<PAGE> 1
VANGUARD
VARIABLE
INSURANCE 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.
[A TALE OF TWO DECADES CHART -- SEE EDGAR APPENDIX]
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.
<TABLE>
<CAPTION>
Income Yields (January 1)
---------------------------------------------------------------
1973 1983 1993 (9/30)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 5.6
RESERVES 3.8 10.5 3.1
- ----------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
---------------------------------------------------------------
1973 1981 1993 (9/30)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
INFLATION 3.4% 12.4% 2.7%
- ----------------------------------------------------------------------------------------
</TABLE>
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 VARIABLE INSURANCE FUND IS INTENDED AS AN INVESTMENT VEHICLE FOR
VARIABLE ANNUITY CONTRACTS CURRENTLY OFFERED BY THE SEPARATE ACCOUNT OF
NATIONAL HOME LIFE ASSURANCE COMPANY. THE FUND CONSISTS OF SIX PORTFOLIOS:
MONEY MARKET, HIGH-GRADE BOND, BALANCED, EQUITY INDEX, EQUITY INCOME, AND
GROWTH.
<PAGE> 3
CHAIRMAN'S LETTER
Dear Planholder:
A continued decline in long-term interest rates created a favorable backdrop
for stocks and bonds during Vanguard Variable Insurance Fund's 1993 fiscal
year, which ended September 30. As a result, investment returns were fully
satisfactory for holders of our bond and equity Portfolios. Meanwhile, money
market rates stabilized at historically low levels. Our Money Market Portfolio
served its role as a safe haven, but offered only a modest return.
INVESTMENT PERFORMANCE
The table below provides our customary presentation of the total return
(capital change plus income) of each Portfolio, along with the results of the
comparative standards we think are most appropriate. For our four original
Portfolios, the results shown are for the full fiscal year; for our two new
Portfolios--the Equity Income and the Growth Portfolios--the period covered is
the four months since inception in June 1993.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Total Returns
------------------------------------
Fiscal Year Ended September 30, 1993
- -------------------------------------------------------------------------------------------------------
<S> <C>
MONEY MARKET PORTFOLIO + 3.1%
AVERAGE MONEY MARKET FUND + 2.6
- ------------------------------------------------------------------------------------------------------
HIGH-GRADE BOND PORTFOLIO + 9.6%
LEHMAN AGGREGATE BOND INDEX +10.0
- ------------------------------------------------------------------------------------------------------
BALANCED PORTFOLIO +14.1%
COMPOSITE INDEX* +13.9
- ------------------------------------------------------------------------------------------------------
EQUITY INDEX PORTFOLIO +12.7%
STANDARD & POOR'S 500 STOCK INDEX +13.0
- ------------------------------------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO + 6.8%**
GROWTH PORTFOLIO + 2.6**
STANDARD & POOR'S 500 STOCK INDEX + 3.4**
- ------------------------------------------------------------------------------------------------------
</TABLE>
* 65% Standard & Poor's 500 Index, 35% Salomon High-Grade Bond Index.
** Since inception on June 7, 1993.
Each total return calculation cited above reflects any change in net asset
value plus the reinvestment of income dividends. They are the best measures of
the returns earned by our investment efforts. However, even more important to
you in monitoring the growth of your investment in the Vanguard Variable
Annuity Plan are the changes in the Accumulated Unit Values for each Portfolio,
and they are reflected in the table below. These returns are somewhat lower
than the Fund returns because of Plan costs totaling approximately 0.55% per
annum (consisting of insurance company mortality and expense charges as well as
Plan administration costs).
[PHOTO -- SEE EDGAR APPENDIX]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Plan Total Returns
- ------------------------------------------------------------------------------------------
Portfolio Fiscal Year Ended September 30, 1993
- -------------------------------------------------------------------------------------------
<S> <C>
MONEY MARKET + 2.5%
HIGH-GRADE BOND + 9.0
BALANCED +13.5
EQUITY INDEX +12.1
EQUITY INCOME + 6.6*
GROWTH + 2.4*
- -------------------------------------------------------------------------------------------
</TABLE>
*Since inception on June 7, 1993.
THE FISCAL YEAR IN REVIEW
If it could ever be said that investment markets were "well behaved," the past
year surely deserves that
1
<PAGE> 4
distinction. Long-term interest rates started the period at 7.3%, fell to about
6.7% by June 30, 1993, and then declined quickly during the final three months
of our fiscal year, closing at 6.0% on September 30, 1993. This decrease in
bond yields, of course, engendered a substantial increase in bond prices; the
long-term U.S. Treasury bond gained some +17% over the year.
Our High-Grade Bond Portfolio participated in the bond rally and provided a
return close to that of its target index, the unmanaged Lehman Aggregate Bond
Index. However, due to the Portfolio's intermediate average maturity and its
31% commitment to mortgages (which underperformed bonds due to homeowner
prepayments), the Portfolio's return, although generous at nearly +10%, fell
short of the truly outstanding returns of longer-term bonds. Our Portfolio
assumes significantly less interest-rate risk than long- term bonds, which
should be to our advantage if rates reverse their downward trend.
Common stock prices in the United States ascended gradually during the fiscal
period with few interruptions. Stocks (as measured by the unmanaged Standard &
Poor's 500 Composite Stock Price Index), with a dividend yield of just under
3%, offered a rewarding, if not unexpected, double-digit return of +13% over
the year. Our Equity Index Portfolio performed as expected, tracking the
Standard & Poor's 500 Index very closely.
Underlying the placidity of the overall stock market were some noteworthy
crosscurrents. Specifically, there was a sharp contrast in the returns of
growth and value stocks. Value stocks, characterized by lower price-to-book
ratios and higher dividend yields, led the way, with the Standard & Poor's
Value Index advancing +22.5% for the year. By contrast, growth stocks,
characterized by higher price-to-book ratios, lower dividend yields, and
generally better prospects for sales and earnings growth, proved disappointing,
as the Standard & Poor's Growth Index returned a mere +3.6%.
Our Balanced Portfolio benefited from the market's value bias, as its equity
holdings (60% of total net assets) are dominated by value stocks. Aided, too,
by the very good results of its bond component (37% of net assets), the
Portfolio had an excellent year in both an absolute sense and relative to its
benchmark.
Our new Equity Income and Growth Portfolios were introduced after much of the
divergence in value and growth stock returns had already occurred.
Nevertheless, our Equity Income Portfolio benefited from the continuing
preference for value stocks, and turned in a strong performance (+6.8%) in its
first few months since inception. By contrast, our Growth Portfolio's return
over the same period was a much more modest +2.6%.
A VARIABLE ANNUITY UPDATE
We noted earlier that the costs associated with the Variable Annuity Plan are
additional to the costs of operating the underlying mutual fund Portfolios. The
total costs of the Vanguard Variable Annuity Plan amount to approximately 1.0%
of average net assets; the costs for comparable Vanguard funds range from 0.2%
to 0.4%. As you know, the Vanguard Plan is by far the most cost-effective
variable annuity on the market. Our Plan's costs are less than one-half the
costs of the average variable annuity. I am also pleased to note that our costs
are expected to decline as our assets grow (reflecting scaled insurance company
fees).
The additional costs of variable annuities, compared to their mutual fund
counterparts, are certainly a drawback. Nevertheless, the annuity does offer
some significant advantages, including a minimum death benefit guarantee and
the availability of guaranteed payout options. Of course, for many, the most
important feature of the annuity is the tax-deferral aspect. Given the new,
higher marginal tax rates applicable to many high income investors under
President Clinton's budget package, the tax deferral of variable annuities will
likely draw even more attention. The new marginal rates (36% for couples with
combined incomes in excess of $140,000 and 39.6% for those with incomes over
$250,000) surely make the deferral of taxes on investment income all the more
attractive.
2
<PAGE> 5
That said, investors should also be aware that the top tax rate for long-term
capital gains remains at 28%. Since variable annuities convert long-term
capital gains into income that will eventually be taxed as ordinary income, for
some investors the variable annuity may be relatively less attractive than it
was before the new tax laws. Investors who buy and hold mutual fund investments
for long time periods, with the anticipation of earning the majority of their
return through long-term capital appreciation rather than current income, may
find direct mutual fund ownership more attractive. As always, the benefits of
the variable annuity are best realized over long investment periods.
LOOKING AHEAD
The strength of longer-term financial assets during our 1993 fiscal year was a
pleasant surprise, following as it did our prior fiscal year that was also very
favorable for stocks and bonds. At the end of last year, I cautioned investors
to have realistic expectations about future returns on financial assets, that
stocks were not "cheap" on an historical basis, and that the possibility of
further substantial price increases for bonds was more remote following last
year's steep decline in yields. While this year has proved to be a good one, I
would nevertheless repeat my words of caution. With interest rates at lows not
seen since 1973, and stocks again at valuation levels that are high by most
historical standards, one cannot help but conclude that long-term financial
assets may be vulnerable to a correction. On the positive side, inflation seems
under control and the prospects for corporate profits seem quite favorable.
Whatever the future holds, the Vanguard Variable Annuity Plan enables you to
create a portfolio of stock, bond, and money market funds balanced to meet your
own unique investment needs. Setting a sensible balance and then "staying the
course" through market cycles remains a powerfully simple prescription for the
long-term investor.
Sincerely,
/S/ JOHN C. BOGLE
- -------------------------------
John C. Bogle
Chairman of the Board
September 13, 1993
Note: Mutual fund data from Lipper Analytical Services, Inc.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
VANGUARD VARIABLE INSURANCE FUND VANGUARD VARIABLE ANNUITY PLAN
- ----------------------------------------------------------------------------------------
SEC SEC
30-Day 30-Day
Fiscal Year Annualized Accumulated Fiscal Year Annualized
Portfolio (Inception) Total Return Yield* Unit Value Total Return Yield*
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Money Market (5/2/91) + 3.1% 2.99% $ 1.08 + 2.5% 2.45%
High-Grade Bond (4/29/91) + 9.6 5.22 12.72 + 9.0 4.68
Balanced (5/23/91) +14.1 3.70 12.73 + 13.5 3.11
Equity Index (4/29/91) +12.7 2.51 12.87 + 12.1 1.90
Equity Income (6/7/93) + 6.8** 4.13 10.66 + 6.6** 3.43
Growth (6/7/93) + 2.6** 1.54 10.24 + 2.4** 0.85
- ----------------------------------------------------------------------------------------
</TABLE>
*Yield for Money Market is a 7-day yield.
**Since inception, June 7, 1993.
3
<PAGE> 6
REPORT FROM VANGUARD FIXED INCOME GROUP
During the fiscal year ended September 30, 1993, short-term interest rates were
relatively stable as the Federal Reserve made no changes to monetary policy.
Having significantly lowered money market rates last year in an effort to
stimulate the economy, the "Fed" this year stood back to watch the results. On
the positive side, the housing sector has been the beneficiary of low mortgage
rates and more affordable prices, and overall job growth has improved, although
though not nearly to the degree experienced in previous economic recoveries. On
the negative side, high-paying manufacturing jobs have continued to decline,
and corporate restructurings have eliminated many middle management positions.
MONEY MARKET PORTFOLIO
Given the stability in short-term rates directly controlled by the Fed (i.e.,
the Federal Funds Rate and the Discount Rate), other related interest rates on
money market securities changed only modestly. Yields on three-month domestic
certificates of deposit were 3.1% at both the beginning and the end of the
fiscal year, and 90-day U.S. Treasury bill yields edged up from 2.7% to 3.0%
during the year.
In an environment in which additional credit risk offers little or no
additional yield, we are keeping the creditworthiness of the Money Market
Portfolio high. Throughout the year, the average credit quality of the
Portfolio, based on long-term credit ratings, has been "AA", and all holdings
have the highest short-term credit ratings as judged by the nationally
recognized credit rating agencies. Currently, we are managing the Portfolio's
average weighted maturity in a range of 45 to 60 days.
HIGH-GRADE BOND PORTFOLIO
The bond market rally stalled briefly during the fourth quarter of 1992, but
resumed in earnest through September 1993. For the full twelve months
(9/30/92-9/30/93), short-term rates rose about 0.25%, while five-year,
ten-year, and thirty-year rates declined by 0.55%, 1.00%, and 1.35%,
respectively. The modest pace of economic growth caused many investors to lower
their expectation of future inflation, which made expected real (i.e., after
inflation) rates of return attractive.
The performance of various sectors of the Lehman Aggregate Bond Index
for the year ended September 30, 1993, are shown below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
12-Month Total Return
- ------------------------------------------------------------------------------------------------
<S> <C>
LEHMAN AGGREGATE BOND INDEX +10.0%
- ------------------------------------------------------------------------------------------------
GOVERNMENT SECTOR +11.1%
CORPORATE SECTOR +12.5
MORTGAGE-BACKED SECURITIES SECTOR + 6.6
- ------------------------------------------------------------------------------------------------
</TABLE>
The best performing category was the corporate sector, with a return of +12.5%,
which reflected investor confidence that the economy was on the rebound. The
worst performing category was the mortgage sector, with a return of +6.6%. This
low relative return was caused by the major decline in long-term interest rates
which generated two major refinancing waves. As mortgage loans were refinanced,
the investors in the original higher interest rate loans were repaid and forced
to invest in lower-yielding investments. This had the effect of limiting both
the value (total return) and the yield (income) of the mortgage portfolio.
The High-Grade Bond Portfolio is designed to closely replicate the
performance of the Lehman Aggregate Bond Index. For the year the Portfolio
return was +9.6%, -0.4% below the return of the Index. Adjusted for expenses
and transaction costs (neither of which affect the theoretical Index), the
difference was a favorable +0.1%.
As of September 30, 1993, the Portfolio was composed of 41% government bonds,
26% corporate bonds, 2% foreign bonds, and 31% mortgage-backed securities.
Respectfully,
John W. Hollyer Kenneth E. Volpert
Assistant Vice President Assistant Vice President
Money Market Portfolio High-Grade Bond Portfolio
Vanguard Fixed Income Group October 12, 1993
4
<PAGE> 7
REPORT FROM WELLINGTON MANAGEMENT COMPANY
Since our last annual report to shareholders of Vanguard Variable Insurance
Fund, net assets of the Balanced Portfolio have grown to $191 million, with
approximately 60% in common stocks and 40% in investment-grade fixed-income
securities, including a nominal amount in cash. During the twelve-month period,
the Portfolio achieved a total return of +14.1% and at year-end provided a
current yield of 3.7% (See Chairman's letter for details).
The common stock portion of the Portfolio is focused on four sectors that we
believe offer the best value and appreciation prospects. Industrial and
consumer cyclicals represent 42% of equities. As the domestic economy continues
its steady forward pace and the downturn in Europe and Japan turns to expansion
(as it inevitably will) earnings of basic industrial companies should advance
sharply. Over the past several years, costs have been greatly reduced and
operating rates are high for many basic industries, so even modest world-wide
economic growth should allow some improvement in pricing and significant
improvement in profitability.
The energy and finance sectors, representing 18% and 16% of equities, are
less sensitive to the economy but also have earnings prospects that are not
adequately reflected in the prices of the companies' stocks. Energy and
petrochemical earnings will increase from very depressed levels, as current low
oil prices, in our opinion, are not sustainable for very long. Financial
companies, particularly the banks, continue to provide earnings and dividend
growth of 10%-12%, while selling at inexpensive price-to-earnings ratios of 9
to 10 times.
Finally, we have expanded our holdings of health-care stocks, now 12% of
equities, to reflect attractive valuations, including dividend yields that
rival those of utilities in a number of cases. Clearly, under some version of
health-care reform that is likely over the next few years, the industry will
have to compete in a more difficult and competitive environment. Nonetheless,
the positive attributes of the industry--growth of medical care, technological
innovation, and a worldwide presence will permit well- positioned companies to
continue to grow at above-average rates.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Portfolio Allocation
- ---------------------------------------------------------
Percent of Total
Investment Type Net Assets
- ---------------------------------------------------------
<S> <C>
Basic Industry 18%
Finance 10
Consumer 8
Utilities 3
Energy 11
Applied Science 10
- ---------------------------------------------------------
Total Equities 60%
- ---------------------------------------------------------
Fixed-Income Securities 37%
Cash 3%
- ---------------------------------------------------------
Total Net Assets 100%
- ---------------------------------------------------------
</TABLE>
The fixed-income portion of your Portfolio continues to be invested in high
quality, relatively long maturity securities of the U.S. Treasury and
corporate America. Because of the big increase in bond prices, we have
shortened maturities, but only a little in light of our continued emphasis on
current income.
Respectfully,
Vincent Bajakian, Senior Vice President
Portfolio Manager
Wellington Management Company
October 14, 1993
5
<PAGE> 8
REPORT FROM VANGUARD CORE MANAGEMENT GROUP
The 1993 fiscal year began amid uncertainty about the U.S. economy and the
Presidential election. During the first fiscal quarter (i.e., fourth calendar
quarter of 1992), most economic indicators strengthened moderately, increasing
hopes for the long-awaited recovery and the prospect of a corporate earnings
rebound. As the uncertainty surrounding the election and President Clinton's
health-care reform passed, the stock market pushed higher, advancing +5.0%
during the quarter, as measured by the unmanaged Standard & Poor's 500 Index.
The rally continued into the second fiscal quarter as the Federal Reserve
moved to push short-term rates lower, fearing the slight uptick in economic
activity would not be sustainable. The bond market cooperated and long-term
interest rates plunged from 7.5% in early January to 6.7% at the beginning of
March. Given this favorable environment, the stock market advanced an
additional +4.4% by the end of the quarter.
There were, however, major crosscurrents within the stock market. The deep
cyclical stocks, which usually perform well during the initial stages of an
economic recovery, responded to the Fed's commitment to jump-start the economy
by advancing +9.2%, as measured by the Standard & Poor's/BARRA Value Index. At
the same time, growth stocks, the propellants of the 1980's bull market, were
lackluster performers, declining -0.5%. This +9.7% disparity in returns between
"value" and "growth" stocks was the largest quarterly differential ever
measured by Standard & Poor's. The disparity continued into April as Philip
Morris announced that it would lower prices on its leading cigarettes to halt
erosion of its market share to the generic brands. Numerous consumer non-
durable stocks, such as RJR Nabisco, Coca-Cola, and Procter & Gamble followed
suit, with their common shares plummeting precipitously. "Value" stocks
outperformed "growth" stocks by another +4.2% during the month.
During the third quarter, many economic indicators weakened and a rebound was
uncertain. Despite the realization that a strong earnings recovery was still
not in the immediate future, the stock market struggled slightly higher in the
second half of the fiscal year, based on a further decline in both short- and
long-term interest rates. By fiscal year-end (September 30, 1993), the Standard
& Poor's 500 Index posted a total return of +13.0%. When considered in the
context of an historical (since 1926) equity return averaging +10.3% per year,
the stock market had yet another fine year.
Having reached a critical mass, the return of the Equity Index Portfolio of
the Vanguard Variable Insurance Fund lagged the total return of the Standard &
Poor's 500 by only -0.01% before expenses. We believe that we should be able to
achieve this level of precision on an on-going basis.
Respectfully,
George U. Sauter, Vice President
Vanguard Core Management Group
October 14, 1993
6
<PAGE> 9
REPORT FROM NEWELL ASSOCIATES
The Equity Income Portfolio of Vanguard Variable Insurance Fund is managed
using our Relative Yield Strategy. This strategy is based on the concept that
developments affecting specific companies or the economy often drive the prices
of stocks to extremes of valuation--either optimistic or pessimistic. The
strategy provides a disciplined framework within which decisions are made to
buy stocks that appear undervalued from the standpoint of historical dividend
yield, and to sell stocks as they become overvalued on that basis. Relative
yield is used to build the Portfolio stock by stock from the bottom up, using
the stocks of large dividend- paying corporations traded in U.S. markets.
Application of our strategy does not depend upon predicting the future course
of the market or the economy. Because of the contrarian aspects of the Relative
Yield Strategy, Portfolio composition often reflects the antithesis of the
consensus views and expectations of the investment community.
Electric utilities compose the largest group in the Portfolio (15% of net
assets). Many stocks in this group have high dividend yields relative to the
rest of the market, warranting a substantial position. Petroleum stocks (15%)
also have above-average yields because of weak demand and worries about OPEC
over-production. We think prospects will look brighter as the world's economies
improve. Telephone stocks (11%) offer higher-than-average yields because
investors still perceive this group to be regulated, but technological and
regulatory changes bode well for the future.
Drug stocks (8%) and tobacco stocks (4%) have been weak this year because of
worries about pending health-care legislation. We think the concerns have been
overdone and high yields make the stocks attractive. Other groups having
improved prospects as the effects of the recent recession diminish are
insurance (7%), chemicals (6%), retail (5%), and natural gas (4%).
The Fund ordinarily is fully invested so that it stays positioned to
participate in rising markets. However, it is well represented in areas that
are traditionally less volatile than average and this strategy offers
protection during market weakness.
Respectfully,
Roger D. Newell, Chairman
Newell Associates
October 13, 1993
7
<PAGE> 10
REPORT FROM LINCOLN CAPITAL MANAGEMENT COMPANY
The Growth Portfolio was available for investment for the last four months of
the fiscal year ended September 30, 1993. Returns were positive and about in
line with appropriate benchmarks. Portfolios with a value orientation or a
significant participation in mid- sized and small company stocks did better
during this very short period.
Lincoln Capital Management emphasizes seasoned growth companies with moderate
valuations and prefers long holding periods. The largest ten issues, shown in
the list that follows, possess the appealing characteristics of companies we
prefer.
- --------------------------------------------------------------
1. FANNIE MAE, THE LARGEST MORTGAGE FINANCING COMPANY
2. GENERAL ELECTRIC, A DIVERSIFIED MANUFACTURER
(#1 IN MOST SEGMENTS)
3. WAL-MART STORES, THE LARGEST RETAILER IN THE COUNTRY
4. MCDONALD'S, THE LARGEST FAST FOOD CHAIN
5. FREDDIE MAC, A LARGE MORTGAGE FINANCING COMPANY
6. PEPSICO, THE LARGEST SNACK FOOD COMPANY, #2 IN SOFT DRINKS
7. AUTOMATIC DATA PROCESSING, #1 PAYROLL SERVICES COMPANY
8. PFIZER, A MAJOR PHARMACEUTICAL COMPANY
9. AMERICAN INTERNATIONAL GROUP, A MAJOR INTERNATIONAL
INSURANCE COMPANY
10. CHEMICAL BANKING, A MAJOR MONEY CENTER BANK
- --------------------------------------------------------------
Interestingly, these stocks, and the overall Portfolio, have price-to-earnings
ratios below that of the market, a nearly unique occurrence in Lincoln's 25
years of experience investing in growth stocks. Today one can acquire shares in
fine, growing companies at very reasonable prices. Nice!
Sincerely,
J. Parker Hall III, President
Lincoln Capital Management Company
October 8, 1993
8
<PAGE> 11
CUMULATIVE PERFORMANCE--VANGUARD VARIABLE INSURANCE FUND
[MONEY MARKET PORTFOLIO CHART - SEE EDGAR APPENDIX]
[HIGH-GRADE BOND PORTFOLIO CHART - SEE EDGAR APPENDIX]
9
<PAGE> 12
[BALANCED PORTFOLIO CHART - SEE EDGAR APPENDIX]
[EQUITY INDEX PORTFOLIO CHART - SEE EDGAR APPENDIX]
10
<PAGE> 13
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS
- -----------------------------------------------------------------
September 30, 1993
<TABLE>
<CAPTION>
Face Market
Amount Value
MONEY MARKET PORTFOLIO (000) (000)+
- -----------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(8.1%)
- -----------------------------------------------------------------
Federal Home Loan Bank
3.15%, 10/8/93 $1,000 $ 999
Federal National Mortgage Assn.
3.21%-3.43%, 10/20/93-3/15/94 6,750 6,682
U.S. Treasury Notes
5.50%-7.75%, 11/15/93-11/30/93 1,500 1,505
- -----------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS (Cost
$9,186) 9,186
- -----------------------------------------------------------------
COMMERCIAL PAPER (77.2%)
- -----------------------------------------------------------------
BANK HOLDING COMPANY (5.3%)
Bankers Trust New York Corp.
3.13%, 10/1/93 2,000 2,000
Norwest Corp.
3.13%-3.16%, 10/8/93-11/23/93 2,000 1,994
PNC Funding Corp.
3.15%, 10/5/93 2,000 1,999
----------
GROUP TOTAL 5,993
----------
- -----------------------------------------------------------------
FINANCE -- AUTO (.9%)
Ford Credit Receivables Funding
3.18%, 10/5/93 1,000 1,000
----------
- -----------------------------------------------------------------
FINANCE -- SECURITIES DEALERS (4.4%)
Credit Suisse First Boston
3.12%, 10/15/93 1,000 999
Goldman Sachs & Co.
3.11%-3.16%, 10/13/93-11/5/93 2,000 1,996
Merrill Lynch & Co.
3.13%, 10/8/93 1,000 999
Morgan Stanley Co.
3.15%, 10/18/93 1,000 999
----------
GROUP TOTAL 4,993
----------
- -----------------------------------------------------------------
FINANCE -- OTHER (18.4%)
AI Credit
3.12%, 10/7/93 2,000 1,999
Asset Securitization Cooperative Corp.
3.12%, 12/10/93 1,000 994
Associates Corp.
3.16%, 10/6/93 1,000 1,000
Banc One Diversified Services Corp.
3.16%, 10/19/93 2,000 1,997
Ciesco L.P.
3.10%-3.19%, 11/2/93-12/7/93 2,000 1,991
Commercial Credit Co.
3.11%-3.12%, 10/4/93-10/14/93 2,000 1,999
Corporate Asset Funding Corp.
3.15%, 11/17/93 1,000 996
Eiger Capital Corp.
3.13%, 11/16/93-11/29/93 3,000 2,987
General Electric Capital Corp.
3.26%-3.35%, 10/25/93-2/28/94 $3,000 $ 2,973
Matterhorn Capital Corp.
3.12%, 12/17/93 1,000 993
Panasonic Finance Corp.
3.20%, 11/3/93 1,000 997
Pitney Bowes Credit Corp.
3.09%-3.11%, 10/18/93-10/21/93 2,000 1,997
----------
GROUP TOTAL 20,923
----------
- -----------------------------------------------------------------
INDUSTRIAL (9.9%)
Chevron Oil Finance Corp.
3.11%, 12/14/93-12/30/93 3,000 2,979
H. J. Heinz Co.
3.09%, 11/10/93 1,000 997
Koch Industries
3.10%, 10/4/93 1,000 1,000
Nestle Capital Corp.
3.12%, 10/12/93-11/9/93 4,000 3,994
Norfolk & Southern Corp.
3.11%, 12/6/93 2,000 1,989
Mobil Australia Finance
3.17%, 10/21/93 282 282
----------
GROUP TOTAL 11,241
----------
- -----------------------------------------------------------------
INSURANCE (6.3%)
AIG Funding Inc.
3.14%, 10/29/93 150 150
Met Life Funding Inc.
3.10%, 12/3/93 1,000 995
Prudential Funding Corp.
3.14%, 10/12/93 1,000 999
Safeco Credit Corp.
3.10%-3.24%, 10/18/93-2/17/94 3,000 2,981
USAA Capital Corp.
3.14%-3.23%, 10/7/93-2/10/94 2,029 2,016
----------
GROUP TOTAL 7,141
----------
- -----------------------------------------------------------------
UTILITY (5.6%)
American Telephone & Telegraph Co.
3.09%-3.21%, 10/21/93-2/3/94 4,399 4,380
US West Communications Inc.
3.15%, 10/29/93 2,000 1,995
----------
GROUP TOTAL 6,375
----------
- -----------------------------------------------------------------
OTHER (.9%)
Stanford University Board of Trustees
3.14%, 11/9/93 1,000 997
----------
- -----------------------------------------------------------------
FOREIGN GOVERNMENT (22.4%)
Province of Alberta
3.29%, 12/15/93 2,000 1,986
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------
<S> <C> <C>
Province of British Columbia
3.29%-3.31%, 11/15/93-2/8/94 $2,000 $ 1,984
Caisse des Depots et Consignations
3.13%, 12/16/93 1,000 993
Canadian Wheat Board
3.18%-3.25%, 10/22/93-4/5/94 3,000 2,979
KFW International Finance
3.25%-3.35%, 2/7/94-3/28/94 3,000 2,956
New South Wales Treasury Corp.
3.16%-3.25%, 11/8/93-11/15/93 3,000 2,989
Oesterreichische Kontrollbank
3.15%, 10/22/93 1,625 1,622
Province of Ontario
3.32%, 12/22/93 1,000 993
Queensland Treasury Corp.
3.14%-3.20%, 11/18/93-11/22/93 2,000 1,991
Kingdom of Sweden
3.13%-3.29%, 10/7/93-2/18/94 4,100 4,079
Western Australia Teasury Corp.
3.25%-3.30%, 3/2/94-3/16/94 3,000 2,956
----------
GROUP TOTAL 25,528
----------
- -----------------------------------------------------------------
FOREIGN -- OTHER (3.1%)
Alcatel Capital Corp.
3.12%, 10/28/93 1,500 1,497
British Telecommunications Inc.
3.13%, 11/30/93 2,000 1,990
----------
GROUP TOTAL 3,487
----------
- -----------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost $87,678) 87,678
- -----------------------------------------------------------------
CERTIFICATES OF DEPOSIT (7.9%)
- -----------------------------------------------------------------
YANKEE CERTIFICATES OF DEPOSIT --
U.S. BRANCHES (7.0%)
Banque Nationale de Paris
3.15%, 10/14/93 1,000 1,000
Bayerische Landesbank
3.48%, 2/9/94 1,000 1,000
Credit Suisse
3.54%-3.56%, 3/11/94-3/18/94 2,000 2,000
Dresdner Bank
3.35%, 11/8/93 2,000 2,000
Westdeutsche Landesbank
3.25%, 1/20/94-2/18/94 2,000 2,000
----------
GROUP TOTAL 8,000
----------
- -----------------------------------------------------------------
YANKEE CERTIFICATE OF DEPOSIT --
CANADIAN BRANCH (.9%)
Societe Generale
3.30%, 11/1/93 1,000 997
----------
- -----------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT
(Cost $8,997) 8,997
- -----------------------------------------------------------------
EURODOLLAR CERTIFICATES OF DEPOSIT (3.5%)
- -----------------------------------------------------------------
Bayerische Landesbank
3.53%, 2/18/94 $1,000 $ 1,001
Deutsche Bank
3.34%-3.98%, 12/9/93-12/21/93 2,000 2,001
Dresdner Bank
3.11%, 11/8/93 1,000 1,000
- -----------------------------------------------------------------
TOTAL EURODOLLAR CERTIFICATES
OF DEPOSIT (Cost $4,002) 4,002
- -----------------------------------------------------------------
BANKERS ACCEPTANCE (.9%)
- -----------------------------------------------------------------
Corestates Bank
3.12%, 11/17/93
(Cost $996) 1,000 996
- -----------------------------------------------------------------
REPURCHASE AGREEMENT (1.9%)
- -----------------------------------------------------------------
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account, 3.48%, 10/1/93
(Cost $2,234) 2,234 2,234
- -----------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(Cost $113,093) 113,093
- -----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.5%)
- -----------------------------------------------------------------
Other Assets -- Note C 1,096
Liabilities (567)
----------
529
- -----------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------
Applicable to 113,621,643 outstanding
shares of beneficial interest
(unlimited authorization --
no par value) $113,622
- -----------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
=================================================================
+See Note A to Financial Statements.
- -----------------------------------------------------------------
AT SEPTEMBER 30, 1993,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
Amount Per
(000) Share
-------- -----
Paid in Capital $113,622 $1.00
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains -- --
Unrealized Appreciation of Investments -- --
- ----------------------------------------------------------------
NET ASSETS $113,622 $1.00
- ----------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
HIGH-GRADE BOND PORTFOLIO (000) (000)+
- -----------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS (41.1%)
- -----------------------------------------------------------------
U.S. Treasury Bonds
7.875%, 2/15/21 $1,800 $ 2,170
8.0%, 11/15/21 265 325
8.125%, 8/15/19 2,035 2,507
8.5%, 2/15/20 860 1,103
8.875%, 8/15/17 - 2/15/19 2,310 3,055
10.75%, 8/15/05 400 577
11.625%, 11/15/02 1,000 1,445
14.0%, 11/15/11 2,390 4,200
U.S. Treasury Notes
4.0%, 9/30/94 1,300 1,307
5.875%, 5/15/95 300 310
6.0%, 11/15/94 765 786
6.25%, 2/15/03 50 53
6.375%, 8/15/02 1,620 1,733
6.75%, 5/31/97 450 484
6.875%, 2/15/94 150 152
7.0%, 4/15/99 1,180 1,299
7.5%, 1/31/96 250 269
7.75%, 2/15/95 700 738
7.875%, 4/15/98 1,020 1,152
8.0%, 8/15/99 140 162
8.25%, 7/15/98 2,060 2,365
8.5%, 8/15/95 - 11/15/00 2,945 3,388
8.625%, 10/15/95 - 8/15/97 1,575 1,774
8.75%, 8/15/00 250 303
8.875%, 11/15/98 - 2/15/99 650 769
9.0%, 5/15/98 450 529
9.25%, 1/15/96 400 446
9.5%, 10/15/94 1,500 1,591
- -----------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $33,327) 34,992
- -----------------------------------------------------------------
MORTGAGE SECURITIES (30.6%)
- -----------------------------------------------------------------
U.S. GOVERNMENT (28.8%)
Federal Home Loan Mortgage Corp.
6.0%, 7/1/98 - 7/1/08 293 298
6.5%, 4/1/98 - 8/1/23 796 815
7.0%, 1/1/98 - 9/1/23 1,229 1,268
7.5%, 4/1/98 - 9/1/23 1,568 1,627
8.0%, 6/1/96 - 6/1/23 1,548 1,615
8.5%, 3/1/96 - 4/1/23 774 810
9.0%, 9/1/19 - 6/1/22 1,100 1,167
9.5%, 12/1/05 153 162
10.0%, 3/1/17 - 11/1/19 293 319
Federal National Mortgage Assn.
6.0%, 6/15/00 100 102
6.5%, 3/1/00 - 9/1/23 596 609
7.0%, 5/1/00 - 9/1/23 1,583 1,632
7.5%, 4/1/99 - 9/1/23 $1,549 $ 1,607
8.0%, 2/1/00 - 4/1/23 1,482 1,547
8.5%, 11/1/06 - 3/1/23 934 981
9.0%, 3/1/20 - 7/1/22 683 727
9.5%, 6/1/01 - 9/1/19 566 609
10.0%, 8/1/20 - 8/1/21 424 465
10.5%, 8/1/20 117 129
Government National Mortgage Assn.
7.0%, 3/30/22 - 9/15/23 550 566
7.5%, 5/15/08 - 9/15/23 979 1,025
8.0%, 3/15/08 - 5/15/23 1,439 1,519
8.5%, 12/15/16 - 2/15/22 830 880
9.0%, 4/15/16 - 8/15/21 2,330 2,485
9.5%, 4/15/17 -7/15/21 592 638
10.0%, 5/15/20 - 8/15/20 429 471
10.5%, 5/15/19 119 133
11.0%, 10/15/15 97 109
11.5%, 2/15/13 179 203
------------
GROUP TOTAL 24,518
------------
- -----------------------------------------------------------------
PRIVATE (1.8%)
American Housing Trust
7.6%, 10/25/05 540 559
Resolution Trust Corp.
7.75% - 10.397%,
12/25/18 - 8/25/21 934 968
------------
GROUP TOTAL 1,527
------------
- -----------------------------------------------------------------
TOTAL MORTGAGE SECURITIES
(Cost $25,709) 26,045
- -----------------------------------------------------------------
CORPORATE BONDS (25.5%)
- -----------------------------------------------------------------
ASSET-BACKED SECURITIES (2.3%)
Chase Manhattan Credit Card Trust
8.75%, 8/15/99 300 329
7.4%, 5/15/00 300 323
MBNA Credit Card Trust
7.75%, 10/15/98 300 324
Sears, Roebuck & Co.
Credit Card Account Trust
7.75%, 9/15/98 300 330
5.9%, 11/15/98 300 309
Standard Trust Credit Card Trust
9.375%, 8/10/96 300 324
------------
GROUP TOTAL 1,939
------------
- -----------------------------------------------------------------
FINANCE (10.7%)
American General Finance
9.25%, 7/1/94 300 312
Associates Corp.
8.75%, 9/4/96 600 660
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------
<S> <C> <C>
AVCO Financial Services
8.85%, 2/1/96 $ 420 $ 459
7.5%, 11/15/96 200 215
Bank of America
10.0%, 2/1/03 200 250
Bankers Trust New York Corp.
8.25%, 7/2/96 400 437
CIT Group Holdings
8.6%, 12/1/94 300 316
5.65%, 11/15/95 450 462
Chase Manhattan Corp.
8.5%, 3/1/96 500 541
Chemical Banking Corp.
6.625%, 1/15/98 250 263
Commercial Credit Corp.
6.75%, 1/15/97 450 474
Countrywide Funding Corp.
7.31%, 8/28/00 600 647
Dean Witter Discover & Co.
6.0%, 3/1/98 410 421
Ford Motor Credit Corp.
8.25%, 7/15/96 300 326
7.875%, 1/15/97 450 487
Household Finance Corp.
9.25%, 2/15/95 450 480
Mellon Finance
6.125%, 11/15/95 400 414
Merrill Lynch & Co., Inc.
7.25%, 5/15/97 400 428
Morgan Stanley Group Inc.
9.25%, 3/1/98 200 230
NationsBank Inc.
5.375%, 12/1/95 425 433
Norwest Finance
7.1%, 11/15/96 450 480
Transamerica Financial Corp.
8.375%, 2/15/98 325 364
------------
GROUP TOTAL 9,099
------------
- -----------------------------------------------------------------
INDUSTRIAL (7.4%)
American Brands Inc.
7.875%, 1/15/23 100 109
Anheuser-Busch Co., Inc.
8.625%, 12/1/16 150 159
7.375%, 7/1/23 75 78
Archer-Daniels-Midland Co.
8.125%, 6/1/12 125 146
British Petroleum
7.875%, 5/15/02 200 225
Boeing Co.
8.375%, 3/1/96 450 488
CSX Corp.
8.4%, 8/1/96 150 164
8.25%, 11/1/96 350 382
Conagra, Inc.
9.75%, 11/1/97 $ 150 $ 174
9.875%, 11/15/05 120 154
Conrail Corp.
9.75%, 6/15/20 100 133
Ford Capital Corp.
9.0%, 6/1/96 225 248
Ford Motor Corp.
9.95%, 2/15/32 65 88
Grand Metropolitan Corp.
9.0%, 8/15/11 300 364
ITT Corp.
7.25%, 11/15/96 450 480
International Paper Co.
7.625%, 1/15/07 100 110
May Department Stores Co.
9.75%, 2/15/21 100 127
McDonalds Corp.
6.75%, 2/15/03 230 244
PepsiCo Inc.
6.125%, 1/15/98 200 208
Philip Morris Cos., Inc.
8.25%, 10/15/03 150 172
Phillips Petroleum
7.92%, 4/15/23 150 157
Tele-Communications, Inc.
10.125%, 8/1/01 320 385
Texaco Capital Corp.
8.875%, 9/1/21 150 187
Union Carbide
7.875%, 4/1/23 125 132
Union Oil of California
9.125%, 2/15/06 115 140
Union Pacific
8.625%, 5/15/22 175 204
Waste Management, Inc.
7.875%, 8/15/96 275 298
Whirlpool Corp.
9.0%, 3/1/03 150 179
Xerox Corp.
9.625%, 10/15/00 400 432
------------
GROUP TOTAL 6,367
------------
- -----------------------------------------------------------------
UTILITY (5.1%)
Alabama Power Co.
8.75%, 12/1/21 130 154
Arizona Public Service
8.0%, 2/1/25 150 169
Carolina Power & Light
6.875%, 8/15/23 175 176
Enron Corp.
9.65%, 5/15/01 450 555
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------
<S> <C> <C>
Georgia Power Co.
9.23%, 12/1/19 $ 125 $ 144
Houston Lighting & Power Co.
8.75%, 3/1/22 100 123
Michigan Bell Telephone
7.5%, 2/15/23 175 189
New York Telephone
7.0%, 8/15/25 175 174
Niagara Mohawk Power Co.
9.5%, 3/1/21 175 214
7.875%, 4/1/24 75 81
Pacific Bell Corp.
7.25%, 7/1/02 225 246
Southern Bell Telephone Co.
7.625%, 3/15/13 450 465
Southwestern Bell Corp.
7.625%, 10/1/13 125 129
7.625%, 3/1/23 100 108
Texas Utilities Corp.
7.125%, 6/1/97 600 637
U.S. West Financial Corp.
8.85%, 9/20/99 500 586
Virginia Electric Power
6.625%, 4/1/03 200 210
----------
GROUP TOTAL 4,360
----------
- -----------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $21,086) 21,765
- -----------------------------------------------------------------
FOREIGN BONDS (2.3%)
- -----------------------------------------------------------------
CANADA (1.5%)
Province of Alberta
9.25%, 4/1/00 365 439
Province of British Columbia
7.0%, 1/15/03 170 184
Province of Manitoba
9.5%, 10/1/00 130 158
9.25%, 4/1/20 120 151
Province of Ontario
7.75%, 6/4/02 200 224
7.375%, 1/27/03 110 121
----------
GROUP TOTAL 1,277
----------
- -----------------------------------------------------------------
WORLD BANKS (.8%)
European Investment Bank
8.875%, 3/1/01 $ 225 $ 270
InterAmerican Development Bank
8.5%, 3/15/11 130 160
International Bank for
Reconstruction and Development
12.375%, 10/15/02 175 255
----------
GROUP TOTAL 685
----------
- -----------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $1,888) 1,962
- -----------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.2%)
- -----------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account, 3.39%, 10/1/93
(Cost $1,014) 1,014 1,014
- -----------------------------------------------------------------
TOTAL INVESTMENTS (100.7%)
(Cost $83,024) 85,778
- -----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.7%)
- -----------------------------------------------------------------
Other Assets -- Note C 2,260
Liabilities (2,821)
----------
(561)
- -----------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------
Applicable to 7,786,314 outstanding
shares of beneficial interest
(unlimited authorization --
no par value) $85,217
- -----------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.94
=================================================================
+See Note A to Financial Statements.
- -----------------------------------------------------------------
AT SEPTEMBER 30, 1993,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------
Amount Per
(000) Share
------ -----
Paid in Capital $81,327 $10.44
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 1,136 .15
Unrealized Appreciation of
Investments 2,754 .35
- -----------------------------------------------------------------
NET ASSETS $85,217 $10.94
- -----------------------------------------------------------------
</TABLE>
15
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
BALANCED PORTFOLIO Shares (000)+
- -----------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (58.5%)
- -----------------------------------------------------------------
APPLIED SCIENCE & RESEARCH (10.2%)
- -----------------------------------------------------------------
DEFENSE ELECTRONICS & AEROSPACE (1.4%)
Northrop Corp. 55,500 $ 1,949
United Technologies Corp. 11,800 655
MEDICAL PRODUCTS & SERVICES (7.9%)
Abbott Laboratories, Inc. 66,600 1,823
American Home Products Corp. 38,000 2,313
Baxter International, Inc. 77,100 1,696
Bristol-Myers Squibb Co. 37,200 2,093
Columbia Healthcare Corp. 34,448 1,008
Johnson & Johnson 51,000 2,002
Pfizer, Inc. 48,500 2,886
Zeneca Group ADR 43,399 1,400
OFFICE EQUIPMENT (.9%)
Xerox Corp. 24,000 1,755
------------
GROUP TOTAL 19,580
------------
- -----------------------------------------------------------------
BASIC INDUSTRY (28.0%)
- -----------------------------------------------------------------
CHEMICALS (3.5%)
Cabot Corp. 9,300 516
Dow Chemical Co. 31,000 1,810
E.I. du Pont de Nemours & Co. 48,300 2,246
Ethyl Corp. 23,600 419
Imperial Chemical Industries PLC ADR 8,800 382
PPG Industries, Inc. 14,100 920
Witco Chemical Corp. 7,000 419
MANUFACTURING (5.5%)
Cooper Industries, Inc. 21,200 1,007
Emerson Electric Co. 11,400 670
General Electric Co. 35,800 3,428
Hanson PLC ADR 65,000 1,194
Honeywell, Inc. 57,800 2,066
Minnesota Mining &
Manufacturing Co. 10,200 1,049
Thomas & Betts Corp. 18,200 1,140
METAL (2.7%)
Aluminum Co. of America 32,300 2,168
British Steel PLC ADR 58,400 1,110
Reynolds Metals Co. 21,700 903
USX-U.S. Steel Group 27,900 893
OIL (10.6%)
Amerada Hess Corp. 20,000 1,060
Amoco Co. 10,400 601
Ashland Oil, Inc. 15,400 522
British Petroleum Co. PLC ADR 13,000 772
Chevron Corp. 13,300 1,300
Exxon Corp. 39,300 2,574
Halliburton Co. 18,000 668
Imperial Oil, Ltd. 2,200 79
Kerr-McGee Corp. 20,200 1,048
Norsk Hydro AS ADR 20,900 575
Pennzoil Co. 9,700 616
Phillips Petroleum Co. 31,800 1,069
Repsol SA ADR 40,400 1,166
Royal Dutch Petroleum Co. 13,700 1,392
Societe Nationale Elf Aquitaine ADR 14,500 536
Texaco, Inc. 26,000 1,761
Unocal Corp. 17,500 492
USX-Marathon Group 23,200 464
*YPF Sociedad ADR 28,000 711
PAPER (3.0%)
Georgia-Pacific Corp. 25,200 1,569
International Paper Co. 19,500 1,175
Temple Inland, Inc. 31,000 1,271
Westvaco Corp. 27,300 921
Willamette Industries, Inc. 20,400 775
TRANSPORTATION & OTHER SERVICES (2.7%)
British Airways PLC ADR 31,250 1,676
Canadian Pacific Ltd. 51,000 804
Norfolk Southern Corp. 15,400 1,051
Union Pacific Corp. 25,800 1,613
------------
GROUP TOTAL 53,531
------------
- -----------------------------------------------------------------
CONSUMER & SERVICES (8.0%)
- -----------------------------------------------------------------
CONSUMER NON-DURABLES (1.5%)
Kimberly-Clark Corp. 41,600 2,038
Philip Morris Cos., Inc. 11,600 532
Sara Lee Corp. 12,800 302
CONSUMER PRODUCTS & SERVICES (3.5%)
Brunswick Corp. 66,000 924
The Dun & Bradstreet Corp. 17,000 1,063
Eastman Kodak Co. 23,100 1,369
Fleming Cos., Inc. 122 4
Ford Motor Co. 20,000 1,105
General Motors Corp. 19,000 793
SuperValu Inc. 44,900 1,476
RETAIL (3.0%)
May Department Stores Co. 35,800 1,557
J.C. Penney Co., Inc. 26,000 1,219
Sears, Roebuck & Co. 17,600 948
Woolworth Corp. 76,500 1,913
------------
GROUP TOTAL 15,243
------------
- -----------------------------------------------------------------
FINANCE (9.1%)
- -----------------------------------------------------------------
BANKS & FINANCE (6.9%)
Banc One Corp. 59,225 2,458
The Bank of New York Co., Inc. 38,700 2,191
CoreStates Financial Corp. 25,285 1,460
First Bank System, Inc. 67,000 2,228
First Union Corp. 26,000 1,238
Norwest Corp. 86,600 2,392
Wachovia Corp. 32,800 1,283
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------
<S> <C> <C>
INSURANCE & SERVICES (2.2%)
Allstate Corp. 37,200 $ 1,181
AON Corp. 7,300 407
CIGNA Corp. 3,000 195
Exel, Ltd. 5,000 231
First Colony Corp. 8,225 248
General Re Corp. 14,700 1,808
NAC Re Corp. 4,402 159
------------
GROUP TOTAL 17,479
------------
- -----------------------------------------------------------------
UTILITIES (3.2%)
- -----------------------------------------------------------------
ELECTRIC (.7%)
Entergy Corp. 12,000 465
Philadelphia Electric Co. 25,100 825
TELEPHONE (2.5%)
Bell Atlantic Corp. 12,000 765
NYNEX Corp. 17,600 808
Pacific Telesis Group 12,300 666
Southwestern Bell Corp. 30,200 1,302
U.S. West Corp. 25,100 1,236
------------
GROUP TOTAL 6,067
------------
- -----------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $104,114) 111,900
- -----------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (1.9%)
- -----------------------------------------------------------------
AMAX, Inc. $4.00 13,000 845
Bethlehem Steel Corp. $3.50 10,000 480
Cooper Industries, Inc. $1.60 16,900 509
Ford Motor Co. 8.40% 6,900 654
Norwest Corp. $3.50 9,500 765
Sears, Roebuck & Co. PERCS $3.75 5,200 294
- -----------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $3,060) 3,547
- -----------------------------------------------------------------
CONVERTIBLE BOND (.1%)
- -----------------------------------------------------------------
Face
Amount
(000)
------
NAC Re Corp.
5.25%, 12/15/02 (Cost $265) $ 260 260
- -----------------------------------------------------------------
CORPORATE BONDS (15.7%)
- -----------------------------------------------------------------
ASSET-BACKED (.5%)
Sears, Roebuck & Co.
8.6%, 5/15/98 822 912
BANKS & FINANCE (4.4%)
American Express Corp.
5.375%, 7/16/01 1,000 994
Associates Corp.
5.25%, 9/1/98 1,000 996
Chase Manhattan Corp.
7.75%, 11/1/99 1,000 1,096
Chemical Banking Corp.
8.625%, 5/1/02 1,000 1,160
Exxon Capital Corp.
6.0%, 7/1/05 1,000 1,016
General Motors Acceptance Corp.
5.5%, 2/21/95 1,000 1,015
8.5%, 1/1/03 1,000 1,111
World Savings & Loan Assn.
5.625%, 1/15/96 1,000 1,031
INDUSTRIAL (7.5%)
Boeing Co.
8.625%, 11/15/31 1,000 1,198
Coca-Cola Enterprises
8.5%, 2/1/22 1,000 1,163
Georgia-Pacific Corp.
9.625%, 3/15/22 1,000 1,168
International Business Machines Corp.
6.375%, 11/1/97 1,000 1,035
May Department Stores Co.
10.25%, 1/1/21 1,000 1,372
Occidental Petroleum Corp.
11.75%, 3/15/11 1,000 1,192
Procter & Gamble
9.36%, 1/1/21 1,000 1,275
Sears, Roebuck & Co.
9.375%, 11/1/11 1,000 1,224
TRW, Inc.
9.375%, 4/15/21 1,000 1,257
United Parcel Service
8.375%, 4/1/20 2,000 2,432
Wal-Mart Stores, Inc.
7.25%, 6/1/13 1,000 1,062
RAILROAD (.6%)
Conrail Corp.
7.875%, 5/15/43 1,000 1,104
TELEPHONE (1.0%)
BellSouth Telecommunications
7.5%, 6/15/33 1,000 1,082
US West Communications
6.875%, 9/15/33 1,000 969
UTILITIES (1.7%)
Duke Power Co.
7.0%, 7/1/33 1,000 998
Hydro-Quebec Electric Commission
8.4%, 1/15/22 1,000 1,153
Wisconsin Electric Power
7.7%, 12/15/27 1,000 1,083
- -------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $27,723) 30,098
- -------------------------------------------------------------------
FOREIGN BONDS (1.7%)
- -------------------------------------------------------------------
Province of British Columbia
7.0%, 1/15/03 1,000 1,084
Italy Government
6.0%, 9/27/03 1,000 998
Province of Ontario
7.375%, 1/27/03 1,000 1,095
- -------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $2,988) 3,177
- -------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS
(19.3%)
- --------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
7.05%, 1/29/03 $1,000 $ 1,074
Federal National Mortgage Assn.
8.0%, 5/1/16 - 2/1/23 2,527 2,638
Government National Mortgage Assn.
9.5%, 12/15/19 462 498
U.S. Treasury Notes
4.25%, 7/31/95 7,000 7,053
6.25%, 2/15/03 4,000 4,237
7.125%, 10/15/98 - 2/15/23 8,000 8,926
7.5%, 11/15/01 2,500 2,864
7.875%, 7/31/96 5,000 5,484
8.25%, 11/15/94 4,000 4,207
- --------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost $35,842) 36,981
- --------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.8%)
- --------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account, 3.39%, 10/1/93
(Cost $7,263) 7,263 7,263
- --------------------------------------------------------------------------
TOTAL INVESTMENTS (101.0%)
(Cost $181,255) 193,226
- --------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.0%)
- --------------------------------------------------------------------------
Other Assets -- Notes C and F 20,680
Liabilities -- Note F (22,609)
--------------
(1,929)
- --------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------
Applicable to 16,519,254 outstanding
shares of beneficial interest
(unlimited authorization--
no par value) $191,297
- --------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $11.58
==========================================================================
+See Note A to Financial Statements.
*Non-Income Producing Security.
- --------------------------------------------------------------------------
AT SEPTEMBER 30, 1993, NET ASSETS
CONSISTED OF:
- --------------------------------------------------------------------------
Amount Per
(000) Share
------- -----
Paid in Capital $176,677 $10.70
Undistributed Net Investment Income 772 .05
Accumulated Net Realized Gains 1,877 .11
Unrealized Appreciation of
Investments 11,971 .72
- --------------------------------------------------------------------------
NET ASSETS $191,297 $11.58
- --------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
Market
Value
EQUITY INDEX PORTFOLIO Shares (000)+
- ----------------------------------------------------------------
COMMON STOCKS (99.0%)(1)
- ----------------------------------------------------------------
<S> <C> <C>
General Electric Co. 43,356 $4,151
Exxon Corp. 63,194 4,139
American Telephone & Telegraph Co. 68,487 4,032
Wal-Mart Stores, Inc. 116,834 2,877
The Coca Cola Co. 66,074 2,792
Royal Dutch Petroleum Co. 27,273 2,772
Philip Morris Cos., Inc. 44,552 2,044
GTE Corp. 48,039 1,844
Merck & Co., Inc. 57,725 1,775
Mobil Corp. 20,304 1,657
Procter & Gamble Co. 34,586 1,643
Chevron Corp. 16,507 1,614
E.I. du Pont de Nemours & Co. 34,442 1,602
PepsiCo, Inc. 40,376 1,580
American International Group, Inc. 16,087 1,579
BellSouth Corp. 25,265 1,529
Intel Corp. 21,400 1,509
General Motors Corp. 36,001 1,503
Bristol-Myers Squibb Co. 26,352 1,482
Amoco Corp. 25,310 1,462
Bell Atlantic Corp. 21,986 1,402
Motorola, Inc. 13,828 1,397
Ford Motor Co. 25,034 1,383
Southwestern Bell Corp. 30,500 1,315
Johnson & Johnson 33,134 1,301
International Business Machines Corp. 29,043 1,220
Ameritech Corp. 13,728 1,175
Abbott Laboratories, Inc. 42,016 1,150
Pacific Telesis Group 20,998 1,137
Minnesota Mining & Manufacturing Co. 11,041 1,136
Federal National Mortgage Assn. 13,847 1,090
U.S. West Corp. 21,085 1,038
The Walt Disney Co. 27,340 1,032
Eastman Kodak Co. 16,749 992
NYNEX Corp. 20,998 963
Pfizer, Inc. 16,061 956
Sears, Roebuck & Co. 17,687 953
American Home Products Corp. 15,628 951
McDonald's Corp. 17,918 929
Atlantic Richfield Co. 8,123 929
Texaco, Inc. 13,117 889
Hewlett-Packard Co. 12,795 875
American Express Co. 24,507 873
Home Depot, Inc. 22,612 871
Unilever NV 8,120 867
Chrysler Corp. 17,750 845
Schlumberger Ltd. 12,277 818
Dow Chemical Co. 13,840 $ 808
BankAmerica Corp. 17,941 789
Pacific Gas & Electric Co. 21,843 773
Time Warner, Inc. 18,960 773
J.P. Morgan & Co., Inc. 9,806 769
WMX Technologies Inc. 24,375 743
Eli Lilly & Co. 14,787 739
MCI Communications Corp. 26,812 734
Southern Co. 16,132 726
*Citicorp 18,965 721
Banc One Corp. 17,197 714
Emerson Electric Co. 11,347 667
NationsBank, Inc. 12,883 663
The Boeing Co. 17,187 660
Union Pacific Corp. 10,400 650
Schering-Plough Corp. 9,854 649
Gillette Co. 11,136 639
Sprint Corp. 17,129 627
Anheuser-Busch Co., Inc. 13,664 627
Sara Lee Corp. 24,524 579
Kellogg Co. 11,682 578
Chemical Banking Corp. 12,724 573
*McCaw Cellular Communications, Inc. 10,700 572
The Dun & Bradstreet Corp. 9,158 572
Primerica Corp. 11,997 571
ITT Corp. 6,029 564
J.C. Penney Co., Inc. 11,866 556
*Tele-Communications, Inc. Class A 21,813 545
*Toys R Us, Inc. 14,776 545
May Department Stores Co. 12,492 543
Merrill Lynch & Co., Inc. 5,401 529
SCE Corp. 22,574 528
General Re Corp. 4,275 526
Allied-Signal, Inc. 7,170 523
Texas Utilities Co. 11,208 514
Capital Cities/ABC, Inc. 884 510
Kmart Corp. 20,600 497
General Mills, Inc. 8,230 496
Campbell Soup Co. 12,706 489
The Seagram Co. Ltd. 18,852 483
Norfolk Southern Corp. 7,015 479
Paramount Communications, Inc. 6,035 476
Federal Home Loan Mortgage Corp. 9,100 461
H.J. Heinz Co. 12,814 456
Warner-Lambert Co. 6,869 454
Tenneco, Inc. 8,547 451
Duke Power Co. 10,305 447
Phillips Petroleum Co. 13,219 444
*Oracle Systems Corp. 7,168 440
Public Service Enterprise Group Inc. 12,236 430
</TABLE>
19
<PAGE> 22
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------
<S> <C> <C>
Consolidated Edison Co.
of New York, Inc. 11,857 $ 428
Raytheon Co. 6,862 426
Weyerhaeuser Co. 10,403 424
Enron Corp. 11,904 417
The Limited, Inc. 18,321 415
Colgate-Palmolive Co. 7,866 413
CSX Corp. 5,297 411
Norwest Corp. 14,734 407
First Union Corp. 8,518 406
Caterpillar, Inc. 5,102 403
Monsanto Co. 6,153 403
Rockwell International Corp. 11,173 402
Dominion Resources, Inc. 8,309 402
Kimberly-Clark Corp. 8,120 398
Archer-Daniels-Midland Co. 17,310 387
Xerox Corp. 5,285 386
Dean Witter Discover and Co. 8,608 380
The Chubb Corp. 4,464 376
International Paper Co. 6,219 375
FPL Group, Inc. 9,516 375
Philadelphia Electric Co. 11,131 366
Automatic Data Processing, Inc. 7,278 366
PNC Bank Corp. 11,780 362
American Electric Power Co., Inc. 9,369 361
Gannett Co., Inc. 7,520 360
American General Corp. 10,976 359
AMP, Inc. 5,412 358
Wells Fargo & Co. 2,803 354
United Technologies Corp. 6,343 352
Entergy Corp. 8,976 348
PPG Industries, Inc. 5,312 347
Unocal Corp. 12,269 345
The Chase Manhattan Corp. 9,284 345
Corning, Inc. 10,170 341
Aetna Life and Casualty Co. 5,622 337
CPC International, Inc. 7,702 337
American Brands, Inc. 10,297 335
Bankers Trust New York Corp. 4,162 333
Commonwealth Edison Co. 10,825 329
Conagra, Inc. 12,617 328
Marsh & McLennan, Inc. 3,747 327
The Goodyear Tire & Rubber Co. 7,434 324
Albertson's, Inc. 6,368 321
Occidental Petroleum Corp. 15,391 317
Central & South West Corp. 9,576 315
Texas Instruments, Inc. 4,164 314
Deere & Co. 4,252 308
Baxter International, Inc. 13,972 307
Northern Telecom Ltd. 12,587 307
Pitney Bowes, Inc. 8,014 307
Houston Industries, Inc. 6,556 306
Aluminum Co. of America 4,470 300
Blockbuster Entertainment Corp. 10,304 295
*Novell, Inc. 15,500 291
USX-Marathon Group 14,509 290
UST, Inc. 10,628 286
Georgia-Pacific Corp. 4,574 285
Suntrust Banks, Inc. 6,354 283
NBD Bancorp, Inc. 8,119 278
Cooper Industries, Inc. 5,819 276
The Travelers Corp. 7,304 275
Rubbermaid, Inc. 8,220 272
Pacificorp 13,806 271
*Amgen, Inc. 7,000 270
Carolina Power & Light Co. 8,222 269
Salomon, Inc. 5,622 268
*CNA Financial Corp. 3,124 266
Wm. Wrigley, Jr. Co. 5,834 265
Computer Associates International, Inc. 8,265 264
Great Lakes Chemical Corp. 3,700 263
Textron, Inc. 4,471 260
Sysco Corp. 9,370 258
Detroit Edison Co. 7,494 258
*Promus Co., Inc. 3,406 257
*AMR Corp. 3,935 256
First Interstate Bancorp. 3,824 255
American Cyanamid Co. 4,590 253
Amerada Hess Corp. 4,762 252
Dayton-Hudson Corp. 3,642 251
Consolidated Natural Gas Co. 4,672 250
*Digital Equipment Corp. 6,744 248
Masco Corp. 7,796 248
Upjohn Co. 8,654 247
Quaker Oats Co. 3,652 245
CIGNA Corp. 3,744 243
Honeywell, Inc. 6,784 243
*Compaq Computer Corp. 4,171 242
Fleet Financial Group, Inc. 6,919 241
Burlington Northern, Inc. 4,452 239
Wachovia Corp. 6,100 239
Transamerica Corp. 4,053 238
Genuine Parts Co. 6,329 237
Walgreen Co. 6,346 237
Nucor Corp. 4,372 237
Melville Corp. 5,306 233
Placer Dome Group, Inc. 12,173 233
Conrail, Inc. 3,962 232
Winn Dixie Stores, Inc. 3,955 230
Westinghouse Electric Corp. 17,683 230
Union Electric Corp. 5,200 229
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------
<S> <C> <C>
R.R. Donnelley & Sons Co. 7,810 $ 228
Air Products & Chemicals, Inc. 5,824 226
Hershey Foods Corp. 4,481 223
TRW, Inc. 3,322 223
Lincoln National Corp. 4,766 223
Columbia Healthcare Corp. 7,600 222
CBS, Inc. 826 222
Barnett Banks of Florida, Inc. 4,927 222
Illinois Tool Works, Inc. 5,720 221
The Gap, Inc. 7,484 221
Capital Holding Corp. 5,080 220
Morton International, Inc. 2,496 219
Alcan Aluminium Ltd. 11,548 215
Comcast Corp. Class A 6,931 215
Whirlpool Corp. 3,639 214
Martin Marietta Corp. 2,398 213
Halliburton Co. 5,714 212
Torchmark Corp. 3,754 212
Ralston-Ralston Purina Group 5,423 211
Dillard Department Stores Class A 5,722 206
H & R Block, Inc. 5,412 206
Ingersoll-Rand Co. 5,408 205
Medtronic, Inc. 3,020 205
First Chicago Corp. 4,132 201
International Flavors & Fragrances, Inc. 1,976 201
Browning-Ferris Industries, Inc. 8,706 200
Hercules, Inc. 2,194 200
Ohio Edison Co. 7,905 200
St. Paul Cos., Inc. 2,184 199
Lockheed Corp. 3,126 199
Baltimore Gas & Electric Co. 7,450 197
Syntex Corp. 11,049 193
Safeco Corp. 3,126 192
Avon Products, Inc. 3,614 188
Household International, Inc. 2,371 185
The Times Mirror Co. Class A 6,357 183
Eaton Corp. 3,536 180
McDonnell Douglas Corp. 1,977 178
The Tribune Co. 3,328 178
Louisiana-Pacific Corp. 5,416 177
Hasbro, Inc. 4,469 176
Mellon Bank Corp. 3,188 175
Rohm & Haas Co. 3,433 173
First Fidelity Bancorp. 3,719 172
Harcourt General, Inc. 3,839 172
MBNA Corp. 5,100 171
Woolworth Corp. 6,859 171
Niagara Mohawk Power Corp. 7,172 171
*UAL Corp. 1,247 171
Baker Hughes, Inc. 7,275 171
McGraw-Hill, Inc. 2,498 169
Nike, Inc. Class B 3,750 169
Williams Cos., Inc. 2,683 169
Marriott Corp. 5,387 168
CoreStates Financial Corp. 2,909 168
*Federal Express Corp. 2,707 167
Santa Fe Pacific Corp. 9,145 167
Fluor Corp. 4,061 167
Sherwin-Williams Co. 4,573 165
Lowes Cos., Inc. 3,646 165
*Crown Cork & Seal Co., Inc. 4,574 164
Newmont Mining Corp. 3,435 163
W.R. Grace & Co. 4,672 162
Dow Jones & Co., Inc. 4,902 162
Boatmen's Bancshares, Inc. 2,475 159
Dover Corp. 2,922 159
Northern States Power Co. of Minnesota 3,425 159
*DSC Communications Corp. 2,581 157
Sonat, Inc. 4,472 157
Sun Co., Inc. 5,413 154
Dresser Industries, Inc. 7,068 151
Panhandle Eastern Corp. 5,980 150
American Stores Co. 3,538 150
Union Camp Corp. 3,537 150
Union Carbide Corp. 7,752 149
Becton, Dickinson & Co. 3,952 149
Deluxe Corp. 4,169 148
V F Corp. 3,314 146
General Dynamics Corp. 1,583 146
W.W. Grainger, Inc. 2,708 145
Golden West Financial Corp. 3,327 145
Pennzoil Co. 2,280 145
Newell Co. 4,119 145
Clorox Co. 2,708 145
Coastal Corp. 5,207 143
*Litton Industries, Inc. 2,384 142
Knight-Ridder, Inc. 2,699 141
Phelps Dodge Corp. 3,538 141
Circuit City Stores, Inc. 4,984 140
Jefferson-Pilot Corp. 2,605 139
Bank of Boston Corp. 5,448 139
Champion International Corp. 4,586 139
Bausch & Lomb, Inc. 2,918 137
Apple Computer, Inc. 5,834 136
Loral Corp. 2,151 134
Great Western Financial Corp. 6,757 133
Mattel, Inc. 4,783 132
Engelhard Corp. 4,999 132
Dana Corp. 2,282 132
Delta Air Lines, Inc. 2,499 130
</TABLE>
21
<PAGE> 24
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------
<S> <C> <C>
Reynolds Metals Co. 3,119 $ 130
*Sun Microsystems, Inc. 5,400 130
Kerr-McGee Corp. 2,498 130
U.S. Bancorp 4,931 129
Scott Paper Co. 3,847 126
IMCERA Group, Inc. 3,850 125
Roadway Services, Inc. 2,077 124
The Mead Corp. 2,917 123
*Advanced Micro Devices, Inc. 4,665 123
Nordstrom, Inc. 4,064 123
Borden, Inc. 6,895 122
Shawmut National Corp. 4,953 121
Tandy Corp. 3,275 121
SuperValu, Inc. 3,651 120
Ryder System, Inc. 3,947 120
Nalco Chemical, Inc. 3,538 120
Oryx Energy Co. 4,859 119
*National Semiconductor Corp. 5,807 119
H.F. Ahmanson & Co. 5,933 118
Hilton Hotels Corp. 2,395 117
Westvaco Corp. 3,431 116
TJX Cos., Inc. 3,840 116
American Greetings Corp. Class A 3,726 116
Pall Corp. 5,962 115
Interpublic Group of Cos., Inc. 3,700 115
Homestake Mining Co. 6,798 114
Pacific Enterprises 4,241 112
Temple-Inland Inc. 2,710 111
*The Kroger Co. 5,472 110
USX-U.S. Steel Group 3,401 109
Brown-Forman Corp. Class B 1,355 108
Johnson Controls, Inc. 1,979 108
Reebok International Ltd. 4,381 105
*Lotus Development Corp. 2,285 104
Ethyl Corp. 5,839 104
Praxair, Inc. 6,652 103
Paccar, Inc. 1,668 103
Ashland Oil, Inc. 3,015 102
Cooper Tire & Rubber Co. 4,064 102
Inco Ltd. 5,709 101
New York Times Co. Class A 4,052 101
Alco Standard Corp. 2,282 100
Service Corp. International 4,036 100
McKesson Corp. 1,976 100
Premark International, Inc. 1,561 100
Tyco Labs, Inc. 2,294 99
AMAX, Inc. 4,474 99
Beneficial Corp. 1,252 97
Pet, Inc. 5,706 96
The Stanley Works 2,284 95
*Unisys Corp. 7,924 94
*Owens-Corning Fiberglas Corp. 2,081 93
Gerber Products Co. 3,450 93
Raychem Corp. 2,175 93
*FMC Corp. 1,870 92
*Price Co. 2,397 90
Maytag Corp. 5,312 89
NICOR, Inc. 2,916 89
The Dial Corp. 2,279 89
Northrop Corp. 2,494 88
ALZA Corp. 3,930 87
Continental Corp. 2,809 87
Moore Corp. Ltd. 4,892 86
James River Corp. 4,063 86
Echlin, Inc. 2,812 86
Parker Hannifin Corp. 2,496 85
Liz Claiborne, Inc. 4,170 84
Polaroid Corp. 2,500 84
Harris Corp. 1,978 84
Black & Decker Corp. 4,123 84
Snap-On Tools Corp. 2,183 84
Worthington Industries, Inc. 2,918 83
Armstrong World Industries Inc. 1,974 82
National Medical Enterprises, Inc. 8,518 82
Teledyne Inc. 2,911 80
Whitman Corp. 5,206 78
Avery Dennison Corp. 2,924 77
*King World Productions, Inc. 1,876 77
E-Systems, Inc. 1,762 77
General Signal Corp. 2,378 76
*Computer Sciences Corp. 832 76
Wendys International, Inc. 5,094 76
Pep Boys (Manny, Moe & Jack) 3,211 75
Rite Aid Corp. 4,666 73
Giant Food, Inc. Class A 3,118 72
ENSERCH Corp. 3,430 71
PSI Resources, Inc. 2,709 70
Allergan, Inc. 3,200 70
McDermott International, Inc. 2,488 70
Centex Corp. 1,660 70
Ecolab, Inc. 1,647 70
Charming Shoppes, Inc. 5,600 69
Brunswick Corp. 4,877 68
Perkin-Elmer Corp. 2,166 68
*Columbia Gas Systems, Inc. 2,601 68
Cummins Engine Co., Inc. 830 68
C.R. Bard, Inc. 2,706 67
*Bethlehem Steel Corp. 4,652 67
*Varity Corp. 1,849 66
*Tandem Computers, Inc. 5,413 66
Potlatch Corp. 1,558 66
Louisiana Land & Exploration Co. 1,456 65
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------
<S> <C> <C>
Mercantile Stores Co., Inc. 1,874 $ 64
St. Jude Medical, Inc. 2,194 64
Grumman Corp. 1,666 62
National Service Industries, Inc. 2,499 62
Bemis Co., Inc. 2,702 62
USF&G Corp. 4,368 62
Fleming Cos., Inc. 1,861 62
Briggs & Stratton Corp. 729 62
Scientific-Atlanta, Inc. 1,767 61
Thomas & Betts Corp. 934 58
Manor Care Inc. 2,714 58
Fleetwood Enterprises, Inc. 2,488 58
Ogden Corp. 2,285 57
Cyprus Minerals Co. 2,378 57
United States Surgical Corp. 2,700 57
Peoples Energy Corp. 1,766 56
Russell Corp. 1,981 55
Foster Wheeler Corp. 1,771 55
*Biomet, Inc. 6,224 55
The BF Goodrich Co. 1,251 55
Pulte Corp. 1,447 55
Echo Bay Mines Ltd. 5,398 55
*Maxus Energy Corp. 6,800 54
*Inland Steel Industries, Inc. 1,862 52
Millipore Corp. 1,556 51
Autodesk, Inc. 1,149 51
Arkla, Inc. 5,830 51
Ball Corp. 1,544 47
Santa Fe Energy Resources Inc. 4,428 46
The Timkin Co. 1,559 46
Helmerich & Payne, Inc. 1,349 46
Pittston Services Group 2,075 45
*Clark Equipment Co. 935 45
USLIFE Corp. 1,046 44
*Shoney's Inc. 1,977 44
Great Atlantic & Pacific Tea Co.,
Inc. 1,776 44
Cincinnati Milacron, Inc. 1,755 44
*Beverly Enterprises Inc. 4,246 44
Adolph Coors Co. Class B 2,075 43
John H. Harland Co. 1,675 43
Federal Paper Board Co., Inc. 2,080 43
EG & G, Inc. 2,612 43
Safety-Kleen Corp. 2,812 43
Bruno's Inc. 3,850 42
Giddings & Lewis, Inc. 1,800 42
*Ceridian Corp. 2,285 42
Jostens Inc. 2,081 41
Alexander & Alexander Services, Inc. 1,881 41
Crane Co. 1,363 38
Boise Cascade Corp. 1,776 37
*Rowan Cos., Inc. 3,845 37
*USAir Group, Inc. 2,890 36
Trinova Corp. 1,356 36
Eastern Enterprises 1,245 36
Kaufman & Broad Home Corp. 1,855 36
Morrison-Knudsen Co., Inc. 1,446 36
Yellow Corp. 1,456 35
Tektronix, Inc. 1,458 35
*Cray Research, Inc. 1,453 35
Asarco, Inc. 1,982 33
*Navistar International Corp. 1,380 33
Stride Rite Corp. 2,302 33
*Andrew Corp. 838 32
Luby's Cafeterias, Inc. 1,455 32
Transco Energy Co. 1,861 32
*Consolidated Freightways, Inc. 1,970 31
Longs Drug Stores, Inc. 940 31
*Armco, Inc. 4,877 30
Meredith Corp. 834 30
Shared Medical Systems Corp. 1,245 30
Amdahl Corp. 4,920 30
Springs Industries Inc. Class A 835 29
*Intergraph Corp. 2,796 29
Brown Group, Inc. 835 29
Alberto-Culver Co. Class B 1,257 28
Oneok, Inc. 1,253 28
*Bally Manufacturing Corp. 2,861 28
*Ryan's Family Steak Houses, Inc. 3,205 27
Community Psychiatric Centers 1,994 26
Bassett Furniture Industries, Inc. 652 23
*Stone Container Corp. 3,054 22
Harnischfeger Industries Inc. 1,063 21
Zurn Industries, Inc. 625 20
NACCO Industries, Inc. Class A 418 19
Handleman Co. 1,466 16
Rollins Environmental Services, Inc. 2,720 16
Outboard Marine Corp. 839 16
*M/A-Com, Inc. 1,648 15
*Data General Corp. 1,361 14
Oshkosh B Gosh, Inc. Class A 729 13
*Genesco, Inc. 1,345 11
*Hartmarx Corp. 1,740 11
Skyline Corp. 622 10
N L Industries, Inc. 2,029 10
*National Intergroup, Inc. 744 10
SPX Corp. 528 9
First Mississippi Corp. 1,039 9
*Fedders Corp. 1,537 8
*Zenith Electronics Corp. 1,258 8
*National Education Corp. 959 6
*JWP, Inc. 1,876 2
</TABLE>
- ----------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $149,201) 163,362
- ----------------------------------------------------------------
23
<PAGE> 26
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.1%)
- ----------------------------------------------------------------
<S> <C>
U.S. TREASURY BILL--Note E
2.955%, 12/23/93 $100 $ 99
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account, 3.39%, 10/1/93 1,670 1,670
- ----------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $1,769) 1,769
- ----------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(Cost $150,970) 165,131
- ----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.1%)
- ----------------------------------------------------------------
Other Assets--Note C 662
Liabilities (877)
--------
(215)
- ----------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------
Applicable to 13,328,928 outstanding
shares of beneficial interest
(unlimited authorization--
no par value) $164,916
- ----------------------------------------------------------------
NET ASSET VALUE PER SHARE $12.37
================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Securities
(1) The combined market value of common stocks and Standard & Poors 500 Index
futures contracts represents 100.0% of net assets.
- ----------------------------------------------------------------
AT SEPTEMBER 30, 1993, NET ASSETS
CONSISTED OF:
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Per
(000) Share
---------- -------
<S> <C> <C>
Paid in Capital $148,640 $11.15
Undistributed Net
Investment Income 758 .06
Accumulated Net Realized Gains 1,360 .10
Unrealized Appreciation
of Investments 14,158 1.06
- ----------------------------------------------------------------
NET ASSETS $164,916 $12.37
- ----------------------------------------------------------------
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
Market
Value
EQUITY INCOME PORTFOLIO Shares (000)+
- -----------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (95.9%)
- -----------------------------------------------------------------
AUTO & TRUCKS (.2%)
Dana Corp. 2,000 $ 116
-----------
- -----------------------------------------------------------------
BANKS -- NEW YORK (1.7%)
Bankers Trust New York Corp. 5,500 440
J.P. Morgan & Co., Inc. 5,100 400
-----------
GROUP TOTAL 840
-----------
- -----------------------------------------------------------------
BANKS -- REGIONAL (1.5%)
Barnett Banks of Florida, Inc. 1,700 77
PNC Bank Corp. 17,800 547
Wachovia Corp. 2,400 94
-----------
GROUP TOTAL 718
-----------
- -----------------------------------------------------------------
CHEMICAL -- BASIC (6.3%)
ARCO Chemical Co. 18,400 764
Dow Chemical Co. 16,800 981
E.I. du Pont de Nemours & Co. 10,300 479
Hercules, Inc. 500 45
Monsanto Co. 8,800 576
Union Carbide Corp. 15,600 300
-----------
GROUP TOTAL 3,145
-----------
- -----------------------------------------------------------------
CHEMICAL -- DIVERSIFIED (.1%)
Minnesota Mining &
Manufacturing Co. 600 62
-----------
- -----------------------------------------------------------------
COMPUTERS & OFFICE EQUIPMENT (1.6%)
International Business
Machines Corp. 19,000 798
-----------
- -----------------------------------------------------------------
CONGLOMERATE (3.0%)
Hanson PLC ADR 35,600 654
Ogden Corp. 33,100 832
-----------
GROUP TOTAL 1,486
-----------
- -----------------------------------------------------------------
DRUGS (8.0%)
American Home Products Corp. 14,300 871
Bristol-Myers Squibb Co. 20,900 1,176
Eli Lilly & Co. 21,400 1,070
Upjohn Co. 29,000 826
-----------
GROUP TOTAL 3,943
-----------
- -----------------------------------------------------------------
ELECTRIC -- UTILITY (15.4%)
Allegheny Power Systems, Inc. 9,300 518
Baltimore Gas & Electric Co. 17,200 456
Consolidated Edison Co.
of New York, Inc. 11,100 401
FPL Group, Inc. 25,100 988
Northern States Power Co.
of Minnesota 7,100 329
Oklahoma Gas & Electric Co. 15,300 583
Pacificorp 39,900 $ 783
Pennsylvania Power and Light Co. 3,700 112
Potomac Electric Power Co. 19,300 552
Public Service Enterprise
Group Inc. 22,100 776
SCE Corp. 43,700 1,021
SCANA Corp. 4,700 239
Texas Utilities Co. 16,700 766
Union Electric Corp. 2,700 119
-----------
GROUP TOTAL 7,643
-----------
- -----------------------------------------------------------------
ELECTRIC EQUIPMENT (.3%)
Westinghouse Electric Corp. 12,000 156
-----------
- -----------------------------------------------------------------
ELECTRIC INSTRUMENTS (.8%)
Thomas & Betts Corp. 6,100 382
-----------
- -----------------------------------------------------------------
FINANCIAL SERVICES (3.9%)
H.F. Ahmanson & Co. 29,900 594
American Express Co. 18,500 659
Great Western Financial Corp. 35,900 705
-----------
GROUP TOTAL 1,958
-----------
- -----------------------------------------------------------------
FOOD -- PACKAGED (.6%)
Borden, Inc. 16,600 295
-----------
- -----------------------------------------------------------------
HOME APPLIANCES (.1%)
Maytag Corp. 3,500 59
-----------
- -----------------------------------------------------------------
HOUSEHOLD PRODUCTS (.6%)
Clorox Co. 5,800 310
-----------
- -----------------------------------------------------------------
INSURANCE -- DIVERSIFIED (5.9%)
Aetna Life and Casualty Co. 12,700 762
American General Corp. 7,900 259
CIGNA Corp. 15,700 1,021
The Travelers Corp. 23,800 895
-----------
GROUP TOTAL 2,937
-----------
- -----------------------------------------------------------------
INSURANCE -- PROPERTY & CASUALTY (.8%)
Continental Corp. 12,600 389
-----------
- -----------------------------------------------------------------
NATURAL GAS -- DIVERSIFIED (.6%)
Tenneco, Inc. 5,400 285
-----------
- -----------------------------------------------------------------
NATURAL GAS -- UTILITIES (2.9%)
Arkla, Inc. 11,400 100
Consolidated Natural Gas Co. 15,200 813
NICOR, Inc. 7,300 223
Pacific Enterprises 10,800 286
-----------
GROUP TOTAL 1,422
-----------
- -----------------------------------------------------------------
</TABLE>
25
<PAGE> 28
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------
<S> <C> <C>
PAPER & FOREST PRODUCTS (1.4%)
Union Camp Corp. 7,100 $ 301
Weyerhaeuser Co. 9,100 371
---------
GROUP TOTAL 672
---------
- -----------------------------------------------------------------
PETROLEUM -- DOMESTIC (4.9%)
Amoco Corp. 8,900 514
Atlantic Richfield Co. 9,700 1,109
Sun Co., Inc. 10,900 311
USX-Marathon Group 25,000 500
---------
GROUP TOTAL 2,434
---------
- -----------------------------------------------------------------
PETROLEUM -- INTERNATIONAL (10.4%)
Chevron Corp. 10,700 1,046
Exxon Corp. 15,700 1,028
Mobil Corp. 14,900 1,216
Royal Dutch Petroleum Co. 5,500 559
Texaco, Inc. 19,000 1,287
---------
GROUP TOTAL 5,136
---------
- -----------------------------------------------------------------
PHOTOGRAPHY (2.2%)
Eastman Kodak Co. 18,400 1,090
---------
- -----------------------------------------------------------------
PUBLISHING (2.8%)
The Dun & Bradstreet Corp. 13,900 869
John H. Harland Co. 8,700 223
McGraw-Hill, Inc. 4,700 318
---------
GROUP TOTAL 1,410
---------
- -----------------------------------------------------------------
RETAIL -- GENERAL MERCHANDISE (4.3%)
Kmart Corp. 41,800 1,008
J.C. Penney Co., Inc. 10,200 478
Sears, Roebuck & Co. 3,700 199
Woolworth Corp. 17,100 428
---------
GROUP TOTAL 2,113
---------
- -----------------------------------------------------------------
RETAIL -- SPECIAL LINES (.7%)
McKesson Corp. 7,200 365
---------
- -----------------------------------------------------------------
TELECOMMUNICATIONS (11.3%)
Ameritech Corp. 8,400 719
Bell Atlantic Corp. 12,000 765
BellSouth Corp. 15,000 908
GTE Corp. 26,400 1,013
NYNEX Corp. 27,000 1,239
Pacific Telesis Group 2,200 119
U.S. West Corp. 16,800 827
---------
GROUP TOTAL 5,590
---------
- -----------------------------------------------------------------
TOBACCO (3.6%)
American Brands, Inc. 27,600 $ 897
Philip Morris Cos., Inc. 19,600 899
---------
GROUP TOTAL 1,796
---------
- -----------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $45,692) 47,550
- -----------------------------------------------------------------
TEMPORARY CASH INVESTMENT (7.9%)
- -----------------------------------------------------------------
REPURCHASE AGREEMENT Face
Amount
(000)
------
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 3.39%, 10/1/93
(Cost $3,921) $3,921 3,921
- -----------------------------------------------------------------
TOTAL INVESTMENTS (103.8%)
(Cost $49,613) 51,471
- -----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.8%)
- -----------------------------------------------------------------
Other Assets--Note C 534
Liabilities (2,430)
---------
(1,896)
- -----------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------
Applicable to 4,691,602 outstanding
of beneficial interest
(unlimited authorization--
no par value) $49,575
- -----------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.57
=================================================================
+See Note A to Financial Statements.
- -----------------------------------------------------------------
AT SEPTEMBER 30, 1993,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------
Amount Per
(000) Share
------- ------
Paid in Capital $47,516 $10.13
Undistributed Net Investment
Income 128 .03
Accumulated Net Realized Gains 73 .01
Unrealized Appreciation of Investments 1,858 .40
- -----------------------------------------------------------------
NET ASSETS $49,575 $10.57
- -----------------------------------------------------------------
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
Market
Value
GROWTH PORTFOLIO Shares (000)+
- -----------------------------------------------------------------
COMMON STOCKS (79.8%)
- -----------------------------------------------------------------
<S> <C> <C>
RETAIL AND DISTRIBUTION (9.0%)
Home Depot, Inc. 2,200 $ 85
TJX Cos., Inc. 3,400 102
*Toys R Us, Inc. 28,100 1,036
Wal-Mart Stores, Inc. 64,900 1,598
Walgreen Co. 11,000 411
-----------
GROUP TOTAL 3,232
-----------
- -----------------------------------------------------------------
CONSUMER (22.1%)
*Caesars World, Inc. 1,000 49
Carnival Cruise Lines, Inc. 5,300 233
*Circus Circus Enterprises, Inc. 3,900 179
Duracell International, Inc. 17,100 624
General Mills, Inc. 10,200 615
Gillette Co. 18,900 1,084
Hilton Hotels Corp. 900 44
McDonald's Corp. 29,900 1,551
PepsiCo, Inc. 38,700 1,514
Polygram NV 2,400 83
Procter & Gamble Co. 20,500 974
*Promus Co. Inc. 3,400 257
Rubbermaid, Inc. 8,100 268
Unilever NV 3,900 416
-----------
GROUP TOTAL 7,891
-----------
- -----------------------------------------------------------------
TECHNOLOGY (2.0%)
AMP, Inc. 2,500 165
*Microsoft Corp. 3,000 247
*Novell, Inc. 16,800 315
-----------
GROUP TOTAL 727
-----------
- -----------------------------------------------------------------
HEALTH CARE (9.5%)
Abbott Laboratories, Inc. 18,900 517
IMCERA Group, Inc. 12,500 405
Medtronic, Inc. 1,300 88
Merck & Co., Inc. 10,400 320
National Health Laboratories Inc. 10,000 153
Pfizer, Inc. 21,600 1,285
Warner-Lambert Co. 5,400 357
Wellcome PLC ADR 26,200 269
-----------
GROUP TOTAL 3,394
-----------
- -----------------------------------------------------------------
FINANCE AND INSURANCE (17.3%)
Ambac, Inc. 2,100 101
American International
Group, Inc. 12,300 1,207
Chemical Banking Corp. 24,500 1,103
Countrywide Credit
Industries, Inc. 8,000 260
Federal Home Loan Mortgage Corp. 30,300 $ 1,534
Federal National Mortgage Assn. 20,700 1,630
Norwest Corp. 2,500 69
Progressive Corp. of Ohio 2,600 108
TIG Holdings, Inc. 6,300 157
-----------
GROUP TOTAL 6,169
-----------
- -----------------------------------------------------------------
MEDIA (2.1%)
Knight-Ridder, Inc. 3,700 193
Reuters Holdings PLC ADR 8,100 559
-----------
GROUP TOTAL 752
-----------
- -----------------------------------------------------------------
OTHER (17.8%)
Automatic Data Processing, Inc. 27,700 1,392
First Data Corp. 5,600 219
First Financial Management 8,500 465
General Electric Co. 16,800 1,609
General Motors Corp. Class E 19,800 577
Great Lakes Chemical Corp. 1,300 92
Illinois Tool Works, Inc. 2,500 97
Minnesota Mining &
Manufacturing Co. 2,800 288
Morton International, Inc. 4,700 412
*Renaissance Energy Ltd. 7,500 186
*Tarragon Oil & Gas Ltd. 6,800 97
WMX Technologies Inc. 25,100 765
York International Corp. 4,500 158
-----------
GROUP TOTAL 6,357
-----------
- -----------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $27,942) 28,522
- -----------------------------------------------------------------
TEMPORARY CASH INVESTMENT (19.9%)
- -----------------------------------------------------------------
REPURCHASE AGREEMENT Face
Amount
(000)
--------
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 3.39%, 10/1/93
(Cost $7,105) $7,105 7,105
- -----------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(Cost $35,047) 35,627
- -----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.3%)
- -----------------------------------------------------------------
Other Assets--Note C 478
Liabilities (377)
-----------
101
- -----------------------------------------------------------------
</TABLE>
27
<PAGE> 30
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
(000)+
- -----------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------
<S> <C> <C>
Applicable to 3,482,958 outstanding
$.001 par value shares
(unlimited authorization--
no par value) $35,728
- -----------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.26
=================================================================
+See Note A to Financial Statements.
*Non-Income Producing Securities.
- -----------------------------------------------------------------
AT SEPTEMBER 30, 1993,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------
Amount Per
(000) Share
----- ----
Paid in Capital $35,125 $10.08
Undistributed Net Investment
Income 144 .04
Accumulated Net Realized Losses (121) (.03)
Unrealized Appreciation of Investments 580 .17
- -----------------------------------------------------------------
NET ASSETS $35,728 $10.26
- -----------------------------------------------------------------
</TABLE>
28
<PAGE> 31
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MONEY HIGH-GRADE
MARKET BOND BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1993 1993 1993
(000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends -- -- $3,062
Interest $3,000 $3,982 3,421
- ----------------------------------------------------------------------------------------------------------------------
Total Income 3,000 3,982 6,483
- ----------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B
Basic Fee 8 4 139
Performance Adjustment -- -- (2)
The Vanguard Group--Note C
Management and Administrative 189 127 320
Marketing and Distribution 30 13 23
Custodian's Fees 14 16 5
Auditing Fees 9 9 10
Shareholders' Reports 9 11 17
Annual Meeting and Proxy Costs 3 3 5
- ----------------------------------------------------------------------------------------------------------------------
Total Expenses 262 183 517
- ----------------------------------------------------------------------------------------------------------------------
Net Investment Income 2,738 3,799 5,966
- ----------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)--Note D
Investment Securities Sold -- 1,197 1,727
Futures Contracts -- 27 --
- ----------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) -- 1,224 1,727
- ----------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)--Notes D and E
Investment Securities -- 1,046 9,903
Futures Contracts -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) -- 1,046 9,903
- ----------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $2,738 $6,069 $17,596
======================================================================================================================
</TABLE>
29
<PAGE> 32
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
EQUITY EQUITY
INDEX INCOME GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
Year Ended June 7 to June 7 to
September 30, September 30, September 30,
1993 1993 1993
(000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends $3,861 $429 $104
Interest 111 35 67
- ----------------------------------------------------------------------------------------------------------------------
Total Income 3,972 464 171
- ----------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B
Basic Fee 30 12 14
Performance Adjustment -- -- --
The Vanguard Group--Note C
Management and Administrative 290 23 13
Marketing and Distribution 26 -- --
Custodian's Fees 17 -- --
Auditing Fees 10 -- --
Shareholders' Reports 16 -- --
Annual Meeting and Proxy Costs 5 -- --
- ----------------------------------------------------------------------------------------------------------------------
Total Expenses 394 35 27
- ----------------------------------------------------------------------------------------------------------------------
Net Investment Income 3,578 429 144
- ----------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)--Note D
Investment Securities Sold 1,036 73 (121)
Futures Contracts 325 -- --
- ----------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) 1,361 73 (121)
- ----------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)--Notes D and E
Investment Securities 10,453 1,858 580
Futures Contracts 4 -- --
- ----------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) 10,457 1,858 580
- ----------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations $15,396 $2,360 $603
======================================================================================================================
</TABLE>
30
<PAGE> 33
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MONEY HIGH-GRADE
MARKET BOND BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended YEAR ENDED Year Ended
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30, SEPT. 30, Sept. 30,
1993 1992 1993 1992 1993 1992
(000) (000) (000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $2,738 $2,056 $3,799 $2,101 $5,966 $2,086
Realized Net Gain (Loss)--Note D -- -- 1,224 174 1,727 411
Change in Unrealized Appreciation
(Depreciation)--Notes D and E -- -- 1,046 1,381 9,903 1,858
- ----------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 2,738 2,056 6,069 3,656 17,596 4,355
- ----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income (2,738) (2,056) (3,799) (2,101) (7,655) (1,701)
Realized Net Gain -- -- (231) (59) (263) --
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions (2,738) (2,056) (4,030) (2,160) (7,918) (1,701)
- ----------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--
Note A -- -- -- -- 793 1,043
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular 335,904 240,907 58,665 48,113 129,863 63,540
--In Lieu of Cash
Distributions 2,738 2,056 4,030 2,159 7,895 1,681
Redeemed (295,669) (199,585) (31,160) (16,143) (33,283) (5,465)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share
Transactions 42,973 43,378 31,535 34,129 104,475 59,756
- ----------------------------------------------------------------------------------------------------------------------
Total Increase 42,973 43,378 33,574 35,625 114,946 63,453
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 70,649 27,271 51,643 16,018 76,351 12,898
- ----------------------------------------------------------------------------------------------------------------------
End of Period $113,622 $70,649 $85,217 $51,643 $191,297 $76,351
======================================================================================================================
(1) Distributions Per Share
Net Investment Income $.030 $.040 $.636 $.705 $.69 $.45
Realized Net Gain -- -- $.049 $.027 $.03 --
- ----------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued 335,904 240,907 5,483 4,638 11,742 6,154
Issued in Lieu of Cash
Distributions 2,738 2,056 378 208 717 161
Redeemed (295,669) (199,585) (2,928) (1,557) (2,988) (525)
- ----------------------------------------------------------------------------------------------------------------------
42,973 43,378 2,933 3,289 9,471 5,790
- ----------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net
Investment Income -- -- -- -- $772 $1,668
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 34
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
EQUITY EQUITY
INDEX INCOME GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended JUNE 7 TO JUNE 7 TO
SEPT. 30, Sept. 30, SEPT. 30, SEPT. 30,
1993 1992 1993 1993
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 3,578 $ 1,587 $ 429 $ 144
Realized Net Gain (Loss)--Note D 1,361 206 73 (121)
Change in Unrealized Appreciation
(Depreciation)--Notes D and E 10,457 3,346 1,858 580
- -------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 15,396 5,139 2,360 603
- -------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income (3,537) (1,058) (477) --
Realized Net Gain (189) -- -- --
- -------------------------------------------------------------------------------------------------------
Total Distributions (3,726) (1,058) (477) --
- -------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--
Note A -- -- 176 --
- -------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular 117,081 75,436 49,746 38,418
--In Lieu of Cash Distributions 3,726 1,058 476 --
Redeemed (52,710) (19,412) (2,706) (3,293)
- -------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions 68,097 57,082 47,516 35,125
- -------------------------------------------------------------------------------------------------------
Total Increase 79,767 61,163 49,575 35,728
- -------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 85,149 23,986 -- --
- -------------------------------------------------------------------------------------------------------
End of Period $164,916 $85,149 $49,575 $35,728
=======================================================================================================
(1) Distributions Per Share
Net Investment Income $ .34 $ .24 $ .11 --
Realized Net Gain $ .02 -- -- --
- -------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued 9,884 6,905 4,908 3,806
Issued in Lieu of Cash Distributions 317 96 46 --
Redeemed (4,393) (1,775) (262) (323)
- -------------------------------------------------------------------------------------------------------
5,808 5,226 4,692 3,483
- -------------------------------------------------------------------------------------------------------
(3) Undistributed Net
Investment Income $ 758 $ 717 $ 128 $ 144
- -------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 35
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MONEY HIGH-GRADE
MARKET BOND
PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended May 2+- YEAR ENDED Year Ended April 29-
SEPT. 30, Sept. 30, Sept. 30, SEPT. 30, Sept. 30, Sept. 30,
For a Share Outstanding Throughout Each Period 1993 1992 1991 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $10.64 $10.24 $10.00
----- ----- ----- ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income .030 .040 .023 .636 .705 .299
Net Realized and Unrealized Gain (Loss)
on Investments -- -- -- .349 .427 .240
----- ----- ----- ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS .030 .040 .023 .985 1.132 .539
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.030) (.040) (.023) (.636) (.705) (.299)
Distributions from Realized Capital Gains -- -- -- (.049) (.027) --
----- ----- ----- ------- ------- ------
TOTAL DISTRIBUTIONS (.030) (.040) (.023) (.685) (.732) (.299)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $10.94 $10.64 $10.24
==================================================================================================================================
TOTAL RETURN +3.05% +4.11% +2.35% +9.64% +11.47% +5.48%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) $114 $71 $27 $85 $52 $16
Ratio of Expenses to Average Net Assets .29% .33% .34%* .29% .32% .40%*
Ratio of Net Investment Income
to Average Net Assets 3.00% 3.90% 5.50%* 5.92% 6.66% 6.89%*
Portfolio Turnover Rate N/A N/A N/A 73% 31% 9%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
+Commencement of Operations.
33
<PAGE> 36
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
BALANCED EQUITY INDEX
PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended May 23+- YEAR ENDED Year Ended April 29+
SEPT. 30, Sept. 30, Sept. 30, SEPT. 30, Sept. 30, Sept. 30,
For a Share Outstanding Throughout Each Period 1993 1992 1991 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.83 $10.25 $10.00 $11.32 $10.45 $10.00
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income .67 .51 .19 .34 .26 .08
Net Realized and Unrealized Gain (Loss)
on Investments .80 .52 .06 1.07 .85 .37
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS 1.47 1.03 .25 1.41 1.11 .45
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.69) (.45) -- (.34) (.24) --
Distributions from Realized Capital Gains (.03) -- -- (.02) -- --
------- ------ ------ ------- ------ ------
TOTAL DISTRIBUTIONS (.72) (.45) -- (.36) (.24) --
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.58 $10.83 $10.25 $12.37 $11.32 $10.45
==================================================================================================================================
TOTAL RETURN +14.10% +10.29% +2.50% +12.68% +10.74% +4.50%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) $191 $76 $13 $165 $85 $24
Ratio of Expenses to Average Net Assets .39% .42% .51%* .29% .32% .45%*
Ratio of Net Investment Income
to Average Net Assets 4.45% 4.77% 5.24%* 2.63% 2.84% 3.22%*
Portfolio Turnover Rate 41% 15% 3% 16% 1% 5%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
+Commencement of Operations.
34
<PAGE> 37
<TABLE>
<CAPTION>
EQUITY INCOME GROWTH
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------
JUNE 7+ TO SEPT. 30, JUNE 7+ TO SEPT. 30,
For a Share Outstanding Throughout the Period 1993 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
------ ------
INVESTMENT OPERATIONS
Net Investment Income .14 .04
Net Realized and Unrealized Gain (Loss) on Investments .54 .22
------ ------
TOTAL FROM INVESTMENT OPERATIONS .68 .26
- -------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.11) --
Distributions from Realized Capital Gains -- --
------ ------
TOTAL DISTRIBUTIONS (.11) --
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.57 $10.26
=======================================================================================================
TOTAL RETURN +6.81% +2.60%
- -------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) $50 $36
Ratio of Expenses to Average Net Assets .39%* .43%*
Ratio of Net Investment Income to Average Net Assets 4.30%* 1.63%*
Portfolio Turnover Rate 2% 10%
- -------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
+Commencement of Operations.
35
<PAGE> 38
NOTES TO FINANCIAL STATEMENTS
Vanguard Variable Insurance Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company and consists of the Money
Market, High-Grade Bond, Balanced, Equity Index, Equity Income and Growth
Portfolios. Certain investments of the Money Market, High-Grade Bond and
Balanced Portfolios are in corporate debt instruments; the issuers' abilities
to meet their obligations may be affected by economic developments in their
respective industries. Shares of the Fund are currently offered only to
National Home Life Assurance Company Separate Account IV and Separate Account B
for the Vanguard Variable Annuity Plan Contract.
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: Money Market Portfolio: securities are stated at
amortized cost which approximates market value. Other Portfolios: common
stocks listed on an exchange are valued at the latest quoted sales prices
as of 4:00 PM on the valuation date; such securities not traded are valued
at the mean of the latest quoted bid and asked prices; those securities not
listed are valued at the latest quoted bid prices. Bonds are valued
utilizing the latest bid prices and on the basis of a matrix system (which
considers such factors as security prices, yields, maturities and ratings),
both as furnished by independent pricing services. Temporary cash
investments are valued at amortized cost, which approximates market value.
2. FEDERAL INCOME TAXES: Each Portfolio of 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. EQUALIZATION: The Balanced and Equity Income Portfolios follow the
accounting practice known as "equalization," under which a portion of the
price of capital shares issued and redeemed, equivalent to undistributed
net investment income per share on the date of the transaction, is credited
or charged to undistributed income. As a result, undistributed income per
share is unaffected by Portfolio share sales or redemptions.
4. 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 the 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.
5. FUTURES: The High-Grade Bond and Equity Index Portfolios may utilize
futures contracts to a limited extent. The primary risks associated with
the use of futures contracts are imperfect correlation between the change
in market value of the securities held by the Portfolio and the prices of
futures contracts, and the possibility of an illiquid market. Futures
contracts are valued based upon their quoted daily settlement prices;
changes in initial settlement value are accounted for as unrealized
appreciation (depreciation) until the contracts are terminated, at which
time realized gains (losses) are recognized. Unrealized appreciation
(depreciation) related to open futures contracts is required to be treated
as realized gain (loss) for federal income tax purposes.
6. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on sale of investment securities are those of specific securities sold.
Discounts and premiums on securities purchased are amortized to interest
income over the lives of the respective securities. Distributions to
shareholders of the Money
36
<PAGE> 39
Market and High-Grade Bond Portfolios are declared on a daily basis payable
on the first business day of the following month. Dividend income and
distributions to shareholders of the Balanced, Equity Index, Equity Income
and Growth Portfolios are recorded on the ex-dividend date.
B. Under the terms of advisory contracts, investment advisory fee payments are
calculated at an annual percentage rate of average net assets of the following
Portfolios.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Contract
Investment Expiration
Portfolio Adviser Date
- ----------------------------------------------------------------
<S> <C> <C>
BALANCED WELLINGTON MANAGEMENT APRIL 30, 1994
COMPANY
EQUITY INCOME NEWELL ASSOCIATES MAY 31, 1995
GROWTH LINCOLN CAPITAL MAY 31, 1995
MANAGEMENT COMPANY
- -----------------------------------------------------------------
</TABLE>
The basic fee thus computed for the Balanced Portfolio is subject to
quarterly adjustments based on performance relative to a combined index
comprised of the Standard & Poor's 500 Stock Index and the Salomon Brothers High
Grade Corporate Bond Index. For the periods ended September 30, 1993, the
investment advisory fee of the Balanced Portfolio represented an effective
annual rate of .10 of 1% of average net assets before a decrease of $2,000 based
on performance; the advisory fees of the Equity Income and Growth Portfolios
represented effective annual rates of .10 of 1% and .15 of 1%, respectively, of
average net assets.
The Vanguard Group, Inc. furnishes investment advisory services to the Money
Market, High-Grade Bond and Equity Index Portfolios on an at-cost basis.
C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing and distribution services. The costs of such services
are allocated to each Portfolio of the Fund under methods approved by the Board
of Trustees. At September 30, 1993, the Fund had contributed capital of
$103,000 to Vanguard (included in Other Assets), representing .5% of Vanguard's
capitalization. The Fund's trustees and officers are also directors and
officers of Vanguard.
D. During the periods ended September 30, 1993, 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>
HIGH-GRADE BOND $20,338 $6,685
BALANCED 104,479 26,949
EQUITY INDEX 75,776 21,728
EQUITY INCOME 46,056 436
GROWTH 29,928 1,832
- -----------------------------------------------------------------
</TABLE>
Purchases and sales of U.S. Government securities were:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(000)
-------------------------------
Portfolio Purchases Sales
- -----------------------------------------------------------------
<S> <C> <C>
HIGH-GRADE BOND $65,167 $39,924
BALANCED 49,154 26,535
- -----------------------------------------------------------------
</TABLE>
At September 30, 1993, the Growth Portfolio had available a capital loss carry
forward of $121,000 to offset future net capital gains through September 30,
2001.
At September 30, 1993, unrealized appreciation (depreciation) of investment
securities for financial reporting and federal income tax purposes was:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(000)
-----------------------------------------
Net
Appreciated Depreciated Unrealized
Portfolio Securities Securities Appreciation
- -----------------------------------------------------------------
<S> <C> <C> <C>
HIGH-GRADE BOND $2,790 $(36) $2,754
BALANCED 15,227 (3,256) 11,971
EQUITY INDEX 22,761 (8,600) 14,161
EQUITY INCOME 2,329 (471) 1,858
GROWTH 1,239 (659) 580
- -----------------------------------------------------------------
</TABLE>
37
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS (continued)
E. At September 30, 1993, the aggregate settlement value of open Standard &
Poor's 500 Index futures contracts expiring in December, 1993, held by the
Equity Index Portfolio, the related unrealized depreciation, and the market
value of securities deposited as initial margin for such contracts were
$1,608,000, $3,000 and $99,000 respectively.
F. The market value of Balanced Portfolio securities on loan to broker/dealers
at September 30, 1993, was $18,026,000, for which the Fund has received as
collateral cash of $2,123,000 and U.S. Treasury securities with a market value
of $16,462,000.
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, realization and/or
retention of the collateral may be subject to legal proceedings.
38
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard Variable Insurance Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Money Market, High-Grade Bond, Balanced, Equity Index, Equity Income and
Growth Portfolios of Vanguard Variable Insurance Fund (the "Fund") at September
30, 1993, the results of each of their operations, the changes in each of their
net assets and the financial highlights for each 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
39
<PAGE> 42
TRUSTEES 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.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of Dayton
Hudson Corporation, American Express Bank Ltd., and The St. Paul Companies,
Inc.
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
40
<PAGE> 43
(Continued from inside front cover)
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> 44
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
Variable Annuity
Vanguard Variable Annuity Plan
[VANGUARD LOGO]
Vanguard Financial Center - Valley Forge, Pennsylvania 19482
<TABLE>
<S> <C>
New Account Information 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
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.
Q640-09/93
<PAGE> 45
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.
Line charts illustrating cumulative performance of the Vanguard Money
Market Portfolio compared to (i)the Average Money market fund and (ii)the
Salomon 90-day T-Bill Fund for the years 1991 through 1993 appears on page 9.
line charts illustrating cumulative performance of the Vanguard
High-Grade Portfolio compared to (i) the Average Fixed Fixed Income Fund and
(ii) the Lehman Aggregate Bond Index for the years 1991 through 1993 appear on
page 9.
Line charts illustrating cumulative performance of the Vanguard
Balanced Porfolio compared to (i) theAverage balance Fund and (ii) the
Composite Index for the years 1991 through 1993 appear on page 10.
Line charts illustrating cumulative performance of the Vanguard Equity
Index Portfolio compared to (i) the average Growth & Income Fund and (ii) the
Standard & Poor's 500 Index for the years 1991 through 1993 appear on page 10.
