<PAGE> 1
VANGUARD
BOND INDEX
FUND
Semiannual Report - June 30, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 7,000 highly
motivated men and women--who form the cornerstone of our operations. We could
not survive long--let alone prosper--without them. That's why we chose this
fiscal year's fund reports to celebrate the spirit, enthusiasm, and achievements
of our crew. (We call those who work at Vanguard crew members, not employees,
because they operate as a team to accomplish our mission of serving you, our
clients.)
But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving you
in the years ahead.
[PHOTO] [PHOTO]
John C. Bogle John J. Brennan
Senior Chairman Chairman & CEO
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS......................................... 1
THE MARKETS IN PERSPECTIVE............................................ 6
PORTFOLIO PROFILES.................................................... 8
PERFORMANCE SUMMARIES................................................. 13
FINANCIAL STATEMENTS.................................................. 16
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
Bond prices edged higher during the first six months of Vanguard Bond Index
Fund's fiscal year, reflecting mild inflation and a slight decline in interest
rates.
In this environment, the performance of two of our four portfolios exactly
tracked the returns of the segments of the bond market they represent, and two
actually exceeded the benchmark return. Also, the return of each of our
portfolios outpaced that of its average peer. Our Total Bond Market Portfolio
earned +3.9% during the six months ended June 30, 1998, a solid return for such
a brief period. Meanwhile, the U.S. stock market rocketed to new highs during
the period, returning +17.7%.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 1998
- ----------------------------------------------------------------------------
<S> <C>
TOTAL BOND MARKET PORTFOLIO +3.9%
Average Intermediate-Term
U.S. Government Fund +3.4
Lehman Aggregate Bond Index +3.9
- ----------------------------------------------------------------------------
SHORT-TERM BOND PORTFOLIO +3.2%
Average Short-Term U.S.
Government Fund +2.8
Lehman 1-5 Year Government/
Corporate Index +3.2
- ----------------------------------------------------------------------------
INTERMEDIATE-TERM BOND PORTFOLIO +4.1%
Average Intermediate-Term
U.S. Government Fund +3.4
Lehman 5-10 Year Government/
Corporate Index +4.0
- ----------------------------------------------------------------------------
LONG-TERM BOND PORTFOLIO +5.9%
Average General U.S.
Government Fund +3.6
Lehman Long Government/
Corporate Index +5.7
- ----------------------------------------------------------------------------
Total Bond Market Portfolio-
Institutional Shares +4.0%
- ----------------------------------------------------------------------------
</TABLE>
The table at right presents the six-month total return (capital change plus
reinvested dividends) for each portfolio along with that of its comparative
standards. Detailed per-share figures for each portfolio, including net asset
values, yields, income dividends, and any capital gains, are presented in the
table that follows this letter.
THE PERIOD IN REVIEW
The U.S. economy grew vigorously, inflation was subdued, and interest rates
declined during the first half of 1998. Consumers, heartened by high employment
and rising wages, spent freely, providing the economy's propellant. Strength in
consumer spending was more than enough to offset the negative effects of Asia's
severe economic slump.
Asia's troubles, which have lowered the prices of imported goods in the
United States, were partly responsible for the benign behavior of
inflation--consumer prices rose only 1.1% for the six months and 1.7% for the
twelve months ended June 30. Low inflation was especially soothing to the bond
market, where prices rose and interest rates declined; the yield on the
benchmark 30-year U.S. Treasury bond was 5.63% on June 30, down 29 basis points
(0.29 percentage point) from its yield at the start of the year, reflecting a
price increase of about 4%.
The stock market's rise during the six months, however impressive, was not
straight up. Jitters over Asia prompted an across-the-board decline during parts
of April and May and resulted in a 10% "correction" in some small-stock indexes.
As has been the case for a good portion of the current bull run in stocks,
bigger was better during the half-year and "big growth" was better still. The
S&P 500 Index's advance was once again led by a relatively narrow segment of
blue-chip growth companies. More than half of the Index's remarkable +17.7%
return during the period was accounted for by fewer than 20 giant stocks.
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<PAGE> 4
The declining interest-rate environment was, of course, most helpful to
longer-term bonds. (Conversely, long-term bond prices suffer most when interest
rates are rising.) Accordingly, our Long-Term Bond Portfolio recorded the
highest six-month return of our four portfolios, earning +5.9%, a very generous
inflation-adjusted return of +4.8% for just half a year. The portfolio's return
was 2.3 percentage points higher than that of the average general U.S.
government bond fund, largely because of our longer average maturity and much
lower expenses.
Our Short-Term Bond Portfolio, whose share price benefited the least from
the easing of interest rates, posted a six-month return of +3.2%, all but a tiny
portion of which came from interest income. This topped the +2.8% return of the
average competing fund. Our Intermediate-Term Bond and Total Bond Market
Portfolios returned +4.1% and +3.9%, respectively, and each outpaced the +3.4%
return of the average intermediate-term government bond fund.
In reviewing any half-year performance, it's important to note that
semiannual returns for bond funds account for only one-half of the year's
interest income. Although interest-rate movements can engender large shifts in
the share prices of bond funds, over the long run interest income accounts for
virtually all of a fund's total return. Thus, in evaluating a fund, a full
year's interest income should be considered. The table at left presents each
portfolio's return for the past twelve months, divided into its income and
capital components. Here, you can see the remarkable impact of the fall in
interest rates, especially on the Long-Term Portfolio. Interest rates, to be
sure, can either add to, or subtract from, the income return.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
COMPONENTS OF TOTAL RETURN
TWELVE MONTHS ENDED
JUNE 30, 1998
- ------------------------------------------------------------------
INCOME CAPITAL TOTAL
PORTFOLIO RETURN RETURN RETURN
- ------------------------------------------------------------------
<S> <C> <C> <C>
Total Bond Market +6.7% +3.8% +10.5%
Short-Term Bond +6.1 +1.3 +7.4
Intermediate-Term Bond +6.9 +4.0 +10.9
Long-Term Bond +7.2 +11.0 +18.2
- ------------------------------------------------------------------
Total Bond Market-
Institutional Shares +6.8% +3.8% +10.6%
- ------------------------------------------------------------------
</TABLE>
We hasten to mention the fine job that our Fixed Income Group has done in
keeping our portfolios in line with their respective indexes. Our Total Bond
Market and Short-Term Bond Portfolios exactly matched their respective indexes,
while our Intermediate-Term Bond and Long-Term Bond Portfolios actually earned
slightly more than their benchmarks (Intermediate-Term Bond by 0.1 percentage
point and Long-Term Bond by 0.2 percentage point). Providing an exact match with
an unmanaged index--not to mention actually exceeding a benchmark--is not easy,
given that our portfolios incur operating expenses and transaction costs (albeit
at extremely low levels) that the indexes, which exist only on paper, do not.
IN SUMMARY
During the first half of Vanguard Bond Index Fund's fiscal year, bond investors
once again watched stocks storm ahead, making very respectable bond returns look
puny by comparison.
Such divergences in the performance of stocks and bonds are simply the
nature of the two asset classes. Therefore, bonds play an important role in a
balanced portfolio. Bonds provide higher income than stocks and can mute the
sometimes wide fluctuation in returns from a stock portfolio. We believe that
combining stock funds, bond funds,
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<PAGE> 5
and money market funds in a proportion suitable to individual goals, time
horizons, and risk tolerance is a sensible way to reap some of the financial
markets' rewards, while managing the ever-present risks of investing.
We look forward to reporting to you on the full fiscal year in our 1998
annual report six months hence.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
July 22, 1998
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- --------------------------------------------------------------------------------------------------------------------------
SEC
NET ASSET VALUE PER SHARE CURRENT
------------------------------------- INCOME CAPITAL ANNUALIZED
PORTFOLIO DECEMBER 31, 1997 JUNE 30, 1998 DIVIDENDS GAINS YIELD
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Bond Market $10.09 $10.17 $0.313 -- 6.05%
Total Bond Market--
Institutional Shares 10.09 10.17 0.318 -- 6.15
Short-Term Bond 10.00 10.01 0.290 $0.015 5.61
Intermediate-Term Bond 10.20 10.29 0.320 -- 5.82
Long-Term Bond 10.78 11.06 0.332 0.009 5.96
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 6
Notice to Shareholders
At a special meeting on May 29, 1998, shareholders of Vanguard Bond Index Fund
overwhelmingly approved four proposals. The proposals and voting results were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. This change will reduce the
amount of state taxes the fund pays annually by approximately $647,000 at
current asset levels. Approved as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN APPROVED BY
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Bond Market 363,448,596 5,515,606 3,695,168 97.5%
- ------------------------------------------------------------------------------------------
Short-Term Bond 31,216,961 633,047 488,733 96.5%
- ------------------------------------------------------------------------------------------
Intermediate-Term Bond 46,564,642 1,974,629 5,071,166 86.9%
- ------------------------------------------------------------------------------------------
Long-Term Bond 6,523,577 50,070 117,301 97.5%
- ------------------------------------------------------------------------------------------
</TABLE>
2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This permits
Vanguard Bond Index Fund to participate in Vanguard's interfund lending program,
which allows funds to lend money to each other if--and only if--it makes good
financial sense to do so on both sides of the transaction. The interfund lending
program won't be an integral part of your fund's investment program; it is a
contingency arrangement for managing unusual cash flows. Approved as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN APPROVED BY
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Bond Market 357,793,270 7,364,232 7,501,869 96.0%
- ------------------------------------------------------------------------------------------
Short-Term Bond 30,854,931 945,018 538,792 95.4%
- ------------------------------------------------------------------------------------------
Intermediate-Term Bond 46,940,609 574,539 6,095,289 87.6%
- ------------------------------------------------------------------------------------------
Long-Term Bond 6,335,373 218,469 137,106 94.7%
- ------------------------------------------------------------------------------------------
</TABLE>
2b. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. This
change sets standard limits of 15% of net asset on the amount of money Vanguard
funds can borrow from all sources and the amount of assets that can be pledged
to secure any loans. Approved as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN APPROVED BY
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Bond Market 355,640,672 8,793,263 8,225,435 95.4%
- ------------------------------------------------------------------------------------------
Short-Term Bond 31,023,517 790,158 525,067 95.9%
- ------------------------------------------------------------------------------------------
Intermediate-Term Bond 46,514,008 932,746 6,163,683 86.8%
- ------------------------------------------------------------------------------------------
Long-Term Bond 6,356,423 143,182 191,343 95.0%
- ------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 7
2d. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN ASSESSABLE SECURITIES. This
change eliminated a long-standing, arcane fund policy of not purchasing
assessable securities. Such securities are not a factor in today's world of
publicly traded securities, where the fund's investments are focused. Approved
as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN APPROVED BY
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Bond Market 358,990,093 7,952,046 5,717,232 96.3%
- ------------------------------------------------------------------------------------------
Short-Term Bond 30,531,961 735,359 1,071,420 94.4%
- ------------------------------------------------------------------------------------------
Intermediate-Term Bond 46,747,286 713,215 6,149,936 87.2%
- ------------------------------------------------------------------------------------------
Long-Term Bond 6,165,962 140,351 384,634 92.2%
- ------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 8
THE MARKETS IN PERSPECTIVE
Six Months Ended June 30, 1998
Blue skies predominated for U.S. financial markets during the first six months
of 1998, and even the occasional clouds had silver linings. The bond market
provided solid returns during the half-year, while the stock market's
performance was extraordinarily strong.
After expanding at a 5.4% annual pace during the first quarter, the U.S.
economy kept steaming along through June, fueled by powerful increases in
household spending. Consumers had reason to be upbeat: plentiful jobs
(unemployment fell to 4.3% of the workforce in May); rising wages (personal
income in May was 5.9% higher than in May 1997); and tame inflation (consumer
prices in June were up only 1.7% from a year before).
The economic push provided by consumers more than compensated for the drag
caused by Asia's severe economic problems. Weakening currencies and business
slowdowns in Asia cut into U.S. exports and lowered the cost of Asian imports,
causing the U.S. trade deficit to hit record levels. Ominously, Asia's problems
appear to be more serious and enduring than many economists expected. Yet for
Americans this "Asian contagion" has a bright side: It serves as an escape valve
for the inflationary pressures that ordinarily would be expected to build up
with the U.S. economy humming along at high speed.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998
-----------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 17.7% 30.2% 23.1%
Russell 2000 Index 4.9 16.5 16.0
MSCI EAFE Index 16.1 6.4 10.3
- --------------------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 3.9% 10.5% 6.9%
Lehman 10-Year Municipal Bond Index 2.6 8.5 6.6
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.6 5.3 4.9
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.1% 1.7% 2.5%
- --------------------------------------------------------------------------------
</TABLE>
*Annualized.
U.S. EQUITY MARKETS
The mixture of robust economic growth and anemic inflation was a tonic for the
U.S. stock market. Although prices generally rose, there were striking
disparities in returns between large-capitalization and small-cap stocks and
between growth and value stocks. The large-cap-dominated S&P 500 earned 17.7%
during the six months, nearly double the 9.4% return on the rest of the market
(as measured by the Wilshire 4500 Index) and more than triple the 4.9% return on
the small-cap Russell 2000 Index. Within the S&P 500 Index, growth stocks were
up 23.1%, while value stocks rose 12.1%.
A decline in interest rates contributed to the stock market's rise, as
falling rates on bonds tend to make equities more attractive and to boost the
price investors will pay for each dollar of a stock's earnings or dividends. Yet
growth in earnings and dividends--the long-term underpinning of stock
prices--was unimpressive during the first half of 1998.
Corporate earnings estimates were reduced in June, the tenth consecutive
month in which securities analysts have cut their earnings estimates, according
to I/B/E/S International, a financial research group. Earnings by the S&P 500
companies were expected to
6
<PAGE> 9
rise by only about 2% for the first half of 1998, I/B/E/S reported. With gains
in prices outstripping increases in earnings and dividends, stock valuations are
at or near all-time highs, an indication that investors expect ideal conditions
to continue.
Technology stocks were the best-performing sector during the first half of
1998, generating a 32.7% return. Three other sectors of the stock market--health
care, consumer discretionary stocks such as retailers, and auto &
transportation--each provided returns of about 25% for the six months. Companies
involved in energy, chemicals, or other commodity-based businesses were
generally laggards. Prices of many commodities have declined as Asia's economic
funk cuts demand for energy and other industrial materials in the face of
plentiful supplies.
U.S. FIXED-INCOME MARKETS
Investors in fixed-income securities enjoyed a moderate rise in the market value
of their holdings because of declining interest rates. This price appreciation,
added to coupon interest income, resulted in solid total returns. The 3.9% total
return of the Lehman Aggregate Bond Index during the half-year brought its
return for the 12 months ended June 30 to 10.5%, or a very generous 8.8% after
adjustment for inflation.
Yields on 10-year and 30-year U.S. Treasury bonds declined by 29 basis
points (0.29 percentage point) to 5.45% and 5.63%, respectively, during the
first half of 1998, with most of the drop occurring during the second quarter.
The yield on 3-month Treasury bills declined 36 basis points to 4.99%. Mild
inflation--consumer prices were up 1.1% for the half-year--enabled rates to
decline despite the economy's strong growth.
Yields on corporate and municipal bonds did not decline as far as those on
Treasury securities because of a large increase in the supply of new bonds
issued by companies and municipalities taking advantage of lower rates to
refinance old debt. Similarly, mortgage-backed securities did not match
Treasuries' performance because of expectations that large numbers of homeowners
would pay off old, higher-coupon mortgage loans and refinance with new,
lower-rate loans.
INTERNATIONAL EQUITY MARKETS
Stock markets in Europe soared while those in Asia and most emerging economies
suffered steep declines in U.S.-dollar terms. The 16.1% overall return from
international markets, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East Index, masked the divergence between Europe and
other regions.
Europe's markets were up 27.1% when measured in local currencies and 26.5%
in U.S. dollars, after adjusting for a slight overall rise in the dollar's
value. Stocks benefited from an upswing in most European economies, from signs
that corporate managers are increasingly focused on shareholder value, and from
optimism concerning next year's planned adoption of the euro as a single
European currency.
In the Pacific, which is dominated by Japan's stock market, stocks were
buffeted by several problems: slowing growth in economic activity; continued
instability in currencies; political upheavals; and widespread worries about
corporate and banking insolvencies. On balance, the region's stocks fell 6.0% in
U.S.-dollar terms. Japanese stocks were down 2.5%, but losses were more severe
in the region's smaller markets.
Emerging markets were, on balance, down sharply. Asian stock markets were
hurt by continued weakness in the currency values of several countries, by
Japan's recession, and by a growing conviction that the region's economic
troubles are far from transitory. Venezuela and Mexico, both key oil-producing
nations, were hard hit by falling oil prices.
7
<PAGE> 10
PORTFOLIO PROFILE
Total Bond Market Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of June
30, 1998, compared where appropriate to its unmanaged target index. Key elements
of this Profile are defined on page 9.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
<S> <C>
Number of Issues 599
Yield 6.1%
Yield--Institutional Shares 6.2%
Yield to Maturity 6.2%
Average Coupon 7.4%
Average Maturity 8.6 years
Average Quality Aa1
Average Duration 4.4 years
Expense Ratio 0.21%*
Expense Ratio--Institutional Shares 0.10%*
Cash Reserves 1.5%
</TABLE>
*Annualized.
INVESTMENT FOCUS
- ----------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------------------------
TOTAL BOND MARKET LEHMAN
PORTFOLIO INDEX*
- --------------------------------------------------------------
<S> <C> <C>
R-Squared 1.00 1.00
Beta 1.00 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Treasury/Agency 63.2%
Aaa 5.9
Aa 5.7
A 16.0
Baa 9.1
Ba 0.1
B 0.0
Not Rated 0.0
- -------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Under 1 Year 3.0%
1-5 Years 44.9
5-10 Years 31.3
10-20 Years 4.9
20-30 Years 14.9
Over 30 Years 1.0
- -------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Asset-Backed 4.9%
Finance 16.1
Foreign 3.7
Industrial 8.6
Mortgage 31.2
U.S. Government & Agency 0.8
U.S. Treasury 31.2
Utilities 3.5
- -------------------------------------------------------
Total 100.0%
</TABLE>
8
<PAGE> 11
AVERAGE COUPON. The average interest rate paid on the securities held by a
portfolio. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the portfolio's duration by the change in rates. If interest
rates rise by 1 percentage point, the share price of a portfolio with an average
duration of five years would decline by about 5%. If rates decrease by a
percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity (or are called) and are repaid. In general, the longer the
average maturity, the more a portfolio's share price will fluctuate in response
to changes in market interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating agencies.
The agencies make their judgment after appraising an issuer's ability to meet
its obligations. Quality is graded on a scale, with Aaa or AAA indicating the
most creditworthy bond issuers and A-1 or MIG-1 indicating the most creditworthy
issuers of money market securities.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate bond
investment.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a portfolio's securities by
credit rating can help in gauging the risk that returns could be affected by
defaults or other credit problems.
DISTRIBUTION BY ISSUER. A breakdown of a portfolio's holdings by type of issuer
or type of instrument.
DISTRIBUTION BY MATURITY. An indicator of interest-rate risk. In general, the
higher the concentration of longer-maturity issues, the more a portfolio's share
price will fluctuate in response to changes in interest rates.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: average maturity (short, medium, or long) and average credit quality
(high, medium, or low).
NUMBER OF ISSUES. An indicator of diversification. The more separate issues a
portfolio holds, the less susceptible it is to a price decline stemming from the
problems of a particular issue.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
YIELD. A snapshot of a portfolio's 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.
9
<PAGE> 12
PORTFOLIO PROFILE
Short-Term Bond Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of June
30, 1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
<S> <C>
Number of Issues 157
Yield 5.6%
Yield to Maturity 5.7%
Average Coupon 7.6%
Average Maturity 2.8 years
Average Quality Aaa
Average Duration 2.4 years
Expense Ratio 0.21%*
Cash Reserves 1.5%
</TABLE>
*Annualized.
INVESTMENT FOCUS
- ----------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------------------------
SHORT-TERM BOND LEHMAN
PORTFOLIO INDEX*
- -----------------------------------------------------------
<S> <C> <C>
R-Squared 0.93 1.00
Beta 0.50 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------------------
<S> <C>
Treasury/Agency 64.0%
Aaa 5.9
Aa 6.9
A 17.2
Baa 6.0
Ba 0.0
B 0.0
Not Rated 0.0
- -----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -----------------------------------------------------------
<S> <C>
Under 1 Year 4.0%
1-3 Years 55.0
3-5 Years 33.5
Over 5 Years 7.5
- -----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- -----------------------------------------------------------
<S> <C>
Asset-Backed 4.5%
Finance 17.5
Foreign 2.7
Industrial 6.9
Mortgage 0.0
U.S. Government & Agency 0.3
U.S. Treasury 63.7
Utilities 4.4
- -----------------------------------------------------------
Total 100.0%
</TABLE>
10
<PAGE> 13
PORTFOLIO PROFILE
Intermediate-Term Bond Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of June
30, 1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
<S> <C>
Number of Issues 182
Yield 5.8%
Yield to Maturity 5.9%
Average Coupon 8.0%
Average Maturity 7.3 years
Average Quality Aa1
Average Duration 5.3 years
Expense Ratio 0.21%*
Cash Reserves 1.6%
</TABLE>
*Annualized.
INVESTMENT FOCUS
- -----------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------------------------
INTERMEDIATE-TERM LEHMAN
BOND PORTFOLIO INDEX*
- -----------------------------------------------------------
<S> <C> <C>
R-Squared 0.99 1.00
Beta 1.24 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------------------
<S> <C>
Treasury/Agency 55.2%
Aaa 3.3
Aa 5.4
A 19.8
Baa 16.3
Ba 0.0
B 0.0
Not Rated 0.0
- -----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -----------------------------------------------------------
<S> <C>
Under 1 Year 0.3%
1-5 Years 9.9
5-10 Years 86.1
10-20 Years 3.4
20-30 Years 0.3
Over 30 Years 0.0
- -----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- -----------------------------------------------------------
<S> <C>
Asset-Backed 1.4%
Finance 15.8
Foreign 7.0
Industrial 14.4
Mortgage 0.0
U.S. Government & Agency 2.0
U.S. Treasury 53.3
Utilities 6.1
- -----------------------------------------------------------
Total 100.0%
</TABLE>
11
<PAGE> 14
PORTFOLIO PROFILE
Long-Term Bond Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of June
30, 1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
<S> <C>
Number of Issues 131
Yield 6.0%
Yield to Maturity 6.1%
Average Coupon 8.2%
Average Maturity 22.2 years
Average Quality Aa1
Average Duration 10.2 years
Expense Ratio 0.21%*
Cash Reserves 1.9%
</TABLE>
*Annualized.
INVESTMENT FOCUS
- -----------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------------------------
LONG-TERM BOND LEHMAN
PORTFOLIO INDEX*
- -----------------------------------------------------------
<S> <C> <C>
R-Squared 0.97 1.00
Beta 2.12 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------------------
<S> <C>
Treasury/Agency 59.6%
Aaa 2.3
Aa 6.4
A 18.1
Baa 13.6
Ba 0.0
B 0.0
Not Rated 0.0
- -----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -----------------------------------------------------------
<S> <C>
Under 1 Year 0.5%
1-5 Years 1.6
5-10 Years 6.7
10-20 Years 17.6
20-30 Years 70.2
Over 30 Years 3.4
- -----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- -----------------------------------------------------------
<S> <C>
Asset-Backed 0.4%
Finance 10.2
Foreign 4.8
Industrial 15.4
Mortgage 0.0
U.S. Government & Agency 0.0
U.S. Treasury 59.6
Utilities 9.6
- -----------------------------------------------------------
Total 100.0%
</TABLE>
12
<PAGE> 15
PERFORMANCE SUMMARIES
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolio. Note, too, that
both share price and return can fluctuate widely, so an investment in the
portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL BOND MARKET PORTFOLIO
TOTAL INVESTMENT RETURNS: DECEMBER 11, 1986-JUNE 30, 1998
- --------------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO 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
1997 2.5 6.9 9.4 9.7
1998** 0.8 3.1 3.9 3.9
- --------------------------------------------------------------------
</TABLE>
* Lehman Aggregate Bond Index.
**Six months ended June 30, 1998.
See Financial Highlights table on page 43 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
TOTAL BOND MARKET PORTFOLIO-INSTITUTIONAL SHARES
TOTAL INVESTMENT RETURNS: SEPTEMBER 18, 1995-JUNE 30, 1998
- --------------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO-
INSTITUTIONAL SHARES 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
1997 2.5% 7.1% 9.6% 9.7%
1998** 0.8 3.2 4.0 3.9
- --------------------------------------------------------------------
</TABLE>
*Lehman Aggregate Bond Index.
**Six months ended June 30, 1998.
See Financial Highlights table on page 44 for dividend information since the
portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998
- ----------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION --------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Bond Market* 12/11/1986 10.50% 6.78% 1.23 7.54% 8.77%
Total Bond Market-Institutional Shares 9/18/1995 10.64 -- 1.08** 6.80** 7.88**
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Performance figures are adjusted for the $10 annual account maintenance fee.
**Since inception.
13
<PAGE> 16
PERFORMANCE SUMMARIES (continued)
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolios. Note, too, that
both share price and return can fluctuate widely, so an investment in the
portfolios could lose money.
<TABLE>
<CAPTION>
SHORT-TERM BOND PORTFOLIO
TOTAL INVESTMENT RETURNS: MARCH 1, 1994-JUNE 30, 1998
- ----------------------------------------------------------------
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
1997 0.8% 6.2% 7.0% 7.1%
1998** 0.3 2.9 3.2 3.2
- ----------------------------------------------------------------
</TABLE>
*Lehman 1-5 Year Government/Corporate Index.
**Six months ended June 30, 1998.
See Financial Highlights table on page 44 for dividend and capital gains
information since the portfolio's inception.
<TABLE>
<CAPTION>
INTERMEDIATE-TERM BOND PORTFOLIO
TOTAL INVESTMENT RETURNS: MARCH 1, 1994-JUNE 30, 1998
- ----------------------------------------------------------------
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
1997 2.4% 7.0% 9.4% 9.4%
1998** 0.9 3.2 4.1 4.0
- ----------------------------------------------------------------
</TABLE>
* Lehman 5-10 Year Government/Corporate Index.
**Six months ended June 30, 1998.
See Financial Highlights table on page 45 for dividend and capital gains
information since the portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998
- -------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-Term Bond Portfolio* 3/1/1994 7.39% 0.07% 6.14% 6.21%
Intermediate-Term Bond Portfolio* 3/1/1994 10.87 0.73 6.84 7.57
- -------------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
14
<PAGE> 17
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolio. Note, too, that
both share price and return can fluctuate widely, so an investment in the
portfolio could lose money.
<TABLE>
<CAPTION>
LONG-TERM BOND PORTFOLIO
TOTAL INVESTMENT RETURNS: MARCH 1, 1994-JUNE 30, 1998
- --------------------------------------------------------------------
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
1997 6.9% 7.4% 14.3% 14.5%
1998** 2.7 3.2 5.9 5.7
- --------------------------------------------------------------------
</TABLE>
* Lehman Long Government/Corporate Index.
**Six months ended June 30, 1998.
See Financial Highlights table on page 45 for dividend and capital gains
information since the portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998
- -------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Long-Term Bond Portfolio* 3/1/1994 18.17% 2.45% 7.22% 9.67%
- -------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
15
<PAGE> 18
FINANCIAL STATEMENTS
June 30, 1998 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each portfolio's holdings, including
each security's market value on the last day of the reporting period. Securities
are grouped and subtotaled by bond type (U.S. government and agency issues,
corporate bonds, foreign bonds, etc.); corporate bonds are further classified by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the portfolio's Net Assets. Finally,
Net Assets are divided by the outstanding shares of the portfolio to arrive at
its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets of each portfolio, you will find
a table displaying the composition of the portfolio's net assets. Undistributed
Net Investment Income is usually zero because the portfolio distributes its net
income to shareholders as a dividend each day. Any realized gains must be
distributed annually, so the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The balance shown for Accumulated Net Realized
Gains usually approximates the amount available to distribute to shareholders as
capital gains as of the statement date, but may differ because certain
investments or transactions may be treated differently for financial statement
and tax purposes. Any Accumulated Net Realized Losses, and any cumulative excess
of distributions over net realized gains, will appear as negative balances.
Unrealized Appreciation (Depreciation) is the difference between the value of
the portfolio's investments and their cost, and reflects the gains (losses) that
would be realized if the portfolio were to sell all of its investments at their
statement-date values.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
U.S GOVERNMENT AND AGENCY OBLIGATIONS (62.2%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES (30.8%)
U.S. Treasury Bond 7.25% 5/15/2016 $ 680 $ 797
U.S. Treasury Bond 7.50% 11/15/2016 3,235 3,883
U.S. Treasury Bond 7.625% 2/15/2007 670 713
U.S. Treasury Bond 7.875% 11/15/2007-2/15/2021 21,920 27,803
U.S. Treasury Bond 8.00% 11/15/2021 149,850 193,190
U.S. Treasury Bond 8.125% 8/15/2019-8/15/2021 350,120 453,819
U.S. Treasury Bond 8.50% 2/15/2020 38,670 51,837
U.S. Treasury Bond 8.75% 5/15/2017-8/15/2020 125,100 170,144
U.S. Treasury Bond 8.875% 8/15/2017-2/15/2019 80,010 109,344
U.S. Treasury Bond 9.125% 5/15/2009-5/15/2018 16,340 22,765
U.S. Treasury Bond 9.25% 2/15/2016 835 1,162
U.S. Treasury Bond 9.375% 2/15/2006 110 136
U.S. Treasury Bond 9.875% 11/15/2015 4,390 6,395
U.S. Treasury Bond 10.00% 5/15/2010 2,000 2,491
U.S. Treasury Bond 10.375% 11/15/2009-11/15/2012 223,120 287,146
U.S. Treasury Bond 10.75% 2/15/2003-8/15/2005 42,270 54,980
U.S. Treasury Bond 11.125% 8/15/2003 1,135 1,413
U.S. Treasury Bond 11.25% 2/15/2015 200 320
U.S. Treasury Bond 11.625% 11/15/2002-11/15/2004 13,650 16,893
U.S. Treasury Bond 11.75% 2/15/2010-11/15/2014 1,085 1,601
U.S. Treasury Bond 12.00% 8/15/2013 350 519
U.S. Treasury Bond 12.375% 5/15/2004 100 134
U.S. Treasury Bond 12.75% 11/15/2010 380 541
U.S. Treasury Bond 13.375% 8/15/2001 2,600 3,175
U.S. Treasury Bond 14.00% 11/15/2011 3,420 5,309
U.S. Treasury Note 5.625% 2/28/2001 50 50
U.S. Treasury Note 5.875% 8/15/1998-7/31/1999 46,860 47,024
U.S. Treasury Note 6.00% 8/15/1999 89,000 89,448
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Note 6.25% 4/30/2001-2/28/2002 $103,300 $ 105,574
U.S. Treasury Note 6.375% 1/15/1999-1/15/2000 31,400 31,624
U.S. Treasury Note 6.50% 5/31/2001-8/15/2005 8,245 8,520
U.S. Treasury Note 6.625% 6/30/2001-4/30/2002 230,470 238,734
U.S. Treasury Note 6.75% 6/30/1999 6,600 6,680
U.S. Treasury Note 6.875% 7/31/1999-5/15/2006 183,800 196,854
U.S. Treasury Note 7.00% 7/15/2006 5,080 5,548
U.S. Treasury Note 7.125% 9/30/1999 12,500 12,738
U.S. Treasury Note 7.50% 10/31/1999-5/15/2002 41,125 43,059
U.S. Treasury Note 7.75% 11/30/1999-1/31/2000 140,735 145,131
U.S. Treasury Note 7.875% 11/15/1999-8/15/2001 53,310 55,275
U.S. Treasury Note 8.00% 8/15/1999-5/15/2001 71,300 73,638
U.S. Treasury Strip 0.00% 8/15/2001 1,000 844
----------
2,477,251
----------
AGENCY BONDS & NOTES (0.7%)
Federal Home Loan Bank 5.90% 6/9/2000 1,000 1,004
Federal Home Loan Bank 8.60% 1/25/2000 110 115
Federal Home Loan Mortgage Corp. 6.09% 3/1/2000 285 285
Federal Home Loan Mortgage Corp. 6.155% 9/15/2000 1,000 1,010
Federal Home Loan Mortgage Corp. 6.785% 3/1/2006 9,525 9,556
Federal Home Loan Mortgage Corp. 7.09% 6/1/2005 4,400 4,479
Federal National Mortgage Assn. 4.95% 9/30/1998 2,350 2,347
Federal National Mortgage Assn. 5.35% 8/12/1998 12,350 12,349
Federal National Mortgage Assn. 5.80% 12/10/2003 2,300 2,304
Federal National Mortgage Assn. 5.90% 7/6/2000 3,000 3,013
Federal National Mortgage Assn. 6.20% 7/10/2003 625 624
Federal National Mortgage Assn. 6.25% 8/12/2003 8,200 8,206
Federal National Mortgage Assn. 6.35% 8/10/1999 100 101
Federal National Mortgage Assn. 7.55% 6/10/2004 8,900 9,034
Federal National Mortgage Assn. 8.10% 8/12/2019 110 138
Federal National Mortgage Assn. 8.25% 12/18/2000 100 106
Federal National Mortgage Assn. 8.35% 11/10/1999 270 279
Federal National Mortgage Assn. 8.45% 7/12/1999 110 113
Federal National Mortgage Assn. 8.70% 6/10/1999 110 113
Federal National Mortgage Assn. 9.55% 3/10/1999 225 231
Government Trust Certificate 9.625% 5/15/2002 343 364
Private Export Funding Corp. 8.40% 7/31/2001 225 241
Resolution Funding Corp. 8.125% 10/15/2019 550 699
Resolution Funding Corp. 8.625% 1/15/2030 110 154
Resolution Funding Corp. 8.875% 7/15/2020 280 383
Small Business Administration Variable Rate
Interest-Only Custodial Receipts 2.719% 6/25/2000 17,462 1,580
Tennessee Valley Authority 8.375% 10/1/1999 610 630
-----------
59,458
-----------
MORTGAGE-BACKED SECURITIES (30.7%)
Federal Home Loan Mortgage Corp. 5.50% 12/1/1998-6/1/2011 (1) 5,025 4,959
Federal Home Loan Mortgage Corp. 6.00% 7/1/1998-6/1/2028 (1) 119,388 118,048
Federal Home Loan Mortgage Corp. 6.50% 3/1/2000-6/1/2028 (1) 287,302 287,664
Federal Home Loan Mortgage Corp. 7.00% 7/1/1999-5/1/2028 (1) 319,016 323,995
Federal Home Loan Mortgage Corp. 7.50% 8/1/1999-5/1/2028 (1) 437,498 243,533
Federal Home Loan Mortgage Corp. 8.00% 5/1/2002-12/1/2027 (1) 118,323 122,400
Federal Home Loan Mortgage Corp. 8.50% 9/1/2001-8/1/2027 (1) 33,261 34,702
Federal Home Loan Mortgage Corp. 9.00% 8/1/2001-11/1/2027 (1) 16,964 17,939
Federal Home Loan Mortgage Corp. 9.50% 4/1/2016-6/1/2025 (1) 8,501 9,155
Federal Home Loan Mortgage Corp. 10.00% 7/1/2000-4/1/2025 (1) 1,533 1,674
Federal Home Loan Mortgage Corp. 10.50% 9/1/2000-12/1/2015 (1) 348 363
Federal Home Loan Mortgage Corp. 11.25% 8/1/2014 (1) 21 23
Federal Housing Administration 7.43% 10/1/2020 (1) 523 538
Federal National Mortgage Assn. 5.50% 1/1/2001-6/1/2009 (1) 1,910 1,872
Federal National Mortgage Assn. 6.00% 10/1/2000-4/1/2028 (1) 54,829 53,857
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage Assn. 6.50% 2/1/2000-6/1/2028 (1) $ 156,200 $ 155,974
Federal National Mortgage Assn. 7.00% 9/1/1999-1/1/2028 (1) 200,116 203,008
Federal National Mortgage Assn. 7.50% 1/1/2000-8/1/2027 (1) 107,205 109,986
Federal National Mortgage Assn. 7.75% 10/1/2002 (1) 374 378
Federal National Mortgage Assn. 8.00% 9/1/1998-9/1/2027 (1) 64,604 66,907
Federal National Mortgage Assn. 8.50% 12/1/1998-7/1/2027 (1) 24,297 25,377
Federal National Mortgage Assn. 9.00% 9/1/2003-1/1/2027 (1) 12,205 12,891
Federal National Mortgage Assn. 9.50% 10/1/2001-2/1/2025 (1) 5,762 6,202
Federal National Mortgage Assn. 10.00% 8/1/2005-6/1/2022 (1) 2,233 2,407
Federal National Mortgage Assn. 10.50% 11/1/2000-8/1/2020 (1) 619 676
Government National Mortgage Assn. 6.00% 3/1/2009-6/15/2028 (1) 12,131 11,949
Government National Mortgage Assn. 6.50% 9/15/2008-6/15/2028 (1) 79,453 79,484
Government National Mortgage Assn. 7.00% 6/15/2008-5/15/2028 (1) 170,310 173,091
Government National Mortgage Assn. 7.50% 9/15/2007-3/15/2028 (1) 152,793 157,140
Government National Mortgage Assn. 8.00% 11/15/2001-3/15/2028 (1) 126,150 130,900
Government National Mortgage Assn. 8.50% 5/15/2010-1/15/2028 (1) 46,940 49,568
Government National Mortgage Assn. 9.00% 8/15/2001-6/15/2027 (1) 30,784 32,989
Government National Mortgage Assn. 9.50% 1/1/2004-9/15/2025 (1) 18,197 19,805
Government National Mortgage Assn. 10.00% 3/15/2000-8/15/2025 (1) 4,363 4,815
Government National Mortgage Assn. 10.50% 11/15/2010-1/15/2021 (1) 2,881 3,221
Government National Mortgage Assn. 11.50% 3/15/2010-11/15/2017 (1) 313 358
Resolution Trust Corp. Collateralized Mortgage Obligations 10.35% 8/25/2021 (1) 991 1,034
----------
2,468,882
-----------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $4,815,444) 5,005,591
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (32.6%)
- -------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (4.8%)
AT&T Universal Card Master Trust 5.95% 10/17/2002 (1) 14,120 14,128
Advanta Credit Card Master Trust 6.05% 8/1/2003 (1) 8,750 8,778
American Express Credit Account Master Trust 6.40% 9/15/2002 (1) 17,000 17,315
American Express Credit Account Master Trust 6.80% 12/15/2003 (1) 25,854 26,464
American Express Credit Account Master Trust 7.60% 8/15/2002 (1) 2,000 2,085
American Express Credit Europe 5.375% 7/15/2001 (1) 16,250 16,071
California Infrastructure & Econ. Dev. Bank SP Trust PG&E 6.16% 6/14/2003 (1) 7,875 7,917
California Infrastructure & Econ. Dev. Bank SP Trust PG&E 6.42% 9/25/2008 (1) 11,325 11,522
Chemical Master Credit Card Trust I 5.55% 9/15/2003 (1) 5,450 5,409
Discover Card Master Trust 5.40% 11/16/2001 (1) 25,163 25,135
Discover Card Master Trust 5.75% 4/15/2001 (1) 13,500 13,433
First Bank Corp. Card Master Trust 6.40% 2/15/2003 (1) 5,030 5,094
First USA Credit Card Master Trust 6.42% 3/17/2005 (1) 8,750 8,908
Ford Credit Auto Loan Master Trust 6.50% 8/15/2002 (1) 20,750 21,021
Household Affinity Credit Card Master Trust 5.60% 5/15/2002 (1) 3,195 3,182
MBNA Master Credit Card Trust 5.40% 3/15/1999 (1) 3,750 3,739
MBNA Master Credit Card Trust 6.05% 11/15/2002 (1) 21,375 21,468
MBNA Master Credit Card Trust 6.60% 1/15/2003 (1) 8,500 8,624
MBNA Master Credit Card Trust 6.60% 11/15/2004 (1) 16,065 16,433
NationsBank Credit Card Master Trust 6.45% 4/15/2003 (1) 6,678 6,743
Sears Credit Card Master Trust 5.80% 8/15/2005 (1) 38,000 37,873
Sears Credit Card Master Trust 6.05% 2/15/2004 (1) 19,500 19,599
Sears Credit Card Master Trust 6.25% 1/15/2003 (1) 13,333 13,362
Sears Credit Card Master Trust 7.00% 1/15/2004 (1) 3,000 3,040
Sears Credit Card Master Trust 8.10% 6/15/2004 (1) 1,900 1,961
Standard Credit Card Master Trust 6.80% 4/7/1999 (1) 15,850 15,952
Standard Credit Card Master Trust 7.85% 2/7/2002 (1) 43,261 44,528
Standard Credit Card Master Trust 7.875% 1/7/2000 (1) 3,600 3,623
Standard Credit Card Master Trust 8.875% 9/7/1999 (1) 2,085 2,085
-----------
385,492
-----------
FINANCE (15.8%)
American Express Credit Corp. 6.50% 8/1/2000 2,200 2,226
American Express Credit Corp. 8.50% 6/15/1999 2,325 2,384
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American General Finance Corp. 5.875% 7/1/2000 $ 3,770 $ 3,765
American General Finance Corp. 7.45% 7/1/2002 1,575 1,653
American General Finance Corp. 8.00% 2/15/2000 12,100 12,484
American General Finance Corp. 8.50% 8/15/1998 1,450 1,455
Ameritech Capital Funding 6.15% 1/15/2008 15,975 15,938
Associates Corp. 6.00% 6/15/2000 6,500 6,508
Associates Corp. 6.25% 3/15/1999 7,500 7,529
Associates Corp. 6.375% 8/15/2000 30,000 30,243
Associates Corp. 6.50% 10/15/2002 11,975 12,161
Associates Corp. 6.625% 5/15/2001 3,300 3,346
Associates Corp. 6.625% 6/15/2005 1,000 1,020
Associates Corp. 6.68% 9/17/1999 5,600 5,649
Associates Corp. 7.50% 5/15/1999 3,700 3,749
Associates Corp. 7.50% 4/15/2002 5,800 6,057
Associates Corp. 9.125% 4/1/2000 1,000 1,052
Avalon Properties Inc. 6.875% 12/15/2007 14,050 14,276
Bank of New York Capital I 7.97% 12/31/2026 3,225 3,502
Banc One Corp 6.25% 9/1/2000 MTN 16,000 16,126
Banc One Corp. 6.25% 10/1/2001 MTN 21,500 21,712
BankAmerica Capital II 8.00% 12/15/2026 3,400 3,696
BankAmerica Corp. 7.50% 10/15/2002 400 421
BankAmerica Corp. 7.625% 6/15/2004 1,050 1,127
BankAmerica Corp. 7.875% 12/1/2002 2,000 2,135
BankAmerica Corp. 9.625% 2/13/2001 1,100 1,195
BankAmerica Corp. 10.00% 2/1/2003 4,900 5,652
Bear, Stearns & Co., Inc. 6.50% 6/15/2000 4,225 4,265
Bear, Stearns & Co., Inc. 6.625% 1/15/2004 3,150 3,207
BT Capital Trust B 7.90% 1/15/2027 1,100 1,162
CIGNA Corp. 7.875% 5/15/2027 13,875 15,573
CIGNA Corp. 8.30% 1/15/2023 835 973
CIT Group Holdings 6.625% 6/15/2005 7,900 8,060
CNA Financial Corp. 6.45% 1/15/2008 4,700 4,670
CNA Financial Corp 6.50% 4/15/2005 25,175 25,254
Camden Property Trust 7.00% 11/15/2006 4,250 4,332
Chase Capital I 7.67% 12/1/2026 3,100 3,259
The Chase Manhattan Corp. 8.125% 6/15/2002 1,410 1,511
The Chase Manhattan Corp. 8.50% 2/15/2002 10,000 10,747
The Chase Manhattan Corp. 10.00% 6/15/1999 1,850 1,920
The Chase Manhattan Corp. 10.375% 3/15/1999 3,000 3,092
Chemical Banking Corp. 7.25% 9/15/2002 2,565 2,674
Chemical Bank 9.75% 6/15/1999 18,243 18,900
Chrysler Finance Corp. 5.375% 10/15/1998 850 850
Chrysler Finance Corp. 5.625% 1/15/1999 2,725 2,726
Chrysler Finance Corp. 5.875% 2/7/2001 3,500 3,493
Chrysler Finance Corp. 6.28% 6/21/1999 5,680 5,712
Chrysler Finance Corp. 6.28% 6/23/1999 5,000 5,029
Chrysler Finance Corp. 6.35% 6/22/1999 19,970 20,097
Chrysler Finance Corp. 6.375% 1/28/2000 7,195 7,242
Chrysler Finance Corp. 6.625% 8/15/2000 3,050 3,093
Citicorp 8.625% 12/1/2002 2,000 2,198
Citicorp 9.50% 2/1/2002 1,000 1,107
Citicorp 9.75% 8/1/1999 4,000 4,163
Comerica, Inc. 7.125% 12/1/2013 5,000 5,146
Commercial Credit Corp. 5.90% 9/1/2003 550 545
CoreStates Capital Corp. 6.625% 3/15/2005 6,900 7,036
CoreStates Capital Corp. 9.375% 4/15/2003 1,250 1,414
Countrywide Funding 8.25% 7/15/2002 3,750 4,013
Dean Witter Discover & Co. 6.25% 3/15/2000 3,000 3,011
Dean Witter Discover & Co. 6.75% 8/15/2000 4,000 4,058
Dean Witter, Discover & Co. 6.75% 10/15/2013 800 814
Dean Witter Discover & Co. 6.875% 3/1/2003 2,300 2,363
</TABLE>
19
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<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Donaldson Lufkin & Jenrette 6.50% 6/1/2008 $ 20,000 $ 20,068
Equitable Companies Inc. 7.00% 4/1/2028 4,310 4,435
Equity Residental Properties 6.55% 11/15/2001 16,750 16,855
Fifth Third Bancorp 6.75% 7/15/2005 5,000 5,144
First Bank N.A. 7.55% 6/15/2004 10,000 10,693
First Bank System 7.625% 5/1/2005 5,000 5,368
First Chicago Corp. 6.25% 7/21/2000 6,500 6,546
First Chicago Corp. 6.375% 1/30/2009 5,000 5,012
First Chicago Corp. 6.875% 6/15/2003 5,000 5,163
First Chicago Corp. 7.625% 1/15/2003 2,400 2,538
First Chicago Corp. 8.25% 6/15/2002 5,000 5,375
First Chicago Corp. 9.25% 11/15/2001 1,225 1,345
First Chicago Corp. 10.25% 5/1/2001 2,750 3,050
First Fidelity Bancorp 9.625% 8/15/1999 700 728
First Interstate Bancorp 8.625% 4/1/1999 8,295 8,468
First Interstate Bancorp 10.875% 4/15/2001 2,750 3,093
First Union Corp. 8.00% 11/15/2002 100 107
First Union Corp. 8.125% 6/24/2002 2,900 3,106
Fleet Capital Trust II 7.92% 12/11/2026 3,790 4,098
Fleet Credit Card 6.82% 4/9/2001 5,000 5,110
Fleet Financial Group, Inc. 6.875% 3/1/2003 500 515
Fleet Financial Group, Inc. 7.125% 4/15/2006 5,700 5,977
Fleet Financial Group, Inc. 7.25% 9/1/1999 1,000 1,014
Fleet Mortgage Group 6.50% 6/15/2000 14,495 14,658
Fleet/Norstar Group 8.125% 7/1/2004 4,600 5,032
Ford Motor Credit Co. 6.75% 5/15/2005 1,385 1,424
Ford Motor Credit Co. 6.85% 8/15/2000 17,105 17,410
Ford Motor Credit Co. 7.25% 5/15/1999 500 506
Ford Motor Credit Co. 8.375% 1/15/2000 2,655 2,747
Ford Motor Credit Co. 9.00% 9/15/2001 5,000 5,424
General Electric Capital Corp. 5.59% 4/10/2000 6,000 5,984
General Electric Capital Corp. 5.89% 5/15/2000 5,000 5,011
General Electric Capital Corp. 5.89% 5/11/2001 10,000 10,014
General Electric Capital Corp. 6.90% 9/15/2015 9,000 9,638
General Electric Capital Corp. 8.30% 9/20/2009 275 323
General Motors Acceptance Corp. 5.85% 4/6/2000 34,200 34,195
General Motors Acceptance Corp. 6.00% 2/1/2002 3,850 3,845
General Motors Acceptance Corp. 6.625% 1/10/2002 22,100 22,472
General Motors Acceptance Corp. 6.625% 10/1/2002 5,800 5,918
General Motors Acceptance Corp. 7.00% 3/1/2000 3,300 3,352
General Motors Acceptance Corp. 7.125% 6/1/1999 2,950 2,987
General Motors Acceptance Corp. 7.125% 5/1/2001 10,975 11,287
General Motors Acceptance Corp. 8.00% 10/1/1999 3,000 3,080
General Motors Acceptance Corp. 8.40% 10/15/1999 4,190 4,317
General Motors Acceptance Corp. 8.50% 1/1/2003 5,500 5,993
General Motors Acceptance Corp. 8.625% 6/15/1999 4,250 4,358
General Motors Acceptance Corp. 9.00% 10/15/2002 10,000 11,090
General Motors Acceptance Corp. 9.375% 4/1/2000 3,515 3,713
General Motors Acceptance Corp. 9.625% 12/15/2001 1,000 1,111
Great Western Finance 6.375% 7/1/2000 16,100 16,227
Great Western Finance 8.625% 12/1/1998 2,275 2,303
Health & Retirement Properties Trust 6.75% 12/18/2002 16,250 16,338
Household Finance Corp. 6.45% 2/1/2009 2,430 2,422
Household Finance Corp. 7.65% 5/15/2007 3,250 3,521
Household Finance Corp. 7.75% 6/1/1999 1,000 1,017
International Lease Finance Corp. 6.20% 5/1/2000 4,000 4,019
International Lease Finance Corp. 6.30% 11/1/1999 2,400 2,415
International Lease Finance Corp. 6.375% 8/1/2001 7,500 7,580
International Lease Finance Corp. 6.50% 7/1/2001 2,050 2,078
International Lease Finance Corp. 6.625% 6/1/2000 10,000 10,125
JDN Realty Corp. 6.80% 8/1/2004 10,500 10,528
</TABLE>
20
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<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lehman Brothers Holdings Inc. 6.15% 3/15/2000 MTN $ 18,500 $ 18,529
Lehman Brothers Holdings Inc. 6.625% 11/15/2000 7,861 7,947
Lehman Brothers Holdings Inc. 6.90% 1/29/2001 10,800 10,998
Lehman Brothers Holdings Inc. 7.20% 8/15/2009 16,720 17,591
Lehman Brothers Holdings Inc. 8.375% 2/15/1999 5,400 5,476
Mellon Bank NA 6.50% 8/1/2005 5,300 5,360
Mellon Bank NA 6.75% 6/1/2003 2,775 2,841
Mellon Bank NA 7.375% 5/15/2007 3,500 3,754
Mellon Financial Corp. 7.625% 11/15/1999 850 870
Mellon Financial Corp. 9.75% 6/15/2001 6,647 7,317
Mellon Capital II 7.995% 1/15/2027 3,150 3,410
Merrill Lynch & Co., Inc. 6.07% 10/15/2001 44,700 44,869
Merrill Lynch & Co., Inc. 6.38% 7/18/2000 1,000 1,009
Merrill Lynch & Co., Inc. 6.50% 4/1/2001 18,500 18,730
Merrill Lynch & Co., Inc. 7.00% 3/15/2006 300 314
Merrill Lynch & Co., Inc. 8.00% 2/1/2002 2,600 2,758
Merrill Lynch & Co., Inc. 8.30% 11/1/2002 2,735 2,966
Morgan Stanley, Dean Witter, Discover & Co. 5.89% 3/20/2000 MTN 40,900 40,891
Morgan Stanley, Dean Witter, Discover & Co. 6.375% 8/1/2002 7,000 7,073
Morgan Stanley, Dean Witter Discover & Co. 6.875% 3/1/2007 7,000 7,264
NCNB Corp. 9.50% 6/1/2004 1,725 2,012
NAC Re Corp. 7.15% 11/15/2005 1,500 1,547
NB Capital Trust II 7.83% 12/15/2026 5,000 5,321
National City Corp. 7.20% 5/15/2005 10,000 10,505
NationsBank Corp. 5.75% 3/15/2001 500 498
NationsBank Corp. 6.50% 3/15/2006 5,600 5,697
NationsBank Corp. 6.875% 2/15/2005 580 602
NationsBank Corp. 7.00% 9/15/2001 1,800 1,850
NationsBank Corp. 7.25% 10/15/2025 1,625 1,751
NationsBank Corp. 7.75% 8/15/2004 5,000 5,404
NationsBank Corp. 8.50% 1/15/2007 5,000 5,684
NationsBank Texas 6.75% 8/15/2000 9,800 9,971
Norwest Corp. 6.65% 10/15/2023 40 40
Norwest Corp. 6.80% 5/15/2002 5,000 5,130
Norwest Corp. 7.125% 4/1/2000 500 510
Norwest Financial, Inc. 6.25% 11/1/2002 1,000 1,008
Norwest Financial, Inc. 7.875% 2/15/2002 1,000 1,057
Orion Capital Corp. 7.25% 7/15/2005 9,200 9,527
Orion Capital Corp. 9.125% 9/1/2002 5,421 5,981
PaineWebber Group, Inc. 6.50% 11/1/2005 500 502
PaineWebber Group, Inc. 7.00% 3/1/2000 5,350 5,425
PaineWebber Group, Inc. 7.875% 2/15/2003 2,250 2,389
Pitney Bowes Credit Corp. 9.25% 6/15/2008 2,000 2,454
Realty Income Corp. 7.75% 5/6/2007 3,000 3,142
Republic New York Corp. 7.75% 5/15/2002 3,000 3,178
Republic New York Corp. 7.75% 5/15/2009 4,300 4,777
Republic New York Corp. 9.70% 2/1/2009 5,000 6,288
Salomon, Inc. 6.50% 3/1/2000 17,700 17,852
Salomon, Inc. 6.65% 7/15/2001 7,050 7,143
Salomon, Inc. 6.70% 12/1/1998 3,000 3,014
Salomon, Inc. 6.70% 7/5/2000 2,000 2,025
Salomon Smith Barney Holdings Inc. 5.50% 1/15/1999 5,000 4,992
Salomon Smith Barney Holdings Inc. 5.875% 2/1/2001 13,200 13,123
Salomon Smith Barney Holdings Inc. 6.50% 10/15/2002 300 303
Salomon Smith Barney Holdings Inc. 6.625% 6/1/2000 10,000 10,106
Salomon Smith Barney Holdings Inc. 7.00% 5/15/2000 6,000 6,105
Salomon Smith Barney Holdings Inc. 7.98% 3/1/2000 2,000 2,062
Security Capital Pacific Trust 8.05% 4/1/2017 4,300 4,732
Shurgard Storage Centers, Inc. 7.50% 4/25/2004 3,000 3,130
Simon DeBartolo Group, Inc. 6.75% 7/15/2004 10,000 10,052
Spieker Properties Inc. 7.50% 10/1/2027 700 723
</TABLE>
21
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<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Storage USA, Inc. 7.50% 12/1/2027 $ 5,025 $ 5,194
Summit Properties Inc. 6.80% 8/15/2002 3,500 3,533
Summit Properties Inc. 6.95% 8/15/2004 17,500 17,719
Summit Properties Inc. 7.20% 8/15/2007 1,000 1,024
Summit Bancorp 8.625% 12/10/2002 5,000 5,460
Suntrust Capital 7.90% 6/15/2027 2,085 2,269
SunTrust Banks, Inc. 6.00% 2/15/2026 5,000 4,932
SunTrust Banks, Inc. 7.375% 7/1/2002 5,000 5,232
SunTrust Banks, Inc. 7.375% 7/1/2006 3,500 3,751
SUSA Partnership LP 7.00% 12/1/2007 1,050 1,061
Swiss Bank 7.00% 10/15/2015 750 788
Travelers/Aetna Property Casualty Corp. 6.75% 4/15/2001 9,000 9,159
Travelers/Aetna Property Casualty Corp. 7.75% 4/15/2026 1,000 1,131
USF&G Corp. 7.125% 6/1/2005 600 625
US Bancorp 8.27% 12/15/2026 3,250 3,650
United Dominion Realty Trust, Inc. 7.25% 1/15/2007 3,500 3,614
U.S. Leasing International 6.625% 5/15/2003 195 199
Wachovia Corp. 6.375% 4/15/2003 110 111
Wachovia Corp. 6.80% 6/1/2005 10,000 10,337
Wachovia Corp. 7.00% 12/15/1999 600 610
Wells Fargo & Co. 6.125% 11/1/2003 5,000 4,999
Wells Fargo & Co. 6.875% 4/1/2006 6,400 6,657
Wells Fargo Capital I 7.96% 12/15/2026 3,600 3,942
-----------
1,272,616
-----------
INDUSTRIAL (8.5%)
American Stores Co. 8.00% 6/1/2026 10,500 11,961
Amoco Canada Petroleum Co. 6.75% 2/15/2005 145 151
Anheuser-Busch Cos. Inc. 6.75% 12/15/2027 1,600 1,669
Anheuser-Busch Cos., Inc. 7.10% 6/15/2007 5,050 5,308
Anheuser-Busch Cos., Inc. 7.125% 7/1/2017 3,850 4,065
Anheuser-Busch Cos., Inc. 7.375% 7/1/2023 800 841
Anheuser-Busch Cos., Inc. 8.625% 12/1/2016 626 638
Applied Materials, Inc. 8.00% 9/1/2004 1,625 1,747
Archer-Daniels-Midland Co. 6.25% 5/15/2003 1,000 1,012
Archer-Daniels-Midland Co. 8.875% 4/15/2011 3,745 4,623
Auburn Hills 12.00% 5/1/2020 770 1,265
BP America, Inc. 9.375% 11/1/2000 1,500 1,613
C.R. Bard, Inc. 6.70% 12/1/2026 13,650 14,008
Baxter International, Inc. 9.25% 12/15/1999 100 105
Bayer Corp. 6.65% 2/15/2028 1,300 1,339
Black & Decker Corp. 6.625% 11/15/2000 12,000 12,135
Black & Decker Corp. 7.50% 4/1/2003 22,800 23,959
The Boeing Co. 6.625% 2/15/2038 11,000 11,066
The Boeing Co. 8.75% 8/15/2021 1,800 2,298
Bowater, Inc. 9.375% 12/15/2021 3,000 3,765
Burlington Northern Santa Fe Corp. 6.375% 12/15/2005 6,750 6,780
Burlington Northern Santa Fe Corp. 6.875% 2/15/2016 2,900 2,991
Burlington Northern Santa Fe Corp. 7.00% 12/15/2025 2,350 2,440
Burlington Northern Sante Fe Corp. 7.25% 8/1/2097 4,450 4,813
Burlington Northern Sante Fe Corp. 9.25% 10/1/2006 750 889
CSX Corp. 8.625% 5/15/2022 875 1,066
CSX Corp. 9.00% 8/15/2006 700 811
Caterpillar, Inc. 7.375% 3/1/2097 8,900 9,836
Caterpillar, Inc. 9.00% 4/15/2006 1,600 1,879
Chrysler Corp. 7.45% 2/1/2097 4,375 4,848
Comcast Cablevision 8.125% 5/1/2004 6,500 7,054
Comcast Cablevision 8.375% 5/1/2007 5,000 5,607
Comcast Cablevision 8.875% 5/1/2017 3,300 3,988
Conrail Corp. 9.75% 6/15/2020 1,680 2,284
Continental Airlines (Equipment Trust Certificates) 6.648% 3/15/2019 10,910 11,141
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Continental Airlines (Equipment Trust Certificates) 6.331% 10/15/2004 (1) $ 4,075 $ 4,075
Continental Airlines (Equipment Trust Certificates) 6.41% 10/15/2008 (1) 875 876
Cyprus AMAX Minerals Co. 7.375% 5/15/2007 6,000 6,201
Dayton Hudson Corp. 6.75% 1/1/2028 1,000 991
Deere & Co. 8.50% 1/9/2022 985 1,211
Delta Airlines, Inc. (Equipment Trust Certificates) 8.54% 1/2/2007 (1) 3,777 4,155
The Walt Disney Co. 7.55% 7/15/2093 2,597 3,019
Dow Chemical Co. 8.50% 6/8/2010 MTN 2,500 2,993
Eastman Chemical Co. 6.375% 1/15/2004 6,925 6,923
Eastman Chemical Co. 7.25% 1/15/2024 3,700 3,822
Eastman Chemical Co. 7.60% 2/1/2027 2,988 3,211
Federal Express Corp. 10.00% 9/1/1998 1,500 1,510
Federated Department Stores, Inc. 7.45% 7/15/2017 11,125 11,839
Federated Department Stores, Inc. 8.125% 10/15/2002 5,000 5,353
First Data Corp. 6.625% 4/1/2003 5,135 5,260
First Data Corp. 6.375% 12/15/2007 MTN 1,000 1,016
Ford Capital BV 9.00% 8/15/1998 6,300 6,325
Ford Capital BV 9.50% 7/1/2001 1,925 2,108
Ford Capital BV 9.50% 6/1/2010 825 1,044
Ford Capital BV 9.875% 5/15/2002 2,250 2,540
Ford Holdings 9.25% 3/1/2000 5,900 6,207
Ford Motor Corp. 7.50% 11/15/1999 2,000 2,041
Ford Motor Corp. 9.95% 2/15/2032 835 1,225
Fortune Brands 7.875% 1/15/2023 1,900 2,192
Gannett Co. 5.85% 5/1/2000 1,000 1,001
General Motors Corp. 7.00% 6/15/2003 2,000 2,082
General Motors Corp. 9.125% 7/15/2001 7,900 8,568
H.J. Heinz Co. 6.875% 1/15/2003 100 104
Hertz Corp. 6.00% 2/1/2001 15,000 14,933
International Business Machines Corp. 6.375% 6/15/2000 500 505
International Business Machines Corp. 6.45% 8/1/2007 1,000 1,030
International Business Machines Corp. 6.50% 1/15/2028 650 651
International Business Machines Corp. 7.125% 12/1/2096 11,325 12,220
International Paper Co. 7.875% 8/1/2006 2,265 2,491
HNG Internorth 9.625% 3/15/2006 4,680 5,579
Kroger Co. 6.375% 3/1/2008 6,725 6,721
Kroger Co. 7.65% 4/15/2007 7,550 8,206
Kroger Co. 8.15% 7/15/2006 2,700 3,005
Lockheed Martin Corp. 6.85% 5/15/2001 8,500 8,638
Lockheed Martin Corp. 7.65% 5/1/2016 5,000 5,519
May Department Stores Co. 9.75% 2/15/2021 1,680 2,200
May Department Stores Co. 9.875% 12/1/2002 1,775 2,029
McDonald's Corp. 6.75% 2/15/2003 945 955
Mobil Corp. 7.625% 2/23/2033 920 974
News America Holdings Inc. 8.00% 10/17/2016 9,250 10,254
News America Holdings Inc. 8.50% 2/15/2005 1,600 1,772
Norfolk Southern Corp. 6.875% 5/1/2001 23,475 23,974
Norfolk Southern Corp. 7.70% 5/15/2017 3,450 3,887
Norfolk Southern Corp. 7.80% 5/15/2027 4,375 5,022
Norfolk Southern Corp. 7.90% 5/15/2097 1,750 2,071
Northrop Grumman Corp. 7.00% 3/1/2006 15,700 16,269
Occidental Petroleum Corp. 8.50% 11/9/2001 MTN 14,750 15,789
Occidental Petroleum Corp. 8.50% 9/15/2004 2,500 2,568
Occidental Petroleum Corp. 9.25% 8/1/2019 1,750 2,247
Occidental Petroleum Corp. 10.125% 11/15/2001 7,000 7,834
J.C. Penney & Co., Inc. 6.125% 11/15/2003 2,000 1,991
J.C. Penney & Co., Inc. 6.875% 6/15/1999 3,000 3,022
J.C. Penney & Co., Inc. 7.125% 11/15/2023 1,855 1,945
J.C. Penney & Co., Inc. 9.05% 3/1/2001 625 667
PepsiCo, Inc. 6.25% 9/1/1999 650 654
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Philip Morris Cos., Inc. 6.00% 7/15/2001 $ 110 $ 109
Philip Morris Cos., Inc. 7.00% 7/15/2005 7,150 7,325
Philip Morris Cos., Inc. 7.20% 2/1/2007 1,450 1,507
Philip Morris Cos., Inc. 8.25% 10/15/2003 1,900 2,049
Phillips Petroleum Co. 8.49% 1/1/2023 2,100 2,258
Phillips Petroleum Co. 9.00% 6/1/2001 3,900 4,212
Praxair, Inc. 6.70% 4/15/2001 12,225 12,412
Praxair, Inc. 6.75% 3/1/2003 1,000 1,022
Praxair, Inc. 6.90% 11/1/2006 10,750 11,104
Quaker State Corp. 6.625% 10/15/2005 3,275 3,316
Rockwell International Corp. 8.875% 9/15/1999 110 114
Rohm & Haas Co. 9.80% 4/15/2020 (1) 4,450 5,798
Safeway Inc. 6.85% 9/15/2004 19,300 19,888
Sears, Roebuck & Co. 6.25% 1/15/2004 1,200 1,204
Sears, Roebuck & Co. 6.50% 6/15/2000 18,185 18,358
Sears, Roebuck & Co. 9.375% 11/1/2011 1,845 2,305
Sears, Roebuck & Co. Acceptance Corp. 6.125% 1/15/2006 4,500 4,463
TCI Communications, Inc. 6.375% 5/1/2003 36,325 36,687
TCI Communications, Inc. 8.65% 9/15/2004 5,000 5,604
Tele-Communications, Inc. 7.25% 8/1/2005 3,575 3,754
Tele-Communications, Inc. 7.875% 8/1/2013 6,250 6,984
Tele-Communications, Inc. 9.875% 6/15/2022 500 689
Tenneco, Inc. 8.20% 11/15/1999 12,500 12,820
Tenneco, Inc. 10.075% 2/1/2001 5,150 5,602
Texaco Capital Corp. 7.50% 3/1/2043 850 923
Texaco Capital Corp. 8.25% 10/1/2006 1,000 1,138
Texaco Capital Corp. 8.875% 9/1/2021 705 909
Texaco Capital Corp. 9.00% 12/15/1999 300 313
Texas Instruments Inc. 6.125% 2/1/2006 6,300 6,301
Time Warner Inc. 7.57% 2/1/2024 1,500 1,623
Tosco Corp. 7.00% 7/15/2000 16,000 16,262
Tosco Corp. 7.80% 1/1/2027 1,650 1,820
Union Carbide Corp. 6.75% 4/1/2003 3,500 3,560
Union Carbide Corp. 7.75% 10/1/2096 4,350 4,766
Union Carbide Corp. 7.875% 4/1/2023 4,755 5,239
Union Oil of California 7.20% 5/15/2005 5,000 5,210
Union Oil of California 9.125% 2/15/2006 2,935 3,414
Union Pacific Corp. 7.00% 6/15/2000 5,000 5,083
Union Pacific Corp. 7.00% 2/1/2016 1,450 1,476
Union Pacific Corp. 8.625% 5/15/2022 2,865 3,168
United Technologies Corp. 8.875% 11/15/2019 4,000 5,098
Whirlpool Corp. 9.00% 3/1/2003 2,250 2,492
Whirlpool Corp. 9.10% 2/1/2008 940 1,114
-----------
683,002
-----------
UTILITIES (3.5%)
AT&T Corp. 7.125% 1/15/2002 1,100 1,145
AT&T Corp. 8.35% 1/15/2025 2,350 2,609
Alabama Power Co. 6.00% 3/1/2000 1,950 1,955
Arizona Public Service Co. 7.25% 8/1/2023 2,150 2,180
Baltimore Gas & Electric Co. 8.375% 8/15/2001 5,570 5,932
Bell Atlantic Corp. 7.00% 6/15/2013 4,000 4,173
Bellsouth Capital Funding 6.04% 11/15/2026 1,350 1,391
Carolina Power & Light Co. 6.875% 8/15/2023 2,550 2,536
Carolina Power & Light Co. 8.20% 7/1/2022 110 118
Cincinnati Gas & Electric Co. 6.45% 2/15/2004 1,000 1,015
Coastal Corp. 7.42% 2/15/2037 1,800 1,873
Coastal Corp. 7.75% 10/15/2035 6,600 7,288
Coastal Corp. 8.125% 9/15/2002 2,300 2,468
Coastal Corp. 9.625% 5/15/2012 4,700 5,957
Consolidated Edison Co. of New York, Inc. 6.375% 4/1/2003 5,000 5,071
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consolidated Edison Co. of New York, Inc. 6.625% 2/1/2002 $ 1,000 $ 1,018
Enron Corp. 6.875% 10/15/2007 7,500 7,750
Enron Corp. 7.125% 5/15/2007 6,100 6,398
Enron Corp. 7.625% 9/10/2004 2,000 2,139
Enron Corp. 9.65% 5/15/2001 4,150 4,535
GTE Corp. 7.83% 5/1/2023 4,000 4,254
GTE Corp. 9.10% 6/1/2003 225 252
GTE Florida, Inc. 6.31% 12/15/2002 5,000 5,054
GTE South Inc. Debentures 6.125% 6/15/2007 11,000 10,890
Houston Lighting & Power Co. 8.75% 3/1/2022 1,050 1,165
Illinois Bell Telephone Co. 8.50% 4/22/2026 1,500 1,562
Illinois Power Co. 7.50% 7/15/2025 4,200 4,283
MCI Communications Corp. 6.50% 4/15/2010 11,175 11,199
MCI Communications Corp. 7.50% 8/20/2004 4,050 4,305
MCI Communications Corp. 7.75% 3/23/2025 4,650 4,798
Michigan Bell Telephone Co. 6.375% 2/1/2005 155 155
Michigan Bell Telephone Co. 7.50% 2/15/2023 1,610 1,735
National Rural Utility Co. 6.20% 2/1/2008 18,000 17,970
National Rural Utility Co. 6.75% 9/1/2001 4,350 4,450
New England Telephone & Telegraph Co. 6.875% 10/1/2023 890 901
New England Telephone & Telegraph Cp. 7.875% 11/15/2029 6,150 7,292
New England Telephone & Telegraph Co. 8.625% 8/1/2001 2,500 2,693
New England Telephone & Telegraph Co. 9.00% 8/1/2031 3,750 4,122
New Jersey Bell Telephone Co. 6.625% 4/1/2008 190 189
New York Telephone Co. 6.125% 1/15/2010 1,250 1,233
New York Telephone Co. 7.00% 8/15/2025 1,925 1,920
New York Telephone Co. 7.25% 2/15/2024 5,000 5,165
Northern States Power Co. 7.125% 7/1/2025 5,000 5,414
Northern Telecom Ltd. 6.875% 9/1/2023 4,565 4,699
Pacific Bell Telephone Co. 7.25% 7/1/2002 250 262
Pacific Gas & Electric Co. 6.25% 8/1/2003 5,000 5,071
Pacific Gas & Electric Co. 6.75% 10/1/2023 150 148
Pacific Gas & Electric Co. 8.25% 11/1/2022 4,000 4,389
Pacific Gas & Electric Co. 8.375% 5/1/2025 5,000 5,446
Pacific Gas & Electric Co. 8.75% 1/1/2001 2,000 2,128
Pennsylvania Power & Light Co. 6.50% 4/1/2005 135 138
Public Service Electric & Gas Co. 6.50% 5/1/2004 170 173
South Carolina Electric & Gas 9.00% 7/15/2006 145 170
Southern California Edison Co. 5.625% 10/1/2002 4,000 3,947
Southern California Edison Co. 6.375% 1/15/2006 2,350 2,378
Southern California Edison Co. 6.75% 1/15/2000 600 608
Southern California Gas 7.375% 3/1/2023 120 124
Southwestern Bell Telephone Co. 6.625% 7/15/2007 12,000 12,380
Southwestern Bell Telephone Co. 7.25% 7/15/2025 10,650 10,942
Southwestern Bell Telephone Co. 7.625% 3/1/2023 8,355 8,890
Texas Utilities Co. 7.375% 8/1/2001 2,800 2,895
Texas Utilities Co. 7.875% 3/1/2023 2,075 2,217
Texas Utilities Co. 8.75% 11/1/2023 180 197
Union Electric Power Co. 6.75% 5/1/2008 40 42
U S WEST Capital Funding, Inc. 6.125% 7/15/2002 3,000 3,009
U S WEST Communications Group 6.875% 9/15/2033 165 161
U S WEST Communications Group 7.25% 9/15/2025 18,000 19,415
Virginia Electric & Power Co. 6.625% 4/1/2003 2,300 2,351
Virginia Electric & Power Co. 6.75% 10/1/2023 17,000 16,751
Wisconsin Electric Power Co. 7.70% 12/15/2027 65 69
-----------
277,552
-----------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $2,566,096) 2,618,662
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS (U.S. DOLLAR-DENOMINATED)(3.7%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Province of Alberta 9.25% 4/1/2000 $ 5,075 $ 5,361
Asian Development Bank 9.125% 6/1/2000 740 783
Bayerische Landesbank 5.875% 4/7/2000 21,500 21,534
Bayerische Landesbank 7.375% 12/14/2002 145 153
British Aerospace 8.50% 6/10/2002 3,000 3,226
British Columbia Hydro 12.50% 9/1/2013 400 420
Province of British Columbia 7.00% 1/15/2003 2,550 2,657
Canadian Imperial Bank of Commerce (NY Branch) 6.20% 8/1/2000 55,200 55,568
European Investment Bank 10.125% 10/1/2000 125 137
Falconbridge Ltd. 7.35% 11/1/2006 1,000 1,049
Finland Global Bond 7.875% 7/28/2004 10,300 11,372
Grand Metropolitan Investment Corp. 8.625% 8/15/2001 2,600 2,792
Grand Metropolitan Investment Corp. 9.00% 8/15/2011 2,225 2,769
Hanson Overseas 7.375% 1/15/2003 7,100 7,452
Inter-American Development Bank 7.125% 3/15/2023 975 1,043
Inter-American Development Bank 8.50% 3/15/2011 2,705 3,315
International Bank for Reconstruction & Development 9.25% 7/15/2017 1,615 2,203
KFW International Finance, Inc. 7.20% 3/15/2014 3,550 3,951
KFW International Finance, Inc. 7.625% 2/15/2004 7,025 7,602
KFW International Finance, Inc. 8.85% 6/15/1999 1,025 1,054
KFW International Finance, Inc. 9.125% 5/15/2001 2,400 2,601
Province of Manitoba 7.75% 2/1/2002 6,975 7,375
Province of Manitoba 8.75% 5/15/2001 6,200 6,652
Province of Manitoba 9.125% 1/15/2018 4,850 6,442
Province of Manitoba 9.25% 4/1/2020 2,645 3,604
Province of Manitoba 9.50% 10/1/2000 1,560 1,676
Province of Manitoba 9.625% 3/15/1999 2,500 2,563
Province of Manitoba 9.625% 12/1/2018 3,500 4,876
National Westminster Bancorp Inc. 9.375% 11/15/2003 2,800 3,207
Province of New Brunswick 6.75% 8/15/2013 210 222
Province of New Brunswick 8.75% 5/1/2022 1,850 2,427
Province of New Brunswick 9.75% 5/15/2020 8,500 12,057
New Zealand Government 8.75% 12/15/2006 1,175 1,393
New Zealand Government 10.625% 11/15/2005 400 511
Province of Newfoundland 7.32% 10/13/2023 8,050 8,969
Noranda Inc. 7.00% 7/15/2005 1,045 1,056
Noranda Forest 7.50% 7/15/2003 6,825 7,087
Province of Ontario 7.375% 1/27/2003 915 966
Province of Ontario 7.75% 6/4/2002 1,175 1,250
Petro-Canada 7.875% 6/15/2026 10,000 11,529
Petro-Canada 9.25% 10/15/2021 700 913
Petro Geo-Services 6.625% 3/30/2008 7,675 7,776
Petro Geo-Services 7.125% 3/30/2028 9,370 9,730
Republic of Portugal 5.75% 10/8/2003 14,650 14,645
Province of Saskatchewan 6.625% 7/15/2003 19,750 20,348
Province of Saskatchewan 7.125% 3/15/2008 1,200 1,294
Province of Saskatchewan 7.375% 7/15/2013 1,800 1,997
Province of Saskatchewan 8.00% 7/15/2004 15,950 17,576
Sweden Global Bond 6.50% 3/4/2003 145 150
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS
(COST $284,813) 295,333
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.67% 7/1/1998 $ 88,432 $ 88,432
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note F 5.76%-5.78% 7/1/1998 5,205 5,205
- --------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $93,637) 93,637
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(COST $7,759,990) 8,013,223
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
Other Assets--Note B 263,992
Liabilities--Note F (241,401)
-----------
22,591
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%) $8,035,814
==========================================================================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AT JUNE 30, 1998, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
AMOUNT
(000)
- -------------------------------------------------------------------------------------------------------------------------
Paid in Capital--Note D $7,785,980
Undistributed Net Investment Income --
Accumulated Net Realized Losses--Note D (3,399)
Unrealized Appreciation--Note E 253,233
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS $8,035,814
=========================================================================================================================
Investor Shares--Net Assets applicable to 612,792,935 outstanding
$.001 par value shares (unlimited authorization) $6,232,590
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--INVESTOR SHARES $10.17
=========================================================================================================================
Institutional Shares--Net Assets applicable to 177,298,244 outstanding
$.001 par value shares (unlimited authorization) $1,803,224
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--INSTITUTIONAL SHARES $10.17
=========================================================================================================================
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (63.0%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNEMENT SECURITIES (62.8%)
U.S. Treasury Bond 10.375% 11/15/2009 $21,175 $ 26,476
U.S. Treasury Bond 11.875% 11/15/2003 11,000 14,179
U.S. Treasury Note 5.375% 1/31/2000 1,000 998
U.S. Treasury Note 5.50% 2/29/2000 400 400
U.S. Treasury Note 5.625% 11/30/2000 18,875 18,916
U.S. Treasury Note 6.25% 8/31/2000-2/28/2002 37,545 38,354
U.S. Treasury Note 6.375% 1/15/2000-3/31/2001 5,250 5,349
U.S. Treasury Note 6.625% 6/30/2001-4/30/2002 48,985 50,741
U.S. Treasury Note 7.125% 9/30/1999 1,600 1,630
U.S. Treasury Note 7.50% 10/31/1999-5/15/2002 22,320 23,661
U.S. Treasury Note 7.75% 11/30/1999-1/31/2000 52,110 53,737
U.S. Treasury Note 7.875% 11/15/1999-8/15/2001 28,625 29,823
U.S. Treasury Note 8.00% 8/15/1999 41,850 42,965
U.S. Treasury Note 8.50% 11/15/2000 7,900 8,416
U.S. Treasury Note 8.75% 8/15/2000 35,600 37,882
-----------
353,527
-----------
AGENCY BONDS & NOTES (0.2%)
Federal National Mortgage Assn. 4.95% 9/30/1998 700 699
Federal National Mortgage Assn. 5.35% 8/12/1998 700 700
1,399
-----------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $351,645) 354,926
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (32.8%)
- -------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (4.5%)
<S> <C> <C> <C> <C>
AT&T Universal Card Master Trust 5.95% 10/17/2002 (1) 2,250 2,251
Advanta Credit Card Master Trust 6.05% 8/1/2003 (1) 2,500 2,508
American Express Credit Account Master Trust 6.80% 12/15/2003 (1) 4,000 4,094
California Infrastructure & Econ. Dev. Bank SP Trust PG&E 6.16% 12/14/2000 (1) 1,250 1,257
Discover Card Master Trust 5.40% 11/16/2001 (1) 2,888 2,884
First Bank Corp. Card Master Trust 6.40% 2/15/2003 (1) 1,000 1,013
Ford Credit Auto Loan Master Trust 6.50% 8/15/2002 (1) 2,250 2,280
Sears Credit Card Master Trust 5.80% 8/15/2005 (1) 3,000 2,990
Sears Credit Card Master Trust 8.10% 6/15/2004 (1) 2,500 2,581
Standard Credit Card Master Trust 6.80% 4/7/1999 (1) 650 654
Standard Credit Card Master Trust 7.875% 1/7/2000 (1) 2,500 2,516
-----------
25,028
-----------
FINANCE (17.2%)
American General Finance Corp. 5.875% 7/1/2000 450 449
American General Finance Corp. 7.45% 7/1/2002 425 446
American General Finance Corp. 8.00% 2/15/2000 1,000 1,032
American General Finance Corp. 8.50% 8/15/1998 300 301
Associates Corp. 6.25% 3/15/1999 500 502
Associates Corp. 6.50% 10/15/2002 1,250 1,269
Associates Corp. 6.68% 9/17/1999 2,200 2,219
Associates Corp. 7.50% 4/15/2002 1,400 1,462
Associates Corp. 9.125% 4/1/2000 1,000 1,052
Banc One Corp. 6.25% 10/1/2001 MTN 2,000 2,020
BankAmerica Corp. 7.75% 7/15/2002 250 264
BankAmerica Corp. 7.875% 12/1/2002 1,500 1,601
BankAmerica Corp. 9.625% 2/13/2001 400 435
Bear, Stearns & Co., Inc. 7.625% 4/15/2000 750 770
The Chase Manhattan Corp. 7.75% 11/1/1999 135 138
The Chase Manhattan Corp. 8.625% 5/1/2002 1,000 1,083
The Chase Manhattan Corp. 10.00% 6/15/1999 2,400 2,490
Chemical Banking Corp. 7.25% 9/15/2002 1,500 1,564
Chrysler Finance Corp. 5.375% 10/15/1998 400 400
Chrysler Finance Corp. 5.625% 1/15/1999 350 350
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Chrysler Finance Corp. 6.28% 6/21/1999 $ 2,400 $ 2,414
Chrysler Finance Corp. 6.375% 1/28/2000 1,000 1,007
Chrysler Finance Corp. 6.625% 8/15/2000 450 456
Citicorp 9.75% 8/1/1999 1,000 1,041
Countrywide Funding 8.25% 7/15/2002 250 268
Dean Witter Discover & Co. 6.25% 3/15/2000 210 211
Equity Residential Properties 6.55% 11/15/2001 1,350 1,358
First Chicago Corp. 8.25% 6/15/2002 1,345 1,446
First Chicago Corp. 9.875% 8/15/2000 150 162
First Chicago Corp. 10.25% 5/1/2001 250 277
First Fidelity Bancorp 9.625% 8/15/1999 800 831
First Interstate Bancorp 8.625% 4/1/1999 900 919
First Interstate Bancorp 10.875% 4/15/2001 250 281
First Union Corp. 8.125% 6/24/2002 1,600 1,714
Fleet Credit Card 6.82% 4/9/2001 2,700 2,759
Ford Motor Credit Corp. 8.20% 2/15/2002 900 958
General Electric Capital 5.59% 4/10/2000 1,500 1,496
General Electric Capital 5.89% 5/15/2000 2,500 2,506
General Motors Acceptance Corp. 5.50% 12/15/2001 750 735
General Motors Acceptance Corp. 5.85% 4/6/2000 2,300 2,300
General Motors Acceptance Corp. 7.125% 6/1/1999 500 506
General Motors Acceptance Corp. 7.125% 5/1/2001 2,400 2,468
General Motors Acceptance Corp. 8.625% 6/15/1999 750 769
Great Western Finance 6.375% 7/1/2000 2,000 2,016
Health & Retirement Properties Trust 6.75% 12/18/2002 1,250 1,257
International Lease Finance Corp. 6.20% 5/1/2000 3,000 3,015
International Lease Finance Corp. 6.30% 11/1/1999 2,000 2,012
International Lease Finance Corp. 6.31% 9/1/2000 1,020 1,028
Lehman Brothers Holdings Inc. 6.15% 3/15/2000 MTN 4,250 4,257
Lehman Brothers Holdings Inc. 6.90% 1/29/2001 2,000 2,037
Manufacturers Hanover Corp. 8.50% 2/15/1999 900 914
Mellon Financial Corp. 6.30% 6/1/2000 1,250 1,259
Mellon Financial Corp. 7.625% 11/15/1999 600 614
Merrill Lynch & Co., Inc. 6.07% 10/15/2001 2,300 2,309
Merrill Lynch & Co., Inc. 6.38% 7/18/2000 1,000 1,008
Merrill Lynch & Co., Inc. 6.50% 4/1/2001 1,500 1,519
Merrill Lynch & Co., Inc. 8.00% 2/1/2002 400 424
Morgan Stanley, Dean Witter, Discover & Co. 5.89% 3/20/2000 MTN 3,000 2,999
NationsBank Corp. 7.00% 9/15/2001 1,500 1,542
NationsBank Corp. 8.125% 6/15/2002 1,000 1,069
Norwest Corp. 6.75% 5/12/2000 3,000 3,046
Norwest Financial, Inc. 7.875% 2/15/2002 2,000 2,115
Orion Capital Corp. 9.125% 9/1/2002 1,500 1,655
PaineWebber Group, Inc. 7.00% 3/1/2000 2,450 2,484
Republic New York Corp. 7.75% 5/15/2002 700 742
Salomon, Inc. 6.50% 3/1/2000 1,000 1,009
Salomon, Inc. 6.70% 12/1/1998 1,500 1,507
Salomon Smith Barney Holdings Inc. 5.50% 1/15/1999 500 499
Salomon Smith Barney Holdings Inc. 5.625% 11/15/1998 700 700
Salomon Smith Barney Holdings Inc. 5.875% 2/1/2001 700 696
Salomon Smith Barney Holdings Inc. 7.98% 3/1/2000 1,000 1,031
Summit Properties Inc. 6.80% 8/15/2002 1,500 1,514
Travelers/Aetna Property Casualty Corp. 6.75% 4/15/2001 1,000 1,018
Wells Fargo & Co. 6.875% 5/10/2001 2,750 2,811
-----------
96,835
-----------
INDUSTRIAL (6.8%)
BP America, Inc. 9.375% 11/1/2000 1,004 1,080
Black & Decker Corp. 7.50% 4/1/2003 1,700 1,786
Continental Airlines (Equipment Trust Certificates) 6.331% 4/15/2003 1,700 1,700
Cyprus Minerals Co. 10.125% 4/1/2002 1,500 1,670
Federal Express Corp. 10.00% 9/1/1998 600 604
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Data Corp. 6.625% 4/1/2003 $ 4,200 $ 4,303
Ford Capital BV 9.00% 8/15/1998 535 537
Ford Capital BV 9.50% 7/1/2001 675 739
Ford Capital BV 9.875% 5/15/2002 1,520 1,716
Ford Holdings 9.25% 3/1/2000 1,000 1,052
General Motors Corp. 9.125% 7/15/2001 1,000 1,085
Johnson & Johnson 7.375% 6/29/2002 200 211
Kimberly-Clark 8.625% 5/1/2001 100 107
Mobil Corp. 8.375% 2/12/2001 2,238 2,374
Norfolk Southern Corp. 6.875% 5/1/2001 3,150 3,217
Occidental Petroleum Corp. 8.50% 11/9/2001 MTN 1,500 1,606
J.C. Penney & Co., Inc. 6.875% 6/15/1999 750 755
J.C. Penney & Co., Inc. 9.05% 3/1/2001 375 400
Phillips Petroleum Co. 9.00% 6/1/2001 1,500 1,620
Praxair, Inc. 6.25% 6/30/2000 1,250 1,255
Praxair, Inc. 6.70% 4/15/2001 4,000 4,061
Sears, Roebuck & Co. 6.50% 6/15/2000 1,500 1,514
TCI Communications, Inc. 6.375% 5/1/2003 2,300 2,323
Tele-Communications, Inc. 7.375% 2/15/2000 1,365 1,394
Tenneco, Inc. 8.20% 11/15/1999 350 359
Texaco Capital Corp. 9.00% 12/15/1999 700 731
Xerox Corp. 8.125% 4/15/2002 150 161
-----------
38,360
-----------
UTILITIES (4.3%)
Alabama Power Co. 6.00% 3/1/2000 1,050 1,052
Baltimore Gas & Electric Co. 7.25% 7/1/2002 200 209
Coastal Corp. 8.125% 9/15/2002 1,700 1,824
Commonwealth Edison 7.375% 9/15/2002 1,450 1,508
Consolidated Edison Co. of New York, Inc. 6.625% 2/1/2002 500 509
National Rural Utilities 6.75% 9/1/2001 2,500 2,557
New England Telephone & Telegraph Co. 8.625% 8/1/2001 3,000 3,232
Pacific Bell Telephone Co. 7.25% 7/1/2002 450 472
Pacific Gas & Electric 7.875% 3/1/2002 3,000 3,184
Penn Power & Light 7.75% 5/1/2002 1,000 1,060
Public Service of Colorado 6.00% 1/1/2001 1,000 1,000
Southern California Edison Co. 6.75% 1/15/2000 2,600 2,635
Texas Utilities Co. 7.375% 8/1/2001 450 465
Texas Utilities Co. 8.125% 2/1/2002 600 637
U S WEST Capital Funding, Inc. 6.125% 7/15/2002 4,000 4,012
-----------
24,356
-----------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $183,459) 184,579
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS (U.S. DOLLAR-DENOMINATED)(2.7%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asian Development Bank 9.125% 6/1/2000 700 741
Bayerische Landesbank 5.875% 4/7/2000 1,600 1,602
Canadian Imperial Bank of Commerce (NY Branch) 6.20% 8/1/2000 3,600 3,624
Grand Metropolitan Investment Corp. 8.625% 8/15/2001 1,000 1,074
KFW International Finance, Inc. 9.125% 5/15/2001 400 433
Province of Manitoba 7.75% 2/1/2002 1,500 1,586
Province of Manitoba 8.75% 5/15/2001 1,000 1,073
Province of Manitoba 9.50% 10/1/2000 450 483
Province of Manitoba 9.625% 3/15/1999 500 513
National Westminster Bancorp Inc. 9.45% 5/1/2001 250 272
Noranda Inc. 8.625% 7/15/2002 500 535
Province of Ontario 7.75% 6/4/2002 550 585
Province of Ontario 8.00% 10/17/2001 2,460 2,608
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS
(COST $15,006) 15,129
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.67% 7/1/1998 $ 4,156 $ 4,156
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note F 5.78% 7/1/1998 3,083 3,083
- --------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $7,239) 7,239
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%)
(COST $557,349) 561,873
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.2%)
Other Assets--Note B 18,040
Liabilities--Note F (16,997)
------------
1,043
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Applicable to 56,231,359 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $562,916
=========================================================================================================================
NET ASSET VALUE PER SHARE $10.01
=========================================================================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AT JUNE 30, 1998, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $557,757 $9.92
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 635 .01
Unrealized Appreciation--Note E 4,524 .08
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS $562,916 $10.01
=========================================================================================================================
</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 (54.4%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES (52.5%)
U.S. Treasury Bond 10.00% 5/15/2010 $ 10,990 $ 13,689
U.S. Treasury Bond 10.375% 11/15/2009-11/15/2012 157,440 202,045
U.S. Treasury Bond 10.75% 8/15/2005 21,890 28,488
U.S. Treasury Note 5.75% 10/31/2000-8/15/2003 17,270 17,442
U.S. Treasury Note 6.00% 8/15/1999 5,000 5,025
U.S. Treasury Note 6.25% 1/31/2002-2/15/2003 6,324 6,505
U.S. Treasury Note 6.375% 5/15/1999 2,900 2,921
U.S. Treasury Note 6.50% 8/15/2005 1,900 2,005
U.S. Treasury Note 6.625% 4/30/2002 285 295
U.S. Treasury Note 6.875% 5/15/2006 67,825 73,458
U.S. Treasury Note 7.00% 7/15/2006 75,300 82,243
U.S. Treasury Note 7.125% 2/29/2000 100 103
U.S. Treasury Note 7.25% 5/15/2004-8/15/2004 11,958 12,981
U.S. Treasury Note 7.50% 11/15/2001-2/15/2005 14,405 15,907
U.S. Treasury Note 7.875% 11/15/2004 150 168
-----------
463,275
-----------
AGENCY NOTES (1.9%)
Federal Home Loan Mortgage Corp. 6.785% 3/1/2006 4,500 4,514
Federal Home Loan Mortgage Corp. 7.09% 6/1/2005 3,000 3,054
Federal National Mortgage Assn. 5.80% 12/10/2003 900 902
Federal National Mortgage Assn. 6.25% 8/12/2003 5,600 5,604
Federal National Mortgage Assn. 7.55% 6/10/2004 2,900 2,944
-----------
17,018
-----------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $464,016) 480,293
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (37.0%)
- -------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (1.4%)
California Infrastructure & Econ Dev Bank SP Trust PG&E 6.38% 9/25/2020 (1) 5,500 5,584
California Infrastructure & Econ Dev Bank SP Trust PG&E 6.42% 3/25/2005 (1) 2,400 2,442
Sears Credit Card Master Trust 5.80% 8/15/2005 (1) 4,000 3,987
-----------
12,013
-----------
FINANCE (15.5%)
Ameritech Capital Funding 6.15% 1/15/2008 6,000 5,986
Avalon Properties Inc. 6.875% 12/15/2007 3,700 3,760
BankAmerica Corp. 7.125% 5/1/2006 3,250 3,429
BankAmerica Corp. 7.50% 10/15/2002 400 421
BankAmerica Corp. 7.625% 6/15/2004 450 483
BankAmerica Corp. 10.00% 2/1/2003 700 807
Bank One (Texas) 5.875% 8/2/1999 1,500 1,503
Bear, Stearns & Co., Inc. 6.625% 1/15/2004 350 356
Bradley Operating LP 7.00% 11/15/2004 2,000 2,015
CIT Group Holdings 6.625% 6/15/2005 350 357
CNA Financial Corp. 6.45% 1/15/2008 3,000 2,981
CNA Financial Corp 6.50% 4/15/2005 2,000 2,006
Camden Property Trust 7.00% 11/15/2006 2,000 2,039
Citicorp 7.125% 6/1/2003 135 141
Citicorp 8.625% 12/1/2002 1,500 1,649
Commercial Credit Corp. 5.90% 9/1/2003 450 446
Commercial Credit Corp. 7.875% 7/15/2004 2,000 2,172
CoreStates Capital Corp. 6.625% 3/15/2005 2,400 2,447
CoreStates Capital Corp. 9.375% 4/15/2003 500 566
Dean Witter Discover & Co. 6.875% 3/1/2003 400 411
Equitable Companies Inc. 6.50% 4/1/2008 2,000 2,015
First Chicago Corp. 7.625% 1/15/2003 600 635
First Chicago Corp. 9.875% 7/1/1999 2,200 2,284
First Union Corp. 8.00% 11/15/2002 2,000 2,145
Fleet/Norstar Group 8.125% 7/1/2004 900 985
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fleet Financial Group, Inc. 6.875% 3/1/2003 $ 600 $ 618
Fleet Financial Group, Inc. 7.125% 4/15/2006 1,300 1,363
Ford Motor Credit Corp. 6.625% 6/30/2003 3,000 3,064
Ford Motor Credit Corp. 6.75% 5/15/2005 115 118
General Electric Capital 5.89% 5/15/2000 2,500 2,506
General Motors Acceptance Corp. 6.125% 1/22/2008 5,000 4,933
General Motors Acceptance Corp. 6.60% 1/17/2001 100 102
General Motors Acceptance Corp. 6.625% 10/1/2002 3,200 3,265
Household Finance Corp. 7.625% 1/15/2003 3,500 3,698
Household Finance Corp. 7.65% 5/15/2007 1,000 1,083
International Lease Finance Corp. 6.30% 11/1/1999 5,000 5,031
JDN Realty Corp. 6.80% 8/1/2004 2,310 2,316
Lehman Brothers Holdings Inc. 7.20% 8/15/2009 8,000 8,417
Mellon Bank NA 6.50% 8/1/2005 3,000 3,034
Mellon Bank NA 6.75% 6/1/2003 225 230
Merrill Lynch & Co., Inc. 6.55% 8/1/2004 100 102
Merrill Lynch & Co., Inc. 8.30% 11/1/2002 250 271
Morgan Stanley, Dean Witter Discover & Co. 6.875% 3/1/2007 3,000 3,113
NCNB Corp. 9.50% 6/1/2004 2,000 2,333
NAC Re Corp. 7.15% 11/15/2005 2,500 2,579
NationsBank Corp. 6.50% 3/15/2006 5,900 6,002
NationsBank Corp. 6.875% 2/15/2005 420 436
NationsBank Corp. 6.95% 3/20/2006 3,000 3,116
NationsBank Corp. 7.75% 8/15/2004 500 540
Norwest Financial, Inc. 7.00% 1/15/2003 110 114
Orion Capital Corp. 7.25% 7/15/2005 800 829
PaineWebber Group, Inc. 7.875% 2/15/2003 250 265
Realty Income Corp. 7.75% 5/6/2007 2,000 2,094
Republic New York Corp. 7.75% 5/15/2009 2,400 2,666
Salomon Smith Barney Holdings Inc. 6.875% 6/15/2005 3,300 3,394
Sears, Roebuck & Co. Acceptance Corp. 6.75% 9/15/2005 3,000 3,085
Shurgard Storage Centers, Inc. 7.50% 4/25/2004 3,000 3,130
Simon DeBartolo Group, Inc. 6.75% 7/15/2004 4,000 4,021
Summit Properties Inc. 7.20% 8/15/2007 3,450 3,532
SunTrust Banks, Inc. 7.375% 7/1/2006 2,400 2,572
SUSA Partnership, LP 7.00% 12/1/2007 3,000 3,032
USF&G Corp. 7.125% 6/1/2005 2,400 2,501
United Dominion Realty Trust, Inc. 7.25% 1/15/2007 2,500 2,581
Wells Fargo & Co. 6.875% 4/1/2006 3,000 3,120
-----------
137,245
-----------
INDUSTRIAL (14.1%)
Air Products & Chemicals, Inc. 6.25% 6/15/2003 125 126
Allied Signal Inc. 6.20% 2/1/2008 2,500 2,505
Anheuser-Busch Cos., Inc. 7.10% 6/15/2007 3,400 3,574
Applied Materials, Inc. 8.00% 9/1/2004 150 161
Archer-Daniels-Midland Co. 6.25% 5/15/2003 250 253
C.R. Bard, Inc. 6.70% 12/1/2026 2,300 2,360
Black & Decker Corp. 7.50% 4/1/2003 6,500 6,830
Burlington Northern Santa Fe Corp. 6.375% 12/15/2005 3,000 3,013
Burlington Northern Santa Fe Corp. 9.25% 10/1/2006 1,000 1,185
CSX Corp. 9.00% 8/15/2006 300 347
Caterpillar, Inc. 9.00% 4/15/2006 600 705
Caterpillar, Inc. 9.375% 8/15/2011 1,550 1,972
Comcast Cablevision 8.125% 5/1/2004 3,500 3,799
Continental Airlines (Equipment Trust Certificates) 6.41% 10/15/2008 (1) 1,750 1,752
Continental Airlines (Equipment Trust Certificates) 6.648% 3/15/2019 2,400 2,451
Delta Airlines, Inc. 8.54% 1/2/2007 (1) 474 522
Eastman Chemical Co. 6.375% 1/15/2004 5,075 5,073
Federated Department Stores, Inc. 8.50% 6/15/2003 4,000 4,382
First Data Corp. 6.375% 12/15/2007 MTN 3,500 3,558
First Data Corp. 6.625% 4/1/2003 2,600 2,664
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General Motors Corp. 7.00% 6/15/2003 $ 500 $ 521
International Business Machines Corp. 6.45% 8/1/2007 4,000 4,118
International Paper Co. 7.875% 8/1/2006 35 39
HNG Internorth 9.625% 3/15/2006 2,000 2,384
Kroger Co. 6.375% 3/1/2008 470 470
Kroger Co. 7.65% 4/15/2007 530 576
Kroger Co. 8.15% 7/15/2006 3,800 4,229
Lockheed Martin Corp. 6.50% 4/15/2003 2,000 2,022
Lockheed Martin Corp. 7.70% 6/15/2008 3,300 3,652
May Department Stores Co. 9.875% 12/1/2002 225 257
McDonald's Corp. 6.75% 2/15/2003 450 455
News America Holdings 8.50% 2/15/2005 2,400 2,658
Norfolk Southern Corp. 7.35% 5/15/2007 4,250 4,557
Northrop Grumman Corp. 7.00% 3/1/2006 3,500 3,627
Occidental Petroleum Corp. 8.50% 9/15/2004 3,000 3,082
J.C. Penney & Co., Inc. 6.125% 11/15/2003 130 129
Philip Morris Cos., Inc. 7.00% 7/15/2005 2,200 2,254
Philip Morris Cos., Inc. 8.25% 10/15/2003 250 270
Praxair, Inc. 6.75% 3/1/2003 2,500 2,555
Praxair, Inc. 6.90% 11/1/2006 3,900 4,028
Quaker State Corp. 6.625% 10/15/2005 950 962
Safeway Inc. 6.85% 9/15/2004 3,500 3,607
Sears, Roebuck & Co. 6.25% 1/15/2004 650 652
Sears, Roebuck & Co. Acceptance Corp. 6.125% 1/15/2006 150 149
TCI Communications, Inc. 6.375% 5/1/2003 7,150 7,221
TCI Communications, Inc. 6.875% 2/15/2006 1,250 1,292
Tele-Communications, Inc. 7.25% 8/1/2005 2,000 2,100
Texas Instruments Inc. 6.125% 2/1/2006 3,100 3,100
Time Warner Inc. 8.18% 8/15/2007 2,250 2,501
Tosco Corp. 7.25% 1/1/2007 3,000 3,111
Union Carbide Corp. 6.75% 4/1/2003 3,050 3,102
Union Oil of California 6.375% 2/1/2004 2,000 1,999
Union Oil of California 9.125% 2/15/2006 915 1,064
Union Pacific Corp. 6.125% 1/15/2004 1,000 990
Union Pacific Corp. 7.60% 5/1/2005 3,200 3,398
Whirlpool Corp. 9.00% 3/1/2003 400 443
-----------
124,806
-----------
UTILITIES (6.0%)
Cincinnati Gas & Electric Co. 6.45% 2/15/2004 1,000 1,015
Enron Corp. 6.875% 10/15/2007 1,500 1,550
Enron Corp. 7.125% 5/15/2007 2,546 2,671
Enron Corp. 7.625% 9/10/2004 1,000 1,070
Enron Corp. 9.125% 4/1/2003 2,000 2,235
Florida Power & Light Co. 6.625% 2/1/2003 210 212
GTE South Inc. 6.125% 6/15/2007 2,000 1,980
MCI Communications Corp. 6.50% 4/15/2010 2,150 2,155
MCI Communications Corp. 7.50% 8/20/2004 3,250 3,455
National Rural Utility Co. 6.20% 2/1/2008 4,000 3,993
New York Telephone Co. 6.125% 1/15/2010 5,500 5,425
Pacific Bell Telephone Co. 7.00% 7/15/2004 3,175 3,331
Southern California Edison Co. 6.375% 1/15/2006 3,000 3,036
Southwestern Bell Telephone Co. 5.75% 9/1/2004 2,000 1,965
SouthWestern Bell Telephone Co. 6.625% 7/15/2007 6,000 6,190
Texas Utilities Co. 8.25% 4/1/2004 4,900 5,357
Union Electric Power Co. 7.65% 7/15/2003 3,000 3,218
Virginia Electric & Power Co. 6.625% 4/1/2003 4,000 4,089
-----------
52,947
-----------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $318,195) 327,011
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS (U.S. DOLLAR-DENOMINATED)(7.0%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bank of Nova Scotia 6.875% 5/1/2003 $ 750 $ 769
Province of British Columbia 7.00% 1/15/2003 400 417
Falconbridge Ltd. 7.35% 11/1/2006 1,000 1,049
Finland Global Bond 7.875% 7/28/2004 3,500 3,864
Grand Metropolitan Investment Corp. 9.00% 8/15/2011 3,000 3,733
Hanson Overseas 7.375% 1/15/2003 2,500 2,624
KFW International Finance, Inc. 7.625% 2/15/2004 4,625 5,005
Province of Manitoba 6.125% 1/19/2004 8,000 8,064
National Westminster Bancorp Inc. 9.375% 11/15/2003 1,150 1,317
New Zealand Government 8.75% 12/15/2006 325 385
New Zealand Government 10.625% 11/15/2005 600 767
Noranda Inc. 7.00% 7/15/2005 3,000 3,032
Noranda Inc. 8.125% 6/15/2004 1,000 1,072
Noranda Forest 7.50% 7/15/2003 1,000 1,038
Province of Ontario 7.625% 6/22/2004 5,000 5,410
Petro Geo-Services 6.625% 3/30/2008 5,325 5,395
Republic of Portugal 5.75% 10/8/2003 4,700 4,699
Province of Saskatchewan 6.625% 7/15/2003 4,500 4,636
Province of Saskatchewan 7.125% 3/15/2008 500 539
Province of Saskatchewan 8.00% 7/15/2004 3,900 4,298
Toronto-Dominion Bank 6.50% 8/15/2008 3,000 3,064
- --------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS
(COST $59,596) 61,177
- --------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.67% 7/1/1998 4,294 4,294
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note F 5.76% 7/1/1998 7,530 7,530
- --------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $11,824) 11,824
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(COST $853,631) 880,305
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
Other Assets--Note B 20,739
Liabilities--Note F (18,404)
-----------
2,335
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Applicable to 85,749,785 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $882,640
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.29
==========================================================================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AT JUNE 30, 1998, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $858,802 $10.01
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (2,836) (.03)
Unrealized Appreciation--Note E 26,674 .31
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS $882,640 $10.29
=========================================================================================================================
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
U.S GOVERNMENT SECURITIES (58.6%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bond 8.00% 11/15/2021 $15,045 $ 19,396
U.S. Treasury Bond 8.125% 8/15/2019-8/15/2021 27,350 35,484
U.S. Treasury Bond 8.50% 2/15/2020 570 764
U.S. Treasury Bond 8.75% 5/15/2017-8/15/2020 8,640 11,777
U.S. Treasury Bond 8.875% 8/15/2017-2/15/2019 5,875 8,058
U.S. Treasury Bond 10.375% 11/15/2009-11/15/2012 5,050 6,710
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TOTAL U.S. GOVERNMENT SECURITIES
(COST $75,705) 82,189
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (34.8%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET-BACKED SECURITIES (0.3%)
Sears Credit Card Master Trust 5.80% 8/15/2005 (1) 500 498
---------
FINANCE (10.0%)
Avalon Properties Inc. 6.875% 12/15/2007 700 711
Bank of New York Capital I 7.97% 12/31/2026 375 407
BankAmerica Capital II 8.00% 12/15/2026 400 435
BT Capital Trust B 7.90% 1/15/2027 200 211
CIGNA Corp. 7.875% 5/15/2027 175 196
CIGNA Corp. 8.30% 1/15/2023 500 583
Chase Capital I 7.67% 12/1/2026 400 421
Chemical Bank Corp. 6.125% 11/1/2008 500 493
Citicorp Capital II 8.015% 2/15/2027 450 493
Dean Witter, Discover & Co. 6.75% 10/15/2013 200 203
Equitable Companies Inc. 7.00% 4/1/2028 200 206
First Chicago Corp. 9.875% 7/1/1999 600 623
Fleet Capital Trust II 7.92% 12/11/2026 400 433
General Electric Capital Corp. 6.90% 9/15/2015 1,000 1,071
Household Finance Corp. 6.45% 2/1/2009 70 70
International Lease Finance 6.30% 11/1/1999 600 604
Lehman Brothers Holdings Inc. 7.20% 8/15/2009 835 879
Mellon Capital II 7.995% 1/15/2027 450 487
NationsBank Corp. 7.25% 10/15/2025 375 404
Norwest Corp. 6.65% 10/15/2023 60 60
Security Capital Pacific Trust 8.05% 4/1/2017 200 220
Spieker Properties Inc. 7.50% 10/1/2027 300 310
Summit Properties Inc. 7.20% 8/15/2007 550 563
Suntrust Capital 7.90% 6/15/2027 750 816
Storage USA, Inc. 7.50% 12/1/2027 400 413
Swiss Bank 7.00% 10/15/2015 750 788
Travelers/Aetna Property Casualty Corp. 7.75% 4/15/2026 275 311
US Bancorp 8.27% 12/15/2026 750 842
United Dominion Realty Trust, Inc. 7.25% 1/15/2007 300 310
Wells Fargo Capital I 7.96% 12/15/2026 400 438
-----------
14,001
-----------
INDUSTRIAL (15.1%)
American Stores Co. 8.00% 6/1/2026 400 456
Anheuser-Busch Cos. Inc. 6.75% 12/15/2027 250 261
Anheuser-Busch Cos., Inc. 7.125% 7/1/2017 600 633
Archer-Daniels-Midland Co. 8.875% 4/15/2011 80 99
Auburn Hills 12.00% 5/1/2020 260 427
C.R. Bard, Inc. 6.70% 12/1/2026 500 513
Bayer Corp. 6.65% 2/15/2028 500 515
The Boeing Co. 6.625% 2/15/2038 700 704
Bowater, Inc. 9.375% 12/15/2021 250 314
Burlington Northern Santa Fe Corp. 6.875% 2/15/2016 300 309
Burlington Northern Sante Fe Corp. 7.00% 12/15/2025 50 52
Burlington Northern Sante Fe Corp. 7.25% 8/1/2097 150 162
CSX Corp. 8.625% 5/15/2022 25 31
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Caterpillar Co. 7.375% 3/1/2097 $ 50 $ 55
Caterpillar Inc. 9.375% 8/15/2011 450 573
Chrysler Corp. 7.45% 2/1/2097 225 249
Comcast Cablevision 8.875% 5/1/2017 500 604
Continental Airlines (Equipment Trust Certificates) 6.648% 3/15/2019 470 480
Dayton Hudson Corp. 6.75% 1/1/2028 750 743
Deere & Co. 8.50% 1/9/2022 115 141
The Walt Disney Co. 7.55% 7/15/2093 625 727
Eastman Chemical Co. 7.25% 1/15/2024 250 258
Eastman Chemical Co. 7.60% 2/1/2027 150 161
Federated Department Stores, Inc. 7.45% 7/15/2017 475 506
Ford Capital BV 9.50% 6/1/2010 180 228
Ford Motor Corp. 9.95% 2/15/2032 100 147
International Business Machines Corp. 6.50% 1/15/2028 350 350
International Business Machines Corp. 7.125% 12/1/2096 500 540
Lockheed Martin Corp. 7.70% 6/15/2008 500 553
Lucent Technologies, Inc. 6.50% 1/15/2028 500 507
May Department Stores Co. 9.75% 2/15/2021 40 52
Mobil Corp. 7.625% 2/23/2033 230 244
News America Holdings Inc. 8.00% 10/17/2016 750 831
Norfolk Southern Corp. 7.70% 5/15/2017 400 451
Norfolk Southern Corp. 7.80% 5/15/2027 325 373
Norfolk Southern Corp. 7.90% 5/15/2097 100 118
Northrop Grumman Corp. 9.375% 10/15/2024 400 484
Occidental Petroleum 9.25% 8/1/2019 250 321
J.C. Penney & Co., Inc. 7.125% 11/15/2023 220 231
Phillips Petroleum Co. 8.49% 1/1/2023 900 968
Rohm & Haas Co. 9.80% 4/15/2020 (1) 550 717
Sears, Roebuck & Co. 9.375% 11/1/2011 395 494
Tele-Communications, Inc. 7.875% 8/1/2013 1,000 1,118
Tele-Communications, Inc. 9.875% 6/15/2022 500 689
Texaco Capital Corp. 8.875% 9/1/2021 155 200
Time Warner Inc. 7.57% 2/1/2024 500 541
Tosco Corp. 7.80% 1/1/2027 350 386
Union Carbide Corp. 7.75% 10/1/2096 150 164
Union Carbide Corp. 7.875% 4/1/2023 220 242
Union Pacific Corp. 7.00% 2/1/2016 550 560
Union Pacific Corp. 8.625% 5/15/2022 35 39
United Technologies Corp. 8.875% 11/15/2019 425 542
Whirlpool Corp. 9.10% 2/1/2008 60 71
-----------
21,134
-----------
UTILITIES (9.4%)
AT&T Corp. 8.35% 1/15/2025 300 333
Arizona Public Service Co. 7.25% 8/1/2023 200 203
Coastal Corp. 7.42% 2/15/2037 200 208
Coastal Corp. 7.75% 10/15/2035 400 442
Coastal Corp. 9.625% 5/15/2012 300 380
Commonwealth Edison 7.50% 7/1/2013 750 824
Illinois Power Co. 7.50% 7/15/2025 300 306
MCI Communications Corp. 6.50% 4/15/2010 625 626
MCI Communications Corp. 7.75% 3/23/2025 250 258
Michigan Bell Telephone Co. 7.50% 2/15/2023 1,040 1,121
National Rural Utility Co. 6.20% 2/1/2008 850 849
New England Telephone & Telegraph Co. 6.875% 10/1/2023 110 111
New England Telephone & Telegraph Co. 7.875% 11/15/2029 600 712
New England Telephone & Telegraph Co. 9.00% 8/1/2031 250 275
New York Telephone Co. 6.125% 1/15/2010 1,000 986
Pacific Gas & Electric Co. 8.25% 11/1/2022 1,000 1,097
Southern California Edison Co. 6.75% 1/15/2000 500 507
Southwestern Bell Telephone Co. 7.25% 7/15/2025 450 462
Southwestern Bell Telephone Co. 7.625% 3/1/2023 45 48
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Texas Utilities Co. 7.875% 3/1/2023 $ 1,090 $ 1,165
Texas Utilities Co. 8.75% 11/1/2023 50 55
Union Electric Power Co. 6.75% 5/1/2008 120 126
U S WEST Communications Group 7.25% 9/15/2025 1,000 1,079
Virginia Electric & Power Co. 6.75% 10/1/2023 1,000 985
Wisconsin Electric Power Co. 7.70% 12/15/2027 75 80
------------
13,238
------------
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TOTAL CORPORATE BONDS
(COST $47,117) 48,871
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS (U.S. DOLLAR-DENOMINATED)(4.7%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
British Columbia Hydro 12.50% 9/1/2013 100 105
Grand Metropolitan Investment Corp. 9.00% 8/15/2011 75 93
Inter-American Development Bank 7.125% 3/15/2023 25 27
Inter-American Development Bank 8.50% 3/15/2011 110 135
International Bank for Reconstruction & Development 9.25% 7/15/2017 135 184
KFW International Finance, Inc. 7.20% 3/15/2014 600 668
Province of Manitoba 9.125% 1/15/2018 400 531
Province of Manitoba 9.25% 4/1/2020 485 661
Province of New Brunswick 8.75% 5/1/2022 250 328
Province of New Brunswick 9.75% 5/15/2020 500 709
Province of Newfoundland 10.00% 12/1/2020 750 1,069
Northern Telecom Ltd. 6.875% 9/1/2023 250 257
Petro-Canada 9.25% 10/15/2021 300 391
Petro Geo-Services 7.125% 3/30/2028 625 649
Province of Saskatchewan 7.125% 3/15/2008 100 108
Province of Saskatchewan 7.375% 7/15/2013 600 666
- --------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS
(COST $6,145) 6,581
- --------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $173) 5.67% 7/1/1998 173 173
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.2%)
(COST $129,140) 137,814
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
Other Assets--Note B 5,346
Liabilities (2,867)
------------
2,479
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------
Applicable to 12,688,751 outstanding $.001 par value shares
(unlimited authorization) $140,293
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $11.06
==========================================================================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AT JUNE 30, 1998, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------------------------------------------
Paid in Capital $131,551 $10.37
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 68 .01
Unrealized Appreciation--Note E 8,674 .68
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS $140,293 $11.06
=========================================================================================================================
</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 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>
- ------------------------------------------------------------------------------------------------------------------------
TOTAL BOND SHORT-TERM INTERMEDIATE- LONG-TERM
MARKET BOND TERM BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------------------------------------
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
<S> <C> <C> <C> <C>
Interest $235,754 $15,077 $25,338 $3,641
-------------------------------------------------------------------
Total Income 235,754 15,077 25,338 3,641
-------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services 454 31 47 6
Management and Administrative 1,257 231 392 --
Shareholder Account Maintenance(1) 3,364 131 205 77
Marketing and Distribution(1) 1,169 87 126 15
Taxes (other than income taxes) 272 19 29 4
Custodian Fees 99 12 3 8
Auditing Fees 6 4 4 4
Shareholders' Reports(1) 100 5 8 4
Annual Meeting and Proxy Costs(1) 13 1 1 1
Trustees' Fees and Expenses 7 1 1 --
-------------------------------------------------------------------
Total Expenses 6,741 522 816 119
- ------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 229,013 14,555 24,522 3,522
- ------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD 10,324 654 1,183 71
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES 45,505 358 5,486 3,083
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $284,842 $15,567 $31,191 $6,676
========================================================================================================================
</TABLE>
(1) Expenses of the Total Bond Market Portfolio by class of shares are:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
(000)
----------------------------------------------
INVESTOR INSTITUTIONAL
SHARES SHARES TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class-Specific Expenses:
Shareholder Account Maintenance $3,331 $ 33 $3,364
Marketing and Distribution 871 298 1,169
Shareholders' Reports 100 -- 100
Annual Meeting and Proxy Costs 13 -- 13
----------------------------------------------
Total Class-Specific Expenses 4,315 331 4,646
All Other Portfolio Expenses 1,577 518 2,095
- ------------------------------------------------------------------------------------------------------------------------
Total Expenses $5,892 $ 849 $6,741
========================================================================================================================
</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
detailed in the Statement of Operations. Because the portfolio distributes its
income to shareholders each day, the amounts of Distributions--Net Investment
Income generally equal the net income earned as shown under the Operations
section. The amounts of Distributions--Realized Capital Gain may not match the
capital gains shown in the Operations section, because distributions are
determined on a tax basis and may be made in a period different from the one in
which the gains were realized on the financial statements. The Capital Share
Transactions section shows the amount shareholders invested in the portfolio,
either by purchasing shares or by reinvesting distributions, and the amounts
redeemed. The corresponding numbers of Shares Issued and Redeemed are shown at
the end of the Statement. Distributions, Capital Share Transactions, and Shares
Issued and Redeemed are shown separately for each class of shares.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO
--------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1998 DEC. 31, 1997
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 229,013 $ 356,159
Realized Net Gain (Loss) 10,324 425
Change in Unrealized Appreciation (Depreciation) 45,505 161,978
-------------------------------
Net Increase in Net Assets Resulting from Operations 284,842 518,562
-------------------------------
DISTRIBUTIONS
Net Investment Income
Investor Shares (175,182) (270,877)
Institutional Shares (53,831) (85,282)
Realized Capital Gain
Investor Shares -- --
Institutional Shares -- --
-------------------------------
Total Distributions (229,013) (356,159)
-------------------------------
CAPITAL SHARE TRANSACTIONS--INVESTOR SHARES(1)
Issued 1,414,417 2,673,249
Issued in Lieu of Cash Distributions 157,454 239,069
Redeemed (511,296) (867,035)
-------------------------------
Net Increase--Investor Shares 1,060,575 2,045,283
-------------------------------
CAPITAL SHARE TRANSACTIONS--INSTITUTIONAL SHARES(2)
Issued 252,224 802,671
Issued in Lieu of Cash Distributions 44,389 73,511
Redeemed (134,647) (311,860)
-------------------------------
Net Increase--Institutional Shares 161,966 564,322
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 1,278,370 2,772,008
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 6,757,444 3,985,436
-------------------------------
End of Period $8,035,814 $6,757,444
=========================================================================================================================
(1)Shares Issued (Redeemed)--Investor Shares
Issued 139,530 270,831
Issued in Lieu of Cash Distributions 15,545 24,183
Redeemed (50,471) (87,926)
-------------------------------
Net Increase in Shares Outstanding 104,604 207,088
=========================================================================================================================
(2)Shares Issued (Redeemed)--Institutional Shares
Issued 24,891 81,271
Issued in Lieu of Cash Distributions 4,382 7,435
Redeemed (13,281) (31,495)
-------------------------------
Net Increase in Shares Outstanding 15,992 57,211
=========================================================================================================================
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INTERMEDIATE-TERM
BOND PORTFOLIO BOND PORTFOLIO
--------------------------------- --------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUN. 30, 1998 DEC. 31, 1997 JUN. 30, 1998 DEC. 31, 1997
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 14,555 $ 25,629 $ 24,522 $ 37,752
Realized Net Gain (Loss) 654 1,429 1,183 (80)
Change in Unrealized Appreciation
(Depreciation) 358 3,076 5,486 15,797
-----------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 15,567 30,134 31,191 53,469
-----------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (14,555) (25,629) (24,522) (37,752)
Realized Capital Gain (740) -- -- --
-----------------------------------------------------------------------
Total Distributions (15,295) (25,629) (24,522) (37,752)
-----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 166,596 264,067 252,249 299,703
Issued in Lieu of Cash Distributions 12,989 21,565 20,058 30,780
Redeemed (63,210) (172,160) (82,918) (119,977)
-----------------------------------------------------------------------
Net Increase from Capital
Share Transactions 116,375 113,472 189,389 210,506
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 116,647 117,977 196,058 226,223
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 446,269 328,292 686,582 460,359
-----------------------------------------------------------------------
End of Period $562,916 $446,269 $882,640 $686,582
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 16,629 26,634 24,597 30,030
Issued in Lieu of Cash Distributions 1,297 2,171 1,957 3,083
Redeemed (6,308) (17,286) (8,100) (12,023)
----------------------------------------------------------------------
Net Increase in Shares Outstanding 11,618 11,519 18,454 21,090
========================================================================================================================
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS (continued)
- -------------------------------------------------------------------------------------------------------------------------
LONG-TERM BOND PORTFOLIO
--------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1998 DEC. 31, 1997
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 3,522 $ 3,886
Realized Net Gain (Loss) 71 565
Change in Unrealized Appreciation (Depreciation) 3,083 4,404
--------------------------------
Net Increase in Net Assets Resulting from Operations 6,676 8,855
--------------------------------
DISTRIBUTIONS
Net Investment Income (3,522) (3,886)
Realized Capital Gain (95) --
--------------------------------
Total Distributions (3,617) (3,886)
--------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 74,486 57,876
Issued in Lieu of Cash Distributions 3,025 3,143
Redeemed (28,229) (22,160)
--------------------------------
Net Increase from Capital Share Transactions 49,282 38,859
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 52,341 43,828
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 87,952 44,124
--------------------------------
End of Period $140,293 $87,952
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 6,861 5,640
Issued in Lieu of Cash Distributions 278 307
Redeemed (2,607) (2,167)
--------------------------------
Net Increase in Shares Outstanding 4,532 3,780
=========================================================================================================================
</TABLE>
42
<PAGE> 45
FINANCIAL HIGHLIGHTS
This table summarizes each portfolio's investment results and distributions to
shareholders on a per-share basis for each class of shares. It also presents the
Total Return and shows net investment income and expenses as percentages of
average net assets. These data will help you assess: the variability of the
portfolio's net income and total returns from year to year; the relative
contributions of net income and capital gains to the portfolio's total return;
how much it costs to operate the portfolio; and the extent to which the
portfolio tends to distribute capital gains. The table also shows the Portfolio
Turnover Rate, a measure of trading activity. A turnover rate of 100% means that
the average security is held in the portfolio for one year.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO-INVESTOR SHARES
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -------------------------------------------------------------
THROUGHOUT EACH PERIOD JUNE 30, 1998 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.09 $ 9.84 $10.14 $ 9.17 $10.06 $ 9.88
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT OPERATIONS
Net Investment Income .313 .645 .640 .650 .622 .638
Net Realized and Unrealized Gain (Loss)
on Investments .080 .250 (.300) .970 (.888) .300
-------------------------------------------------------------------------
Total from Investment Operations .393 .895 .340 1.620 (.266) .938
-------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.313) (.645) (.640) (.650) (.622) (.638)
Distributions from Realized Capital Gains -- -- -- -- (.002) (.120)
-------------------------------------------------------------------------
Total Distributions (.313) (.645) (.640) (.650) (.624) (.758)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.17 $10.09 $ 9.84 $10.14 $ 9.17 $10.06
==========================================================================================================================
TOTAL RETURN* 3.95% 9.44% 3.58% 18.18% -2.66% 9.68%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $6,233 $5,129 $2,962 $2,405 $1,731 $1,540
Ratio of Total Expenses to
Average Net Assets 0.21%** 0.20% 0.20% 0.20% 0.18% 0.18%
Ratio of Net Investment Income to
Average Net Assets 6.23%** 6.54% 6.54% 6.66% 6.57% 6.24%
Portfolio Turnover Rate 50%**+ 39% 39% 36% 33% 50%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total return figures do not reflect the annual account maintenance fee of $10.
**Annualized.
+Portfolio turnover rate excluding in-kind redemptions was 49%.
43
<PAGE> 46
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (continued)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO-INSTITUTIONAL SHARES
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED -------------------------- SEP. 18* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD JUNE 30, 1998 1997 1996 DEC. 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.09 $ 9.84 $10.14 $ 9.87
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .318 .655 .650 .174
Net Realized and Unrealized Gain (Loss) on Investments .080 .250 (.300) .270
--------------------------------------------------------
Total from Investment Operations .398 .905 .350 .444
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.318) (.655) (.650) (.174)
Distributions from Realized Capital Gains -- -- -- --
--------------------------------------------------------
Total Distributions (.318) (.655) (.650) (.174)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.17 $10.09 $ 9.84 $10.14
==============================================================================================================================
TOTAL RETURN 4.00% 9.55% 3.68% 4.53%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,803 $1,628 $1,024 $413
Ratio of Total Expenses to Average Net Assets 0.10%** 0.10% 0.10% 0.10%**
Ratio of Net Investment Income to Average Net Assets 6.34%** 6.64% 6.66% 6.48%**
Portfolio Turnover Rate 50%**+ 39% 39% 36%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Inception.
**Annualized.
+Portfolio turnover rate excluding in-kind redemptions was 49%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM BOND PORTFOLIO
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED --------------------------------- MAR. 1* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD JUNE 30, 1998 1997 1996 1995 DEC. 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $ 9.92 $10.07 $ 9.50 $10.00
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .290 .597 .587 .623 .463
Net Realized and Unrealized Gain (Loss) on Investments .025 .080 (.146) .570 (.500)
-----------------------------------------------------------------
Total from Investment Operations .315 .677 .441 1.193 (.037)
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.290) (.597) (.587) (.623) (.463)
Distributions from Realized Capital Gains (.015) -- (.004) -- --
-----------------------------------------------------------------
Total Distributions (.305) (.597) (.591) (.623) (.463)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.01 $10.00 $ 9.92 $10.07 $ 9.50
===================================================================================================================================
TOTAL RETURN** 3.19% 7.04% 4.55% 12.88% -0.37%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $563 $446 $328 $208 $77
Ratio of Total Expenses to Average Net Assets 0.21%+ 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to Average Net Assets 5.83%+ 6.03% 5.93% 6.28% 5.77%+
Portfolio Turnover Rate 99%+ 88%++ 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.
++Portfolio turnover rate excluding in-kind redemptions was 73%.
44
<PAGE> 47
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM BOND PORTFOLIO
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED --------------------------------- MAR. 1* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD JUNE 30, 1998 1997 1996 1995 DEC. 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.20 $ 9.96 $10.37 $ 9.18 $10.00
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .320 .661 .648 .661 .533
Net Realized and Unrealized Gain (Loss) on Investments .090 .240 (.406) 1.217 (.820)
---------------------------------------------------------------
Total from Investment Operations .410 .901 .242 1.878 (.287)
---------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.320) (.661) (.648) (.661) (.533)
Distributions from Realized Capital Gains -- -- (.004) (.027) --
---------------------------------------------------------------
Total Distributions (.320) (.661) (.652) (.688) (.533)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.29 $10.20 $ 9.96 $10.37 $ 9.18
===================================================================================================================================
TOTAL RETURN** 4.07% 9.41% 2.55% 21.07% -2.88%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $883 $687 $460 $346 $71
Ratio of Total Expenses to Average Net Assets 0.21%+ 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to Average Net Assets 6.28%+ 6.64% 6.54% 6.55% 6.88%+
Portfolio Turnover Rate 58%+ 56% 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM BOND PORTFOLIO
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED ------------------------------- MAR. 1* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD JUNE 30, 1998 1997 1996 1995 DEC. 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.78 $10.08 $10.82 $ 8.96 $10.00
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .332 .678 .674 .692 .586
Net Realized and Unrealized Gain (Loss) on Investments .289 .700 (.731) 1.884 (1.040)
----------------------------------------------------------------
Total from Investment Operations .621 1.378 (.057) 2.576 (.454)
----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.332) (.678) (.674) (.692) (.586)
Distributions from Realized Capital Gains (.009) -- (.009) (.024) --
----------------------------------------------------------------
Total Distributions (.341) (.678) (.683) (.716) (.586)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.06 $10.78 $10.08 $10.82 $ 8.96
===================================================================================================================================
TOTAL RETURN** 5.86% 14.30% -0.26% 29.72% -4.53%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $140 $88 $44 $24 $9
Ratio of Total Expenses to Average Net Assets 0.21%+ 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to Average Net Assets 6.17%+ 6.66% 6.75% 6.90% 7.70%+
Portfolio Turnover Rate 71%+ 58% 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.
45
<PAGE> 48
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. Securities for which market quotations are not
readily available are valued by methods deemed by the Board of Trustees to
represent fair value.
2. FEDERAL INCOME TAXES: Each portfolio intends to continue to qualify as a
regulated investment company and distribute all of its income. Accordingly, no
provision for federal income taxes is required in the financial statements.
3. REPURCHASE AGREEMENTS: Each portfolio 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
Trustees. At June 30, 1998, the fund had contributed capital aggregating
$1,491,000 to Vanguard (included in Other Assets), representing 2.1% of
Vanguard's capitalization. The fund's Trustees and officers are also Directors
and officers of Vanguard.
C. The Total Bond Market Portfolio offers two classes of shares, the Investor
Shares and the Institutional Shares. Institutional shares are designed primarily
for institutional investors that meet certain administrative and servicing
criteria and have a minimum investment of $10 million. Investor 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. For the six months ended June 30,
1998, class-specific expenses represented an annual rate of 0.15% and 0.04% of
average net assets of the Investor Shares and Institutional Shares,
respectively. Income, expenses not attributable to a specific class, and
realized and unrealized gains and losses on investments are allocated to each
class of shares based on its relative net assets.
46
<PAGE> 49
D. During the six months ended June 30, 1998, purchases and sales of investment
securities other than U.S. government securities and temporary cash investments
were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
(000)
---------------------------------
PORTFOLIO PURCHASES SALES
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Total Bond Market $1,074,027 $169,980
Short-Term Bond 86,997 12,092
Intermediate-Term Bond 129,757 16,770
Long-Term Bond 22,209 981
- --------------------------------------------------------------------------------------------
</TABLE>
Purchases and sales of U.S. government securities were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
(000)
----------------------------------
PORTFOLIO PURCHASES SALES
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Total Bond Market $2,271,686 $1,641,506
Short-Term Bond 276,705 234,069
Intermediate-Term Bond 295,094 204,893
Long-Term Bond 66,277 38,820
- ---------------------------------------------------------------------------------------------
</TABLE>
During the six months ended June 30, 1998, the Total Bond Market Portfolio
realized $854,000 of net capital gains resulting from in-kind redemptions--in
which shareholders exchanged portfolio shares for securities held by the
portfolio rather than for cash. Because such gains are not taxable to the
portfolio, and are not distributed to shareholders, they have been reclassified
from accumulated net realized gains to paid in capital.
Capital gains distributions are determined on a tax basis and may differ
from realized capital gains for financial-reporting purposes due to differences
in the timing of realization of gains. For federal income tax purposes, at
December 31, 1997, the portfolios had the following capital losses available to
offset future capital gains:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
CAPITAL LOSS
------------------------------------
EXPIRATION
FISCAL YEAR(S)
AMOUNT ENDING
PORTFOLIO (000) DECEMBER 31,
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Total Bond Market $12,406 2002-2004
Intermediate-Term Bond 4,012 2004-2006
- -----------------------------------------------------------------------------------------------
</TABLE>
E. At June 30, 1998, unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(000)
----------------------------------------------------------
APPRECIATED DEPRECIATED NET UNREALIZED
PORTFOLIO SECURITIES SECURITIES APPRECIATION
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Bond Market $256,272 $(3,039) $253,233
Short-Term Bond 4,558 (34) 4,524
Intermediate-Term Bond 26,683 (9) 26,674
Long-Term Bond 8,718 (44) 8,674
- -----------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS (continued)
F. The market values of securities on loan to brokers/dealers at June 30,
1998, and collateral received with respect to such loans, were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(000)
------------------------------------------------------------
COLLATERAL RECEIVED
-----------------------------------
MARKET VALUE MARKET VALUE
OF LOANED OF U.S. TREASURY
PORTFOLIO SECURITIES CASH SECURITIES
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Bond Market $95,277 $5,205 $92,015
Short-Term Bond 12,498 3,083 9,688
Intermediate-Term Bond 63,575 7,530 57,392
- ------------------------------------------------------------------------------------------------
</TABLE>
Security loans are required to be secured at all times by collateral at
least equal to the market value of securities loaned; however, in the event of
default or bankruptcy by the other party to the agreement, retention of the
collateral may be subject to legal proceedings. Cash collateral received is
invested in repurchase agreements.
48
<PAGE> 51
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Senior Chairman of the Board and Director of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman, Chief Executive Officer, and Director of The Vanguard
Group, Inc., and of each of the investment companies in The Vanguard Group.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co., The
Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co., and
NACCO Industries.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
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<PAGE> 52
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