<PAGE> 1
VANGUARD
SMALL CAPITALIZATION
STOCK FUND
ANNUAL REPORT 1993
[PHOTO]
<PAGE> 2
A BRAVE NEW WORLD FOR INVESTING
With the clarity of hindsight, we can now see that the past two decades
composed one of the great cycles in the history of the financial markets, as
reflected in the chart below.
. During the 1973-1982 decade, the nominal total returns (capital change
plus income) of stocks and bonds averaged only about +6% per year; cash
reserves averaged more than +8% annually. However, high inflation rates,
averaging 8.7% annually, devastated these nominal results. Real returns
(nominal returns less the inflation rate) for each of these three major
asset classes were actually negative.
. During the 1983-1992 decade, quite the opposite situation prevailed.
Nominal returns for stocks and bonds were close to their highest levels
in history and forged well into double-digit territory. To make a good
investment environment even better, inflation was tame (averaging 3.8%
annually), and real returns were solidly positive.
[EDGAR REFERENCE -- BAR GRAPH]
This sharp contrast provides us with perspective for the decade that will end
in the year 2002. Some investors will fear a recurrence of the returns of the
first decade, while others will hope for a recurrence of the second; most will
likely anticipate something in between. Whatever the case, there are two
essential elements involved in considering your investment program in the light
of today's circumstances.
First, the yield of each investment class at the start of a decade has
had an important relationship to its future return. Yields were low when 1973
began, high when 1983 began, and are again low today. In fact, current income
yields are remarkably close to the levels of 20 years ago, as shown in the
following table.
Income Yields (January 1)
---------------------------------------
1973 1983 1993 (12/31)
- ----------------------------------------------------------
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 6.0
RESERVES 3.8 10.5 3.1
- ----------------------------------------------------------
But there is a second important element to consider: inflation. It got
progressively worse during most of the first decade, but got progressively
better in the second.
---------------------------------------
1973 1981 1993 (12/31)
- ----------------------------------------------------------
INFLATION 3.4% 12.4% 2.7%
- ----------------------------------------------------------
Today's low yield levels suggest that more modest nominal returns are in
prospect for the coming decade than in the 1980s; indeed, returns could
gravitate
(Please turn to inside back cover)
- -----------------------------------------------------------------------------
VANGUARD SMALL CAPITALIZATION STOCK FUND seeks long-term capital appreciation
by investing in a highly diversified portfolio of small companies selected to
parallel the characteristics and return of the Russell 2000 Index.
<PAGE> 3
CHAIRMAN'S LETTER
[EDGAR REFERENCE - PHOTO OF JOHN C. BOGLE]
FELLOW SHAREHOLDER:
The 1993 fiscal year of Vanguard Small Capitalization Stock Fund, which ended
on September 30, was an outstanding period for stocks with small market
capitalizations and therefore for your Fund. While the unmanaged Standard &
Poor's 500 Composite Stock Price Index, with a total return of +13.0%, enjoyed
a strong year, Vanguard SmallCap Stock Fund garnered a remarkable return of
+31.6%--nearly two and one-half times as large.
That said, I would note that the Fund's total return (capital change
plus income) fell just a bit short of the return of the unmanaged Russell 2000
Index--the benchmark that we use as our matching standard--which consists
primarily of stocks with small market capitalizations. Here are the comparative
results:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Total Return
------------------
Fiscal Year Ended
September 30, 1993
<S> <C>
- ---------------------------------------------------------------------
Vanguard Small Capitalization Stock Fund +31.6%
- ---------------------------------------------------------------------
Russell 2000 Index +33.2%
- ---------------------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $12.63 per share on
September 30, 1992, and $16.23 on September 30, 1993, with the latter figure
adjusted to take into account the reinvestment of our annual dividend of $.18
per share from net investment income and a distribution of $.15 per share from
net realized capital gains. Both payments were the result of our operations
during calendar 1992.
THE FISCAL YEAR IN REVIEW
It was a "small cap" year almost from beginning to end. The +33.2% rise in the
Russell 2000 Index--in which the average company has a market capitalization of
$270 million--was far greater than the +13.0% rise for the Standard & Poor's
500 Index, dominated by large "blue chip" stocks with an average market
capitalization of $15 billion. Given this more than 50-fold differential in
company size, it would be surprising if such periods of disparity in the
returns of the two indexes did not arise with some frequency.
During fiscal 1993, the disparity was created, to an important degree,
by substantial weakness in some of the largest stocks in the Standard & Poor's
500 Index. Two areas hit particularly hard were drug stocks (resulting in part
from fears about the Administration's health-care proposals) and "name brand"
stocks (companies for which brand loyalty no longer seems to assure
ever-ascending earnings). Despite the fact that such "consumer staples" issues
composed fully 26% of the weight of the Standard & Poor's 500 Index at the
outset of the Fund's fiscal year, the Index's total return was a fairly
satisfactory +13.0%. Interestingly, excluding the performance of the consumer
staples stocks, the total return of the Standard & Poor's 500 Index would have
been +21.4%.
On the other hand, the small capitalization Russell 2000 Index
benefited greatly from its insulation from the large consumer staples stocks.
(Continued)
1
<PAGE> 4
[EDGAR REFERENCE - S&P 500 AND RUSSELL 2000 INDEX LINE CHART FOR 1989-1993]
At the same time, financial and technology stocks carry a substantial weight in
the Russell universe (38% of market capitalization vs. 20% in the Standard &
Poor's Index), and these two groups led the small cap market upward by a
dramatic margin. Without these stocks, the total return of the Russell 2000
Index would have been +21.3%, virtually identical to the return on the
"consumer staples free" Standard & Poor's 500 Index as noted above.
Of course, differences such as these are what make financial markets
interesting and challenging. Nonetheless, each phase of the market has its own
character, and there is no assurance--indeed, no possibility--that small cap
stocks will be as successful year after year as they were in fiscal 1993. The
chart above shows the cumulative returns of the Russell 2000 Index and the
Standard & Poor's 500 Index over the past five years. You can see that the
results favor large capitalization stocks by a solid margin: small stocks +86%;
large stocks +98%.
While the chart reflects periods of relative strength for each Index
over the past five years, it actually understates how striking the variations
in performance have been from one year to the next, as shown in this tabulation
of annual returns:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Total Returns
Twelve-Month Periods Ended September 30
---------------------------------------
Russell Standard Russell Index
2000 & Poor's Relative to
Index 500 Index S&P 500 Index
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1989 +21.5% +32.9% -11.4%
1990 -27.2 - 9.2 -18.0
1991 +45.1 +31.1 +14.0
1992 + 8.9 +11.0 - 2.1
1993 +33.2 +13.0 +20.2
- -------------------------------------------------------------------------------
Cumulative Return +86.3% +98.3% -12.0%
- -------------------------------------------------------------------------------
Average Annual Return +13.3% +14.7% - 1.4%
- -------------------------------------------------------------------------------
</TABLE>
The table should make it crystal clear not only that the return of the two
indexes vary widely, but that the returns of stocks in general tend to be quite
volatile.
THE FUND IN FISCAL 1993
Vanguard Small Capitalization Stock Fund enjoyed a competitive 1993 fiscal
year. Our return of +31.6% compared favorably with the +31.7% return for the
average small company fund. While, our ability to match the performance of the
Russell 2000--the Index we have chosen as our "tracking" standard--was again
reaffirmed, our tracking was not nearly as close as we would expect over the
long term. We came within -1.6 percentage points of our benchmark during the
past fiscal year, compared to an average shortfall of -0.3% since we moved to
our index-matching strategy four years ago.
I suppose it is worth emphasizing again the challenges of matching the
Russell 2000 Index: (1) the Index has no operating expenses, while our Fund's
total expenses last year created an unavoidable "drag" equal to 0.18% of
average net assets; (2) the Index comprises 2000 stocks, while our Fund owns
only about one-half that number, albeit carefully selected to minimize our
random tracking error, which can be positive or negative in any given period;
(3) the Index exists only on paper, while the Fund has to buy and sell "real"
securities, a relatively expensive business in the markets for
2
<PAGE> 5
[EDGAR REFERENCE - PERFORMANCE LINE CHART VANGUARD SMALLCAP, AVERAGE SMALL CAP
AND RUSSELL 2000 INDEX]
small cap stocks; (4) the Index experiences no cash inflow or outflow, while
the Fund must invest or liquidate securities with cash flows (the 1%
transaction fee paid by investors when they purchase new shares mitigates the
impact of this cost). This last challenge is often greatest in a year like
fiscal 1993, when fund assets more than doubled, from $202 million to $432
million. About $155 million of this increase represented cash flow; market
appreciation accounted for about $75 million.
The question has been raised lately whether the so-called
"inefficiency" of the small cap markets makes an index strategy less
appropriate than in a large cap market such as the Standard & Poor's 500. Can a
small cap index compete with managers who have demonstrated particular skill in
their evaluation of small company stocks? Our vote is a strong "yes." Even if
there are managers who display great skill in selecting small cap stocks, there
are, inevitably, managers who display no skill. (To be sure, identifying the
former in advance is no mean challenge.) That, after all, is what indexing is
all about: (1) avoid the worst performing funds from one year to the next; (2)
relinquish the opportunity to own the best performers; and (3), by virtue of
low portfolio turnover, minimal expenses, and the absence of substantial
advisory fees, outpace the average manager over an extended period of years.
Thus far, the jury of the marketplace is still out, in part because
mutual funds investing in small company stocks concentrate more on
faster-growing, lower-yielding growth stocks than on the more cyclical,
higher-yielding value stocks that dominate the performance of the Russell 2000
Index. A true comparison of "like with like" is therefore problematic. That
said, Vanguard Small Capitalization Stock Fund outpaced the average small cap
fund over the past two years. However, largely because of an unfavorable
comparison (for both the Fund and the Index) in our 1990 fiscal year, the
average annual rates of return for the four years since we adopted our "index
matching" strategy on September 30, 1989, were: Vanguard Small Capitalization
Stock Fund +11.0%; average small company stock fund +13.6%.
(continued)
3
<PAGE> 6
A LONG-TERM VIEW
The Fund's lifetime record going all the way back to 1960, when it was named
Naess and Thomas Special Fund, is shown in the table on page 6. The chart on
page 3 shows our cumulative returns over the past decade, compared with those
of the Russell 2000 Index as well as the average small company stock fund. This
table summarizes the comparison:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Average Annual Total Returns
----------------------------
Ten Years Ended
September 30, 1993
------------------
First Last Full
Six Years Four Years Ten Years
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Vanguard SmallCap Fund +2.8% +11.0% + 6.0%
- -------------------------------------------------------------------------------
Average SmallCap Fund +9.1% +13.6% +10.9%
Russell 2000 Index +9.5 +11.3 +10.2
- -------------------------------------------------------------------------------
</TABLE>
If it does nothing else, the chart provides a clear view of our rationale in
moving in 1989 from a conventional "active management" strategy to an
unconventional "passive management" strategy. For the first six years of the
period our results were erratic and, quite frankly, unsatisfactory relative to
both comparative standards. During the past four years our results have been
relatively consistent from year to year, comparing favorably to the Russell
2000 Index but still lagging somewhat behind the average competitor. So, it
remains to be seen whether our index strategy can restore the Fund's long-term
record to respectability.
IN SUMMARY
Following a three-year period during which small capitalization stocks have
been market leaders, it would be imprudent not to offer a word of caution. The
equity markets--and particularly smaller stocks--have come a long way in a
relatively short period, and presently hover near record highs. With interest
rates at their lowest levels in two decades and stock yields near historical
lows, there are surely going to be some difficult bumps along the way during
the next few years. You should expect that, in the case of Vanguard Small
Capitalization Stock Fund and other small cap stock funds, any market
volatility will likely be magnified. In rising markets, so much the better, but
in declining markets, so much the worse.
What should investors do in this environment? If you have a long-term
investment horizon, and are willing to accept with equanimity the inevitable
peaks and valleys of the stock market, equities should remain a major component
of your portfolio. Funds emphasizing stocks with smaller market capitalizations
may serve well as a component of your equity holdings. However, an appropriate
position should be maintained among bond funds and short-term reserves, and
additional equity investments should be made gradually over time. Of course, if
you have a more limited investment horizon, a minor reduction in your equity
allocation may be appropriate.
Whatever course you choose, we would recommend that you focus not on
annual fluctuations in absolute and relative performance, but on the long term.
Sincerely,
/S/ JOHN C. BOGLE
-------------
John C. Bogle
Chairman of the Board
October 11,1993
Note: Mutual fund data from Lipper Analytical Services, Inc.
4
<PAGE> 7
Considering Vanguard's growing role in sponsorship of "market index"
funds, we believe it would be useful to bring Vanguard Small Capitalization
Stock Fund under the "Vanguard Index Trust" umbrella, as are our five other
separate and independent Index Portfolios.
As a technical matter, the optimal way to accomplish this objective is to
merge SmallCap Fund, in a tax-free reorganization, into Vanguard Index Trust,
but as a totally separate and distinct investment Portfolio--the Small
Capitalization Stock Portfolio. The new SmallCap Portfolio will continue to
operate under the same investment objectives and policies.
The Board of Directors has determined that the inclusion of Vanguard
SmallCap Fund as a Separate Portfolio of Vanguard Index Trust is in the best
interests of Fund shareholders for two reasons. First, the reorganization
would eliminate the need to produce separate prospectuses, shareholder
reports, and marketing materials for the SmallCap Fund and the Trust, thereby
reducing Fund expenses. Second, as a separate and distinct investment
component of the largest and oldest index mutual fund, Small Capitalization
Stock Portfolio would be more readily identified as an index fund.
A proxy statement and additional information regarding the merger will be
mailed to shareholders in December of 1993, but we wanted to take this
opportunity to tell you about the pending proposal.
AVERAGE ANNUAL TOTAL RETURNS*--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED SEPTEMBER 30, 1993) ARE AS FOLLOWS:
1 YEAR: +30.21% 5 YEARS: +12.20% 10 YEARS: +5.85%
THE FUND'S AVERAGE ANNUAL TOTAL RETURN FOR THE TEN-YEAR PERIOD INCLUDES A
CAPITAL RETURN OF +5.12% AND AN INCOME RETURN OF +0.73%. ALL OF THESE DATA
REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN
INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
*Performance figures are adjusted for the 1% transaction fee on purchases and
the annual account maintenance fee of $10.
5
<PAGE> 8
TOTAL INVESTMENT RETURN
The following table illustrates the results of a single share investment in
VANGUARD SMALL CAPITALIZATION STOCK FUND, through September 30, 1993, including
the period prior to its conversion in September 1989 from an actively managed
portfolio to a passively managed portfolio. During the period illustrated,
stock prices fluctuated and were higher at the end than at the beginning. These
results should not be considered as a representation of the dividend income or
capital gain or loss that may be realized from an investment made in the Fund
today.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA*
- -----------------------------------------------------------------------------------------------------------------
Value with Income Year-end Value
Year Ended Net Asset Income Capital Gains Dividends & Capital of $10,000 Initial Total
September 30 Value Dividends Distributions** Gains Reinvested Investment Return+
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1960 (10/3) $ 3.33 -- -- -- $10,000 --
- -----------------------------------------------------------------------------------------------------------------
1961 3.72 -- $.0045 $ 3.72 11,170 +11.7%
- -----------------------------------------------------------------------------------------------------------------
1962 3.07 $.022 -- 3.09 9,271 -17.0
- -----------------------------------------------------------------------------------------------------------------
1963 3.71 .022 -- 3.76 11,283 +21.7
- -----------------------------------------------------------------------------------------------------------------
1964 4.51 .018 -- 4.59 13,776 +22.1
- -----------------------------------------------------------------------------------------------------------------
1965 5.23 .017 .027 5.37 16,118 +17.0
- -----------------------------------------------------------------------------------------------------------------
1966 4.92 .225 .097 5.18 15,538 - 3.6
- -----------------------------------------------------------------------------------------------------------------
1967 8.56 .037 .397 9.49 28,481 +83.3
- -----------------------------------------------------------------------------------------------------------------
1968 10.51 .03 .407 12.14 36,427 +27.9
- -----------------------------------------------------------------------------------------------------------------
1969 8.90 .022 -- 10.30 30,890 -15.2
- -----------------------------------------------------------------------------------------------------------------
1970 7.78 .035 -- 9.04 27,121 -12.2
- -----------------------------------------------------------------------------------------------------------------
1971 9.74 .13 .107 11.63 34,878 +28.6
- -----------------------------------------------------------------------------------------------------------------
1972 11.66 .07 .153 14.22 42,655 +22.3
- -----------------------------------------------------------------------------------------------------------------
1973 10.35 .047 .407 13.17 39,498 - 7.4
- -----------------------------------------------------------------------------------------------------------------
1974 7.41 .133 -- 9.56 28,675 -27.4
- -----------------------------------------------------------------------------------------------------------------
1975 9.09 .243 -- 12.08 36,245 +26.4
- -----------------------------------------------------------------------------------------------------------------
1976 10.98 .19 .027 14.92 44,762 +23.5
- -----------------------------------------------------------------------------------------------------------------
1977 11.72 .133 .017 16.17 48,522 + 8.4
- -----------------------------------------------------------------------------------------------------------------
1978 13.45 .207 1.04 20.72 62,157 + 28.1
- -----------------------------------------------------------------------------------------------------------------
1979 12.07 .253 1.753 22.48 67,440 + 8.5
- -----------------------------------------------------------------------------------------------------------------
1980 15.21 .337 .90 31.58 94,753 +40.5
- -----------------------------------------------------------------------------------------------------------------
1981 12.09 .133 2.543 29.94 89,825 - 5.2
- -----------------------------------------------------------------------------------------------------------------
1982 12.50 .033 2.107 36.89 110,664 +23.2
- -----------------------------------------------------------------------------------------------------------------
1983 19.77 .303 .92 62.86 188,571 +70.4
- -----------------------------------------------------------------------------------------------------------------
1984 13.15 -- 2.51 48.46 145,388 -22.9
- -----------------------------------------------------------------------------------------------------------------
1985 11.68 .15 .77 46.68 140,052 - 3.7
- -----------------------------------------------------------------------------------------------------------------
1986 13.24 -- -- 52.91 158,715 +13.3
- -----------------------------------------------------------------------------------------------------------------
1987 15.73 -- 1.89 73.02 219,065 +38.0
- -----------------------------------------------------------------------------------------------------------------
1988 11.96 -- 1.213 62.58 187,750 -14.3
- -----------------------------------------------------------------------------------------------------------------
1989 11.88 .143 2.167 74.37 223,095 +18.8
- -----------------------------------------------------------------------------------------------------------------
1990 8.55 .043 -- 53.75 161,235 -27.7
- -----------------------------------------------------------------------------------------------------------------
1991 12.03 .18 .14 78.43 235,258 +45.9
- -----------------------------------------------------------------------------------------------------------------
1992 12.63 .18 .29 85.76 257,231 + 9.3
- -----------------------------------------------------------------------------------------------------------------
1993 16.23 .18 .15 112.86 338,516 +31.6
- -----------------------------------------------------------------------------------------------------------------
LIFETIME $3.516 $20.0365 +3,285.2% +11.3%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted for 3-for-1 stock split, February 23, 1990.
** Prior to 1973 capital gains were retained and taxes were paid by the
Fund. Data from 1974 through 1993 represent capital gains distributions.
+ Adjusted to include reinvestment of income dividends and any capital
gains distributions. Note: No adjustment has been made for taxes payable
by shareholders on income dividends and capital gains distributions.
6
<PAGE> 9
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS
September 30, 1993
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------
COMMON STOCKS (98.3%)(1)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
A & W Brands, Inc. 29,750 $ 727
AAR Corp. 26,900 346
* ALC Communications 36,200 995
A.L. Laboratories, Inc. 12,100 213
* ASK Computer Systems, Inc. 25,900 308
* AST Research, Inc. 29,100 506
Acordia, Inc. 14,600 365
* Acuson Corp. 28,250 335
* ACX Technologies Inc. 8,200 290
ADAC Laboratories 34,033 413
* Adaptec, Inc. 28,800 803
* Addington Resources, Inc. 20,700 357
* Adelphia Communications Corp. Class A 18,900 324
* Advance Circuits, Inc. 36,556 420
* Advanced Tissue Sciences Inc. 43,400 377
* Advantage Healthcare Corp. 20,600 203
* ADVO, Inc. 23,850 379
* Air and Water Technologies Corp. Class A 25,400 349
Air Express International Corp. 12,000 256
Airborne Freight Corp. 22,900 547
* Airgas, Inc. 13,400 528
Alaska Air Group, Inc. 12,400 158
Albany International Corp. 24,200 427
Alex Brown & Sons, Inc. 18,900 558
* Alexander's, Inc. 9,600 593
Alfa Corp. 45,000 551
Alico, Inc. 10,900 210
The Allen Group, Inc. 9,830 569
* Alliance Pharmaceutical Corp. 32,000 324
* Alliant Techsystems, Inc. 19,600 559
* Allied Clinical Laboratories 22,400 456
* Allied Research Corp. 10,100 155
* Allwaste, Inc. 37,200 167
* Alpha Beta Tech 21,000 577
* Altera Corp. 24,500 755
Amcast Industrial Corp. 19,900 373
* American Annuity Group Inc. 38,900 340
Amcore Financial 18,320 444
American Bankers Insurance Group 18,000 522
American Building Maintenance Industries, Inc. 19,000 299
* American City Business Journal 17,500 431
American Ecology Corp. 22,250 264
American Filtrona Corp. 12,200 320
* American Freightways 15,700 279
* American Healthcorp Inc. 20,700 486
American Health Properties, Inc. 20,700 585
American Heritage Life Investment Corp. 16,932 322
American Income Holding Inc. 16,700 440
* American Management Systems, Inc. 25,300 433
* American Oil and Gas Corp. 23,600 274
* American Pacific Corp. 16,200 211
American Software, Inc. Class A 38,200 260
* American Travellers Corp. 24,400 305
Ameron, Inc. 11,300 429
* Ampal-American Israel Corp. 14,000 171
AMPCO-Pittsburgh Corp. 19,800 144
* Amsco International, Inc. 30,600 298
Amtech Corp. 16,350 458
* Anacomp, Inc. 136,800 393
* Analogic Corp. 24,800 360
* Anchor Bancorp Inc. 20,900 295
Anchor Bancorp Wisconsin Inc. 19,600 480
* Andrew Corp. 14,000 542
Angelica Corp. 20,100 505
* Ann Taylor Stores Corp. 24,500 625
* Anthem Electronics, Inc. 14,500 506
Anthony Industries, Inc. 11,225 171
Apogee Enterprises, Inc. 18,700 234
* Applied Bioscience International, Inc. 30,408 177
* Applied Magnetics Corp. 38,600 352
Applied Power, Inc. 18,300 332
Aptargroup Inc. 25,200 529
Aquarion Co. 17,380 487
Arbor Drugs, Inc. 14,400 254
Arctco Inc. 23,400 588
* Arden Group Inc. Class A 11,000 550
Arnold Industries, Inc. 16,200 624
Arrow International, Inc. 13,400 327
Ashland Coal Inc. 15,700 467
* Aspect Telecommunications 26,200 910
Asset Investors Corp. 79,500 407
Associated Banc-Corp. 14,187 541
Associated Natural Gas Corp. 15,700 581
Astro-Med, Inc. 23,900 272
* Atari Corp. 87,100 446
* Athena Neurosciences, Inc. 49,700 379
Athlone Industries, Inc. 18,600 328
* Guy F. Atkinson Co. of California 19,700 177
* Atmel Corp. 15,000 539
* Augat, Inc. 13,500 285
* Automotive Industries Inc. Class A 16,100 469
* Autotote Corp. 15,100 706
* Avatar Holding, Inc. 15,200 530
Avemco Corp. 18,850 337
* Aztar Corp. 44,300 349
BHC Financial Inc. 20,700 818
BGS Systems, Inc. 7,100 181
</TABLE>
7
<PAGE> 10
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------
<S> <C> <C>
* Bisys Group, Inc. 28,000 $ 646
* BJ Services Co. 18,900 413
* BMC Industries, Inc. 32,100 490
BRE Properties Inc. Class A 11,200 396
BSB Bancorp, Inc. 13,677 516
BWIP Holding Inc. Class A 28,700 674
* Babbages, Inc. 16,400 471
J. Baker, Inc. 14,400 294
Baldor Electric Co. 24,150 592
* Baldwin Piano and Organ Co. 17,300 294
* Baldwin Technology Class A 20,400 91
* Ballard Medical Products 29,666 501
* Bally Gaming International Inc. 15,100 299
* Bally Manufacturing Corp. 53,900 519
* Baltimore Bancorp. 48,300 604
* Banctec, Inc. 22,950 479
Bank of Granite Corp. 7,700 223
Bank North Group 14,600 283
Bank South Corp. 49,900 767
* Banyan Systems, Inc. 30,300 496
Barnes Group, Inc. 4,700 151
* Barr Labs Inc. 27,100 671
* Barra Inc. 3,500 28
Bassett Furniture Industries, Inc. 17,325 613
Bay State Gas Co. 14,500 415
Bay View Capital Corp. 21,700 521
Bearings, Inc. 13,600 343
* Bell Bancorp, Inc. 12,900 601
* Benson Eyecare Corp. 45,100 355
Berkshire Realty Company, Inc. 30,300 364
Berry Petroleum Class A 42,800 498
* Bertucci's Holding Corp. 21,300 535
* Best Buy, Inc. 18,450 959
* Bio-Rad Labs, Inc. Class A 14,400 196
Biocraft Laboratories 15,800 454
* Biowhittaker Inc. 41,800 256
Birmingham Steel Corp. 25,550 671
Black Hills Corp. 15,800 411
Blair Corp. 8,800 405
* Bolt Beranek and Newman, Inc. 73,100 722
* Books-a-Million Inc. 9,800 246
* Boole & Babbage Inc. 17,100 414
* Boomtown Inc. 19,300 437
* Borg-Warner Security Corp. 16,700 330
Boston Bancorp 16,500 588
Bowne & Co., Inc. 22,200 425
W.H. Brady Class A 11,000 399
* Breed Technological Inc. 33,900 424
Brenco, Inc. 20,900 257
Brenton Banks, Inc. 14,300 416
* Broderbund Software 9,100 364
* Brooktree Corp. 40,900 736
Brown Group, Inc. 20,700 709
Brush Wellman, Inc. 14,000 168
* Buffets Inc. 36,200 810
* Buttery Food & Drug Stores 4,000 28
CCB Financial Corp. 10,400 383
* CDI Corp. 41,500 394
CNB Bankshares, Inc. 12,520 394
CPI Corp. 12,400 189
CRS/Sirrine, Inc. 37,200 349
* CSF Holdings, Inc. 8,600 202
* C-TEC Corp. 29,100 746
Cabot Oil & Gas Corp. 23,526 582
* Cadence Design Systems, Inc. 53,100 558
* Caere Corp. 18,300 119
* Cal Rep Bancorp, Inc. 1,200 28
* Caldor Corp. 18,200 571
* Calgene, Inc. 27,000 375
* California Federal Bank Class A 30,500 457
California Water Service Co. 9,200 356
Callaway Golf Co. 15,100 889
Calmat Co. 21,500 366
Capital Re Corp. 14,700 382
Capstead Mortgage Corp. 17,600 686
Caraustar Industries Inc. 24,300 401
Cardinal Distribution, Inc. 19,300 702
Carlisle Co., Inc. 15,700 491
Carolina Freight Corp. 17,200 202
Carpenter Technology Corp. 9,600 482
* Carter Hawley Hale Stores, Inc. 39,200 559
* Cascade Natural Gas Corp. 17,300 484
Casey's General Stores 25,900 552
Cash America International Inc. 63,900 535
* Catalina Marketing Corp. 11,200 494
* Catellus Development Corp. 62,850 479
* Catherines Stores 22,000 391
Cato Corp. Class A 23,700 545
* Cellular, Inc. 13,000 227
* Centex Telemanagement Inc. 51,600 361
* Centocor, Inc. 49,200 517
Central Hudson Gas & Electric Corp. 19,300 663
Central Louisiana Electric Co. 26,400 696
Central Vermont Public Service Corp. 25,900 609
Centura Banks, Inc. 18,300 382
* Chambers Development Co. Class A 9,900 43
Chaparral Steel Co. 26,000 254
Charter One Financial 18,050 661
* Charter Medical Corp. 29,700 702
* Bernard Chaus, Inc. 45,400 131
Chemed Corp. 8,600 263
Chemical Finance 2,200 101
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------
<S> <C> <C>
* Chemtrak, Inc. 54,600 $ 218
* The Cherry Corp. 17,600 301
Chesapeake Corp. of Virginia 22,700 454
* Chipcom Corp. 10,200 532
Chittenden Corp. 24,870 448
* Christiana Cos., Inc. 13,900 354
Cilcorp, Inc. 15,500 663
* Cirrus Logic 28,100 896
Citifed Bancorp 17,500 416
Citizens Banking Corp. 23,300 658
* Citizens First Bancorp, Inc. 89,800 617
* City National Corp. 63,400 507
Claire's Stores, Inc. 24,700 395
Clarcor Inc. 13,950 235
* Clark Equipment Co. 13,600 649
* Clean Harbors Inc. 25,600 205
Cleveland-Cliffs Iron Co. 13,300 414
* Clinicom 7,900 129
* Coast Savings Financial, Inc. 40,800 627
* Coastal Bancorp 23,600 319
Coca-Cola Bottling Co. 12,122 417
Coeur D'Alene Mines Corp. 16,871 293
* Cognex Corp. 19,800 653
Collective Bancorporation Inc. 24,300 579
* Collagen Corp. 16,900 467
Colonial Bancgroup, Inc. 20,800 433
* Columbia Laboratories Inc. 30,000 161
Comair Holdings, Inc. 19,800 584
* Comoa, Inc. 16,550 242
* Comdata Holdings Corp. 116,300 349
Commerce Clearing House, Inc. Class A 27,100 420
* Commercial Federal Corp. 14,200 349
Commercial Intertech Corp. 25,200 513
Commercial Metals Co. 11,400 412
Commonwealth Energy Systems 11,600 579
Communications Systems, Inc. 40,400 586
Community Psychiatric Centers 48,750 646
* Compression Labs, Inc. 12,340 169
* Computer Network Technology Corp. 63,100 517
Computer Task Group, Inc. 37,800 274
* Concord EFS Inc. 12,900 342
* Cone Mills Corp. 30,600 478
Connecticut Natural Gas Corp. 15,300 492
Connecticut Water Services, Inc. 3,200 98
* Conner Peripherals, Inc. 48,400 490
* Consolidated Freightways, Inc. 35,300 560
* Continental Medical Systems, Inc. 34,750 278
Cooker Restaurant Corp. 25,200 403
* Copytele, Inc. 20,500 270
* Cordis Corp. 17,000 542
Core Industries, Inc. 20,200 263
* Corrections Corp. of America 21,900 155
Cousins Properties, Inc. 21,200 368
* Coventry Corp. 11,600 429
* Cragin Financial Corp. 15,200 553
CRIIMI MAE Inc. 45,900 562
A.T. Cross Co. Class A 11,600 151
* Crown Central Petroleum Corp. Class A 13,900 205
Cubic Corp. 11,200 230
* Cullen/Frost Bankers, Inc. 12,940 466
Curtice-Burns, Inc. Class A 18,100 240
Curtiss-Wright Corp. 8,900 285
* Cygnus Therapeutic Systems 54,400 333
* Cypress Semiconductor Corp. 41,600 577
* Cytogen Corp. 24,100 172
* DWG Corp. Class A 31,200 991
* Dallas Semiconductor Corp. 29,400 533
Daniel Industries, Inc. 25,700 389
Dart Group Corp. Class A 3,567 292
* Data General Corp. 39,000 400
* Datascope Corp. 26,500 371
Deb Shops, Inc. 9,100 60
* Dekalb Energy Co. Class B 20,500 354
Dekalb Genetics Corp. Class B 15,400 391
Delchamps, Inc. 15,853 367
Delta Woodside 8,000 87
* Dentsply International 8,500 308
Deposit Guaranty Corp. 20,500 641
Devon Energy Corp. 24,900 635
Diagnostic Products Corp. 8,800 169
Dial REIT, Inc. 20,800 231
* Diasonics Inc. 27,840 348
* Diagnostek, Inc. 22,200 350
Dibrell Brothers, Inc. 15,200 426
* Digicon Inc. 127,500 351
* Digital Microwave Corp. 31,900 526
* Digital Communications Associates, Inc. 26,000 484
* Dime Savings Bank of New York 70,600 538
* Dionex Corp. 8,600 270
Dixie Yarn, Inc. 23,600 261
Donaldson Co., Inc. 13,900 542
* Dovatron International Inc. 22,153 424
* Dravo Corp. 33,700 350
* The Dress Barn, Inc. 28,000 420
Dreyer's Grand Ice Cream, Inc. 15,000 416
Duff & Phelps Corp. 35,300 772
Duplex Products, Inc. 19,200 218
Duriron Co., Inc. 13,500 316
Dynamics Corp. of America 9,700 154
* Dynatech Corp. 20,200 472
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS
(continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Elizabethtown Corp. 14,300 $ 486
E-Z-EM, Inc. 2,044 11
* Eagle Hardware & Garden, Inc. 21,000 535
Eastern Utilities Associates 22,580 675
Eaton Vance Corp. 10,600 401
* Egghead, Inc. 42,400 297
* El Paso Electric Co. 27,100 75
* Elcor Corp. 15,200 376
* Electro Rent Corp. 22,124 337
* Electromedics Inc. 80,300 316
Empire District Electric Co. 14,984 360
* Employee Benefit Plans Inc. 31,200 250
* Emulex Corp. 32,200 213
Energen Corp. 24,200 599
* Energy Services, Inc. 159,200 517
* Energy Ventures Inc. 17,000 270
Engraph, Inc. 35,851 558
Enhance Financial Services Group, Inc. 19,900 435
Ennis Business Forms, Inc. 18,950 249
* Enterra Corp. 19,300 478
* Envirosource, Inc. 59,100 185
* Envirotest Systems Corp. Class A 44,900 629
* Epitope Inc. 25,900 557
* Equicredit Corp. 11,000 231
* Evans & Sutherland Computer Corp. 25,000 431
* Excel Industries, Inc. 5,500 100
* Exide Electronics Group, Inc. 18,600 395
* Expeditors International of Washington, Inc. 9,100 256
* Ezcorp, Inc. 32,300 464
F & C Bancshares, Inc. 4,200 85
* F & M Distributors 23,700 184
F & M National Corp. 23,300 373
FMC Gold Co. 37,900 204
* Fabri-Centers of America, Inc. 6,200 88
* Falcon Products, Inc. 27,400 298
Fansteel, Inc. 34,700 278
Farmer Brothers, Inc. 3,050 465
Fastenal Co. 15,200 397
Fay's Drug Co. 23,875 149
* Fedders Corp. 59,800 314
Fidelity National Financial, Inc. 20,989 771
* Fieldcrest Cannon, Inc. 18,600 442
* 50-Off Stores, Inc. 39,000 266
Figgie International Inc. Class A 5,800 100
* Filene's Basement Corp. 51,100 469
Financial Trust Corp. 4,600 191
* First Amarillo Bancorporation, Inc. 12,700 360
First Bancorp of Ohio 29,600 847
First Citizens Bancshares Class A 10,300 502
First Colonial Bankshares 24,400 473
First Commercial Bank Shares 2,000 154
First Commercial Corp. 13,145 427
* First Eastern Corp. 29,660 740
* First Federal Savings Bank 28,200 462
First Financial Bancorp 8,000 423
First Financial Carribean Corp. 14,800 424
First Financial Savings Assn. 26,400 464
First Merchants Corp. 14,400 432
First Michigan Bank Corp. 13,967 400
First Midwest Bancorp 26,700 734
First Mississippi Corp. 27,300 239
First National Bank of Gainsville 26,150 526
First Source Corp. 16,100 380
Firstfed Michigan Corp. 18,750 478
* Firstfed Bancshares Inc. 13,800 304
* First Federal Financial 24,375 497
Fisher Scientific International Inc. 19,100 668
* Flagstar Cos. 24,360 262
Florida East Coast Railway Co. 8,700 533
Florida Rock Industries, Inc. 16,600 446
Fluke Corp. 10,000 246
* Foodmaker, Inc. 44,700 447
Foote, Cone & Belding Communications, Inc. 10,300 389
Foothill Group 44,400 588
Fort Wayne National Corp. 8,800 353
Foxmeyer Corp. 34,828 340
* Frame Technology 29,700 230
* Franklin Quest Co. 21,500 575
Fremont General Corp. 14,900 391
* Fresh Choice, Inc. 4,200 120
Frisch's Restaurants, Inc. 21,668 309
* Fritz Cos., Inc. 12,800 368
H.B. Fuller Co. 16,350 546
Fulton Financial Corp. 16,895 412
G & K Services, Inc. 33,500 750
* GMIS, Inc. 20,300 403
* GTI Corp. 13,800 559
GWC Corp. 15,200 264
Gainsco, Inc. 39,351 492
* Galey & Lord 28,900 329
Arthur J. Gallagher & Co. 17,100 547
Galveston-Houston Co. 73,700 313
Gencorp, Inc. 29,600 485
* General Datacomm Industries, Inc. 62,500 680
General Host Corp. 37,000 305
General Housewares Corp. 15,000 206
* Genesco, Inc. 48,400 387
Genesee Corp. Class B 2,042 73
* Gentex Corp. 18,600 530
Genesis Health 29,900 553
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------
<S> <C> <C>
* Genetic Therapy, Inc. 27,500 $ 505
* Geneva Steel Class A 3,100 38
* Gensia Inc. 22,100 580
* Genta Inc. 45,400 397
Gerber Scientific, Inc. 19,400 264
* Gerrity Oil & Gas Corp. 27,900 398
Gibson Greetings, Inc. 19,100 366
Gilbert Associates, Inc. Class A 16,075 281
* Gilead Sciences, Inc. 19,900 286
Gleason Corp. 18,900 239
* Glendale Federal 4,924 42
* Global Natural Resources, Inc. 60,200 519
* Glycomed, Inc. 50,500 417
Goody Products, Inc. 15,500 378
* Goody's Family Clothing 21,100 298
Gorman-Rupp Co. 12,750 353
Goulds Pumps, Inc. 24,900 640
Graco, Inc. 13,200 426
* Great American Management, Inc. 13,000 435
* Greenwich Pharmaceuticals, Inc. 89,900 230
Greif Brothers Corp. Class A 13,100 511
Grey Advertising, Inc. 2,700 483
* Grossmans, Inc. 92,500 278
* Groundwater Technology, Inc. 22,500 270
Grow Group, Inc. 28,400 412
Guardsmen Chemicals Inc. 19,025 262
* Gundle Environmental Systems, Inc. 10,100 106
* Gupta Corp. 13,400 208
* Gymboree Inc. 13,500 565
HBO and Co. 17,700 655
Hubco, Inc. 24,134 588
Hancock Holding Co. 15,146 517
Handleman Co. 35,300 397
Handy & Harman 26,200 321
* Harman International Industries, Inc. 25,900 515
Harnischfeger Industries Inc. 30,400 589
Harper Group, Inc. 27,000 351
* Hartmarx Corp. 14,600 89
Hawkeye Bancorp 24,100 479
* HEALTHSOUTH Rehabilitation Corp. 32,500 500
* Healthcare Compare Corp. 42,200 870
* Health Management Associates Class A 20,150 798
Health and Rehabilitation Properties Trust 36,300 535
* Healthdyne, Inc. 32,100 189
* Healthinfusion Inc. 31,200 211
* Healthsource, Inc. 13,800 676
* Heartland Express, Inc. 13,300 396
Hechinger Co. Class A 32,100 357
* Hecla Mining Co. 35,700 366
* Helen of Troy Corp. 17,600 256
Helene Curtis, Inc. 11,900 308
Herbalife International of America, Inc. 23,600 326
Heritage Financial Services, Inc. 19,000 316
* Heritage Media Corp. Class A 47,775 711
Hexcel Corp. 19,000 114
* Hibernia Corp. Class A 97,500 817
* Hillhaven Corp. 101,500 336
Holly Corp. 12,600 365
* Hollywood Park, Inc. 11,100 366
* Holnam, Inc. 11,400 53
Home Beneficial Corp. Class B 20,700 481
* Homedco Group Inc. 16,200 441
* Hook Suprex 50,600 361
Houghton Mifflin Co. 17,500 759
* House of Fabrics, Inc. 39,570 326
* Hovnanian Enterprises Class A 15,150 216
* Hovnanian Enterprises Class B 9,650 130
Hudson Foods Inc. Class A 28,000 301
Huffy Corp. 12,000 228
Hughes Supply, Inc. 4,700 86
Hunt Manufacturing Co. 28,300 442
* ICF Kaiser International Inc. 49,800 218
* ICH Corp. 78,500 520
* ICN Pharmaceuticals, Inc. 33,500 364
* IHOP Corp. 22,700 560
* IMRS Inc. 22,500 419
IRT Property Co. 44,772 560
IWC Resources Corp. 17,800 418
* IDEX Corp. 14,800 485
* IDEXX Corp. 14,400 702
* Immune Response 22,454 230
* Immunex Corp. 17,300 316
Imo Industries, Inc. 14,100 102
* Imperial Bancorp 37,827 515
* Imperial Credit 28,800 400
Imperial Holly Corp. 27,150 312
* Immunomedics Inc. 45,300 297
Independence Bancorp, Inc. 13,552 420
Independent Insurance Group, Inc. 24,900 414
Indiana Energy, Inc. 17,800 625
* Indressco Inc. 30,900 386
* Infinity Broadcasting Corp. 24,150 1,156
* Input/Output, Inc. 24,100 533
Insteel Industries, Inc. 8,283 78
* Instrument Systems Corp. 73,600 635
* Integrated Device Technology Inc. 58,200 1,080
* Integrated Health Services, Inc. 21,900 589
Intelligent Electronics Inc. 37,600 832
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS
(continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Intercontinental Bank 17,400 $ 318
* Intercontinental Life Corp. 26,800 422
Interface, Inc. 19,000 205
* Intergraph Corp. 49,700 528
* Interlake Corp. 68,800 249
Intermet Corp. 43,100 426
International Aluminum Corp. 13,400 301
* International Dairy Queen, Inc. Class A 33,800 537
* International Family Entertainment 18,400 400
International Multifoods Corp. 21,300 479
* International Rectifier Corp. 37,400 407
International Shipholding Corp. 17,300 396
* International Technology 73,700 322
Interstate Bakeries 23,800 381
Interstate Power Co. 11,200 329
* Intertan, Inc. 14,700 75
* Intervoice, Inc. 53,600 1,179
* Invacare Corp. 15,800 375
* Invtro International 22,800 311
* Ionics, Inc. 10,300 482
Irwin Financial Corp. 6,600 168
* ISIS Pharmaceuticals, Inc. 42,500 263
JSB Financial 15,800 397
* Jacobs Engineering Group Inc. 17,100 398
* Jan Bell Marketing Inc. 22,600 223
Jefferson Bankshares, Inc. 16,900 344
John Alden Financial Group 27,900 792
* Johnson Worldwide Associates, Inc. 9,900 208
* Joy Technologies, Inc. 36,000 387
Juno Lighting, Inc. 21,200 395
Justin Industries, Inc. 16,850 303
* KLA Instruments Corp. 22,600 590
KN Energy, Inc. 11,600 464
* Kaiser Aluminum & Chemical Corp. 27,600 197
Kansas City Life Insurance Co. 12,030 645
Katy Industries, Inc. 14,200 385
Kaydon Corp. 19,600 390
* Kelly Oil Corp. 37,800 491
Kellwood Co. 15,800 589
* Kemet Corp. 18,000 283
Kennametal, Inc. 12,000 441
* Kennedy-Wilson, Inc. 25,400 105
* Kent Electronics Corp. 15,900 411
* Key Tronic Corp. 35,700 353
* Keystone Consolidated Industries, Inc. 32,900 333
Keystone Financial, Inc. 18,650 580
Kinetic Concepts, Inc. 36,000 131
* Kirby Corp. 32,200 700
* Knowledgeware, Inc. 23,900 266
* Komag, Inc. 17,000 274
* The Krystal Co. 14,200 170
Kuhlman Corp. 13,900 202
Kysor Industrial Corp. 19,500 334
* LDDS Communications, Inc. 19,000 948
La Quinta Inns Inc. 17,400 757
La-Z-Boy Chair Co. 14,600 442
Laclede Gas Co. 9,000 447
* Laclede Steel Co. 7,000 114
* Ladd Furniture, Inc. 58,900 493
* LAM Research Corp. 26,700 914
* Lamson & Sessions Co. 35,500 178
Landauer, Inc. 24,600 406
* Landmark Graphics Corp. 29,200 577
* Lands' End, Inc. 4,200 172
* Landstar System 28,700 434
* Lattice Semiconductor Corp. 19,900 430
Lawson Products, Inc. 13,100 342
* Lechters Corp. 24,300 279
Legg Mason Inc. 23,000 540
Lesco, Inc. 22,900 321
* Leslie Fay Co. 16,000 54
Liberty Bankcorp Inc. 13,900 469
Liberty Corp. 19,500 585
* Lifetime Hoan Corp. 4,500 60
Life Re Corp. 15,300 386
Life Technologies, Inc. 23,100 459
* Lincare Holdings Inc. 15,000 585
Lincoln Telecommunications Co. 13,900 502
* Lindsay Manufacturing Co. 12,625 412
* Liposome Co., Inc. 25,200 162
Liqui-Box Corp. 13,900 518
* Longhorn Steaks Inc. 33,300 283
Lufkin Industries 14,414 259
* M/A-Com, Inc. 64,800 575
MTS Systems Corp. 14,500 442
* MacFrugal's Bargains Close-Outs, Inc. 35,400 531
MacDermid, Inc. 3,700 103
The MacNeal-Schwendler Corp. 31,700 448
Madison Gas & Electric Co. 12,350 445
Magna Group 29,500 555
* Magnatek 21,800 289
Manitowoc Co., Inc. 11,600 367
* Marcam Corp. 3,000 36
* Marine Drilling Co., Inc. 40,500 314
Mark Twain Bancshares, Inc. 20,550 619
* Marshall Industries 10,300 509
* Maxim Integrated Products, Inc. 15,800 668
* Maxtor Corp. 65,000 341
Maybelline, Inc. 20,300 462
McDonald and Co. Investments, Inc. 29,160 456
* McGaw Inc. 28,900 267
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Measurex Corp. 13,200 $ 238
* Medco Research, Inc. 18,400 207
Medex, Inc. 26,200 301
Media General, Inc. Class A 15,700 416
* Medic Computer Systems, Inc. 13,800 178
* Medical Care America 44,248 791
* Medimmune Inc. 21,300 461
Mediq, Inc. 62,300 288
* MEDSTAT Group, Inc. 17,110 233
Medusa Corp. 21,700 760
* Mental Health Management 6,537 28
Mentor Corp. 24,800 341
Mentor Graphics Corp. 55,300 608
Meredith Corp. 12,900 469
* Merisel, Inc. 29,100 413
Merrill Corp. 25,000 669
* Mesa, Inc. 33,800 245
Metricom 36,400 541
Metropolitan Financial Corp. 39,098 674
* Michaels Stores, Inc. 14,900 525
* Micronics Computers, Inc. 41,600 247
Mid Am Inc. 20,390 451
Mid-America Bancorp 5,300 103
Mid-American Waste Systems, Inc. 22,000 195
* Mid Atlantic Medical Services 14,400 391
* Mid-State Federal Savings Bank 9,995 397
Middlesex Water Co. 6,200 126
Midland Co. 4,900 218
* Midland Financial Group, Inc. 17,000 361
Midwest Grain Products 13,800 337
* Millicom, Inc. 38,600 965
Mine Safety Appliances Co. 12,100 514
* Mohawk Industries, Inc. 22,200 674
* Molecular Biosystems, Inc. 23,500 605
* Molten Metal Technology 22,800 519
The Money Store 12,800 307
Monk Austin, Inc. 100 1
* Morgan Products Ltd. 21,500 134
Mosinee Paper Corp. 9,000 207
* Mueller Indusries Inc. 10,800 344
* Musicland Stores Corp. 30,500 545
* Mutual Assurance Inc. 310 7
NBB Bancorp, Inc. 18,300 700
NBSC Corp. 1,100 22
N.S. Bancorp Inc. 18,200 601
N L Industries, Inc. 68,700 343
NYMAGIC, Inc. 6,600 196
* Nabors Industries, Inc. 67,600 634
NACCO Industries, Inc. Class A 9,200 425
* Namic U.S.A. Corp. 32,900 259
Nash-Finch Co. 16,100 314
Nashua Corp. 14,200 412
* Natec Resources, Inc. 28,800 29
National Bankcorp of Alaska Inc. 9,700 518
National Community Bancorp 16,600 579
National Computer Systems, Inc. 24,500 361
National Data Corp. 30,400 528
* National Education Corp. 71,000 462
* National Media Corp 60,400 310
* National Patent Development Corp. 101,800 344
National Penn Bancshares Inc. 2,354 89
* National Pizza Corp. Class A 20,100 126
* National Presto Industries, Inc. 4,600 243
* National Western Life Insurance Co. Class A 7,500 357
Nature's Sunshine Inc. 28,080 330
* Nautica Enterprises 17,937 496
* Nellcor Inc. 19,800 450
* Netframe Systems Inc. 19,900 321
* Network Equipment Technologies 38,900 306
* Network General Corp. 28,000 366
* Network Systems Corp. 33,200 278
Neutrogena Corp. 2,200 37
New England Business Service, Inc. 21,800 349
* News Image Industries Inc. 18,700 256
New Jersey Resources Corp. 20,100 585
* New Line Cinema Corp. 30,600 692
New York Bancorp Inc. 12,000 257
* Nichols Research Corp. 16,800 218
* Noble Drilling Corp. 22,700 210
* Nord Resources Corp. 43,100 205
* Nortek, Inc. 15,500 89
North American Mortgage 18,600 600
North Carolina Natural Gas Corp. 16,534 463
Northwest Natural Gas Co. 15,600 578
Northwestern Public Service Co. 17,800 572
* Novellus Systems, Inc. 16,600 593
* OEA, Inc. 17,800 510
* OHM Corp. 35,100 412
OMI Corp. 64,100 425
* Oak Industries, Inc. 19,600 343
Oakwood Homes Corp. 26,400 686
* Oceaneering International, Inc. 27,100 461
* Octel Communications Corp. 20,000 468
Oil-Dri Corp. of America 13,275 292
* Old America Stores 22,300 348
Old National Bancorp 19,856 730
Olsten Corp. 30,607 842
* Omega Environmental, Inc. 59,900 475
One Valley Bancorp of West Virginia Inc. 12,400 381
Oneida Ltd. 19,790 242
* Optical Radiation Corp. 16,000 256
* Orbital Sciences Corp. 37,200 698
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS
(continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Oregon Metallurgical Corp. 6,600 $ 33
* Organogenesis, Inc. 38,400 269
Oregon Steel Mills, Inc. 18,200 412
Orion Capital Corp. 14,000 616
O'Sullivan Corp. 15,600 174
Otter Tail Power Co. 12,800 430
Outboard Marine Corp. 22,300 413
* Outlook Graphic 27,800 341
Owens and Minor, Inc. 23,325 536
* Oxford Health Plan 7,100 579
* PS Group, Inc. 10,900 116
* Pacific Physician Services, Inc. 26,100 542
Pacific Scientific Co. 15,800 282
* Pacific Western BancShares 50,200 439
* Parker Drilling Co. 64,300 482
* Payless Cashways, Inc. 43,300 509
* Pec Israel Economic Corp. 21,500 677
* The Penn Traffic Co. 9,200 359
Penn Virginia Corp. 12,000 441
Pennsylvania Real Estate Investment Trust 21,100 533
Pentair, Inc. 21,150 738
Penwest Ltd. 17,050 350
* Peoples Telephone Co., Inc. 34,950 441
Peoples Westchester Savings Bank 17,600 711
Petroleum Heat & Power Co. Class B 28,800 569
* Petroleum Helicopters, Inc. 4,300 71
Petrolite Corp. 12,100 473
Phillips Jacobs 11,133 125
* Phycor, Inc. 20,100 492
* Physician Corp. of America 38,400 734
Piccadilly Cafeterias, Inc. 21,000 226
* Picturetel Inc. 16,700 290
Piedmont Natural Gas, Inc. 29,801 756
Pier 1 Imports Inc. 41,400 424
Pitt Des Moines, Inc. 7,100 202
Pittway Corp. Class A 12,200 308
Plains Petroleum Co. 19,300 533
* Platinum Technology, Inc. 32,300 311
* Plexus Corp. 28,700 423
Ply-Gem Industries, Inc. 24,200 327
* Pogo Producing Co. 33,500 632
Pope & Talbot, Inc. 12,800 277
* Powell Industries, Inc. 26,700 170
Precision Castparts Corp. 30,800 785
Premier Bancshares Corp. 15,300 295
* Premier Bancorp, Inc. 32,090 560
* Primedex Health Systems Inc. 69,950 289
* Primark Corp. 29,500 339
* Progress Software Corp. 12,100 688
Protective Life Corp. 13,800 688
* Protein Design Labs 37,200 523
Public Service Co. of New Mexico 49,900 574
Pulitzer Publishing Co. 9,470 302
Puritan-Bennett Corp. 12,600 211
* Pyramid Technology Corp. 24,300 525
* QMS, Inc. 31,800 290
* Quadrex Corp. 25,100 110
Quaker Chemical Corp. 5,500 92
Quaker State Corp. 31,100 435
Quanex Corp. 11,800 229
* Quantum Chemical Corp. 36,200 778
* Quantum Corp. 51,800 592
* Quantum Health Resources, Inc. 15,200 371
Quixote Corp. 23,100 344
* RPC Energy Services 41,700 328
Radiation Systems, Inc. 21,450 346
* Rasterops 42,800 383
* Read-Right Corp. 41,500 436
* Recognition International Inc. 28,100 443
Regal-Beloit Corp. 23,500 511
Reliable Life Insurance Co. Class A 3,300 180
Reliance Group Holdings 7,300 60
* Ren Corp. 42,300 412
* Repligen Corp. 33,500 218
* Research Industries Corp. 16,200 138
Resource Mortgage Capital Corp. 19,900 614
* Respironics, Inc. 21,300 386
* Revco Drug Stores, Inc. 37,900 512
* Rexnord Corp. 20,300 363
Richardson Electronics, Ltd. 14,500 83
* Riggs National Corp. 47,500 442
* Riser Foods, Inc. Class A 44,700 352
River Forest Bancorp, Inc. 8,700 318
* Robert Half International, Inc. 26,700 741
* Rochester Community Savings Bank 36,500 616
Rollins Environmental Services, Inc. 73,637 442
Rollins Truck Leasing 29,050 596
Roper Industries Inc. 12,000 425
* Rose's Stores Inc. Class B 48,700 44
* Ross Stores, Inc. 28,700 402
* Royal Appliance Manufacturing Co. 69,400 451
* Royce Laboratories, Inc. 99,700 185
Ruddick Corp. 24,600 507
Russ Berrie, Inc. 22,400 305
* Ryan's Family Steak Houses, Inc. 64,800 555
Rykoff-Sexton, Inc. 15,800 278
Ryland Group, Inc. 17,700 341
* SCI Systems, Inc. 25,500 430
SCOR U.S. Corp. 13,000 218
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------
<S> <C> <C>
SEI Corp. 31,000 $ 612
SFFED Corp. 29,500 583
* SGI International 91,200 168
SPS Technologies, Inc. 14,900 413
SPI Pharmaceuticals 16,608 237
SPX Corp. 11,800 205
Safeguard Services, Inc. 31,500 421
* Safety First Inc. 12,200 242
* Saga Communications, Inc. 2,100 41
* Sahara Resorts, Inc. 13,500 314
St. Ives Laboratories, Inc. 10,300 101
St. Joseph Light & Power Co. 7,900 288
St. Mary Land & Exploration Co. 25,400 349
Saint Paul Bancorp, Inc. 22,700 690
* Salick Health Care, Inc. 22,400 353
* Santa Monica Bank 15,300 113
Savannah Foods & Industries, Inc. 29,900 486
Sbarro, Inc. 9,200 404
* Scherer Health 17,000 368
* Scholastic Corp. 15,300 734
* Sciclone Pharmaceuticals 23,700 441
* Scios Nova, Inc. 37,000 273
* The Score Board, Inc. 17,050 565
Scotsman Industries, Inc. 29,900 374
* Scotts Co. 24,100 440
Seafield Capital Corp. 13,500 478
Sealed Air Corp. 23,300 682
Sealright Co. 15,800 269
Selective Insurance Group 20,000 605
* Sepracor Inc. 47,000 405
Sequa Corp. Class A 17,500 582
* Sequent Computer Systems, Inc. 35,300 554
Shared Medical Systems Corp. 24,700 599
Shopko Stores, Inc. 39,700 427
* Shorewood Packaging 45,000 444
* Show Biz Pizza Time, Inc. 11,800 162
* Sierra Health Services 22,400 403
Sierra Pacific Resources 30,700 664
* Silicon Valley Group, Inc. 46,900 516
Simpson Industries, Inc. 29,800 522
Sizzler International 21,300 229
Skyline Corp. 28,900 488
* Skywest, Inc. 4,000 100
* Smith International, Inc. 44,700 486
* Smithfield Foods, Inc. 27,800 427
Snyder Oil Corp. 22,700 482
* Software Etc. Stores Inc. 19,800 416
* Software Publishing Corp. 27,450 165
* Solv-Ex Corp. 36,000 182
* Sonic Corp. 18,300 490
South Jersey Industries, Inc. 17,136 437
* Southdown, Inc. 13,300 309
* Southeastern Public Service Co. 4,000 98
Southern California Water Co. 8,100 383
Southern Indiana Gas & Electric 18,033 609
Southern National Corp. 35,700 732
Southwest Gas Corp. 37,100 645
Southwestern Energy Co. 29,800 607
* Spacelabs Medical 26,500 576
* Spartan Motors, Inc. 17,400 359
Spelling Entertainment 68,400 650
* Sports & Recreation 18,200 512
Standard Commercial Tobacco Co. 12,200 178
Standard Motor Products, Inc. 7,600 162
Standard Products Co. 19,725 661
The Standard Register Co. 2,400 44
Standex International Corp. 5,600 117
Stanhome, Inc. 23,500 667
L. S. Starrett Co. Class A 4,500 114
Steel Technologies, Inc. 23,150 483
* Stein Mart Inc. 20,250 471
Sterling Chemicals, Inc. 103,000 373
* Sterling Software, Inc. 16,196 389
Stewart Enterprises, Inc. Class A 14,100 539
Stone & Webster, Inc. 19,300 562
* Stone Container Corp. 66,325 481
Storage Equities, Inc. 42,700 619
Strawbridge & Clothier Class A 10,135 203
* Structural Dynamics Research Corp. 34,100 484
Suffolk Bancorp 7,400 161
Summit Bancorp 29,300 667
Summit Health Ltd. 62,400 398
* Summit Technology, Inc. 17,100 436
Sun Television & Appliances 19,300 511
* Sungard Data Systems 22,000 858
* Sunshine Mining Co. 174,100 392
Super Food Services, Inc. 42,300 449
* Sunrise Medical, Inc. 16,700 403
* Swift Transportation Co., Inc. 9,000 266
* Swing-n-Slide Corp. 37,200 367
* Sybron Corp. 26,400 736
* Symantec Corp. 32,400 632
* Symbol Technologies, Inc. 23,700 320
* Syncor International Corp. 18,500 294
* Synergen, Inc. 28,750 311
* Synopsys, Inc. 15,500 732
* Syratech Inc. 6,400 94
System Software Associates, Inc. 19,400 323
* Systems & Computer Technology Corp. 42,000 525
* TBC Corp. 33,300 437
TCA Cable Television, Inc. 18,200 470
TCF Financial Corp. 14,300 568
* ToHQ, Inc. 30,400 57
</TABLE>
15
<PAGE> 18
STATEMENT OF NET ASSETS
(continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------
<S> <C> <C>
TNT Freightways 21,000 $ 483
TNP Enterprises, Inc. 21,300 373
T Squared Medical 41,500 249
* Tandycrafts, Inc. 24,800 350
Tasty Baking Co. Class A 20,900 285
* Tech Data Corp. 18,600 570
* Tech-Sym Corp. 12,800 240
* Tecnol Medical Products Inc. 32,800 488
* Tejas Gas Corp. 7,100 396
* Tejas Power Corp. Class A 9,900 93
Tejon Ranch Co. 18,600 274
* Telco Systems, Inc. 32,100 321
Teleflex Inc. 16,550 542
* Telios Pharmaceutical Inc. 61,300 329
* Tellabs, Inc. 13,500 847
Telxon Corp. 45,100 457
Tennant Co. 2,900 125
* Terra Industries, Inc. 106,600 506
* Tesoro Petroleum Corp. 52,400 393
* Tetra Technologies Inc. 52,900 370
Texas Industries, Inc. 9,660 243
* Theratech, Inc. 24,400 342
* Thermedics, Inc. 29,000 707
* Thermo Cardiosystems Inc. 20,000 613
* Thermo Process Systems 23,000 207
Thiokol Corp. 22,700 508
Tiffany & Co. 15,550 459
* Timberland Co. 14,600 858
* Tokheim Corp. 11,200 134
* Toll Brothers, Inc. 32,700 474
The Topps Co., Inc. 50,425 378
The Toro Co. 5,200 132
Total System Services, Inc. 15,600 454
* Trans World Music Corp. 9,300 124
Transco Energy Co. 47,000 799
Trenwick Group Inc. 12,800 602
* Trimble Navigation Ltd. 35,900 433
Trust Co. Bancorp 37,600 564
Trustco Bank 11,918 542
Trustmark Corp. 8,300 451
* Tucson Electric Power Co. 174,500 654
* Tuesday Morning, Inc. 29,300 385
Tultex Corp. 27,800 229
Tyco Toys, Inc. 38,300 512
* UNC, Inc. 43,100 286
UNR Industries, Inc. 51,900 347
* USG Corp. 43,100 921
USLICO Corp. 16,800 294
* Unicare Financial Corp. 16,600 365
* Union Corp. 4,800 59
Union Planters Corp. 20,730 601
United Carolina Bancshare Corp. 16,800 428
United Cities Gas Co. 25,906 521
United Companies Finance Corp. 17,455 1,025
United Dominion Realty 42,700 699
United Fire & Casualty Co. 10,100 376
United Industrial Corp. 12,100 79
* United Insurance Cos., Inc. 18,600 453
United Missouri Bancshares 13,470 527
* United Retail 28,500 328
* U.S. Bioscience 52,100 501
* U.S. Long Distance Corp. 33,500 645
* U.S. Robotics, Inc. 18,300 622
U.S. Shoe Corp. 51,700 530
United States Trust Corp. 9,800 537
United Water Resources, Inc. 22,800 351
United Wisconsin 12,200 351
Univar Corp. 28,400 341
* Universal Health Services Class B 25,500 418
* VLSI Technology, Inc. 40,400 689
Valhi, Inc. 9,600 47
Valley Bancorp 23,900 863
Valmont Industries, Inc. 22,400 339
Value City Department Stores, Inc. 28,300 470
Value Line, Inc. 11,300 452
* Varco International, Inc. 63,300 451
Varlen Corp. 8,300 317
* Vencor, Inc. 17,000 387
* Ventritex Inc. 20,600 747
Venture Stores, Inc. 18,800 374
Versa Technology, Inc. 17,100 261
* Vicor Corp. 16,900 296
* Vicorp Restaurants, Inc. 21,200 384
Victoria Bank 15,500 434
* Viewlogic Systems, Inc. 16,100 400
Vigoro Corp. 20,300 513
* Viratek, Inc. 31,500 437
* Vital Signs, Inc. 20,200 346
* Vivra, Inc. 14,450 499
* Vmark Software 29,100 469
WD-40 Co. 8,150 387
* Waban, Inc. 37,600 564
Wackenhut Corp. 2,500 34
* Wainoco Oil Corp. 91,300 388
Wallace Computer Services, Inc. 26,500 712
Warner Insurance Services, Inc. 26,250 158
Washington Energy Co. 26,769 502
Washington National Corp. 18,048 429
Washington Real Estate Investment Trust 33,350 734
Watts Industries Class A 12,200 532
Waverly, Inc. 12,400 220
* Weatherford International, Inc. 58,100 726
Del E. Webb Corp. 18,300 220
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Werner Enterprises, Inc. 18,900 $ 463
West Co., Inc. 17,100 417
* Western Bank 1,500 22
Western Investment Real Estate Trust 25,700 363
* Western Publishing Group, Inc. 23,200 361
* Western Waste Industries 24,400 430
Wheatly TXT Corp. 34,000 340
Whitney Holdings 10,200 388
* Whittaker Corp. 30,300 409
Wicor, Inc. 17,900 586
* Williams Sonoma, Inc. 4,050 100
Wilshire Oil Co. of Texas 30,525 210
* Windmere Corp. 53,700 443
* Winnebago Industries, Inc. 52,200 359
* Wisconsin Central Transportation Corp. 9,800 458
Wiser Oil Co. 25,300 424
Wolohan Lumber Co. 19,390 347
Woodhead Industries, Inc. 25,800 400
* World Corp. 47,900 180
* Worldtex Inc. 67,300 421
Wyle Laboratories 22,700 392
* Wyman Gordon Corp. 48,200 223
* Xoma Corp. 18,400 106
York Financial Corp. 9,100 201
* Zebra Technologies Class A 12,700 568
* Zenith Electronics Corp. 11,800 74
* Zenith Laboratories 5,300 368
Zenith National Insurance Corp. 15,100 428
Zero Corp. 12,200 168
* Zilog Inc. 20,850 732
Zions Bancorp. 14,000 592
Zurn Industries, Inc. 15,800 508
- ------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $366,323) 424,324
- ------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (2.7%)
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
---------
<S> <C> <C>
U.S. TREASURY BILL--NOTE D
2.955%, 12/23/93 $ 200 199
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
3.39%, 10/1/93 11,569 11,569
- ------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $11,768) 11,768
- ------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.0%)
(Cost $378,091) 436,092
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
(000)+
- ------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.0%)
- ------------------------------------------------------------------------------------------
<S> <C>
Other Assets--Notes C and E $ 8,994
Liabilities--Note E (13,247)
--------
(4,253)
- ------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------
Applicable to 26,614,965 outstanding
$.001 par value shares
(authorized 40,000,000 shares) $431,839
NET ASSET VALUE PER SHARE $16.23
==========================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Securities.
(1) The combined market value of common stocks and New York Stock Exchange
Composite Index, Russell 2000 Index and Standard & Poor's Midcap 400 Index
futures contracts represents 100.0% of net assets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1993, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------
Amount Per
(000) Share
-------- --------
<S> <C> <C>
Paid in Capital--Note F $347,952 $13.07
Undistributed Net Investment Income--Note F 3,644 .14
Accumulated Net Realized Gains--Note F 22,163 .84
Unrealized Appreciation of Investments 58,080 2.18
- ------------------------------------------------------------------------------------------
NET ASSETS $431,839 $16.23
- ------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
September 30, 1993
(000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,873
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358
- -------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,231
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . . . . . . . . . . . . . . . . $ 59
Administration and Operations . . . . . . . . . . . . . . . . . . . . . . . 342
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . . . 76 477
-----
Taxes (other than income taxes)--Note A . . . . . . . . . . . . . . . . . . . 24
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . . . 6
- -------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 578
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . 4,653
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN--Note C
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,597
Options Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 977
- -------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . 22,606
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)--Notes C and D
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,230
Options Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
- -------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . 51,362
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . . . . . $78,621
===================================================================================================================
</TABLE>
18
<PAGE> 21
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
SEPTEMBER 30, 1993 September 30, 1992
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . $ 4,653 $ 2,808
Realized Net Gain--Note C . . . . . . . . . . . . . . . . . . 22,606 2,372
Change in Unrealized Appreciation (Depreciation)--Notes C and D 51,362 2,165
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . 78,621 7,345
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . (3,245) (1,817)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . (2,705) (2,927)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . (5,950) (4,744)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . . . . . 134,318 86,380
-- In Lieu of Cash Distributions . . . . . . . . . . 5,199 4,216
-- Exchange . . . . . . . . . . . . . . . . . . . . 86,107 51,757
Redeemed -- Regular . . . . . . . . . . . . . . . . . . . . . (24,260) (21,958)
-- Exchange . . . . . . . . . . . . . . . . . . . . (43,946) (32,684)
- -------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . 157,418 87,711
- -------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . 230,089 90,312
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . 201,750 111,438
- -------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . $431,839 $201,750
===================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . $ .18 $ .18
Realized Net Gain . . . . . . . . . . . . . . . . . . . . $ .15 $ .29
- -------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . 14,929 10,654
Issued in Lieu of Cash Distributions . . . . . . . . . . . 379 372
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . (4,663) (4,322)
- -------------------------------------------------------------------------------------------------------------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,645 6,704
- -------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . $ 3,644 $ 1,988
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
For a Share Outstanding Throughout Each Year(1) 1993 1992 1991 1990(2) 1989
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . $12.63 $12.03 $8.55 $11.88 $11.96
------ ------ ------- ------ ------
INVESTMENT ACTIVITIES
Net Investment Income . . . . . . . . . . . . . . . . .20 .19 .20 17 .10
Net Realized and Unrealized
Gain (Loss) on Investments . . . . . . . . . . . . 3.73 .88 3.60 (3.46) 2.13
------ ------ ------- ------ ------
TOTAL FROM INVESTMENT ACTIVITIES . . . . . . . . 3.93 1.07 3.80 (3.29) 2.23
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.18) (.18) (.18) (.04) (.14)
Distributions from Realized Capital Gains . . . . . . (.15) (.29) (.14) -- (2.17)
------ ------ ------- ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (.33) (.47) (.32) (.04) (2.31)
- -------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year . . . . . . . . . . . . . $16.23 $12.63 $12.03 $8.55 $11.88
===================================================================================================================
Total Return(3) . . . . . . . . . . . . . . . . . . . +31.60% +9.34% +45.91% -27.73% +18.83%
- -------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . $431 $202 $111 $40 $20
Ratio of Expenses to Average Net Assets . . . . . . . . .18% .18% .21% .31% 1.00%
Ratio of Net Investment Income to Average Net Assets . 1.47% 1.65% 2.11% 1.91% .65%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 26% 26% 33% 40% 160%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Adjusted to reflect a 3-for-1 stock split as of February 23, 1990.
(2) Prior to September 11, 1989, Schroder Capital Management International,
Inc. provided investment advisory services to the Fund. Effective
September 11, 1989, The Vanguard Group, Inc. provides investment advisory
services on an at-cost basis.
(3) Total return figures do not reflect the 1% transaction fee on purchases or
the annual account maintenance fee of $10.
20
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
Vanguard Small Capitalization Stock Fund is registered under the Investment
Company Act of 1940 as a diversified open-end investment company.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Common stocks listed on an exchange are valued at the
latest quoted sales prices as of 4:00 PM on the valuation date; securities
not traded on the valuation date and securities not listed are valued at
the mean of the latest quoted bid and asked prices. Temporary cash
investments are valued at amortized cost which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard
Group of Investment Companies, transfers uninvested cash balances into a
Pooled Cash Account, the daily aggregate of which is invested in
repurchase agreements secured by U.S. Government obligations. Securities
pledged as collateral for repurchase agreements are held by the Fund's
custodian bank until maturity of the repurchase agreement. Provisions of
the agreement ensure that the market value of this collateral is
sufficient in the event of default; however, in the event of default or
bankruptcy by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal proceedings.
4. FUTURES AND OPTIONS: The Fund may utilize index futures contracts and
options to a limited extent. The primary risks associated with the use of
futures contracts and options are imperfect correlation between the change
in market value of the securities held by the Fund and the prices of
futures contracts and options, and the possibility of an illiquid market.
Futures contracts and purchased options are valued based upon their quoted
daily settlement prices. The premium received for a written option is
recorded as an asset with an equal liability which is marked to market
based on the option's quoted daily settlement price. Fluctuations in the
value of such instruments are accounted for as unrealized appreciation
(depreciation) until terminated at which time realized gains and losses
are recognized. Unrealized appreciation (depreciation) related to open
futures contracts and options is required to be treated as realized gain
(loss) for Federal income tax purposes.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on sales of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
B. The Vanguard Group, Inc. furnishes at cost investment advisory, corporate
management, administrative, marketing and distribution services. The costs of
such services are allocated to the Fund under methods approved by the Board of
Directors. At September 30, 1993, the Fund had contributed capital of $68,000
to Vanguard (included in Other Assets), representing .3% of Vanguard's
capitalization. The Fund's officers and directors are also officers and
directors of Vanguard.
C. During the year ended September 30, 1993, the Fund made purchases of
$234,421,000 and sales of $79,178,000 of investment securities other than U.S.
Government securities and temporary cash investments. At September 30, 1993,
unrealized appreciation of investment securities for financial reporting and
Federal income tax purposes aggregated $58,001,000 of which $84,711,000 related
to appreciated securities and $26,710,000 related to depreciated securities.
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (continued)
D. During the year ended September 30, 1993, the Fund wrote the following
options on the Wilshire 5000 and Russell 2000 Indexes:
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
Written (000)
- ----------------------------------------------------------------------------
<S> <C> <C>
Options open at September 30, 1992 -- --
Options written 700 $ 235
Options closed (360) (131)
Options exercised (340) (104)
----- -----
Options open at September 30, 1993 -- --
- ----------------------------------------------------------------------------
</TABLE>
At September 30, 1993, the aggregate settlement value of open New York Stock
Exchange Composite Index, Russell 2000 Index and Standard & Poor's Midcap 400
Index futures contracts expiring in December 1993, the relaxed unrealized
appreciation and the market value of securities deposited as initial margin
were $7,657,000, $79,000 and $199,000, respectively.
E. The market value of securities on loan to broker/dealers at September 30,
1993, was $6,269,000 for which the Fund had received cash collateral of
$6,606,000.
F. Effective in 1993, generally accepted accounting principles require that
differences between undistributed net investment income or accumulated net
realized capital gains for financial reporting and tax purposes, if permanent,
be reclassified to or from paid in capital. In connection with the adoption of
this accounting method, the Fund has reclassified prior years' permanent
differences of $248,000 from paid in capital to undistributed net investment
income and $7,249,000 from accumulated net realized gains to paid in capital.
These reclassifications have no effect on net assets or net asset values per
share.
22
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Small Capitalization Stock Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Small Capitalization Stock Fund (the "Fund") at September 30, 1993,
the results of its operations, the changes in its net assets and the financial
highlights of the respective periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereinafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
October 25, 1993
SPECIAL 1993 TAX INFORMATION (UNAUDITED)
FOR VANGUARD SMALL CAPITALIZATION STOCK FUND, INC.
Corporate shareholders should note that for the fiscal year ended September 30,
1993, 47.5% of the investment income (i.e., dividend income plus short-term
capital gains, if any) qualifies for the intercorporate dividends received
deduction.
23
<PAGE> 26
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc. and Immune Response Corporation; Trustee of
the Universal Health Realty Income Trust.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., and The Southern New England Telephone
Company.
ALFRED M. RANKIN, JR., President and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company, and The
Standard Products Company.
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 Company
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.
J. LAWRENCE WILSON, Chairman and Director of Rohm & Haas Company; Director of
Cummins Engine Company and Vanderbilt University; Trustee of the Culver
Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD
Senior Vice President
Planning & Development
JAMES H. GATELY
Senior Vice President
Institutional
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
VINCENT S. MCCORMACK
Senior Vice President
Operations
RALPH K. PACKARD
Senior Vice President
Chief Financial Officer
24
<PAGE> 27
toward those of the 1970s. However, the current level of inflation
suggests that future real returns may prove to be satisfactory. Looking
forward, the main risks to the investor are two: (1) that yields on financial
assets will rise sharply, reducing the prices of stocks and bonds alike; and
(2) that inflation, presently at moderate levels, will accelerate.
SOME COURSES OF ACTION
What, if any, present action should be taken by investors to deal with these
two major risks? Should your allocation of assets among stock funds, bond
funds, and money market funds be adjusted? Here are some reasonable courses of
action to consider:
. For long-term investors who have built a substantial balanced portfolio
of stock, bond, and money market funds, stay the course. Even if
withdrawing from the stock market proves to be justified, the next
decision--when to return--will one day be required. "Being right twice"
is no mean challenge.
. For long-term investors gradually accumulating assets for, say,
retirement, stay your present course. Continue to invest regularly. By
doing so, you buy more shares of a mutual fund when its price falls, and
fewer shares when its price rises, virtually assuring a reasonable
average cost.
. For risk-averse investors who are highly confident that stock prices are
"too high," make only marginal--not "all or nothing"--changes in your
portfolio balance. Given the perils of predicting the future, any
changes should be limited to, say, 15 percentage points. That is, if
your normal portfolio allocation is 60% in stock funds, it might be
reduced to 45%; if 85%, to 70%.
. For investors who simply must have more income, never lose sight of the
added principal risk involved in shifting from money market funds to
bond funds. Long-term bond funds provide a generous and durable income
stream, but their prices are highly volatile. Short-term and
intermediate-term bond funds offer a "middle way" of increasing income
with more modest risk to principal.
. For investors who are tempted to find an "easy way" to higher returns,
never forget that risk and reward go hand in hand. Precipitously
replacing certificates of deposit with broad-based common stock funds
verges on the irrational. Funds investing in other securities
markets--emerging nations, international stocks and bonds, and small
U.S. companies--carry their own special risks. Generally, limit such
alternative investments to, say, 20% of your total portfolio.
For all investors, be prepared for sharp interim swings in stock and bond
prices. The central tenet of investing is "prices fluctuate," and sensible
long-term investors simply must take such fluctuations in their stride.
Successful investing is as much a function of your own discipline and
equanimity as it is of the returns available in the securities markets.
THREE ESSENTIAL PRINCIPLES
As we confront the brave new world of investing that may well lie ahead in the
coming decade--and it is important to think in decade-length terms--we would
underscore three caveats:
1. Have "rational expectations" for future returns. At prices prevailing
today, it seems highly unlikely that the returns enjoyed by investors in
the past decade will be repeated in the coming decade.
2. Maintain a balanced portfolio consisting of stock, bond, and money
market funds. Each asset class has its own risk and reward
characteristics. By allocating your resources among the three asset
classes according to your own requirements, you can build a portfolio
providing appropriate elements of capital appreciation, capital
conservation, and current income.
3. In balancing risk against reward, be sure to consider cost. Many mutual
funds carry hefty sales charges or high expense ratios, or both. Other
factors held equal, expenses reduce returns, dollar for dollar. Put
another way, high-cost funds must select investments with higher
prospective gross returns--which entail higher risks--to match the net
returns earned by low-cost funds.
This brief Annual Report essay can provide only an elementary look at the
challenges investors face today. History can give us perspective, but it cannot
give us performance. Famed British economist Lord Keynes had it right when he
said, "the inevitable never happens. It is the unexpected always."
<PAGE> 28
THE VANGUARD FAMILY OF FUNDS
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Small Capitalization Stock Fund
Vanguard Specialized Portfolios
GROWTH FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellington Fund
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
Vanguard/Wellesley Income Fund
TAX-FREE INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
MONEY MARKET FUND
Vanguard Money Market Reserves
[VANGUARD LOGO]
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information 1-(800) 662-7447
Shareholder Account Services: 1-(800) 662-2739
This Report has been prepared for shareholders and
may be distributed to others only if preceded or
accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q480-9/93
<PAGE> 29
EDGAR Appendix
This appendix describes components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the flags of
The United States of America and Vanguard flying from a halyard.
A bar chart called "A Tale of Two Decades" appears on the inside front
cover. This chart illustrates Average Annual Total Return, in nominal and real
terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades
since 1973.
A running head featuring the Vanguard flag logo appears at the top of
pages one through 24.
A photograph of John C. Bogle appears at the upper-right of page one.
A line chart of the Indexed Value (Standard & Poor's Growth Index and
Standard & Poor's Value Index) of the U.S. Growth Portfolio for the Fiscal
Years 1988 through 1993 appears at the upper-right of page two.
Line charts illustrating cumulative performance of the Vanguard U.S.
Growth Portfolio and the Vanguard International Portfolio compared to (i) the
S&P 500 Index and (ii) Average Growth and International Funds for the Fiscal
Years 1984 through 1993 appear on page four.
