETS
At year-end, the yield on the 30-year U.S. Treasury bond was 6.64%, noticeably
higher than its 5.95% level on December 31, 1995. The change in rates during
1996 reflects increased concern about the prospects for rising inflation, due
to indications of greater than expected strength in the economy.
When the year began, the general expectation was that modest economic
growth and benign inflation would continue, giving the Federal Reserve no
reason to boost inter-
7
<PAGE> 10
est rates. That complacency was shattered by an exceptionally strong February
jobs report, the first of what turned out to be a succession of signs that in
fact the economy was growing at a much faster--and potentially
inflation-inducing--pace. The bond market reacted swiftly to meet the perceived
risk: The 30-year Treasury bond's yield jumped from just below 6.0% at the end
of 1995 to 6.7% in late March. The next several months saw a consistent pattern
in which bond yields rose on the Friday of the jobs-report release only to fall
back by the middle of the month. Hindsight shows that most of the worry was
wasted: Inflation, as measured by the Consumer Price Index, remained near an
annualized rate of 3.3%. But increasing signs of growth in late November and
December reignited inflation concerns and caused bonds to finish the year on a
sour note.
Despite the numerous setbacks suffered by the bond market in 1996, indexes
were able to finish the year with positive total returns. Although the specter
of the Federal Reserve Board loomed large during the year, in fact the Board
acted only once, lowering the federal funds rate by a total of 0.25% in
January.
Corporate bonds, mortgage-backed issues, and municipals were three
relatively bright spots in 1996. The strength in earnings that benefited stock
prices extended to the corporate bond sector as well. These bonds, especially
those of lower credit quality, performed well relative to Treasuries, supported
by general confidence in companies' ability to meet payments. The
stable-to-rising interest-rate environment throughout most of the year
benefited another large segment of the bond market--mortgage-backed
securities--as the threat of refinancings receded. Finally, municipal bonds
outpaced their U.S. Treasury counterparts. The sector was shielded to a certain
extent from the inflation wars of the Treasury market, as demand outstripped
supply for much of the year.
INTERNATIONAL EQUITY MARKETS
Investors who assess international markets by the often-cited EAFE
benchmark--the Morgan Stanley Capital International-Europe, Australasia, Far
East Index, with its 1996 return of 6.4%--could have overlooked a striking
regional disparity between the European and Pacific markets. Europe's markets
gained 21.4% during the year, while their Pacific counterparts posted a decline
of -8.2%. Clearly, the outlook and environments that characterized the European
and Far East markets were quite different.
The poor returns in the Pacific region largely reflected ongoing concern
about the health of the Japanese economy. Growth in Japan has remained modest
at best for several years despite government efforts to stimulate the economy
through public works programs and tax incentives. In Europe, the picture was
dramatically different, with the region benefiting from a variety of factors.
Among the most important were (1) ongoing efforts to lower government deficits
consistent with the Maastricht Treaty guidelines, (2) improving economic
growth, and (3) a greater commitment by corporate executives to increasing
"shareholder value."
8
<PAGE> 11
PERFORMANCE SUMMARY: TOTAL BOND MARKET PORTFOLIO-
INDIVIDUAL CLASS
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 12/11/86-12/31/96
- ----------------------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO-
INDIVIDUAL CLASS LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1986 -0.6% 0.4% -0.2% -0.2%
1987 -7.4 8.5 1.1 2.8
1988 -1.6 9.0 7.4 7.9
1989 4.3 9.3 13.6 14.5
1990 -0.3 8.9 8.6 9.0
1991 6.4 8.8 15.2 16.0
1992 -0.2 7.3 7.1 7.4
1993 3.0 6.7 9.7 9.8
1994 -8.8 6.1 -2.7 -2.9
1995 10.6 7.6 18.2 18.5
1996 -3.0 6.6 3.6 3.6
- -------------------------------------------------------------------------------
</TABLE>
*Lehman Aggregate Bond Index.
See Financial Highlights table on page 43 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 12/31/86-12/31/96
- ----------------------------------------------------------------------------------------------------
TOTAL BOND MARKET INST LIPPER INTERMEDIATE U.S. GOVERNMENT LEHMAN AGGREGATE BOND INDEX
<S> <C> <C> <C>
10000000 10000000 10000000
1995 10453000 10383000 10436000
10256000 10211000 10250000
10321000 10234000 10310000
10508000 10393000 10500000
1996 10838000 10662000 10816000
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
----------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL BOND MARKET PORTFOLIO-
INDIVIDUAL CLASS* 3.55% 6.93% 7.98% $21,556
AVERAGE INTERMEDIATE
U.S. GOVERNMENT FUND 2.68 5.60 7.04 19,739
LEHMAN AGGREGATE BOND INDEX 3.63 7.04 8.47 22,547
- -----------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
- ---------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ----------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Bond Market Portfolio-
Individual Class* 12/11/8 63.55% 6.93% 0.14% 7.84% 7.98%
- ---------------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
9
<PAGE> 12
PERFORMANCE SUMMARY: TOTAL BOND MARKET PORTFOLIO-
INSTITUTIONAL CLASS
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 9/18/95-12/31/96
- --------------------------------------------------
TOTAL BOND MARKET PORTFOLIO-
INSTITUTIONAL CLASS LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------
<S> <C> <C> <C> <C>
1995 2.7% 1.8% 4.5% 4.4%
1996 -3.0 6.7 3.7 3.6
- --------------------------------------------------
</TABLE>
*Lehman Aggregate Bond Index.
See Financial Highlights table on page 43 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 9/18/95-12/31/96
- -----------------------------------------------------------------------------------------------------
TOTAL BOND MARKET INST LIPPER INTERMEDIATE U.S. GOVERNMENT LEHMAN AGGREGATE BOND INDEX
<S> <C> <C> <C>
10000000 10000000 10000000
1995 10453000 10383000 10436000
10256000 10211000 10250000
10321000 10234000 10310000
10508000 10393000 10500000
1996 10838000 10662000 10816000
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
--------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000,000 INVESTMENT
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL BOND MARKET PORTFOLIO-
INSTITUTIONAL CLASS 3.68% 6.46% $10,838,000
AVERAGE INTERMEDIATE
U.S. GOVERNMENT FUND 2.68 5.11 10,662,000
LEHMAN AGGREGATE BOND INDEX 3.63 6.29 10,816,000
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
- -------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Bond Market Portfolio-
Institutional Class 9/18/95 3.68% -0.24% 6.70% 6.46%
- -------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
PERFORMANCE SUMMARY: SHORT-TERM BOND PORTFOLIO
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate so that an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 3/1/94-12/31/96
- ---------------------------------------------------------
SHORT-TERM BOND PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -5.0% 4.6% -0.4% -0.2%
1995 6.0 6.9 12.9 12.9
1996 -1.5 6.0 4.5 4.7
- ---------------------------------------------------------
</TABLE>
*Lehman Short-Term (1-5 Years) Government/Corporate Index.
See Financial Highlights table on page 44 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 3 /1/94-12/31/96
- ----------------------------------------------------------------------------------------------------
TOTAL BOND MARKET INST LIPPER INTERMEDIATE U.S. GOVERNMENT LEHMAN AGGREGATE BOND INDEX
<S> <C> <C> <C>
10000000 10000000 10000000
1995 10453000 10383000 10436000
10256000 10211000 10250000
10321000 10234000 10310000
10508000 10393000 10500000
1996 10838000 10662000 10816000
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM BOND PORTFOLIO* 4.53% 5.87% $11,754
AVERAGE SHORT
U.S. GOVERNMENT FUND 3.84 4.80 11,423
LEHMAN SHORT-TERM (1-5 YEARS)
GOVERNMENT/CORPORATE INDEX 4.67 5.98 11,790
- ------------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
- ----------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-Term Bond Portfolio* 3/1/94 4.53% -0.27% 6.14% 5.87%
- ----------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
11
<PAGE> 14
PERFORMANCE SUMMARY: INTERMEDIATE-TERM BOND PORTFOLIO
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 3 /1/94-12/31/96
- --------------------------------------------------------
INTERMEDIATE-TERM BOND PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -8.2% 5.3% -2.9% -2.9%
1995 13.3 7.8 21.1 21.4
1996 -3.9 6.5 2.6 2.7
- --------------------------------------------------------
</TABLE>
*Lehman Intermediate-Term (5-10 Years) Government/Corporate Index.
See Financial Highlights table on page 44 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 3 /1/94-12/31/96
- ----------------------------------------------------------------------------------------------------
TOTAL BOND MARKET INST LIPPER INTERMEDIATE U.S. GOVERNMENT LEHMAN AGGREGATE BOND INDEX
<S> <C> <C> <C>
10000000 10000000 10000000
1995 10453000 10383000 10436000
10256000 10211000 10250000
10321000 10234000 10310000
10508000 10393000 10500000
1996 10838000 10662000 10816000
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTERMEDIATE-TERM BOND PORTFOLIO* 2.53% 6.80% $12,052
AVERAGE INTERMEDIATE
U.S. GOVERNMENT FUND 2.68 5.06 11,504
LEHMAN INTERMEDIATE-TERM
(5-10 YEARS) GOVERNMENT/
CORPORATE INDEX 2.69 6.97 12,104
- ------------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
- ---------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Intermediate-Term Bond Portfolio* 3/1/94 2.53% -0.04% 6.84% 6.80%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
12
<PAGE> 15
PERFORMANCE SUMMARY: LONG-TERM BOND PORTFOLIO
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 3/1/94-12/31/96
- ------------------------------------------------------
LONG-TERM BOND PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -10.4% 5.9% -4.5% -4.6%
1995 21.0 8.7 29.7 30.0
1996 -6.8 6.5 -0.3 0.1
- ------------------------------------------------------
</TABLE>
*Lehman Long-Term (10+ Years) Government/Corporate Index.
See Financial Highlights table on page 45 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 3/1/94-12/31/96
- -----------------------------------------------------------------------------------------------------
TOTAL BOND MARKET INST LIPPER INTERMEDIATE U.S. GOVERNMENT LEHMAN AGGREGATE BOND INDEX
<S> <C> <C> <C>
10000000 10000000 10000000
1995 10453000 10383000 10436000
10256000 10211000 10250000
10321000 10234000 10310000
10508000 10393000 10500000
1996 10838000 10662000 10816000
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM BOND PORTFOLIO* -0.32% 7.68% $12,335
AVERAGE GENERAL
U.S. GOVERNMENT FUND 1.72 4.76 11,410
LEHMAN LONG-TERM (10+ YEARS)
GOVERNMENT/CORPORATE INDEX 0.14 7.91 12,408
- -----------------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
- --------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Long-Term Bond Portfolio* 3/1/94 -0.32% 0.39% 7.29% 7.68%
- --------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
13
<PAGE> 16
PORTFOLIO PROFILE: TOTAL BOND MARKET PORTFOLIO
DECEMBER 31, 1996
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to its unmanaged target index. Key elements of this Profile
are defined on page 15.
<TABLE>
<CAPTION>
INDIVIDUAL CLASS--FINANCIAL ATTRIBUTES
- ----------------------------------------
<S> <C>
Number of Issues 504
Yield 6.5%
Yield to Maturity* 6.6%
Average Coupon 7.6%
Average Maturity 8.8 years
Average Quality Aaa
Average Duration 4.7 years
Expense Ratio 0.20%
Cash Reserves 1.3%
</TABLE>
*After expenses.
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS--FINANCIAL ATTRIBUTES
- -----------------------------------------
<S> <C>
Number of Issues 504
Yield 6.6%
Yield to Maturity* 6.6%
Average Coupon 7.6%
Average Maturity 8.8 years
Average Quality Aaa
Average Duration 4.7 years
Expense Ratio 0.10%
Cash Reserves 1.3%
</TABLE>
*After expenses.
<TABLE>
<CAPTION>
INDIVIDUAL CLASS--VOLATILITY MEASURES
- ------------------------------------------
TOTAL BOND
MARKET LEHMAN*
- ------------------------------------------
<S> <C> <C>
R-Squared 1.00 1.00
Beta 0.98 1.00
</TABLE>
*Lehman Aggregate Bond Index.
INVESTMENT FOCUS
- -------------------------------------------
[CHART]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
Aaa 73.7%
Aa 2.9
A 15.1
Baa 8.3
Ba --
B --
Not Rated --
- -----------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -----------------------------------------
<S> <C>
Under 1 Year 1.4%
1-5 Years 38.7
5-10 Years 37.5
10-20 Years 6.7
20-30 Years 15.1
Over 30 Years 0.6
- -----------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- ---------------------------------------
<S> <C>
Treasury 35.4%
Mortgage 30.8
Finance 10.9
Industrial 8.5
Asset-Backed 4.7
Foreign 3.9
Utilities 3.8
Agency 2.0
- ---------------------------------------
Total 100.0%
</TABLE>
14
<PAGE> 17
[PHOTO]
AVERAGE COUPON. The average interest rate, expressed as a percentage of face
value, paid on the securities held by a portfolio.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To estimate the price
sensitivity of a portfolio, multiply its duration by the change in rates. If
interest rates rise by one percentage point, the share price of a portfolio
with an average duration of five years would decline by about 5%. If rates
decrease by a percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity and are repaid. In general, the longer the average maturity, the
more a portfolio's share price will fluctuate in response to changes in market
interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating
agencies. The agencies assign ratings after appraising an issuer's ability to
meet its obligations. Quality is graded on a scale, with Aaa indicating the
most creditworthy corporate bond issuers.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing investments.
DISTRIBUTION BY CREDIT QUALITY. An indicator of the risk of default or other
credit problems on securities held by a portfolio.
DISTRIBUTION BY ISSUER. A breakdown of a portfolio's holdings by type of issuer
or type of instrument.
DISTRIBUTION BY MATURITY. An indicator of interest-rate risk. In general, the
higher the concentration of longer-maturity issues, the more a portfolio's
share price will fluctuate in response to changes in interest rates.
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 interest income. The yield, expressed as a
percentage of the portfolio's net asset value, is based on income earned over
the past 30 days and is annualized, or projected forward for the coming year.
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a portfolio were held to their maturity dates.
15
<PAGE> 18
PORTFOLIO PROFILE: SHORT-TERM BOND PORTFOLIO
DECEMBER 31, 1996
This Profile provides a snapshot of the Portfolio's characteristics. Key
elements of this Profile are defined on page 15.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ------------------------------------
<S> <C>
Number of Issues 138
Yield 5.9%
Yield to Maturity* 5.9%
Average Coupon 7.4%
Average Maturity 2.4 years
Average Quality Aaa
Average Duration 2.3 years
Expense Ratio 0.20%
Cash Reserves 1.7%
</TABLE>
*After expenses.
INVESTMENT FOCUS
- ------------------------------------
[CHART]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
Aaa 77.9%
Aa 2.5
A 14.4
Baa 5.2
Ba --
B --
Not Rated --
- -----------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -----------------------------------------
<S> <C>
Under 1 Year 1.3%
1-5 Years 98.7
5-10 Years --
10-20 Years --
20-30 Years --
Over 30 Years --
- -----------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- ---------------------------------------
<S> <C>
Treasury 71.6%
Mortgage --
Finance 12.2
Industrial 7.5
Asset-Backed 4.9
Foreign 1.6
Utilities 1.4
Agency 0.8
- ---------------------------------------
Total 100.0%
</TABLE>
16
<PAGE> 19
PORTFOLIO PROFILE: INTERMEDIATE-TERM BOND PORTFOLIO
DECEMBER 31, 1996
This Profile provides a snapshot of the Portfolio's characteristics. Key
elements of this Profile are defined on page 15.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ---------------------------------------
<S> <C>
Number of Issues 153
Yield 6.5%
Yield to Maturity* 6.5%
Average Coupon 7.9%
Average Maturity 7.5 years
Average Quality Aa1
Average Duration 5.4 years
Expense Ratio 0.20%
Cash Reserves 1.9%
</TABLE>
*After expenses.
INVESTMENT FOCUS
- ---------------------------------------
[CHART]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
Aaa 58.3%
Aa 3.0
A 26.2
Baa 12.5
Ba --
B --
Not Rated --
- -----------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -----------------------------------------
<S> <C>
Under 1 Year 0.3%
1-5 Years 3.2
5-10 Years 89.5
10-20 Years 7.0
20-30 Years --
Over 30 Years --
- -----------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- ---------------------------------------
<S> <C>
Treasury 52.7%
Finance 16.0
Industrial 12.0
Foreign 8.3
Utilities 6.6
Agency 4.4
Asset-Backed --
Mortgage --
- ---------------------------------------
Total 100.0%
</TABLE>
17
<PAGE> 20
PORTFOLIO PROFILE: LONG-TERM BOND PORTFOLIO
DECEMBER 31, 1996
This Profile provides a snapshot of the Portfolio's characteristics. Key
elements of this Profile are defined on page 15.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -------------------------------------
<S> <C>
Number of Issues 88
Yield 6.8%
Yield to Maturity* 6.8%
Average Coupon 8.1%
Average Maturity 21.7 years
Average Quality Aaa
Average Duration 9.8 years
Expense Ratio 0.20%
Cash Reserves 1.8%
</TABLE>
*After expenses.
INVESTMENT FOCUS
- -------------------------------------
[CHART]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
Aaa 69.6%
Aa 4.2
A 17.1
Baa 9.1
Ba --
B --
Not Rated --
- -----------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -----------------------------------------
<S> <C>
Under 1 Year --
1-5 Years 0.7%
5-10 Years 11.6
10-20 Years 9.7
20-30 Years 74.8
Over 30 Years 3.2
- -----------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- ---------------------------------------
<S> <C>
Treasury 67.4%
Industrial 11.0
Utilities 9.7
Foreign 6.8
Finance 5.1
Agency --
Asset-Backed --
Mortgage --
- ---------------------------------------
Total 100.0%
</TABLE>
18
<PAGE> 21
[PHOTO]
FINANCIAL STATEMENTS
DECEMBER 31, 1996
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*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT and AGENCY OBLIGATIONS (67.3%)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES (34.9%)
U.S. Treasury Bonds 7.25% 5/15/16-8/15/22 $ 3,205 $ 3,389
U.S. Treasury Bonds 7.50% 11/15/16 1,135 1,229
U.S. Treasury Bonds 7.625% 2/15/07-11/15/22 16,625 18,316
U.S. Treasury Bonds 7.875% 11/15/07-2/15/21 15,095 17,056
U.S. Treasury Bonds 8.00% 11/15/21 15,950 18,288
U.S. Treasury Bonds 8.125% 8/15/19-8/15/21 117,145 135,918
U.S. Treasury Bonds 8.50% 2/15/20 38,670 46,446
U.S. Treasury Bonds 8.75% 5/15/17-8/15/20 82,900 101,552
U.S. Treasury Bonds 8.875% 8/15/17-2/15/19 78,050 96,470
U.S. Treasury Bonds 9.125% 5/15/09-5/15/18 31,040 39,262
U.S. Treasury Bonds 9.25% 2/15/16 435 552
U.S. Treasury Bonds 9.375% 2/15/06 110 132
U.S. Treasury Bonds 9.875% 11/15/15 4,390 5,864
U.S. Treasury Bonds 10.00% 5/15/10 2,000 2,446
U.S. Treasury Bonds 10.375% 11/15/09-11/15/12 108,420 136,036
U.S. Treasury Bonds 10.75% 2/15/03-8/15/05 40,880 52,428
U.S. Treasury Bonds 11.125% 8/15/03 1,135 1,427
U.S. Treasury Bonds 11.25% 2/15/15 200 295
U.S. Treasury Bonds 11.625% 11/15/02-11/15/04 13,650 17,252
U.S. Treasury Bonds 11.75% 2/15/10-11/15/14 1,085 1,541
U.S. Treasury Bonds 12.00% 8/15/13 350 501
U.S. Treasury Bonds 12.375% 5/15/04 100 135
U.S. Treasury Bonds 12.75% 11/15/10 380 538
U.S. Treasury Bonds 13.375% 8/15/01 2,600 3,339
U.S. Treasury Bonds 14.00% 11/15/11 3,420 5,259
U.S. Treasury Notes 4.75% 8/31/98 4,560 4,482
U.S. Treasury Notes 5.25% 12/31/97-7/31/98 6,630 6,580
U.S. Treasury Notes 5.375% 5/31/98 1,800 1,791
U.S. Treasury Notes 5.50% 11/15/98 45,300 44,996
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Notes 5.625% 11/30/98-2/28/01 52,100 51,293
U.S. Treasury Notes 5.75% 10/31/00-8/15/03 13,025 12,718
U.S. Treasury Notes 5.875% 8/15/98 210 210
U.S. Treasury Notes 6.00% 11/30/97 1,900 1,906
U.S. Treasury Notes 6.25% 7/31/98-2/15/03 55,005 55,122
U.S. Treasury Notes 6.375% 1/15/99-3/31/01 27,350 27,535
U.S. Treasury Notes 6.50% 5/31/01-8/15/05 745 752
U.S. Treasury Notes 6.625% 6/30/01 300 305
U.S. Treasury Notes 6.75% 5/31/99-6/30/99 16,400 16,686
U.S. Treasury Notes 6.875% 7/31/99 18,710 19,090
U.S. Treasury Notes 7.00% 4/15/99-7/15/06 35,900 36,986
U.S. Treasury Notes 7.25% 2/15/98-8/15/04 18,395 18,869
U.S. Treasury Notes 7.50% 10/31/99-11/15/01 79,480 83,369
U.S. Treasury Notes 7.75% 11/30/99-2/15/01 69,635 72,938
U.S. Treasury Notes 7.875% 1/15/98-8/15/01 33,710 34,715
U.S. Treasury Notes 8.00% 1/15/97-8/15/99 6,300 6,560
U.S. Treasury Notes 8.25% 7/15/98 85,475 88,520
U.S. Treasury Notes 8.50% 2/15/00 13,450 14,364
U.S. Treasury Notes 8.75% 8/15/00 4,225 4,579
U.S. Treasury Notes 8.875% 11/15/98-2/15/99 51,550 54,328
U.S. Treasury Notes 9.00% 5/15/98 22,650 23,606
U.S. Treasury Notes 9.25% 8/15/98 1,000 1,052
U.S. Treasury Strip 0.00% 8/15/01 1,000 755
---------
1,389,778
---------
AGENCY BONDS AND NOTES (2.0%)
Federal Home Loan Bank 6.85% 2/25/97 560 561
Federal Home Loan Bank 8.60% 1/25/00 110 117
Federal Home Loan Mortgage Corp. 6.09% 3/1/00 285 282
Federal Home Loan Mortgage Corp. 6.785% 3/1/06 9,525 9,288
Federal Home Loan Mortgage Corp. 7.09% 6/1/05 4,400 4,382
Federal National Mortgage Assn. 4.95% 9/30/98 2,350 2,313
Federal National Mortgage Assn. 5.30% 3/11/98 10,400 10,350
Federal National Mortgage Assn. 5.35% 8/12/98 12,350 12,242
Federal National Mortgage Assn. 5.80% 12/10/03 2,300 2,206
Federal National Mortgage Assn. 5.90% 7/6/00 3,000 2,967
Federal National Mortgage Assn. 6.20% 7/10/03 625 603
Federal National Mortgage Assn. 6.25% 8/12/03 8,200 7,946
Federal National Mortgage Assn. 6.40% 3/25/03 5,000 4,891
Federal National Mortgage Assn. 7.55% 6/10/04 8,900 9,043
Federal National Mortgage Assn. 8.10% 8/12/19 110 123
Federal National Mortgage Assn. 8.20% 3/10/98 225 231
Federal National Mortgage Assn. 8.35% 11/10/99 170 180
Federal National Mortgage Assn. 8.45% 7/12/99 110 116
Federal National Mortgage Assn. 8.625% 10/18/21 1,170 1,219
Federal National Mortgage Assn. 8.70% 6/10/99 110 116
Federal National Mortgage Assn. 9.55% 3/10/99 225 241
Government Trust Certificate 9.625% 5/15/02 523 561
Private Export Funding Corp. 7.70% 1/31/97 500 501
Private Export Funding Corp. 8.40% 7/31/01 225 243
Resolution Funding Corp. 8.125% 10/15/19 550 622
Resolution Funding Corp. 8.625% 1/15/30 110 135
Resolution Funding Corp. 8.875% 7/15/20 280 341
Small Business Administration Variable Rate Interest Only
Custodial Receipts 2.719% 6/25/00 23,798 2,421
Tennessee Valley Authority 8.375% 10/1/99 610 643
Tennessee Valley Authority 8.625% 11/15/29 4,000 4,212
---------
79,096
---------
MORTGAGE OBLIGATIONS (30.4%)
Bear Stearns Collateralized Mortgage Obligation Series 1988-4B
(Secured by Federal Home Loan Mortgage Corp.) 9.20% 11/1/18 111 113
Federal Home Loan Mortgage Corp. 5.50% 12/1/98-6/1/11 6,965 6,750
</TABLE>
20
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corp. 6.00% 6/1/98-4/1/26 32,535 31,482
Federal Home Loan Mortgage Corp. 6.50% 2/1/98-5/1/26 79,139 76,991
Federal Home Loan Mortgage Corp. 7.00% 1/1/98-6/1/26 93,390 92,523
Federal Home Loan Mortgage Corp. 7.50% 6/1/97-9/1/26 63,113 63,579
Federal Home Loan Mortgage Corp. 8.00% 5/1/02-9/1/26 45,058 46,145
Federal Home Loan Mortgage Corp. 8.50% 9/1/01-10/1/26 19,478 20,258
Federal Home Loan Mortgage Corp. 9.00% 8/1/01-6/1/25 10,790 11,396
Federal Home Loan Mortgage Corp. 9.50% 2/1/17-4/1/25 7,101 7,650
Federal Home Loan Mortgage Corp. 10.00% 7/1/00-4/1/25 2,355 2,560
Federal Home Loan Mortgage Corp. 10.50% 9/1/00-12/1/15 618 651
Federal Home Loan Mortgage Corp. 11.25% 8/1/14 39 44
Federal Housing Administration 7.43% 10/1/20 538 530
Federal National Mortgage Assn. 5.50% 1/1/01-6/1/09 2,421 2,317
Federal National Mortgage Assn. 6.00% 10/1/00-8/1/26 38,770 37,260
Federal National Mortgage Assn. 6.50% 2/1/00-8/1/26 93,983 91,241
Federal National Mortgage Assn. 7.00% 9/1/99-12/1/26 128,497 126,805
Federal National Mortgage Assn. 7.50% 1/1/00-12/1/26 106,195 106,723
Federal National Mortgage Assn. 7.75% 10/1/02 1,245 1,254
Federal National Mortgage Assn. 8.00% 9/1/98-12/1/26 72,012 73,611
Federal National Mortgage Assn. 8.50% 12/1/98-11/1/26 29,775 30,944
Federal National Mortgage Assn. 9.00% 6/1/97-9/1/26 17,065 18,002
Federal National Mortgage Assn. 9.50% 10/1/01-2/1/25 9,186 9,919
Federal National Mortgage Assn. 10.00% 8/1/05-6/1/22 3,561 3,841
Federal National Mortgage Assn. 10.50% 11/1/00-8/1/20 1,031 1,129
Government National Mortgage Assn. 6.00% 3/1/09-3/15/26 5,445 5,148
Government National Mortgage Assn. 6.50% 9/15/08-6/15/26 31,728 30,579
Government National Mortgage Assn. 7.00% 6/15/08-7/15/26 72,155 71,065
Government National Mortgage Assn. 7.50% 1/15/08-12/15/26 72,112 72,503
Government National Mortgage Assn. 8.00% 11/15/01-11/15/26 68,769 70,467
Government National Mortgage Assn. 8.50% 5/15/10-12/15/26 29,066 30,284
Government National Mortgage Assn. 9.00% 8/15/01-12/15/26 31,445 33,313
Government National Mortgage Assn. 9.50% 1/1/04-9/15/25 16,398 17,757
Government National Mortgage Assn. 10.00% 3/15/00-8/15/25 6,940 7,617
Government National Mortgage Assn. 10.50% 11/15/10-1/15/21 4,343 4,817
Government National Mortgage Assn. 11.50% 3/15/10-11/15/17 454 515
Government National Mortgage Assn. 12.00% 4/15/15 4 4
Resolution Trust Corp. Collateralized Mortgage Obligations 7.75% 12/25/18 3,461 3,447
Resolution Trust Corp. Collateralized Mortgage Obligations 10.40% 8/25/21 1,414 1,478
---------
1,212,712
---------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT and AGENCY OBLIGATIONS
(COST $2,640,906) 2,681,586
- --------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (27.6%)
- --------------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (4.7%)
Banc One Credit Card Master Trust 7.55% 12/15/99 8,850 8,977
Chase Manhattan Credit Card Trust 7.40% 5/15/00 2,888 2,898
Discover Card Master Trust 5.40% 11/16/01 27,450 27,141
First Chicago Master Trust 6.25% 8/15/99 5,400 5,400
First Deposit Master Trust 5.75% 6/15/01 10,320 10,291
First Deposit Master Trust 6.05% 8/15/02 33,600 33,642
MBNA Master Credit Card Trust 5.40% 9/15/00 5,000 4,941
MBNA Master Credit Card Trust 6.20% 8/15/99 5,700 5,702
MBNA Master Credit Card Trust 7.75% 10/15/98 1,283 1,285
Sears Credit Card Master Trust 6.25% 1/15/03 20,000 20,081
Sears Credit Card Master Trust 7.00% 1/15/04 3,000 3,057
Sears Credit Card Master Trust 7.25% 7/16/01 8,850 8,927
Sears Credit Card Master Trust 8.10% 6/15/04 1,900 1,994
Standard Credit Card Master Trust 6.80% 4/7/01 15,850 16,053
Standard Credit Card Master Trust 6.75% 6/7/00 20,000 20,200
Standard Credit Card Master Trust 7.85% 2/7/02 7,750 8,070
Standard Credit Card Master Trust 7.875% 1/7/00 3,600 3,708
</TABLE>
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<TABLE>
<CAPTION>
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FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Standard Credit Card Master Trust 8.875% 9/7/99 $ 2,085 $ 2,168
Standard Credit Card Master Trust 9.375% 9/10/98 2,000 2,035
---------
186,570
---------
FINANCE (10.8%)
American Express Credit Corp. 6.50% 8/1/00 2,200 2,206
American Express Credit Corp. 8.50% 6/15/99 2,325 2,441
American General Finance Corp. 5.875% 7/1/00 3,770 3,697
American General Finance Corp. 7.45% 7/1/02 1,575 1,630
American General Finance Corp. 8.00% 2/15/00 11,700 12,187
American General Finance Corp. 8.50% 8/15/98 700 724
Associates Corp. 5.875% 8/15/97 300 300
Associates Corp. 6.25% 3/15/99 7,500 7,504
Associates Corp. 6.625% 6/15/05 1,000 979
Associates Corp. 7.25% 5/15/98 4,800 4,868
Associates Corp. 7.50% 4/15/02 4,800 4,974
AVCO Financial Services 5.50% 5/1/98 750 745
BankAmerica Corp. 7.50% 10/15/02 400 414
BankAmerica Corp. 7.625% 6/15/04 1,050 1,094
BankAmerica Corp. 9.625% 2/13/01 1,100 1,216
BankAmerica Corp. 10.00% 2/1/03 4,900 5,661
Bear Stearns Co. 6.50% 6/15/00 500 500
Bear Stearns Co. 6.625% 1/15/04 3,150 3,079
Bear Stearns Co. 6.75% 8/15/00 2,000 2,012
Bear Stearns Co. 9.125% 4/15/98 2,100 2,178
Beneficial Corp. 9.125% 2/15/98 5,710 5,900
CIT Group Holdings 6.625% 6/15/05 7,900 7,751
Chase Manhattan Corp. 6.625% 1/15/98 200 201
Chemical Banking Corp. 7.25% 9/15/02 500 512
Chrysler Finance Corp. 5.375% 10/15/98 850 839
Chrysler Finance Corp. 5.625% 1/15/99 2,725 2,698
Chrysler Finance Corp. 5.875% 2/7/01 3,500 3,417
Chrysler Finance Corp. 6.50% 6/15/98 4,000 4,025
Chrysler Finance Corp. 6.625% 8/15/00 2,550 2,556
Citicorp 8.625% 12/1/02 2,000 2,180
Citicorp 9.75% 8/1/99 4,000 4,315
Citicorp 10.15% 2/15/98 6,500 6,796
Commercial Credit Corp. 5.90% 9/1/03 550 526
CoreStates Capital 6.625% 3/15/05 6,900 6,710
CoreStates Capital 9.375% 4/15/03 1,250 1,413
Countrywide Funding 8.25% 7/15/02 3,750 3,992
Dean Witter Discover & Co. 6.00% 3/1/98 19,350 19,356
Dean Witter Discover & Co. 6.75% 8/15/00 4,000 4,029
Dean Witter Discover & Co. 6.75% 10/15/13 800 746
Dean Witter Discover & Co. 6.875% 3/1/03 1,600 1,603
First Chicago Corp. 6.875% 6/15/03 5,000 5,004
First Chicago Corp. 7.625% 1/15/03 2,400 2,500
First Chicago Corp. 9.25% 11/15/01 1,225 1,350
First Chicago Corp. 10.25% 5/1/01 2,750 3,115
First Fidelity Bancorp 9.625% 8/15/99 700 754
First Interstate Bancorp 8.625% 4/1/99 8,295 8,695
First Interstate Bancorp 10.875% 4/15/01 2,750 3,171
First Union Corp. 8.00% 11/15/02 100 106
First Union Corp. 8.125% 6/24/02 2,900 3,077
Fleet Financial Group, Inc. 6.875% 3/1/03 500 501
Fleet Financial Group, Inc. 7.125% 4/15/06 5,700 5,693
Fleet Financial Group, Inc. 7.25% 9/1/99 1,000 1,019
Fleet/Norstar Group 8.125% 7/1/04 4,600 4,891
Ford Motor Credit Corp. 6.25% 2/26/98 1,000 1,002
Ford Motor Credit Corp. 6.75% 5/15/05 1,385 1,358
Ford Motor Credit Corp. 9.00% 9/15/01 5,000 5,466
Ford Motor Credit Corp. 9.375% 12/15/97 125 129
</TABLE>
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<TABLE>
<CAPTION>
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FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General Electric Capital Corp. 8.30% 9/20/09 $ 275 $ 307
General Motors Acceptance Corp. 6.625% 10/1/02 5,800 5,763
General Motors Acceptance Corp. 7.00% 8/15/97 4,000 4,028
General Motors Acceptance Corp. 7.125% 6/1/99 2,950 2,998
General Motors Acceptance Corp. 8.00% 10/1/99 3,000 3,121
General Motors Acceptance Corp. 8.40% 10/15/99 4,190 4,402
General Motors Acceptance Corp. 8.50% 1/1/03 500 541
General Motors Acceptance Corp. 8.625% 6/15/99 4,250 4,465
General Motors Acceptance Corp. 9.625% 12/15/01 1,000 1,120
Great Western Finance 6.125% 6/15/98 10,100 10,099
Great Western Finance 6.375% 7/1/00 16,100 16,014
Great Western Finance 8.625% 12/1/98 2,275 2,365
Household Finance Corp. 6.45% 2/1/09 2,430 2,290
Household Finance Corp. 7.65% 5/15/07 3,250 3,393
Household Finance Corp. 7.75% 6/1/99 1,000 1,027
Household Finance Corp. 8.95% 9/15/99 3,000 3,188
Lehman Brothers, Inc. 5.75% 2/15/98 3,000 2,985
Lehman Brothers, Inc. 6.625% 11/15/00 5,000 4,975
Mellon Bank 6.75% 6/1/03 2,775 2,760
Mellon Financial Corp. 7.625% 11/15/99 850 877
Merrill Lynch & Co., Inc. 6.50% 4/1/01 18,000 17,952
Merrill Lynch & Co., Inc. 7.00% 3/15/06 300 299
Merrill Lynch & Co., Inc. 8.00% 2/1/02 2,600 2,744
Merrill Lynch & Co., Inc. 8.30% 11/1/02 2,735 2,933
Merrill Lynch & Co., Inc. 9.00% 5/1/98 2,450 2,538
Morgan Stanley Group, Inc. 9.25% 3/1/98 4,625 4,792
NCNB Corp. 9.50% 6/1/04 1,725 1,982
NAC Re Corp. 7.15% 11/15/05 1,500 1,498
NationsBank Corp. 6.50% 3/15/06 5,000 4,805
NationsBank Corp. 6.625% 1/15/98 3,900 3,926
NationsBank Corp. 6.75% 8/15/00 9,600 9,691
NationsBank Corp. 6.875% 2/15/05 580 574
NationsBank Corp. 7.00% 9/15/01 1,800 1,824
NationsBank Corp. 7.25% 10/15/25 1,625 1,562
Norwest Financial, Inc. 6.25% 11/1/02 1,000 982
Norwest Financial, Inc. 6.65% 10/15/23 40 36
Orion Capital Corp. 7.25% 7/15/05 9,200 9,187
Orion Capital Corp. 9.125% 9/1/02 3,921 4,308
PaineWebber Inc. 6.50% 11/1/05 500 469
PaineWebber Inc. 7.00% 3/1/00 4,350 4,380
PaineWebber Inc. 7.875% 2/15/03 2,250 2,337
Pitney Bowes Credit Corp. 9.25% 6/15/08 2,000 2,355
Republic New York Corp. 7.75% 5/15/02 3,000 3,146
Republic New York Corp. 7.75% 5/15/09 4,300 4,519
Salomon, Inc. 6.70% 12/1/98 3,000 3,011
Sears, Roebuck & Co. Acceptance Corp. 6.125% 1/15/06 4,500 4,248
Sears, Roebuck & Co. Acceptance Corp. 6.50% 6/15/00 18,185 18,194
Smith Barney Holdings, Inc. 5.50% 1/15/99 5,000 4,933
Smith Barney Holdings, Inc. 6.50% 10/15/02 300 295
Smith Barney Holdings, Inc. 6.625% 6/1/00 10,000 10,024
Smith Barney Holdings, Inc. 7.00% 5/15/00 6,000 6,079
Smith Barney Holdings, Inc. 7.98% 3/1/00 2,000 2,082
Summit Bancorp. 8.625% 12/10/02 5,000 5,421
SunTrust Banks 7.375% 7/1/06 5,000 5,138
SunTrust Banks 8.875% 2/1/98 115 118
Transamerica Financial Corp. 6.75% 1/15/98 1,200 1,208
Transamerica Financial Corp. 8.375% 2/15/98 100 102
Travelers/Aetna Property Casualty Corp. 6.75% 4/15/01 9,000 9,036
Travelers/Aetna Property Casualty Corp. 7.75% 4/15/26 1,000 1,029
USF & G Co. 7.125% 6/1/05 600 604
U.S. Leasing International 6.625% 5/15/03 195 192
</TABLE>
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<TABLE>
<CAPTION>
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FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wachovia Corp. 6.375% 4/15/03 $ 110 $ 108
Wells Fargo & Co. 6.875% 4/1/06 6,400 6,293
----------
429,477
----------
INDUSTRIAL (8.4%)
AMAX, Inc. 9.875% 6/13/01 1,000 1,116
American Airlines (Equipment Trust Certificates) 9.71% 1/2/07 2,891 3,243
American Brands, Inc. 7.875% 1/15/23 1,900 2,000
Amoco Canada 6.75% 2/15/05 145 145
Anheuser Busch Co., Inc. 7.375% 7/1/23 800 792
Anheuser Busch Co., Inc. 8.625% 12/1/16 2,900 3,029
Applied Materials, Inc. 8.00% 9/1/04 1,625 1,714
Archer-Daniels-Midland Co. 6.25% 5/15/03 1,000 977
Archer-Daniels-Midland Co. 8.875% 4/15/11 3,745 4,334
Auburn Hills 12.00% 5/1/20 970 1,471
BP America, Inc. 9.375% 11/1/00 1,500 1,651
Baxter International, Inc. 9.25% 12/15/99 100 107
Boeing Co. 8.75% 8/15/21 1,800 2,119
Black & Decker Corp. 6.625% 11/15/00 11,000 10,999
Black & Decker Corp. 7.50% 4/1/03 9,200 9,489
Bowater, Inc. 9.375% 12/15/21 3,000 3,586
Burlington Northern Santa Fe Corp. 6.375% 12/15/05 6,750 6,468
Burlington Northern Santa Fe Corp. 6.875% 2/15/16 2,900 2,740
Burlington Northern Santa Fe Corp. 7.00% 12/15/25 2,350 2,199
CSX Corp. 8.625% 5/15/22 875 970
CSX Corp. 9.00% 8/15/06 700 788
Caterpillar, Inc. 9.00% 4/15/06 1,600 1,825
Chrysler Corp. 10.40% 8/1/99 3,550 3,639
Conrail Corp. 9.75% 6/15/20 1,680 2,065
Cyprus AMAX Minerals Co. 7.375% 5/15/07 6,000 6,031
Deere & Co. 8.50% 1/9/22 985 1,112
Delta Airlines, Inc. (Equipment Trust Certificates) 8.54% 1/2/07 4,138 4,399
Dow Chemical Co. 8.50% 6/8/10 2,500 2,783
Eastman Chemical Co. 6.375% 1/15/04 5,525 5,376
Eastman Chemical Co. 7.25% 1/15/24 3,700 3,596
Falconbridge, Ltd. 7.35% 11/1/06 1,000 1,011
Federal Express Corp. 10.00% 9/1/98 1,500 1,587
Ford Capital BV 9.00% 8/15/98 6,300 6,572
Ford Capital BV 9.125% 5/1/98 6,500 6,751
Ford Capital BV 9.50% 7/1/01 1,925 2,128
Ford Capital BV 9.50% 6/1/10 825 980
Ford Capital BV 9.875% 5/15/02 1,250 1,422
Ford Holdings 9.25% 3/1/00 5,900 6,361
Ford Motor Corp. 7.50% 11/15/99 2,000 2,055
Ford Motor Corp. 9.95% 2/15/32 835 1,082
Gannett Co. 5.25% 3/1/98 190 189
Gannett Co. 5.85% 5/1/00 1,000 982
General Motors Corp. 7.00% 6/15/03 2,000 2,013
General Motors Corp. 9.125% 7/15/01 7,900 8,637
General Motors Corp. 9.625% 12/1/00 6,750 7,450
W.R. Grace & Co. 7.40% 2/1/00 6,700 6,856
W.R. Grace & Co. 7.75% 10/1/02 500 521
W.R. Grace & Co. 8.00% 8/15/04 7,900 8,364
H.J. Heinz Co. 6.875% 1/15/03 100 101
HNG Internorth 9.625% 3/15/06 4,680 5,494
International Business Machines Corp. 6.375% 11/1/97 100 100
International Business Machines Corp. 7.125% 12/1/2096 5,525 5,253
International Paper Co. 7.625% 1/15/07 1,765 1,834
International Paper Co. 7.875% 8/1/06 500 529
Kellogg Co. 5.90% 7/15/97 120 120
May Department Stores Co. 9.75% 2/15/21 1,680 2,035
May Department Stores Co. 9.875% 12/1/02 1,775 2,046
</TABLE>
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<TABLE>
<CAPTION>
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FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
McDonald's Corp. 6.75% 2/15/03 $ 945 $ 949
Medpartners 7.375% 10/1/06 3,950 3,964
Mobil Corp. 7.625% 2/23/33 920 925
News America Holdings 8.50% 2/15/05 1,600 1,714
News America Holdings 9.125% 10/15/99 11,500 12,271
Noranda, Inc. 7.50% 7/15/03 6,825 6,999
Occidental Petroleum 8.50% 11/9/01 14,750 15,800
Occidental Petroleum 8.50% 9/15/04 2,500 2,599
Occidental Petroleum 9.25% 8/1/19 1,750 2,097
Occidental Petroleum 10.125% 11/15/01 7,000 7,973
J.C. Penney Co., Inc. 6.125% 11/15/03 2,000 1,921
J.C. Penney Co., Inc. 6.875% 6/15/99 3,000 3,034
J.C. Penney Co., Inc. 7.125% 11/15/23 1,855 1,744
J.C. Penney Co., Inc. 9.05% 3/1/01 625 679
PepsiCo, Inc. 6.125% 1/15/98 3,550 3,558
Philip Morris Co. 6.00% 7/15/01 110 106
Philip Morris Co. 8.25% 10/15/03 1,900 2,020
Phillips Petroleum Co. 8.49% 1/1/23 3,000 3,171
Phillips Petroleum Co. 9.00% 6/1/01 3,400 3,704
Praxair, Inc. 6.75% 3/1/03 1,000 999
Praxair, Inc. 6.90% 11/1/06 10,000 9,969
Quaker State Corp. 6.625% 10/15/05 3,275 3,161
Rockwell International 8.875% 9/15/99 110 117
Sears, Roebuck & Co. 6.25% 1/15/04 1,200 1,158
Sears, Roebuck & Co. 9.25% 4/15/98 8,550 8,879
Sears, Roebuck & Co. 9.375% 11/1/11 1,845 2,206
Tenneco Inc. 8.20% 11/15/99 12,500 13,039
Tenneco Inc. 10.075% 2/1/01 5,150 5,757
Texaco Capital Corp. 7.50% 3/1/43 850 845
Texaco Capital Corp. 8.25% 10/1/06 1,000 1,096
Texaco Capital Corp. 8.875% 9/1/21 705 832
Texaco Capital Corp. 9.00% 12/15/99 300 321
Texas Instruments 6.125% 2/1/06 6,300 5,945
Union Carbide Corp. 6.75% 4/1/03 3,500 3,478
Union Carbide Corp. 7.75% 10/1/2096 800 807
Union Carbide Corp. 7.875% 4/1/23 4,755 4,933
Union Oil of California 7.20% 5/15/05 5,000 5,039
Union Oil of California 9.125% 2/15/06 2,935 3,313
Union Oil of California 9.25% 2/1/03 1,045 1,167
Union Oil of California 9.75% 12/1/00 5,840 6,470
Union Pacific Corp. 8.625% 5/15/22 2,865 3,071
Whirlpool Corp. 9.00% 3/1/03 2,250 2,487
Whirlpool Corp. 9.10% 2/1/08 940 1,081
----------
334,634
----------
UTILITIES--ELECTRIC & GAS (2.3%)
Alabama Power Co. 6.00% 3/1/00 1,950 1,926
Alabama Power Co. 8.75% 12/1/21 1,147 1,218
Arizona Public Service Co. 7.25% 8/1/23 2,150 2,027
Arizona Public Service Co. 7.625% 3/15/98 12,700 12,926
Arizona Public Service Co. 8.00% 2/1/25 2,510 2,534
Baltimore Gas & Electric Co. 8.375% 8/15/01 5,570 5,966
Carolina Power & Light Co. 6.875% 8/15/23 2,550 2,354
Carolina Power & Light Co. 8.20% 7/1/22 110 114
Cincinnati Gas & Electric Co. 6.45% 2/15/04 1,000 976
Cincinnati Gas & Electric Co. 8.125% 8/1/03 2,250 2,295
Coastal Corp. 7.75% 10/15/35 6,600 6,719
Coastal Corp. 8.125% 9/15/02 1,300 1,375
Connecticut Power and Light Co. 7.625% 4/1/97 483 483
Consolidated Edison Co. of New York, Inc. 6.625% 2/1/02 1,000 997
Enron Corp. 7.125% 5/15/07 6,100 6,145
Enron Corp. 7.625% 9/10/04 2,000 2,085
- ------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Enron Corp. 9.65% 5/15/01 $4,150 $ 4,585
Houston Lighting and Power Co. 8.75% 3/1/22 1,050 1,118
Illinios Power Co. 7.50% 7/15/25 4,200 4,028
Pacific Gas and Electric Co. 6.25% 8/1/03 5,000 4,865
Pacific Gas and Electric Co. 6.75% 10/1/23 150 135
Pacific Gas and Electric Co. 8.75% 1/1/01 2,000 2,151
Pennsylvania Power & Light Co. 6.50% 4/1/05 135 130
Public Service Electric & Gas Co. 6.50% 5/1/04 170 164
South Carolina Electric & Gas 9.00% 7/15/06 145 163
Southern California Edison Co. 6.375% 1/15/06 5,350 5,111
Southern California Gas 7.375% 3/1/23 120 116
Texas Utilities Co. 5.75% 7/1/98 1,200 1,193
Texas Utilities Co. 5.875% 4/1/98 4,200 4,191
Texas Utilities Co. 7.375% 8/1/01 2,800 2,873
Texas Utilities Co. 7.875% 3/1/23 2,975 2,985
Texas Utilities Co. 8.25% 4/1/04 3,250 3,489
Texas Utilities Co. 8.75% 11/1/23 180 190
Union Electric Power Co. 6.75% 5/1/08 40 39
Union Electric Power Co. 7.65% 7/15/03 2,000 2,088
Virginia Electric & Power Co. 6.625% 4/1/03 2,300 2,295
Wisconsin Electric Power 7.70% 12/15/27 65 66
--------
92,115
--------
UTILITIES--TELEPHONE (1.4%)
AT&T Corp. 7.125% 1/15/02 1,100 1,121
GTE Corp. 7.83% 5/1/23 4,000 4,027
GTE Corp. 8.75% 11/1/21 750 865
GTE Corp. 8.85% 3/1/98 2,300 2,371
GTE Corp. 9.10% 6/1/03 225 251
MCI Communications Corp. 7.50% 8/20/04 4,050 4,199
MCI Communications Corp. 7.75% 3/23/25 4,650 4,709
Michigan Bell Telephone Co. 6.375% 2/1/05 155 149
Michigan Bell Telephone Co. 7.50% 2/15/23 2,510 2,492
New England Telephone & Telegraph Co. 6.875% 10/1/23 890 822
New England Telephone & Telegraph Co. 8.625% 8/1/01 2,000 2,157
New England Telephone & Telegraph Co. 9.00% 8/1/31 3,750 4,082
New Jersey Bell Telephone Co. 6.625% 4/1/08 190 182
New York Telephone Co. 7.00% 8/15/25 1,925 1,814
New York Telephone Co. 7.75% 12/15/06 120 122
Northern Telecom, Ltd. 6.875% 9/1/23 4,565 4,266
Pacific Bell Corp. 7.00% 7/15/04 2,275 2,305
Pacific Bell Corp. 7.25% 7/1/02 250 257
Southern Bell Telephone Co. 7.625% 3/15/13 4,950 4,932
Southwestern Bell Telephone Co. 7.25% 7/15/25 5,650 5,489
Southwestern Bell Telephone Co. 7.625% 10/1/13 1,620 1,644
Southwestern Bell Telephone Co. 7.625% 3/1/23 8,355 8,431
U S WEST Communications Group 6.875% 9/15/33 165 149
--------
56,836
--------
- ------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $1,095,909) 1,099,632
- ------------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS (DOLLAR DENOMINATED) (3.8%)
- ------------------------------------------------------------------------------------------
Province of Alberta 9.20% 11/1/97 145 149
Province of Alberta 9.25% 4/1/00 5,075 5,509
Asian Development Bank 9.125% 6/1/00 740 802
Bayerische Landesbank 7.375% 12/14/02 145 151
British Aerospace 8.50% 6/10/02 3,000 3,228
Province of British Columbia 7.00% 1/15/03 2,550 2,604
British Columbia Hydro 12.50% 9/1/13 400 453
European Investment Bank 10.125% 10/1/00 125 140
Export Import Bank Japan 7.50% 3/9/97 110 110
Export Import Bank Japan 9.00% 4/15/98 600 622
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finland Global Bond 6.75% 11/24/97 $ 200 $ 202
Grand Metropolitan Investment Corp. 9.00% 8/15/11 2,225 2,646
Hanson Overseas 7.375% 1/15/03 6,500 6,669
Republic of Indonesia 7.75% 8/1/06 10,650 10,798
Inter-American Development Bank 7.125% 3/15/23 975 939
Inter-American Development Bank 8.50% 3/15/11 2,705 3,086
Inter-American Development Bank 9.50% 10/15/97 5,400 5,552
International Bank for Reconstruction & Development 9.25% 7/15/17 1,615 2,009
KFW International Finance, Inc. 7.20% 3/15/14 3,550 3,599
KFW International Finance, Inc. 7.625% 2/15/04 7,025 7,414
KFW International Finance, Inc. 8.85% 6/15/99 1,025 1,085
KFW International Finance, Inc. 9.125% 5/15/01 2,400 2,641
Korean Development Bank 6.25% 5/1/00 5,000 4,964
Korean Development Bank 6.625% 11/21/03 11,100 10,989
Korean Development Bank 7.00% 7/15/99 1,300 1,320
Korean Development Bank 7.25% 5/15/06 6,250 6,359
Province of Manitoba 6.125% 1/19/04 1,500 1,449
Province of Manitoba 7.75% 2/1/02 3,600 3,780
Province of Manitoba 8.75% 5/15/01 5,700 6,174
Province of Manitoba 9.25% 4/1/20 2,645 3,230
Province of Manitoba 9.50% 10/1/00 1,560 1,715
Province of Manitoba 9.625% 3/15/99 2,500 2,674
Province of Manitoba 9.625% 12/1/18 3,500 4,408
National Westminster Bancorp Inc. 9.375% 11/15/03 2,800 3,192
Province of New Brunswick 6.75% 8/15/13 210 203
Province of New Brunswick 8.75% 5/1/22 1,850 2,171
Province of Newfoundland 7.32% 10/13/23 8,050 7,934
New Zealand Government 8.75% 12/15/06 1,175 1,346
New Zealand Government 10.625% 11/15/05 400 501
Province of Ontario 7.375% 1/27/03 915 950
Province of Ontario 7.75% 6/4/02 1,175 1,241
Republic of Portugal 5.75% 10/8/03 2,150 2,045
Province of Saskatchewan 7.125% 3/15/08 1,200 1,211
Province of Saskatchewan 7.375% 7/15/13 1,800 1,834
Province of Saskatchewan 8.00% 7/15/04 15,950 17,103
Sweden Global Bond 6.50% 3/4/03 145 145
Kingdom of Thailand 8.25% 3/15/02 4,100 4,361
Tokyo Metro Government 10.375% 10/20/97 135 139
- ---------------------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS
(COST $150,499) 151,846
- ---------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.3%)
- ---------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
(COST $50,565) 6.39% 1/2/97 50,565 50,565
- ---------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(COST $3,937,879) 3,983,629
- ---------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- ---------------------------------------------------------------------------------------------------
Other Assets--Notes B and F 148,327
Liabilities--Note F (146,520)
--------
1,807
- ---------------------------------------------------------------------------------------------------
NET ASSETS (100%) $3,985,436
- ---------------------------------------------------------------------------------------------------
</TABLE>
*See Note A in Notes to Financial Statements.
27
<PAGE> 30
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
AMOUNT
TOTAL BOND MARKET PORTFOLIO (000)
- -----------------------------------------------------------------------------------------
<S> <C>
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------
Paid in Capital $3,952,980
Undistributed Net Investment Income --
Accumulated Net Realized Losses--Note E (13,294)
Unrealized Appreciation--Note E 45,750
- -----------------------------------------------------------------------------------------
NET ASSETS $3,985,436
=========================================================================================
Individual Class--Net Assets Applicable to 301,101,470
outstanding $.001 par value shares** $2,961,576
- -----------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--INDIVIDUAL CLASS $9.84
=========================================================================================
Institutional Class--Net Assets Applicable to 104,094,958
outstanding $.001 par value shares** $1,023,860
- -----------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--INSTITUTIONAL CLASS $9.84
=========================================================================================
</TABLE>
**Authorized 550,000,000 shares for Total Bond Market Portfolio.
28
<PAGE> 31
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (71.0%)
- --------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (70.3%)
U.S. Treasury Notes 4.75% 8/31/98 $ 1,575 $ 1,548
U.S. Treasury Notes 5.125% 4/30/98-6/30/98 1,675 1,662
U.S. Treasury Notes 5.25% 7/31/98 3,925 3,893
U.S. Treasury Notes 5.375% 5/31/98 2,975 2,960
U.S. Treasury Notes 5.50% 11/15/98 10,800 10,727
U.S. Treasury Notes 5.625% 11/30/00 21,600 21,208
U.S. Treasury Notes 6.25% 8/31/00-4/30/01 12,125 12,156
U.S. Treasury Notes 6.375% 1/15/00-3/31/01 7,850 7,903
U.S. Treasury Notes 6.75% 5/31/99-6/30/99 2,725 2,773
U.S. Treasury Notes 6.875% 7/31/99-3/31/00 7,350 7,505
U.S. Treasury Notes 7.00% 4/15/99 7,050 7,207
U.S. Treasury Notes 7.25% 2/15/98 9,200 9,351
U.S. Treasury Notes 7.50% 10/31/99-11/15/01 26,700 28,039
U.S. Treasury Notes 7.75% 11/30/99-2/15/01 21,110 22,094
U.S. Treasury Notes 7.875% 4/15/98-11/15/99 925 953
U.S. Treasury Notes 8.00% 8/15/99 18,300 19,169
U.S. Treasury Notes 8.25% 7/15/98 35,895 37,174
U.S. Treasury Notes 8.75% 8/15/00 300 325
U.S. Treasury Notes 8.875% 11/15/98-2/15/99 16,290 17,183
U.S. Treasury Notes 9.00% 5/15/98 15,175 15,815
U.S. Treasury Notes 9.125% 5/15/99 950 1,015
-------
230,660
-------
AGENCY NOTES (0.7%)
Federal National Mortgage Assn. 4.95% 9/30/98 700 689
Federal National Mortgage Assn. 5.30% 3/11/98 1,075 1,070
Federal National Mortgage Assn. 5.35% 8/12/98 700 694
-------
2,453
-------
- --------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $232,122) 233,113
- --------------------------------------------------------------------------------------------------
CORPORATE BONDS (25.7%)
- --------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (4.9%)
Banc One Credit Card Master Trust 7.55% 12/15/99 650 659
Chase Manhattan Credit Card Master Trust 7.40% 5/15/00 225 226
Discover Card Master Trust 5.40% 11/16/01 3,150 3,115
First Chicago Master Trust 6.25% 8/15/99 300 300
First Deposit Master Trust 5.75% 6/15/01 2,500 2,493
First Deposit Master Trust 6.05% 8/15/02 2,500 2,503
MBNA Master Credit Card Trust 7.75% 10/15/98 100 100
Sears Credit Card Master Trust 7.25% 7/16/01 650 656
Sears Credit Card Master Trust 8.10% 6/15/04 2,500 2,623
Standard Credit Card Master Trust 6.80% 4/7/01 650 658
Standard Credit Card Master Trust 7.875% 1/7/00 2,500 2,575
------
15,908
------
FINANCE (12.0%)
American General Finance Corp. 5.875% 7/1/00 450 441
American General Finance Corp. 8.00% 2/15/00 1,400 1,458
American General Finance Corp. 8.50% 8/15/98 300 310
Associates Corp. 5.875% 8/15/97 200 200
Associates Corp. 6.25% 3/15/99 500 500
Associates Corp. 7.25% 5/15/98 200 203
Associates Corp. 9.125% 4/1/00 1,000 1,076
AVCO Financial Services 5.50% 5/1/98 250 248
BankAmerica Corp. 9.625% 2/13/01 400 442
Bear Stearns Co. 7.625% 4/15/00 750 773
Bear Stearns Co. 9.125% 4/15/98 650 674
Chase Manhattan Corp. 6.625% 1/15/98 200 201
Chase Manhattan Corp. 7.75% 11/1/99 135 140
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Chrysler Finance Corp. 5.375% 10/15/98 $ 400 $ 395
Chrysler Finance Corp. 5.625% 1/15/99 350 347
Chrysler Finance Corp. 6.625% 8/15/00 450 451
Chrysler Finance Corp. 6.50% 6/15/98 250 252
Citicorp 9.75% 8/1/99 1,000 1,079
Citicorp 10.15% 2/15/98 1,000 1,046
Dean Witter Discover & Co. 6.00% 3/1/98 1,800 1,801
Dean Witter Discover & Co. 6.25% 3/15/00 210 208
First Chicago Corp. 9.875% 8/15/00 150 166
First Chicago Corp. 10.25% 5/1/01 250 283
First Fidelity Bancorp 9.625% 8/15/99 800 861
First Interstate Bancorp 8.625% 4/1/99 900 943
First Interstate Bancorp 10.875% 4/15/01 250 288
Ford Motor Credit Corp. 6.25% 2/26/98 250 251
General Motors Acceptance Corp. 7.125% 6/1/99 500 508
General Motors Acceptance Corp. 8.625% 6/15/99 750 788
Great Western Finance 6.125% 6/15/98 1,500 1,500
Great Western Finance 6.375% 7/1/00 2,000 1,989
International Lease Finance Corp. 6.20% 5/1/00 3,000 2,971
Lehman Brothers Inc. 5.75% 2/15/98 750 746
Manufacturers Hanover Corp. 8.50% 2/15/99 900 939
Mellon Financial Corp. 6.50% 12/1/97 300 301
Mellon Financial Corp. 7.625% 11/15/99 600 619
Merrill Lynch & Co., Inc. 6.50% 4/1/01 2,000 1,995
Merrill Lynch & Co., Inc. 9.00% 5/1/98 300 311
Morgan Stanley Group, Inc. 9.25% 3/1/98 200 207
NationsBank Corp. 6.625% 1/15/98 350 352
NationsBank Corp. 6.75% 8/15/00 700 707
NationsBank Corp. 7.00% 9/15/01 1,500 1,520
PaineWebber Inc. 7.00% 3/1/00 1,450 1,460
Salomon, Inc. 6.70% 12/1/98 1,500 1,506
Sears, Roebuck & Co. Acceptance Corp. 6.50% 6/15/00 1,500 1,501
Smith Barney Holdings, Inc. 5.50% 1/15/99 500 493
Smith Barney Holdings, Inc. 5.625% 11/15/98 700 693
Smith Barney Holdings, Inc. 7.98% 3/1/00 1,000 1,041
SunTrust Banks 8.875% 2/1/98 500 515
Transamerica Financial Corp. 6.75% 1/15/98 300 302
Transamerica Financial Corp. 8.375% 2/15/98 400 409
Travelers/Aetna Property Casualty Corp. 6.75% 4/15/01 1,000 1,004
------
39,414
------
INDUSTRIAL (7.4%)
AMAX, Inc. 9.875% 6/13/01 600 669
Black & Decker Co. 6.625% 11/15/00 1,000 1,000
BP America, Inc. 8.875% 12/1/97 800 821
Chrysler Corp. 10.40% 8/1/99 350 359
Federal Express Corp. 10.00% 9/1/98 600 635
Ford Capital BV 9.00% 8/15/98 535 558
Ford Capital BV 9.125% 5/1/98 1,215 1,262
Ford Capital BV 9.375% 1/1/98 750 775
Ford Capital BV 9.50% 7/1/01 675 746
Ford Holdings 9.25% 3/1/00 1,000 1,078
General Motors Corp. 9.125% 7/15/01 1,000 1,093
General Motors Corp. 9.625% 12/1/00 400 441
W.R. Grace & Co. 7.40% 2/1/00 1,550 1,586
Kimberly Clark 8.625% 5/1/01 100 108
Mobil Corp. 8.375% 2/12/01 2,238 2,389
News America Holdings 9.125% 10/15/99 2,500 2,668
Occidental Petroleum Corp. 8.50% 11/9/01 500 536
J.C. Penney Co., Inc. 6.875% 6/15/99 750 758
J.C. Penney Co., Inc. 9.05% 3/1/01 375 407
PepsiCo, Inc. 6.125% 1/15/98 200 200
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Phillips Petroleum Co. 9.00% 6/1/01 $2,000 $2,179
Praxair, Inc. 6.25% 6/30/00 1,250 1,243
Sears, Roebuck & Co. 9.25% 4/15/98 1,300 1,350
Tenneco Inc. 8.20% 11/15/99 350 365
Texaco Capital Corp. 9.00% 11/15/97 105 108
Texaco Capital Corp. 9.00% 12/15/99 700 749
Union Oil of California 9.75% 12/1/00 210 233
------
24,316
------
UTILITIES (1.4%)
Alabama Power Co. 6.00% 3/1/00 1,050 1,037
Arizona Public Service Co. 7.625% 3/15/98 800 814
GTE Corp. 8.85% 3/1/98 700 722
Public Service of Colorado 6.00% 1/1/01 1,000 983
Texas Utilities Co. 5.75% 7/1/98 300 298
Texas Utilities Co. 5.875% 4/1/98 800 799
-----
4,653
-----
- -----------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $84,244) 84,291
- -----------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS (Dollar Denominated) (1.6%)
- -----------------------------------------------------------------------------------------
Asian Development Bank 9.125% 6/1/00 700 758
Export Import Bank of Japan 9.00% 4/15/98 500 518
Inter-American Development Bank 9.50% 10/15/97 600 617
KFW International Finance 9.125% 5/15/01 400 440
Province of Manitoba 8.75% 5/15/01 1,500 1,625
Province of Manitoba 9.50% 10/1/00 450 495
Province of Manitoba 9.625% 3/15/99 500 535
National Westminster Bancorp. 9.45% 5/1/01 250 277
- -----------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS
(COST $5,213) 5,265
- -----------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.6%)
- -----------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $1,976) 6.39% 1/2/97 1,976 1,976
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.9%)
(COST $323,555) 324,645
- -----------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.1%)
- -----------------------------------------------------------------------------------------
Other Assets--Notes B and F 22,496
Liabilities--Note F (18,849)
--------
3,647
- -----------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------
Applicable to 33,093,763 outstanding $.001 par value shares
(authorized 250,000,000 shares) $328,292
=========================================================================================
NET ASSET VALUE PER SHARE $9.92
=========================================================================================
*See Note A in Notes to Financial Statements.
- -----------------------------------------------------------------------------------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
<CAPTION>
- -----------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $327,288 $9.89
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note E (86) --
Unrealized Appreciation--Note E 1,090 .03
=========================================================================================
NET ASSETS $328,292 $9.92
=========================================================================================
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- ----------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (56.1%)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES (51.8%)
U.S. Treasury Bonds 10.375% 11/15/09-11/15/12 $72,665 $ 90,781
U.S. Treasury Bonds 10.75% 8/15/05 21,890 28,084
U.S. Treasury Notes 5.75% 8/15/03 29,270 28,392
U.S. Treasury Notes 5.875% 7/31/97 1,000 1,003
U.S. Treasury Notes 6.25% 2/15/03 10,074 10,061
U.S. Treasury Notes 6.375% 8/15/02 18,620 18,742
U.S. Treasury Notes 7.00% 7/15/06 22,300 23,168
U.S. Treasury Notes 7.125% 2/29/00 100 103
U.S. Treasury Notes 7.25% 5/15/04-8/15/04 7,433 7,822
U.S. Treasury Notes 7.50% 11/15/01-2/15/05 18,035 19,191
U.S. Treasury Notes 7.875% 11/15/04 7,360 8,032
U.S. Treasury Notes 8.75% 10/15/97 550 563
U.S. Treasury Notes 8.875% 11/15/98 2,250 2,367
-------
238,309
-------
AGENCY NOTES (4.3%)
Federal Home Loan Mortgage Corp. 6.785% 3/1/06 4,500 4,388
Federal Home Loan Mortgage Corp. 7.09% 6/1/05 3,000 2,988
Federal National Mortgage Assn. 5.80% 12/10/03 900 863
Federal National Mortgage Assn. 6.25% 8/12/03 5,600 5,427
Federal National Mortgage Assn. 7.00% 8/12/02 2,900 2,878
Federal National Mortgage Assn. 7.55% 6/10/04 2,900 2,947
Tennessee Valley Authority 6.875% 1/15/02 200 201
------
19,692
------
- ----------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $254,754) 258,001
- ----------------------------------------------------------------------------------------------
CORPORATE BONDS (33.9%)
- ----------------------------------------------------------------------------------------------
FINANCE (15.7%)
American General Finance Corp. 7.45% 7/1/02 425 440
Associates Corp. 7.50% 4/15/02 2,400 2,487
BankAmerica Corp. 6.20% 2/15/06 3,000 2,830
BankAmerica Corp. 7.50% 10/15/02 400 414
BankAmerica Corp. 7.625% 6/15/04 450 469
BankAmerica Corp. 7.75% 7/15/02 250 261
BankAmerica Corp. 10.00% 2/1/03 700 809
Bear Stearns Co. 6.625% 1/15/04 350 342
Chase Manhattan Corp. 8.625% 5/1/02 1,000 1,084
Chemical Banking Corp. 7.25% 9/15/02 3,565 3,651
CIT Group Holdings 6.625% 6/15/05 350 343
Citicorp 7.125% 6/1/03 135 137
Citicorp 8.625% 12/1/02 1,500 1,635
Commercial Credit Corp. 5.90% 9/1/03 450 431
Commercial Credit Corp. 7.875% 7/15/04 2,000 2,110
CoreStates Capital Corp. 6.625% 3/15/05 2,400 2,334
CoreStates Capital Corp. 9.375% 4/15/03 500 565
Countrywide Funding 8.25% 7/15/02 250 266
Dean Witter Discover & Co. 6.875% 3/1/03 400 401
First Chicago Corp. 7.625% 1/15/03 600 625
First Union Corp. 8.00% 11/15/02 2,000 2,114
First Union Corp. 8.125% 6/24/02 1,600 1,698
Fleet Financial Group, Inc. 6.875% 3/1/03 600 602
Fleet Financial Group, Inc. 7.125% 4/15/06 1,300 1,298
Fleet/Norstar Group 8.125% 7/1/04 900 957
Ford Motor Credit Corp. 6.625% 6/30/03 3,000 2,959
Ford Motor Credit Corp. 8.20% 2/15/02 900 955
General Motors Acceptance Corp. 5.50% 12/15/01 750 710
General Motors Acceptance Corp. 6.625% 10/1/02 3,200 3,179
Household Finance Corp. 7.625% 1/15/03 3,500 3,637
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Household Finance Corp. 7.65% 5/15/07 $ 850 $ 887
Mellon Bank 6.75% 6/1/03 225 224
Merrill Lynch & Co., Inc. 8.00% 2/1/02 400 422
Merrill Lynch & Co., Inc. 8.30% 11/1/02 250 268
NAC Re Corp. 7.15% 11/15/05 2,500 2,496
NCNB Corp. 9.50% 6/1/04 2,000 2,299
NationsBank Corp. 6.50% 3/15/06 2,900 2,787
NationsBank Corp. 6.875% 2/15/05 325 322
NationsBank Corp. 7.75% 8/15/04 500 522
NationsBank Corp. 8.125% 6/15/02 1,000 1,062
Norwest Financial, Inc. 7.00% 1/15/03 110 112
Orion Capital Corp. 7.25% 7/15/05 500 499
Orion Capital Corp. 9.125% 9/1/02 3,000 3,296
Paine Webber Group, Inc. 7.875% 2/15/03 250 260
Republic New York Corp. 7.75% 5/15/02 700 734
Republic New York Corp. 7.75% 5/15/09 2,400 2,522
Sears Roebuck Acceptance Corp. 6.75% 9/15/05 3,000 2,955
Smith Barney Holdings 6.875% 6/15/05 3,300 3,249
SunTrust Banks 7.375% 7/1/06 2,400 2,466
USF & G Co. 7.125% 6/1/05 2,400 2,415
Wells Fargo & Co. 6.875% 4/1/06 3,000 2,950
--------
72,490
--------
INDUSTRIAL (11.7%)
Air Products & Chemicals, Inc. 6.25% 6/15/03 125 122
American Airlines (Equipment Trust Certificates) 9.71% 1/2/07 482 541
Applied Materials, Inc. 8.00% 9/1/04 150 158
Archer-Daniels-Midland Co. 6.25% 5/15/03 250 244
Black & Decker Corp. 7.50% 4/1/03 3,500 3,610
Burlington Northern Santa Fe Corp. 6.375% 12/15/05 3,000 2,874
CSX Corp. 9.00% 8/15/06 275 310
Caterpillar, Inc. 9.00% 4/15/06 500 570
Coastal Corp. 10.25% 10/15/04 2,000 2,370
Cyprus Minerals Co. 10.125% 4/1/02 1,500 1,708
Delta Airlines, Inc. (Equipment Trust Certificates) 8.54% 1/2/07 520 552
Eastman Chemical Co. 6.375% 1/15/04 3,475 3,381
Falconbridge, Ltd. 7.35% 11/1/06 1,000 1,011
First Data Corp. 6.625% 4/1/03 2,000 1,995
Ford Capital BV 9.875% 5/15/02 2,520 2,866
General Motors Corp. 7.00% 6/15/03 500 503
W.R. Grace & Co. 7.75% 10/1/02 500 521
W.R. Grace & Co. 8.00% 8/15/04 2,850 3,017
HNG Internorth 9.625% 3/15/06 2,000 2,348
Johnson & Johnson 7.375% 6/29/02 200 208
Lockheed Martin Corp. 6.50% 4/15/03 2,000 1,972
May Department Stores Co. 9.875% 12/1/02 225 259
McDonald's Corp. 6.75% 2/15/03 450 452
McDonnell Douglas Corp. 9.25% 4/1/02 1,000 1,117
Medpartners 7.375% 10/1/06 600 602
News America Holdings 8.50% 2/15/05 2,000 2,142
Noranda, Inc. 7.50% 7/15/03 1,000 1,025
Occidental Petroleum 8.50% 11/9/01 1,000 1,071
Occidental Petroleum 8.50% 9/15/04 3,000 3,119
J.C. Penney Co., Inc. 6.125% 11/15/03 130 125
Philip Morris Co. 8.25% 10/15/03 250 266
Praxair, Inc. 6.75% 3/1/03 2,500 2,497
Quaker State Corp. 6.625% 10/15/05 800 772
Sears, Roebuck & Co. 6.25% 1/15/04 650 627
Texas Instruments 6.125% 2/1/06 2,800 2,642
Union Carbide Corp. 6.75% 4/1/03 3,050 3,031
Union Oil of California 6.375% 2/1/04 2,000 1,938
Union Oil of California 9.125% 2/15/06 200 226
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Union Oil of California 9.25% 2/1/03 $ 550 $ 614
Whirlpool Corp. 9.00% 3/1/03 400 442
Xerox Corp. 8.125% 4/15/02 150 160
------
54,008
------
UTILITIES--ELECTRIC & GAS (4.2%)
Baltimore Gas & Electric Co. 7.25% 7/1/02 200 205
Coastal Corp. 8.125% 9/15/02 2,700 2,856
Cincinnati Gas & Electric Co. 6.45% 2/15/04 1,000 976
Cincinnati Gas & Electric Co. 8.125% 8/1/03 250 255
Consolidated Edison Co. of New York, Inc. 6.625% 2/1/02 500 499
Enron Corp. 7.125% 5/15/07 2,300 2,317
Enron Corp. 7.625% 9/10/04 1,000 1,043
Florida Power & Light Co. 6.625% 2/1/03 210 206
Pacific Gas & Electric 7.875% 3/1/02 3,000 3,162
Texas Utilities Co. 7.375% 8/1/01 450 462
Texas Utilities Co. 8.125% 2/1/02 600 634
Texas Utilities Co. 8.25% 4/1/04 1,650 1,771
Union Electric Corp. 7.65% 7/15/03 1,000 1,044
Virginia Electric & Power Co. 6.625% 4/1/03 4,000 3,990
------
19,420
------
UTILITIES--TELEPHONE (2.3%)
MCI Communications Corp. 7.50% 8/20/04 3,250 3,369
New England Telephone & Telegraph Co. 8.625% 8/1/01 3,500 3,775
Pacific Bell Corp. 7.00% 7/15/04 900 912
Pacific Bell Corp. 7.25% 7/1/02 450 462
Southwestern Bell Telephone 5.75% 9/1/04 2,000 1,870
------
10,388
------
- -----------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $154,416) 156,306
- -----------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS (Dollar Denominated) (8.1%)
- -----------------------------------------------------------------------------------------
Province of British Columbia 7.00% 1/15/03 400 408
Hanson Overseas 7.375% 1/15/03 2,500 2,565
Republic of Indonesia 7.75% 8/1/06 2,900 2,940
KFW International Finance, Inc. 7.625% 2/15/04 4,625 4,881
Korean Development Bank 6.625% 11/21/03 2,250 2,228
Korean Development Bank 7.25% 5/15/06 3,000 3,052
Province of Manitoba 6.125% 1/19/04 1,500 1,449
Province of Manitoba 7.75% 2/1/02 4,875 5,119
National Westminster Bancorp Inc. 9.375% 11/15/03 1,150 1,311
New Zealand Government 8.75% 12/15/06 125 143
New Zealand Government 10.625% 11/15/05 600 752
Noranda Inc. 8.125% 6/15/04 1,000 1,056
Noranda Inc. 8.625% 7/15/02 500 540
Bank of Nova Scotia 6.875% 5/1/03 750 752
Province of Ontario 7.75% 6/4/02 550 581
Republic of Portugal 5.75% 10/8/03 600 571
Province of Saskatchewan 7.125% 3/15/08 500 505
Province of Saskatchewan 8.00% 7/15/04 3,900 4,182
Kingdom of Thailand 8.25% 3/15/02 4,000 4,255
- -----------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS
(COST $37,036) 37,290
- -----------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.0%)
- -----------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
(COST $4,447) 6.39% 1/2/97 4,447 4,447
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.1%)
(COST $450,653) 456,044
- -----------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- ------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.9%)
- ------------------------------------------------------------------------------------------
<S> <C>
Other Assets--Notes B and F $ 39,791
Liabilities--Note F (35,476)
---------
4,315
- ------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------
Applicable to 46,206,179 outstanding $.001 par value shares
(authorized 250,000,000 shares) $460,359
==========================================================================================
NET ASSET VALUE PER SHARE $9.96
==========================================================================================
*See Note A in Notes to Financial Statements.
- ------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
<CAPTION>
- ------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $458,907 $9.93
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note E (3,939) (.09)
Unrealized Appreciation--Note E 5,391 .12
- -----------------------------------------------------------------------------------------
NET ASSETS $460,359 $9.96
==========================================================================================
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (66.2%)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bonds 7.25% 8/15/22 $ 225 $ 238
U.S. Treasury Bonds 7.625% 11/15/22 600 662
U.S. Treasury Bonds 7.875% 2/15/21 145 164
U.S. Treasury Bonds 8.00% 11/15/21 1,150 1,318
U.S. Treasury Bonds 8.125% 8/15/19-8/15/21 10,555 12,247
U.S. Treasury Bonds 8.50% 2/15/20 570 685
U.S. Treasury Bonds 8.75% 5/15/17-5/15/20 3,555 4,342
U.S. Treasury Bonds 8.875% 8/15/17-2/15/19 3,415 4,223
U.S. Treasury Bonds 9.125% 5/15/18 1,495 1,894
U.S. Treasury Notes 5.75% 8/15/03 125 121
U.S. Treasury Notes 6.375% 3/31/01 300 302
U.S. Treasury Notes 7.00% 7/15/06 250 260
U.S. Treasury Notes 7.50% 2/15/05 790 845
U.S. Treasury Notes 7.875% 11/15/04 1,750 1,910
- -------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $28,194) 29,211
- -------------------------------------------------------------------------------------------
CORPORATE BONDS (25.3%)
- -------------------------------------------------------------------------------------------
FINANCE (5.0%)
Chemical Bank Corp. 6.125% 11/1/08 500 459
Dean Witter Discover & Co 6.75% 10/15/13 200 186
Ford Motor Credit Corp. 6.75% 5/15/05 115 113
Household Finance Corp. 6.45% 2/1/09 70 66
Household Finance Corp. 7.65% 5/15/07 150 157
NationsBank Corp. 6.875% 2/15/05 95 94
NationsBank Corp. 7.25% 10/15/25 375 360
Norwest Corp. 6.65% 10/15/23 60 55
Orion Capital Corp. 7.25% 7/15/05 300 299
Sears, Roebuck & Co. Acceptance Corp. 6.125% 1/15/06 150 142
Travelers/Aetna Property Casualty Corp. 7.75% 4/15/26 275 283
-----
2,214
-----
INDUSTRIAL (10.8%)
Archer-Daniels-Midland Co. 8.875% 4/15/11 80 93
Auburn Hills 12.00% 5/1/20 60 91
Bowater, Inc. 9.375% 12/15/21 250 299
Burlington Northern 6.875% 2/15/16 300 283
Burlington Sante Fe 7.00% 12/15/25 50 47
CSX Corp. 8.625% 5/15/22 25 28
CSX Corp. 9.00% 8/15/06 25 28
Caterpillar, Inc. 9.00% 4/15/06 100 114
Deere & Co. 8.50% 1/9/22 115 130
Eastman Chemical Co. 7.25% 1/15/24 250 243
Ford Capital BV 9.50% 6/1/10 180 214
Ford Motor Corp. 9.95% 2/15/32 100 130
International Business Machines Corp. 7.125% 12/1/2096 250 238
International Paper Co. 7.625% 1/15/07 35 36
May Department Stores Co. 9.75% 2/15/21 40 48
Mobil Corp. 7.625% 2/23/33 230 231
News America Holdings 8.50% 2/15/05 400 428
Occidental Petroleum 9.25% 8/1/19 250 300
J.C. Penney Co., Inc. 7.125% 11/15/23 220 207
Quaker State Corp. 6.625% 10/15/05 150 145
Sears, Roebuck & Co. 9.375% 11/1/11 395 472
Texas Instruments 6.125% 2/1/06 300 283
Texaco Capital Corp. 8.875% 9/1/21 155 183
Union Carbide Corp. 7.75% 10/1/2096 50 50
Union Carbide Corp. 7.875% 4/1/23 220 228
Union Oil of California 9.125% 2/15/06 90 102
Union Pacific Corp. 8.625% 5/15/22 35 37
Whirlpool Corp. 9.10% 2/1/08 60 69
-----
4,757
-----
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES--ELECTRIC & GAS (4.6%)
Alabama Power Co. 8.75% 12/1/21 $ 140 $ 149
Arizona Public Service Co. 7.25% 8/1/23 200 189
Arizona Public Service Co. 8.00% 2/1/25 315 318
Coastal Corp. 7.75% 10/15/35 400 407
Enron Corp. 7.125% 5/15/07 246 248
Illinios Power Co. 7.50% 7/15/25 300 288
Texas Utilities Co. 7.875% 3/1/23 190 191
Texas Utilities Co. 8.75% 11/1/23 50 53
Union Electric Power Co. 6.75% 5/1/08 120 118
Wisconsin Electric Power Co. 7.70% 12/15/27 75 76
------
2,037
------
UTILITIES--TELEPHONE (4.9%)
GTE Corp. 7.83% 5/1/23 250 252
GTE Corp. 8.75% 11/1/21 250 288
MCI Communications Corp. 7.75% 3/23/25 250 253
Michigan Bell Telephone Co. 7.50% 2/15/23 140 139
New England Telephone & Telegraph Co. 6.875% 10/1/23 110 102
New England Telephone & Telegraph Co. 9.00% 8/1/31 250 272
Northern Telecom 6.875% 9/1/23 250 234
Southern Bell Telephone Co. 7.625% 3/15/13 50 50
Southwestern Bell Telephone Co. 7.25% 7/15/25 450 437
Southwestern Bell Telephone Co. 7.625% 10/1/13 80 81
Southwestern Bell Telephone Co. 7.625% 3/1/23 45 45
------
2,153
------
- -----------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $11,055) 11,161
- -----------------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS (DOLLAR DENOMINATED) (6.7%)
- -----------------------------------------------------------------------------------------------
British Columbia Hydro 12.50% 9/1/13 100 113
Grand Metropolitan Investment Corp. 9.00% 8/15/11 75 89
Inter-American Development Bank 7.125% 3/15/23 25 24
Inter-American Development Bank 8.50% 3/15/11 110 125
International Bank for Reconstruction & Development 9.25% 7/15/17 135 168
KFW International Finance, Inc. 7.20% 3/15/14 600 608
Province of Manitoba 9.25% 4/1/20 485 592
Province of New Brunswick 8.75% 5/1/22 250 293
New Zealand Government 8.75% 12/15/06 200 229
Province of Saskatchewan 7.125% 3/15/08 100 101
Province of Saskatchewan 7.375% 7/15/13 600 611
- -----------------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS
(COST $2,889) 2,953
- -----------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.2%)
- -----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $101) 6.39% 1/2/97 101 101
- -----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.4%)
(COST $42,239) 43,426
- -----------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.6%)
- -----------------------------------------------------------------------------------------------
Other Assets--Note B 950
Liabilities (252)
-----
698
- -----------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------
Applicable to 4,376,733 outstanding $.001 par value shares
(authorized 250,000,000 shares) $44,124
===============================================================================================
NET ASSET VALUE PER SHARE $10.08
===============================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
37
<PAGE> 40
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
AMOUNT PER
LONG-TERM BOND PORTFOLIO (000) SHARE
- ------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $43,410 $9.92
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note E (473) (.11)
Unrealized Appreciation--Note E 1,187 .27
- ------------------------------------------------------------------------------------------
NET ASSETS $44,124 $10.08
==========================================================================================
</TABLE>
38
<PAGE> 41
STATEMENT OF OPERATIONS
This Statement shows interest earned by each Portfolio during the reporting
period, and details the operating expenses charged to the Portfolio. The Total
Bond Market Portfolio also reports the breakdown of 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 any
Unrealized Appreciation (Depreciation) on investments during the period.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------
TOTAL BOND SHORT-TERM INTERMEDIATE- LONG-TERM
MARKET BOND TERM BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest $225,339 $17,107 $29,172 $2,460
-------------------------------------------------------
Total Income 225,339 17,107 29,172 2,460
-------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services 400 32 52 4
Management and Administrative 1,751 304 401 --
Shareholder Account Maintenance1 2,277 92 215 30
Marketing and Distribution1 932 77 123 9
Taxes (other than income taxes) 246 20 32 3
Custodian Fees 175 19 21 14
Auditing Fees 11 8 8 8
Shareholders' Reports1 127 3 10 2
Annual Meeting and Proxy Costs1 30 1 2 1
Directors' Fees and Expenses 9 1 1 --
------------------------------------------------------
Total Expenses 5,958 557 865 71
- ---------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 219,381 16,550 28,307 2,389
- ---------------------------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT
SECURITIES SOLD (5,514) (90) (3,931) (473)
- ---------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES (74,246) (3,312) (11,605) (1,054)
===================================================================================================
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $139,621 $13,148 $12,771 $ 862
===================================================================================================
(1)Expenses of the Total Bond Market Portfolio by Class are:
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(000)
--------------------------------------
INDIVIDUAL INSTITUTIONAL
CLASS CLASS TOTAL
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class-Specific Expenses:
Shareholder Account Maintenance $2,258 $ 19 $2,277
Marketing and Distribution 786 146 932
Shareholders' Reports 127 -- 127
Annual Meeting and Proxy Costs 30 -- 30
-----------------------------------
Total Class-Specific Expenses 3,201 165 3,366
All Other Portfolio Expenses 2,041 551 2,592
- ---------------------------------------------------------------------------------------------------
Total Expenses $5,242 $ 716 $5,958
===================================================================================================
</TABLE>
See Note C in Notes to Financial Statements.
39
<PAGE> 42
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each Portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes
information that is detailed in the Statement of Operations. Because the
Portfolio distributes its income to shareholders each day, the amounts of
Distributions--Net Investment Income generally equal the net income earned as
shown under the Operations section. The amounts of Distributions--Realized
Capital Gain may not match the capital gains shown in the Operations section,
because distributions are determined on a tax basis and may be made in a period
different from the one in which the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount
shareholders invested in the Portfolio, either by purchasing shares or by
reinvesting distributions, and the amounts redeemed. The corresponding numbers
of Shares Issued and Redeemed are shown at the end of the Statement. The Total
Bond Market Portfolio-Individual and -Institutional shares' Distributions,
Capital Share Transactions, and Shares Issued and Redeemed are shown
separately.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO
----------------------------
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
(000) (000)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 219,381 $ 146,726
Realized Net Gain (Loss) (5,514) 4,808
Change in Unrealized Appreciation (Depreciation) (74,246) 210,856
----------------------------
Net Increase in Net Assets Resulting from Operations 139,621 362,390
----------------------------
DISTRIBUTIONS
Net Investment Income
Individual Class (171,657) (141,500)
Institutional Class (47,724) (5,226)
Realized Capital Gain
Individual Class -- --
Institutional Class -- --
----------------------------
Total Distributions (219,381) (146,726)
----------------------------
CAPITAL SHARE TRANSACTIONS--INDIVIDUAL CLASS(1)
Issued 1,373,171 1,132,841
Issued in Lieu of Cash Distributions 147,464 121,731
Redeemed (893,692) (787,427)
----------------------------
Net Increase--Individual Class 626,943 467,145
----------------------------
CAPITAL SHARE TRANSACTIONS--INSTITUTIONAL CLASS(2)
Issued 702,749 403,027
Issued in Lieu of Cash Distributions 41,752 3,862
Redeemed (124,465) (2,189)
----------------------------
Net Increase--Institutional Class 620,036 404,700
- ---------------------------------------------------------------------------------------------
Total Increase 1,167,219 1,087,509
- ---------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 2,818,217 1,730,708
----------------------------
End of Year $3,985,436 $2,818,217
=============================================================================================
(1)Shares Issued (Redeemed)--Individual Class
Issued 139,884 116,319
Issued in Lieu of Cash Distributions 15,068 12,465
Redeemed (91,062) (80,354)
----------------------------
Net Increase in Shares Outstanding 63,890 48,430
=============================================================================================
(2)Shares Issued (Redeemed)--Institutional Class
Issued 71,819 40,585
Issued in Lieu of Cash Distributions 4,272 384
Redeemed (12,749) (216)
----------------------------
Net Increase in Shares Outstanding 63,342 40,753
=============================================================================================
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
SHORT-TERM INTERMEDIATE-TERM
BOND PORTFOLIO BOND PORTFOLIO
-------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1996 1995
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 16,550 $ 9,250 $ 28,307 $ 13,240
Realized Net Gain (Loss) (90) 539 (3,931) 1,817
Change in Unrealized Appreciation
(Depreciation) (3,312) 6,934 (11,605) 20,339
-------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 13,148 16,723 12,771 35,396
-------------------------------------------------
DISTRIBUTIONS
Net Investment Income (16,550) (9,250) (28,307) (13,240)
Realized Capital Gain (88) -- (166) (888)
-------------------------------------------------
Total Distributions (16,638) (9,250) (28,473) (14,128)
--------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 166,669 140,245 281,767 294,078
Issued in Lieu of Cash Distributions 14,288 8,107 24,466 12,148
Redeemed (56,772) (25,210) (175,804) (53,262)
-------------------------------------------------
Net Increase from Capital
Share Transactions 124,185 123,142 130,429 252,964
- --------------------------------------------------------------------------------------------
Total Increase 120,695 130,615 114,727 274,232
- --------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 207,597 76,982 345,632 71,400
-------------------------------------------------
End of Year $328,292 $207,597 $460,359 $345,632
============================================================================================
(1)Shares Issued (Redeemed)
Issued 16,763 14,263 28,221 29,647
Issued in Lieu of Cash Distributions 1,443 818 2,469 1,208
Redeemed (5,726) (2,567) (17,819) (5,300)
-------------------------------------------------
Net Increase in Shares Outstanding 12,480 12,514 12,871 25,555
============================================================================================
</TABLE>
41
<PAGE> 44
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
LONG-TERM BOND PORTFOLIO
------------------------
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
(000) (000)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 2,389 $ 974
Realized Net Gain (Loss) (473) 134
Change in Unrealized Appreciation (Depreciation) (1,054) 2,639
-----------------------
Net Increase in Net Assets Resulting from Operations 862 3,747
-----------------------
DISTRIBUTIONS
Net Investment Income (2,389) (974)
Realized Capital Gain (26) (54)
-----------------------
Total Distributions (2,415) (1,028)
-----------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 36,232 18,312
Issued in Lieu of Cash Distributions 1,913 741
Redeemed (16,950) (5,884)
-----------------------
Net Increase from Capital Share Transactions 21,195 13,169
- ------------------------------------------------------------------------------------------
Total Increase 19,642 15,888
- ------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 24,482 8,594
-----------------------
End of Year $44,124 $24,482
==========================================================================================
(1)Shares Issued (Redeemed)
Issued 3,616 1,816
Issued in Lieu of Cash Distributions 192 73
Redeemed (1,693) (586)
-------------------
Net Increase in Shares Outstanding 2,115 1,303
==========================================================================================
</TABLE>
42
<PAGE> 45
FINANCIAL HIGHLIGHTS
This table summarizes each Portfolio's investment results and distributions to
shareholders on a per-share basis; the Total Bond Market Portfolio-Individual
and -Institutional shares' results are shown separately. It also presents the
Portfolio's Total Return and shows net investment income and expenses as
percentages of average net assets. These data will help you assess: the
variability of the Portfolio's net income and total returns from year to year;
the relative contributions of net income and capital gains to the Portfolio's
total return; how much it costs to operate the Portfolio; and the extent to
which the Portfolio tends to distribute capital gains. The table also shows the
Portfolio Turnover Rate, a measure of trading activity. A turnover rate of 100%
means that the average security is held in the Portfolio for one year.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO-INDIVIDUAL CLASS
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $10.14 $ 9.17 $10.06 $ 9.88 $9.99
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .640 .650 .622 .638 .699
Net Realized and Unrealized Gain (Loss) on Investments (.300) .970 (.888) .300 (.018)
------------------------------------------------
Total from Investment Operations .340 1.620 (.266) .938 .681
------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.640) (.650) (.622) (.638) (.699)
Distributions from Realized Capital Gains -- -- (.002) (.120) (.092)
------------------------------------------------
Total Distributions (.640) (.650) (.624) (.758) (.791)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.84 $10.14 $ 9.17 $10.06 $9.88
=================================================================================================================
TOTAL RETURN* 3.58% 18.18% -2.66% 9.68% 7.14%
=================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $2,962 $2,405 $1,731 $1,540 $1,066
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.18% 0.18% 0.20%
Ratio of Net Investment Income to Average Net Assets 6.54% 6.66% 6.57% 6.24% 7.06%
Portfolio Turnover Rate 39% 36% 33% 50% 49%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
*Total return figures do not reflect the annual account maintenance fee of $10.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Total Bond Market Portfolio-Institutional Class
YEAR ENDED SEP. 18* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD DEC. 31, 1996 DEC. 31, 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.14 $ 9.87
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .650 .174
Net Realized and Unrealized Gain (Loss) on Investments (.300) .270
-----------------------------
Total from Investment Operations .350 .444
-----------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.650) (.174)
Distributions from Realized Capital Gains -- --
-----------------------------
Total Distributions (.650) (.174)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.84 $10.14
===================================================================================================================
TOTAL RETURN 3.68% 4.53%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,024 $413
Ratio of Total Expenses to Average Net Assets 0.10% 0.10%**
Ratio of Net Investment Income to Average Net Assets 6.66% 6.48%**
Portfolio Turnover Rate 39% 36%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
43
<PAGE> 46
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SHORT-TERM BOND PORTFOLIO
YEAR ENDED
DECEMBER 31,
--------------- MAR. 1* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1996 1995 DEC. 31, 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.07 $ 9.50 $10.00
- -----------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .587 .623 .463
Net Realized and Unrealized Gain (Loss) on Investments (.146) .570 (.500)
-----------------------------
Total from Investment Operations .441 1.193 (.037)
-----------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.587) (.623) (.463)
Distributions from Realized Capital Gains (.004) -- --
Total Distributions (.591) (.623) (.463)
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.92 $10.07 $ 9.50
===============================================================================================
TOTAL RETURN** 4.55% 12.88% -0.37%
===============================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $328 $208 $77
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to Average Net Assets 5.93% 6.28% 5.77%+
Portfolio Turnover Rate 65% 65% 53%
- -----------------------------------------------------------------------------------------------
</TABLE>
*Subscription period for the Portfolio was from January 18, 1994, through
February 28, 1994, during which time all assets were held in money market
instruments.
**Total return figures do not reflect the annual account maintenance fee of $10.
+Annualized.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM BOND PORTFOLIO
YEAR ENDED
DECEMBER 31,
------------------ MAR. 1* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1996 1995 DEC. 31, 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.37 $ 9.18 $10.00
- ------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .648 .661 .533
Net Realized and Unrealized Gain (Loss) on Investments (.406) 1.217 (.820)
------------------------------
Total from Investment Operations .242 1.878 (.287)
------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.648) (.661) (.533)
Distributions from Realized Capital Gains (.004) (.027) --
Total Distributions (.652) (.688) (.533)
- ------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.96 $10.37 $ 9.18
================================================================================================
TOTAL RETURN** 2.55% 21.07% -2.88%
================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $460 $346 $71
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to Average Net Assets 6.54% 6.55% 6.88%+
Portfolio Turnover Rate 80% 71% 63%
- ------------------------------------------------------------------------------------------------
</TABLE>
*Subscription period for the Portfolio was from January 18, 1994, through
February 28, 1994, during which time all assets were held in money market
instruments.
**Total return figures do not reflect the annual account maintenance fee of $10.
+Annualized.
44
<PAGE> 47
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
LONG-TERM BOND PORTFOLIO
YEAR ENDED
DECEMBER 31,
--------------- MAR. 1* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1996 1995 DEC. 31, 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.82 $ 8.96 $10.00
- --------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .674 .692 .586
Net Realized and Unrealized Gain (Loss) on Investments (.731) 1.884 (1.040)
--------------------------------
Total from Investment Operations (.057) 2.576 (.454)
--------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.674) (.692) (.586)
Distributions from Realized Capital Gains (.009) (.024) --
Total Distributions (.683) (.716) (.586)
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.08 $10.82 $ 8.96
==================================================================================================
TOTAL RETURN** -0.26% 29.72% -4.53%
==================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $44 $24 $9
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to Average Net Assets 6.75% 6.90% 7.70%+
Portfolio Turnover Rate 46% 45% 70%
- --------------------------------------------------------------------------------------------------
</TABLE>
*Subscription period for the Portfolio was from January 18, 1994, through
February 28, 1994, during which time all assets were held in money market
instruments.
**Total return figures do not reflect the annual account maintenance fee of $10.
+Annualized.
NOTES TO FINANCIAL STATEMENTS
Vanguard Bond Index Fund is registered under the Investment Company Act of 1940
as a diversified open-end investment company, or mutual fund, and comprises the
Total Bond Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond
Portfolios. Certain of the Fund's investments are in corporate debt
instruments; the issuers' abilities to meet their 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 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.
45
<PAGE> 48
3. REPURCHASE AGREEMENTS: Each Portfolio of the Fund, along with other
members of The Vanguard Group, transfers uninvested cash balances into a Pooled
Cash Account, 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. 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.
5. 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.
B. The Vanguard Group furnishes at cost investment advisory, corporate
management, administrative, marketing, and distribution services. The costs of
such services are allocated to the Fund under methods approved by the Board of
Directors. At December 31, 1996, the Fund had contributed capital aggregating
$418,000 to Vanguard (included in Other Assets), representing 2.1% of
Vanguard's capitalization. The Fund's directors and officers are also directors
and officers of Vanguard.
C. The Total Bond Market Portfolio offers two classes of shares, the Individual
Class and the Institutional Class. Institutional shares are designed primarily
for institutional investors that meet certain administrative and servicing
criteria and have a minimum investment of $10 million. Individual shares are
offered to all other investors. Both classes of shares have equal rights as to
assets and earnings, except that each class bears certain class-specific
expenses related to its shareholder activity.
D. During the year ended December 31, 1996, purchases and sales of investment
securities other than U.S. government securities and temporary cash investments
were:
-----------------------------------------------------------------------
(000)
-----------------------------
PORTFOLIO PURCHASES SALES
-----------------------------------------------------------------------
Total Bond Market $546,173 $240,341
Short-Term Bond 48,517 22,541
Intermediate-Term Bond 99,076 54,775
Long-Term Bond 8,692 2,404
-----------------------------------------------------------------------
Purchases and sales of U.S. government securities were:
-----------------------------------------------------------------------
(000)
-----------------------------
PORTFOLIO PURCHASES SALES
-----------------------------------------------------------------------
Total Bond Market $2,140,893 $1,043,886
Short-Term Bond 256,152 154,173
Intermediate-Term Bond 372,287 283,233
Long-Term Bond 27,787 13,472
-----------------------------------------------------------------------
46
<PAGE> 49
E. At December 31, 1996, the Portfolios had available realized capital losses
to offset future taxable capital gains through the following fiscal year-ends:
-----------------------------------------------------------------------
EXPIRATION
FISCAL YEAR(S) ENDING AMOUNT
PORTFOLIO DECEMBER 31, (000)
-----------------------------------------------------------------------
Total Bond Market 2002-2004 $12,831
Short-Term Bond 2004 90
Intermediate-Term Bond 2004 3,931
Long-Term Bond 2004 473
-----------------------------------------------------------------------
At December 31, 1996, unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was:
-----------------------------------------------------------------------
(000)
----------------------------------------------
APPRECIATED DEPRECIATED NET UNREALIZED
PORTFOLIO SECURITIES SECURITIES APPRECIATION
-----------------------------------------------------------------------
Total Bond Market $62,856 $(17,106) $45,750
Short-Term Bond 1,793 (703) 1,090
Intermediate-Term Bond 6,312 (921) 5,391
Long-Term Bond 1,332 (145) 1,187
-----------------------------------------------------------------------
F. The market values of securities on loan to broker/dealers at December 31,
1996, and collateral received with respect to such loans, were:
-----------------------------------------------------------------------
(000)
---------------------------------------------
COLLATERAL RECEIVED
----------------------------
MARKET VALUE MARKET VALUE
OF LOANED OF U.S. TREASURY
PORTFOLIO SECURITIES CASH SECURITIES
-----------------------------------------------------------------------
Total Bond Market $25,100 $17,450 $8,365
Short-Term Bond 10,151 10,353 --
Intermediate-Term Bond 60,981 28,760 34,061
-----------------------------------------------------------------------
Security loans are required to be secured at all times by collateral at least
equal to the market value of securities loaned; however, in the event of
default or bankruptcy by the other party to the agreement, retention of the
collateral may be subject to legal proceedings.
47
<PAGE> 50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard Bond Index 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 present fairly, in all material respects, the financial position of
Total Bond Market, Short-Term Bond, Intermediate-Term Bond and Long-Term Bond
Portfolios (separate portfolios of Vanguard Bond Index Fund, the "Fund") at
December 31, 1996, and the results of each of their operations, the changes in
each of their net assets and the financial highlights for each of the 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 December 31, 1996 by correspondence with the custodian and
brokers and, with respect to unsettled securities transactions, the application
of alternative auditing procedures, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1997
All comparative mutual fund data are from Lipper Analytical Services, Inc.or
Morningstar unless otherwise noted.
48
<PAGE> 51
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer Inc.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massa-chusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co.,
and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric
Co., Procter & Gamble Co., and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and
Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President,
Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President,
Institutional.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[VANGUARD LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
[email protected] http://www.vanguard.com
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1996 Vanguard Marketing Corporation, Distributor
<PAGE> 52
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q8-40-12/96
[PHOTO]
