-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, HTkFMml0XWxZpyp2ttHbDjXzidOwH2UWUZelIvoJ2cek/BbBTuGvXs7OT1RgdX7B vjU1h631ixz9Xkp3EMKyJQ== 0000893220-94-000029.txt : 19940202 0000893220-94-000029.hdr.sgml : 19940202 ACCESSION NUMBER: 0000893220-94-000029 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19930930 FILED AS OF DATE: 19940201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD SMALL CAPITALIZATION STOCK FUND INC CENTRAL INDEX KEY: 0000069559 STANDARD INDUSTRIAL CLASSIFICATION: 0000 IRS NUMBER: 520794097 STATE OF INCORPORATION: PA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-30D SEC ACT: 40 SEC FILE NUMBER: 811-00928 FILM NUMBER: 94504048 BUSINESS ADDRESS: STREET 1: 1300 MORRIS DR STREET 2: P O BOX 2600 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 2156691000 FORMER COMPANY: FORMER CONFORMED NAME: NAESS & THOMAS SPECIAL FUND INC DATE OF NAME CHANGE: 19890905 N-30D 1 SMALL CAPITALIZATION FUND REPORT END 9/30/93 1 VANGUARD SMALL CAPITALIZATION STOCK FUND ANNUAL REPORT 1993 [PHOTO] 2 A BRAVE NEW WORLD FOR INVESTING With the clarity of hindsight, we can now see that the past two decades composed one of the great cycles in the history of the financial markets, as reflected in the chart below. . During the 1973-1982 decade, the nominal total returns (capital change plus income) of stocks and bonds averaged only about +6% per year; cash reserves averaged more than +8% annually. However, high inflation rates, averaging 8.7% annually, devastated these nominal results. Real returns (nominal returns less the inflation rate) for each of these three major asset classes were actually negative. . During the 1983-1992 decade, quite the opposite situation prevailed. Nominal returns for stocks and bonds were close to their highest levels in history and forged well into double-digit territory. To make a good investment environment even better, inflation was tame (averaging 3.8% annually), and real returns were solidly positive. [EDGAR REFERENCE -- BAR GRAPH] This sharp contrast provides us with perspective for the decade that will end in the year 2002. Some investors will fear a recurrence of the returns of the first decade, while others will hope for a recurrence of the second; most will likely anticipate something in between. Whatever the case, there are two essential elements involved in considering your investment program in the light of today's circumstances. First, the yield of each investment class at the start of a decade has had an important relationship to its future return. Yields were low when 1973 began, high when 1983 began, and are again low today. In fact, current income yields are remarkably close to the levels of 20 years ago, as shown in the following table. Income Yields (January 1) --------------------------------------- 1973 1983 1993 (12/31) - ---------------------------------------------------------- STOCKS 2.7% 4.9% 2.7% BONDS 5.8 10.7 6.0 RESERVES 3.8 10.5 3.1 - ---------------------------------------------------------- But there is a second important element to consider: inflation. It got progressively worse during most of the first decade, but got progressively better in the second. --------------------------------------- 1973 1981 1993 (12/31) - ---------------------------------------------------------- INFLATION 3.4% 12.4% 2.7% - ---------------------------------------------------------- Today's low yield levels suggest that more modest nominal returns are in prospect for the coming decade than in the 1980s; indeed, returns could gravitate (Please turn to inside back cover) - ----------------------------------------------------------------------------- VANGUARD SMALL CAPITALIZATION STOCK FUND seeks long-term capital appreciation by investing in a highly diversified portfolio of small companies selected to parallel the characteristics and return of the Russell 2000 Index. 3 CHAIRMAN'S LETTER [EDGAR REFERENCE - PHOTO OF JOHN C. BOGLE] FELLOW SHAREHOLDER: The 1993 fiscal year of Vanguard Small Capitalization Stock Fund, which ended on September 30, was an outstanding period for stocks with small market capitalizations and therefore for your Fund. While the unmanaged Standard & Poor's 500 Composite Stock Price Index, with a total return of +13.0%, enjoyed a strong year, Vanguard SmallCap Stock Fund garnered a remarkable return of +31.6%--nearly two and one-half times as large. That said, I would note that the Fund's total return (capital change plus income) fell just a bit short of the return of the unmanaged Russell 2000 Index--the benchmark that we use as our matching standard--which consists primarily of stocks with small market capitalizations. Here are the comparative results:
- --------------------------------------------------------------------- Total Return ------------------ Fiscal Year Ended September 30, 1993 - --------------------------------------------------------------------- Vanguard Small Capitalization Stock Fund +31.6% - --------------------------------------------------------------------- Russell 2000 Index +33.2% - ---------------------------------------------------------------------
The Fund's total return is based on net asset values of $12.63 per share on September 30, 1992, and $16.23 on September 30, 1993, with the latter figure adjusted to take into account the reinvestment of our annual dividend of $.18 per share from net investment income and a distribution of $.15 per share from net realized capital gains. Both payments were the result of our operations during calendar 1992. THE FISCAL YEAR IN REVIEW It was a "small cap" year almost from beginning to end. The +33.2% rise in the Russell 2000 Index--in which the average company has a market capitalization of $270 million--was far greater than the +13.0% rise for the Standard & Poor's 500 Index, dominated by large "blue chip" stocks with an average market capitalization of $15 billion. Given this more than 50-fold differential in company size, it would be surprising if such periods of disparity in the returns of the two indexes did not arise with some frequency. During fiscal 1993, the disparity was created, to an important degree, by substantial weakness in some of the largest stocks in the Standard & Poor's 500 Index. Two areas hit particularly hard were drug stocks (resulting in part from fears about the Administration's health-care proposals) and "name brand" stocks (companies for which brand loyalty no longer seems to assure ever-ascending earnings). Despite the fact that such "consumer staples" issues composed fully 26% of the weight of the Standard & Poor's 500 Index at the outset of the Fund's fiscal year, the Index's total return was a fairly satisfactory +13.0%. Interestingly, excluding the performance of the consumer staples stocks, the total return of the Standard & Poor's 500 Index would have been +21.4%. On the other hand, the small capitalization Russell 2000 Index benefited greatly from its insulation from the large consumer staples stocks. (Continued) 1 4 [EDGAR REFERENCE - S&P 500 AND RUSSELL 2000 INDEX LINE CHART FOR 1989-1993] At the same time, financial and technology stocks carry a substantial weight in the Russell universe (38% of market capitalization vs. 20% in the Standard & Poor's Index), and these two groups led the small cap market upward by a dramatic margin. Without these stocks, the total return of the Russell 2000 Index would have been +21.3%, virtually identical to the return on the "consumer staples free" Standard & Poor's 500 Index as noted above. Of course, differences such as these are what make financial markets interesting and challenging. Nonetheless, each phase of the market has its own character, and there is no assurance--indeed, no possibility--that small cap stocks will be as successful year after year as they were in fiscal 1993. The chart above shows the cumulative returns of the Russell 2000 Index and the Standard & Poor's 500 Index over the past five years. You can see that the results favor large capitalization stocks by a solid margin: small stocks +86%; large stocks +98%. While the chart reflects periods of relative strength for each Index over the past five years, it actually understates how striking the variations in performance have been from one year to the next, as shown in this tabulation of annual returns:
- ------------------------------------------------------------------------------ Total Returns Twelve-Month Periods Ended September 30 --------------------------------------- Russell Standard Russell Index 2000 & Poor's Relative to Index 500 Index S&P 500 Index - ------------------------------------------------------------------------------- 1989 +21.5% +32.9% -11.4% 1990 -27.2 - 9.2 -18.0 1991 +45.1 +31.1 +14.0 1992 + 8.9 +11.0 - 2.1 1993 +33.2 +13.0 +20.2 - ------------------------------------------------------------------------------- Cumulative Return +86.3% +98.3% -12.0% - ------------------------------------------------------------------------------- Average Annual Return +13.3% +14.7% - 1.4% - -------------------------------------------------------------------------------
The table should make it crystal clear not only that the return of the two indexes vary widely, but that the returns of stocks in general tend to be quite volatile. THE FUND IN FISCAL 1993 Vanguard Small Capitalization Stock Fund enjoyed a competitive 1993 fiscal year. Our return of +31.6% compared favorably with the +31.7% return for the average small company fund. While, our ability to match the performance of the Russell 2000--the Index we have chosen as our "tracking" standard--was again reaffirmed, our tracking was not nearly as close as we would expect over the long term. We came within -1.6 percentage points of our benchmark during the past fiscal year, compared to an average shortfall of -0.3% since we moved to our index-matching strategy four years ago. I suppose it is worth emphasizing again the challenges of matching the Russell 2000 Index: (1) the Index has no operating expenses, while our Fund's total expenses last year created an unavoidable "drag" equal to 0.18% of average net assets; (2) the Index comprises 2000 stocks, while our Fund owns only about one-half that number, albeit carefully selected to minimize our random tracking error, which can be positive or negative in any given period; (3) the Index exists only on paper, while the Fund has to buy and sell "real" securities, a relatively expensive business in the markets for 2 5 [EDGAR REFERENCE - PERFORMANCE LINE CHART VANGUARD SMALLCAP, AVERAGE SMALL CAP AND RUSSELL 2000 INDEX] small cap stocks; (4) the Index experiences no cash inflow or outflow, while the Fund must invest or liquidate securities with cash flows (the 1% transaction fee paid by investors when they purchase new shares mitigates the impact of this cost). This last challenge is often greatest in a year like fiscal 1993, when fund assets more than doubled, from $202 million to $432 million. About $155 million of this increase represented cash flow; market appreciation accounted for about $75 million. The question has been raised lately whether the so-called "inefficiency" of the small cap markets makes an index strategy less appropriate than in a large cap market such as the Standard & Poor's 500. Can a small cap index compete with managers who have demonstrated particular skill in their evaluation of small company stocks? Our vote is a strong "yes." Even if there are managers who display great skill in selecting small cap stocks, there are, inevitably, managers who display no skill. (To be sure, identifying the former in advance is no mean challenge.) That, after all, is what indexing is all about: (1) avoid the worst performing funds from one year to the next; (2) relinquish the opportunity to own the best performers; and (3), by virtue of low portfolio turnover, minimal expenses, and the absence of substantial advisory fees, outpace the average manager over an extended period of years. Thus far, the jury of the marketplace is still out, in part because mutual funds investing in small company stocks concentrate more on faster-growing, lower-yielding growth stocks than on the more cyclical, higher-yielding value stocks that dominate the performance of the Russell 2000 Index. A true comparison of "like with like" is therefore problematic. That said, Vanguard Small Capitalization Stock Fund outpaced the average small cap fund over the past two years. However, largely because of an unfavorable comparison (for both the Fund and the Index) in our 1990 fiscal year, the average annual rates of return for the four years since we adopted our "index matching" strategy on September 30, 1989, were: Vanguard Small Capitalization Stock Fund +11.0%; average small company stock fund +13.6%. (continued) 3 6 A LONG-TERM VIEW The Fund's lifetime record going all the way back to 1960, when it was named Naess and Thomas Special Fund, is shown in the table on page 6. The chart on page 3 shows our cumulative returns over the past decade, compared with those of the Russell 2000 Index as well as the average small company stock fund. This table summarizes the comparison:
- ------------------------------------------------------------------------------ Average Annual Total Returns ---------------------------- Ten Years Ended September 30, 1993 ------------------ First Last Full Six Years Four Years Ten Years - ------------------------------------------------------------------------------- Vanguard SmallCap Fund +2.8% +11.0% + 6.0% - ------------------------------------------------------------------------------- Average SmallCap Fund +9.1% +13.6% +10.9% Russell 2000 Index +9.5 +11.3 +10.2 - -------------------------------------------------------------------------------
If it does nothing else, the chart provides a clear view of our rationale in moving in 1989 from a conventional "active management" strategy to an unconventional "passive management" strategy. For the first six years of the period our results were erratic and, quite frankly, unsatisfactory relative to both comparative standards. During the past four years our results have been relatively consistent from year to year, comparing favorably to the Russell 2000 Index but still lagging somewhat behind the average competitor. So, it remains to be seen whether our index strategy can restore the Fund's long-term record to respectability. IN SUMMARY Following a three-year period during which small capitalization stocks have been market leaders, it would be imprudent not to offer a word of caution. The equity markets--and particularly smaller stocks--have come a long way in a relatively short period, and presently hover near record highs. With interest rates at their lowest levels in two decades and stock yields near historical lows, there are surely going to be some difficult bumps along the way during the next few years. You should expect that, in the case of Vanguard Small Capitalization Stock Fund and other small cap stock funds, any market volatility will likely be magnified. In rising markets, so much the better, but in declining markets, so much the worse. What should investors do in this environment? If you have a long-term investment horizon, and are willing to accept with equanimity the inevitable peaks and valleys of the stock market, equities should remain a major component of your portfolio. Funds emphasizing stocks with smaller market capitalizations may serve well as a component of your equity holdings. However, an appropriate position should be maintained among bond funds and short-term reserves, and additional equity investments should be made gradually over time. Of course, if you have a more limited investment horizon, a minor reduction in your equity allocation may be appropriate. Whatever course you choose, we would recommend that you focus not on annual fluctuations in absolute and relative performance, but on the long term. Sincerely, /S/ JOHN C. BOGLE ------------- John C. Bogle Chairman of the Board October 11,1993 Note: Mutual fund data from Lipper Analytical Services, Inc. 4 7 Considering Vanguard's growing role in sponsorship of "market index" funds, we believe it would be useful to bring Vanguard Small Capitalization Stock Fund under the "Vanguard Index Trust" umbrella, as are our five other separate and independent Index Portfolios. As a technical matter, the optimal way to accomplish this objective is to merge SmallCap Fund, in a tax-free reorganization, into Vanguard Index Trust, but as a totally separate and distinct investment Portfolio--the Small Capitalization Stock Portfolio. The new SmallCap Portfolio will continue to operate under the same investment objectives and policies. The Board of Directors has determined that the inclusion of Vanguard SmallCap Fund as a Separate Portfolio of Vanguard Index Trust is in the best interests of Fund shareholders for two reasons. First, the reorganization would eliminate the need to produce separate prospectuses, shareholder reports, and marketing materials for the SmallCap Fund and the Trust, thereby reducing Fund expenses. Second, as a separate and distinct investment component of the largest and oldest index mutual fund, Small Capitalization Stock Portfolio would be more readily identified as an index fund. A proxy statement and additional information regarding the merger will be mailed to shareholders in December of 1993, but we wanted to take this opportunity to tell you about the pending proposal. AVERAGE ANNUAL TOTAL RETURNS*--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED SEPTEMBER 30, 1993) ARE AS FOLLOWS: 1 YEAR: +30.21% 5 YEARS: +12.20% 10 YEARS: +5.85% THE FUND'S AVERAGE ANNUAL TOTAL RETURN FOR THE TEN-YEAR PERIOD INCLUDES A CAPITAL RETURN OF +5.12% AND AN INCOME RETURN OF +0.73%. ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. *Performance figures are adjusted for the 1% transaction fee on purchases and the annual account maintenance fee of $10. 5 8 TOTAL INVESTMENT RETURN The following table illustrates the results of a single share investment in VANGUARD SMALL CAPITALIZATION STOCK FUND, through September 30, 1993, including the period prior to its conversion in September 1989 from an actively managed portfolio to a passively managed portfolio. During the period illustrated, stock prices fluctuated and were higher at the end than at the beginning. These results should not be considered as a representation of the dividend income or capital gain or loss that may be realized from an investment made in the Fund today.
- ----------------------------------------------------------------------------------------------------------------- PERIOD PER SHARE DATA* - ----------------------------------------------------------------------------------------------------------------- Value with Income Year-end Value Year Ended Net Asset Income Capital Gains Dividends & Capital of $10,000 Initial Total September 30 Value Dividends Distributions** Gains Reinvested Investment Return+ - ----------------------------------------------------------------------------------------------------------------- 1960 (10/3) $ 3.33 -- -- -- $10,000 -- - ----------------------------------------------------------------------------------------------------------------- 1961 3.72 -- $.0045 $ 3.72 11,170 +11.7% - ----------------------------------------------------------------------------------------------------------------- 1962 3.07 $.022 -- 3.09 9,271 -17.0 - ----------------------------------------------------------------------------------------------------------------- 1963 3.71 .022 -- 3.76 11,283 +21.7 - ----------------------------------------------------------------------------------------------------------------- 1964 4.51 .018 -- 4.59 13,776 +22.1 - ----------------------------------------------------------------------------------------------------------------- 1965 5.23 .017 .027 5.37 16,118 +17.0 - ----------------------------------------------------------------------------------------------------------------- 1966 4.92 .225 .097 5.18 15,538 - 3.6 - ----------------------------------------------------------------------------------------------------------------- 1967 8.56 .037 .397 9.49 28,481 +83.3 - ----------------------------------------------------------------------------------------------------------------- 1968 10.51 .03 .407 12.14 36,427 +27.9 - ----------------------------------------------------------------------------------------------------------------- 1969 8.90 .022 -- 10.30 30,890 -15.2 - ----------------------------------------------------------------------------------------------------------------- 1970 7.78 .035 -- 9.04 27,121 -12.2 - ----------------------------------------------------------------------------------------------------------------- 1971 9.74 .13 .107 11.63 34,878 +28.6 - ----------------------------------------------------------------------------------------------------------------- 1972 11.66 .07 .153 14.22 42,655 +22.3 - ----------------------------------------------------------------------------------------------------------------- 1973 10.35 .047 .407 13.17 39,498 - 7.4 - ----------------------------------------------------------------------------------------------------------------- 1974 7.41 .133 -- 9.56 28,675 -27.4 - ----------------------------------------------------------------------------------------------------------------- 1975 9.09 .243 -- 12.08 36,245 +26.4 - ----------------------------------------------------------------------------------------------------------------- 1976 10.98 .19 .027 14.92 44,762 +23.5 - ----------------------------------------------------------------------------------------------------------------- 1977 11.72 .133 .017 16.17 48,522 + 8.4 - ----------------------------------------------------------------------------------------------------------------- 1978 13.45 .207 1.04 20.72 62,157 + 28.1 - ----------------------------------------------------------------------------------------------------------------- 1979 12.07 .253 1.753 22.48 67,440 + 8.5 - ----------------------------------------------------------------------------------------------------------------- 1980 15.21 .337 .90 31.58 94,753 +40.5 - ----------------------------------------------------------------------------------------------------------------- 1981 12.09 .133 2.543 29.94 89,825 - 5.2 - ----------------------------------------------------------------------------------------------------------------- 1982 12.50 .033 2.107 36.89 110,664 +23.2 - ----------------------------------------------------------------------------------------------------------------- 1983 19.77 .303 .92 62.86 188,571 +70.4 - ----------------------------------------------------------------------------------------------------------------- 1984 13.15 -- 2.51 48.46 145,388 -22.9 - ----------------------------------------------------------------------------------------------------------------- 1985 11.68 .15 .77 46.68 140,052 - 3.7 - ----------------------------------------------------------------------------------------------------------------- 1986 13.24 -- -- 52.91 158,715 +13.3 - ----------------------------------------------------------------------------------------------------------------- 1987 15.73 -- 1.89 73.02 219,065 +38.0 - ----------------------------------------------------------------------------------------------------------------- 1988 11.96 -- 1.213 62.58 187,750 -14.3 - ----------------------------------------------------------------------------------------------------------------- 1989 11.88 .143 2.167 74.37 223,095 +18.8 - ----------------------------------------------------------------------------------------------------------------- 1990 8.55 .043 -- 53.75 161,235 -27.7 - ----------------------------------------------------------------------------------------------------------------- 1991 12.03 .18 .14 78.43 235,258 +45.9 - ----------------------------------------------------------------------------------------------------------------- 1992 12.63 .18 .29 85.76 257,231 + 9.3 - ----------------------------------------------------------------------------------------------------------------- 1993 16.23 .18 .15 112.86 338,516 +31.6 - ----------------------------------------------------------------------------------------------------------------- LIFETIME $3.516 $20.0365 +3,285.2% +11.3% - -----------------------------------------------------------------------------------------------------------------
* Adjusted for 3-for-1 stock split, February 23, 1990. ** Prior to 1973 capital gains were retained and taxes were paid by the Fund. Data from 1974 through 1993 represent capital gains distributions. + Adjusted to include reinvestment of income dividends and any capital gains distributions. Note: No adjustment has been made for taxes payable by shareholders on income dividends and capital gains distributions. 6 9 STATEMENT OF NET ASSETS FINANCIAL STATEMENTS September 30, 1993
Market Value Shares (000)+ - ------------------------------------------------------------------------------------------ COMMON STOCKS (98.3%)(1) - ------------------------------------------------------------------------------------------ A & W Brands, Inc. 29,750 $ 727 AAR Corp. 26,900 346 * ALC Communications 36,200 995 A.L. Laboratories, Inc. 12,100 213 * ASK Computer Systems, Inc. 25,900 308 * AST Research, Inc. 29,100 506 Acordia, Inc. 14,600 365 * Acuson Corp. 28,250 335 * ACX Technologies Inc. 8,200 290 ADAC Laboratories 34,033 413 * Adaptec, Inc. 28,800 803 * Addington Resources, Inc. 20,700 357 * Adelphia Communications Corp. Class A 18,900 324 * Advance Circuits, Inc. 36,556 420 * Advanced Tissue Sciences Inc. 43,400 377 * Advantage Healthcare Corp. 20,600 203 * ADVO, Inc. 23,850 379 * Air and Water Technologies Corp. Class A 25,400 349 Air Express International Corp. 12,000 256 Airborne Freight Corp. 22,900 547 * Airgas, Inc. 13,400 528 Alaska Air Group, Inc. 12,400 158 Albany International Corp. 24,200 427 Alex Brown & Sons, Inc. 18,900 558 * Alexander's, Inc. 9,600 593 Alfa Corp. 45,000 551 Alico, Inc. 10,900 210 The Allen Group, Inc. 9,830 569 * Alliance Pharmaceutical Corp. 32,000 324 * Alliant Techsystems, Inc. 19,600 559 * Allied Clinical Laboratories 22,400 456 * Allied Research Corp. 10,100 155 * Allwaste, Inc. 37,200 167 * Alpha Beta Tech 21,000 577 * Altera Corp. 24,500 755 Amcast Industrial Corp. 19,900 373 * American Annuity Group Inc. 38,900 340 Amcore Financial 18,320 444 American Bankers Insurance Group 18,000 522 American Building Maintenance Industries, Inc. 19,000 299 * American City Business Journal 17,500 431 American Ecology Corp. 22,250 264 American Filtrona Corp. 12,200 320 * American Freightways 15,700 279 * American Healthcorp Inc. 20,700 486 American Health Properties, Inc. 20,700 585 American Heritage Life Investment Corp. 16,932 322 American Income Holding Inc. 16,700 440 * American Management Systems, Inc. 25,300 433 * American Oil and Gas Corp. 23,600 274 * American Pacific Corp. 16,200 211 American Software, Inc. Class A 38,200 260 * American Travellers Corp. 24,400 305 Ameron, Inc. 11,300 429 * Ampal-American Israel Corp. 14,000 171 AMPCO-Pittsburgh Corp. 19,800 144 * Amsco International, Inc. 30,600 298 Amtech Corp. 16,350 458 * Anacomp, Inc. 136,800 393 * Analogic Corp. 24,800 360 * Anchor Bancorp Inc. 20,900 295 Anchor Bancorp Wisconsin Inc. 19,600 480 * Andrew Corp. 14,000 542 Angelica Corp. 20,100 505 * Ann Taylor Stores Corp. 24,500 625 * Anthem Electronics, Inc. 14,500 506 Anthony Industries, Inc. 11,225 171 Apogee Enterprises, Inc. 18,700 234 * Applied Bioscience International, Inc. 30,408 177 * Applied Magnetics Corp. 38,600 352 Applied Power, Inc. 18,300 332 Aptargroup Inc. 25,200 529 Aquarion Co. 17,380 487 Arbor Drugs, Inc. 14,400 254 Arctco Inc. 23,400 588 * Arden Group Inc. Class A 11,000 550 Arnold Industries, Inc. 16,200 624 Arrow International, Inc. 13,400 327 Ashland Coal Inc. 15,700 467 * Aspect Telecommunications 26,200 910 Asset Investors Corp. 79,500 407 Associated Banc-Corp. 14,187 541 Associated Natural Gas Corp. 15,700 581 Astro-Med, Inc. 23,900 272 * Atari Corp. 87,100 446 * Athena Neurosciences, Inc. 49,700 379 Athlone Industries, Inc. 18,600 328 * Guy F. Atkinson Co. of California 19,700 177 * Atmel Corp. 15,000 539 * Augat, Inc. 13,500 285 * Automotive Industries Inc. Class A 16,100 469 * Autotote Corp. 15,100 706 * Avatar Holding, Inc. 15,200 530 Avemco Corp. 18,850 337 * Aztar Corp. 44,300 349 BHC Financial Inc. 20,700 818 BGS Systems, Inc. 7,100 181
7 10 STATEMENT OF NET ASSETS (continued)
Market Value Shares (000)+ - ------------------------------------------------------------------------------------------ * Bisys Group, Inc. 28,000 $ 646 * BJ Services Co. 18,900 413 * BMC Industries, Inc. 32,100 490 BRE Properties Inc. Class A 11,200 396 BSB Bancorp, Inc. 13,677 516 BWIP Holding Inc. Class A 28,700 674 * Babbages, Inc. 16,400 471 J. Baker, Inc. 14,400 294 Baldor Electric Co. 24,150 592 * Baldwin Piano and Organ Co. 17,300 294 * Baldwin Technology Class A 20,400 91 * Ballard Medical Products 29,666 501 * Bally Gaming International Inc. 15,100 299 * Bally Manufacturing Corp. 53,900 519 * Baltimore Bancorp. 48,300 604 * Banctec, Inc. 22,950 479 Bank of Granite Corp. 7,700 223 Bank North Group 14,600 283 Bank South Corp. 49,900 767 * Banyan Systems, Inc. 30,300 496 Barnes Group, Inc. 4,700 151 * Barr Labs Inc. 27,100 671 * Barra Inc. 3,500 28 Bassett Furniture Industries, Inc. 17,325 613 Bay State Gas Co. 14,500 415 Bay View Capital Corp. 21,700 521 Bearings, Inc. 13,600 343 * Bell Bancorp, Inc. 12,900 601 * Benson Eyecare Corp. 45,100 355 Berkshire Realty Company, Inc. 30,300 364 Berry Petroleum Class A 42,800 498 * Bertucci's Holding Corp. 21,300 535 * Best Buy, Inc. 18,450 959 * Bio-Rad Labs, Inc. Class A 14,400 196 Biocraft Laboratories 15,800 454 * Biowhittaker Inc. 41,800 256 Birmingham Steel Corp. 25,550 671 Black Hills Corp. 15,800 411 Blair Corp. 8,800 405 * Bolt Beranek and Newman, Inc. 73,100 722 * Books-a-Million Inc. 9,800 246 * Boole & Babbage Inc. 17,100 414 * Boomtown Inc. 19,300 437 * Borg-Warner Security Corp. 16,700 330 Boston Bancorp 16,500 588 Bowne & Co., Inc. 22,200 425 W.H. Brady Class A 11,000 399 * Breed Technological Inc. 33,900 424 Brenco, Inc. 20,900 257 Brenton Banks, Inc. 14,300 416 * Broderbund Software 9,100 364 * Brooktree Corp. 40,900 736 Brown Group, Inc. 20,700 709 Brush Wellman, Inc. 14,000 168 * Buffets Inc. 36,200 810 * Buttery Food & Drug Stores 4,000 28 CCB Financial Corp. 10,400 383 * CDI Corp. 41,500 394 CNB Bankshares, Inc. 12,520 394 CPI Corp. 12,400 189 CRS/Sirrine, Inc. 37,200 349 * CSF Holdings, Inc. 8,600 202 * C-TEC Corp. 29,100 746 Cabot Oil & Gas Corp. 23,526 582 * Cadence Design Systems, Inc. 53,100 558 * Caere Corp. 18,300 119 * Cal Rep Bancorp, Inc. 1,200 28 * Caldor Corp. 18,200 571 * Calgene, Inc. 27,000 375 * California Federal Bank Class A 30,500 457 California Water Service Co. 9,200 356 Callaway Golf Co. 15,100 889 Calmat Co. 21,500 366 Capital Re Corp. 14,700 382 Capstead Mortgage Corp. 17,600 686 Caraustar Industries Inc. 24,300 401 Cardinal Distribution, Inc. 19,300 702 Carlisle Co., Inc. 15,700 491 Carolina Freight Corp. 17,200 202 Carpenter Technology Corp. 9,600 482 * Carter Hawley Hale Stores, Inc. 39,200 559 * Cascade Natural Gas Corp. 17,300 484 Casey's General Stores 25,900 552 Cash America International Inc. 63,900 535 * Catalina Marketing Corp. 11,200 494 * Catellus Development Corp. 62,850 479 * Catherines Stores 22,000 391 Cato Corp. Class A 23,700 545 * Cellular, Inc. 13,000 227 * Centex Telemanagement Inc. 51,600 361 * Centocor, Inc. 49,200 517 Central Hudson Gas & Electric Corp. 19,300 663 Central Louisiana Electric Co. 26,400 696 Central Vermont Public Service Corp. 25,900 609 Centura Banks, Inc. 18,300 382 * Chambers Development Co. Class A 9,900 43 Chaparral Steel Co. 26,000 254 Charter One Financial 18,050 661 * Charter Medical Corp. 29,700 702 * Bernard Chaus, Inc. 45,400 131 Chemed Corp. 8,600 263 Chemical Finance 2,200 101
8 11
Market Value Shares (000)+ - ------------------------------------------------------------------------------------------ * Chemtrak, Inc. 54,600 $ 218 * The Cherry Corp. 17,600 301 Chesapeake Corp. of Virginia 22,700 454 * Chipcom Corp. 10,200 532 Chittenden Corp. 24,870 448 * Christiana Cos., Inc. 13,900 354 Cilcorp, Inc. 15,500 663 * Cirrus Logic 28,100 896 Citifed Bancorp 17,500 416 Citizens Banking Corp. 23,300 658 * Citizens First Bancorp, Inc. 89,800 617 * City National Corp. 63,400 507 Claire's Stores, Inc. 24,700 395 Clarcor Inc. 13,950 235 * Clark Equipment Co. 13,600 649 * Clean Harbors Inc. 25,600 205 Cleveland-Cliffs Iron Co. 13,300 414 * Clinicom 7,900 129 * Coast Savings Financial, Inc. 40,800 627 * Coastal Bancorp 23,600 319 Coca-Cola Bottling Co. 12,122 417 Coeur D'Alene Mines Corp. 16,871 293 * Cognex Corp. 19,800 653 Collective Bancorporation Inc. 24,300 579 * Collagen Corp. 16,900 467 Colonial Bancgroup, Inc. 20,800 433 * Columbia Laboratories Inc. 30,000 161 Comair Holdings, Inc. 19,800 584 * Comoa, Inc. 16,550 242 * Comdata Holdings Corp. 116,300 349 Commerce Clearing House, Inc. Class A 27,100 420 * Commercial Federal Corp. 14,200 349 Commercial Intertech Corp. 25,200 513 Commercial Metals Co. 11,400 412 Commonwealth Energy Systems 11,600 579 Communications Systems, Inc. 40,400 586 Community Psychiatric Centers 48,750 646 * Compression Labs, Inc. 12,340 169 * Computer Network Technology Corp. 63,100 517 Computer Task Group, Inc. 37,800 274 * Concord EFS Inc. 12,900 342 * Cone Mills Corp. 30,600 478 Connecticut Natural Gas Corp. 15,300 492 Connecticut Water Services, Inc. 3,200 98 * Conner Peripherals, Inc. 48,400 490 * Consolidated Freightways, Inc. 35,300 560 * Continental Medical Systems, Inc. 34,750 278 Cooker Restaurant Corp. 25,200 403 * Copytele, Inc. 20,500 270 * Cordis Corp. 17,000 542 Core Industries, Inc. 20,200 263 * Corrections Corp. of America 21,900 155 Cousins Properties, Inc. 21,200 368 * Coventry Corp. 11,600 429 * Cragin Financial Corp. 15,200 553 CRIIMI MAE Inc. 45,900 562 A.T. Cross Co. Class A 11,600 151 * Crown Central Petroleum Corp. Class A 13,900 205 Cubic Corp. 11,200 230 * Cullen/Frost Bankers, Inc. 12,940 466 Curtice-Burns, Inc. Class A 18,100 240 Curtiss-Wright Corp. 8,900 285 * Cygnus Therapeutic Systems 54,400 333 * Cypress Semiconductor Corp. 41,600 577 * Cytogen Corp. 24,100 172 * DWG Corp. Class A 31,200 991 * Dallas Semiconductor Corp. 29,400 533 Daniel Industries, Inc. 25,700 389 Dart Group Corp. Class A 3,567 292 * Data General Corp. 39,000 400 * Datascope Corp. 26,500 371 Deb Shops, Inc. 9,100 60 * Dekalb Energy Co. Class B 20,500 354 Dekalb Genetics Corp. Class B 15,400 391 Delchamps, Inc. 15,853 367 Delta Woodside 8,000 87 * Dentsply International 8,500 308 Deposit Guaranty Corp. 20,500 641 Devon Energy Corp. 24,900 635 Diagnostic Products Corp. 8,800 169 Dial REIT, Inc. 20,800 231 * Diasonics Inc. 27,840 348 * Diagnostek, Inc. 22,200 350 Dibrell Brothers, Inc. 15,200 426 * Digicon Inc. 127,500 351 * Digital Microwave Corp. 31,900 526 * Digital Communications Associates, Inc. 26,000 484 * Dime Savings Bank of New York 70,600 538 * Dionex Corp. 8,600 270 Dixie Yarn, Inc. 23,600 261 Donaldson Co., Inc. 13,900 542 * Dovatron International Inc. 22,153 424 * Dravo Corp. 33,700 350 * The Dress Barn, Inc. 28,000 420 Dreyer's Grand Ice Cream, Inc. 15,000 416 Duff & Phelps Corp. 35,300 772 Duplex Products, Inc. 19,200 218 Duriron Co., Inc. 13,500 316 Dynamics Corp. of America 9,700 154 * Dynatech Corp. 20,200 472
9 12 STATEMENT OF NET ASSETS (continued)
Market Value Shares (000)+ - ------------------------------------------------------------------------------------------ Elizabethtown Corp. 14,300 $ 486 E-Z-EM, Inc. 2,044 11 * Eagle Hardware & Garden, Inc. 21,000 535 Eastern Utilities Associates 22,580 675 Eaton Vance Corp. 10,600 401 * Egghead, Inc. 42,400 297 * El Paso Electric Co. 27,100 75 * Elcor Corp. 15,200 376 * Electro Rent Corp. 22,124 337 * Electromedics Inc. 80,300 316 Empire District Electric Co. 14,984 360 * Employee Benefit Plans Inc. 31,200 250 * Emulex Corp. 32,200 213 Energen Corp. 24,200 599 * Energy Services, Inc. 159,200 517 * Energy Ventures Inc. 17,000 270 Engraph, Inc. 35,851 558 Enhance Financial Services Group, Inc. 19,900 435 Ennis Business Forms, Inc. 18,950 249 * Enterra Corp. 19,300 478 * Envirosource, Inc. 59,100 185 * Envirotest Systems Corp. Class A 44,900 629 * Epitope Inc. 25,900 557 * Equicredit Corp. 11,000 231 * Evans & Sutherland Computer Corp. 25,000 431 * Excel Industries, Inc. 5,500 100 * Exide Electronics Group, Inc. 18,600 395 * Expeditors International of Washington, Inc. 9,100 256 * Ezcorp, Inc. 32,300 464 F & C Bancshares, Inc. 4,200 85 * F & M Distributors 23,700 184 F & M National Corp. 23,300 373 FMC Gold Co. 37,900 204 * Fabri-Centers of America, Inc. 6,200 88 * Falcon Products, Inc. 27,400 298 Fansteel, Inc. 34,700 278 Farmer Brothers, Inc. 3,050 465 Fastenal Co. 15,200 397 Fay's Drug Co. 23,875 149 * Fedders Corp. 59,800 314 Fidelity National Financial, Inc. 20,989 771 * Fieldcrest Cannon, Inc. 18,600 442 * 50-Off Stores, Inc. 39,000 266 Figgie International Inc. Class A 5,800 100 * Filene's Basement Corp. 51,100 469 Financial Trust Corp. 4,600 191 * First Amarillo Bancorporation, Inc. 12,700 360 First Bancorp of Ohio 29,600 847 First Citizens Bancshares Class A 10,300 502 First Colonial Bankshares 24,400 473 First Commercial Bank Shares 2,000 154 First Commercial Corp. 13,145 427 * First Eastern Corp. 29,660 740 * First Federal Savings Bank 28,200 462 First Financial Bancorp 8,000 423 First Financial Carribean Corp. 14,800 424 First Financial Savings Assn. 26,400 464 First Merchants Corp. 14,400 432 First Michigan Bank Corp. 13,967 400 First Midwest Bancorp 26,700 734 First Mississippi Corp. 27,300 239 First National Bank of Gainsville 26,150 526 First Source Corp. 16,100 380 Firstfed Michigan Corp. 18,750 478 * Firstfed Bancshares Inc. 13,800 304 * First Federal Financial 24,375 497 Fisher Scientific International Inc. 19,100 668 * Flagstar Cos. 24,360 262 Florida East Coast Railway Co. 8,700 533 Florida Rock Industries, Inc. 16,600 446 Fluke Corp. 10,000 246 * Foodmaker, Inc. 44,700 447 Foote, Cone & Belding Communications, Inc. 10,300 389 Foothill Group 44,400 588 Fort Wayne National Corp. 8,800 353 Foxmeyer Corp. 34,828 340 * Frame Technology 29,700 230 * Franklin Quest Co. 21,500 575 Fremont General Corp. 14,900 391 * Fresh Choice, Inc. 4,200 120 Frisch's Restaurants, Inc. 21,668 309 * Fritz Cos., Inc. 12,800 368 H.B. Fuller Co. 16,350 546 Fulton Financial Corp. 16,895 412 G & K Services, Inc. 33,500 750 * GMIS, Inc. 20,300 403 * GTI Corp. 13,800 559 GWC Corp. 15,200 264 Gainsco, Inc. 39,351 492 * Galey & Lord 28,900 329 Arthur J. Gallagher & Co. 17,100 547 Galveston-Houston Co. 73,700 313 Gencorp, Inc. 29,600 485 * General Datacomm Industries, Inc. 62,500 680 General Host Corp. 37,000 305 General Housewares Corp. 15,000 206 * Genesco, Inc. 48,400 387 Genesee Corp. Class B 2,042 73 * Gentex Corp. 18,600 530 Genesis Health 29,900 553
10 13
Market Value Shares (000)+ - ------------------------------------------------------------------------------------------ * Genetic Therapy, Inc. 27,500 $ 505 * Geneva Steel Class A 3,100 38 * Gensia Inc. 22,100 580 * Genta Inc. 45,400 397 Gerber Scientific, Inc. 19,400 264 * Gerrity Oil & Gas Corp. 27,900 398 Gibson Greetings, Inc. 19,100 366 Gilbert Associates, Inc. Class A 16,075 281 * Gilead Sciences, Inc. 19,900 286 Gleason Corp. 18,900 239 * Glendale Federal 4,924 42 * Global Natural Resources, Inc. 60,200 519 * Glycomed, Inc. 50,500 417 Goody Products, Inc. 15,500 378 * Goody's Family Clothing 21,100 298 Gorman-Rupp Co. 12,750 353 Goulds Pumps, Inc. 24,900 640 Graco, Inc. 13,200 426 * Great American Management, Inc. 13,000 435 * Greenwich Pharmaceuticals, Inc. 89,900 230 Greif Brothers Corp. Class A 13,100 511 Grey Advertising, Inc. 2,700 483 * Grossmans, Inc. 92,500 278 * Groundwater Technology, Inc. 22,500 270 Grow Group, Inc. 28,400 412 Guardsmen Chemicals Inc. 19,025 262 * Gundle Environmental Systems, Inc. 10,100 106 * Gupta Corp. 13,400 208 * Gymboree Inc. 13,500 565 HBO and Co. 17,700 655 Hubco, Inc. 24,134 588 Hancock Holding Co. 15,146 517 Handleman Co. 35,300 397 Handy & Harman 26,200 321 * Harman International Industries, Inc. 25,900 515 Harnischfeger Industries Inc. 30,400 589 Harper Group, Inc. 27,000 351 * Hartmarx Corp. 14,600 89 Hawkeye Bancorp 24,100 479 * HEALTHSOUTH Rehabilitation Corp. 32,500 500 * Healthcare Compare Corp. 42,200 870 * Health Management Associates Class A 20,150 798 Health and Rehabilitation Properties Trust 36,300 535 * Healthdyne, Inc. 32,100 189 * Healthinfusion Inc. 31,200 211 * Healthsource, Inc. 13,800 676 * Heartland Express, Inc. 13,300 396 Hechinger Co. Class A 32,100 357 * Hecla Mining Co. 35,700 366 * Helen of Troy Corp. 17,600 256 Helene Curtis, Inc. 11,900 308 Herbalife International of America, Inc. 23,600 326 Heritage Financial Services, Inc. 19,000 316 * Heritage Media Corp. Class A 47,775 711 Hexcel Corp. 19,000 114 * Hibernia Corp. Class A 97,500 817 * Hillhaven Corp. 101,500 336 Holly Corp. 12,600 365 * Hollywood Park, Inc. 11,100 366 * Holnam, Inc. 11,400 53 Home Beneficial Corp. Class B 20,700 481 * Homedco Group Inc. 16,200 441 * Hook Suprex 50,600 361 Houghton Mifflin Co. 17,500 759 * House of Fabrics, Inc. 39,570 326 * Hovnanian Enterprises Class A 15,150 216 * Hovnanian Enterprises Class B 9,650 130 Hudson Foods Inc. Class A 28,000 301 Huffy Corp. 12,000 228 Hughes Supply, Inc. 4,700 86 Hunt Manufacturing Co. 28,300 442 * ICF Kaiser International Inc. 49,800 218 * ICH Corp. 78,500 520 * ICN Pharmaceuticals, Inc. 33,500 364 * IHOP Corp. 22,700 560 * IMRS Inc. 22,500 419 IRT Property Co. 44,772 560 IWC Resources Corp. 17,800 418 * IDEX Corp. 14,800 485 * IDEXX Corp. 14,400 702 * Immune Response 22,454 230 * Immunex Corp. 17,300 316 Imo Industries, Inc. 14,100 102 * Imperial Bancorp 37,827 515 * Imperial Credit 28,800 400 Imperial Holly Corp. 27,150 312 * Immunomedics Inc. 45,300 297 Independence Bancorp, Inc. 13,552 420 Independent Insurance Group, Inc. 24,900 414 Indiana Energy, Inc. 17,800 625 * Indressco Inc. 30,900 386 * Infinity Broadcasting Corp. 24,150 1,156 * Input/Output, Inc. 24,100 533 Insteel Industries, Inc. 8,283 78 * Instrument Systems Corp. 73,600 635 * Integrated Device Technology Inc. 58,200 1,080 * Integrated Health Services, Inc. 21,900 589 Intelligent Electronics Inc. 37,600 832
11 14 STATEMENT OF NET ASSETS (continued)
Market Value Shares (000)+ - ------------------------------------------------------------------------------------------ Intercontinental Bank 17,400 $ 318 * Intercontinental Life Corp. 26,800 422 Interface, Inc. 19,000 205 * Intergraph Corp. 49,700 528 * Interlake Corp. 68,800 249 Intermet Corp. 43,100 426 International Aluminum Corp. 13,400 301 * International Dairy Queen, Inc. Class A 33,800 537 * International Family Entertainment 18,400 400 International Multifoods Corp. 21,300 479 * International Rectifier Corp. 37,400 407 International Shipholding Corp. 17,300 396 * International Technology 73,700 322 Interstate Bakeries 23,800 381 Interstate Power Co. 11,200 329 * Intertan, Inc. 14,700 75 * Intervoice, Inc. 53,600 1,179 * Invacare Corp. 15,800 375 * Invtro International 22,800 311 * Ionics, Inc. 10,300 482 Irwin Financial Corp. 6,600 168 * ISIS Pharmaceuticals, Inc. 42,500 263 JSB Financial 15,800 397 * Jacobs Engineering Group Inc. 17,100 398 * Jan Bell Marketing Inc. 22,600 223 Jefferson Bankshares, Inc. 16,900 344 John Alden Financial Group 27,900 792 * Johnson Worldwide Associates, Inc. 9,900 208 * Joy Technologies, Inc. 36,000 387 Juno Lighting, Inc. 21,200 395 Justin Industries, Inc. 16,850 303 * KLA Instruments Corp. 22,600 590 KN Energy, Inc. 11,600 464 * Kaiser Aluminum & Chemical Corp. 27,600 197 Kansas City Life Insurance Co. 12,030 645 Katy Industries, Inc. 14,200 385 Kaydon Corp. 19,600 390 * Kelly Oil Corp. 37,800 491 Kellwood Co. 15,800 589 * Kemet Corp. 18,000 283 Kennametal, Inc. 12,000 441 * Kennedy-Wilson, Inc. 25,400 105 * Kent Electronics Corp. 15,900 411 * Key Tronic Corp. 35,700 353 * Keystone Consolidated Industries, Inc. 32,900 333 Keystone Financial, Inc. 18,650 580 Kinetic Concepts, Inc. 36,000 131 * Kirby Corp. 32,200 700 * Knowledgeware, Inc. 23,900 266 * Komag, Inc. 17,000 274 * The Krystal Co. 14,200 170 Kuhlman Corp. 13,900 202 Kysor Industrial Corp. 19,500 334 * LDDS Communications, Inc. 19,000 948 La Quinta Inns Inc. 17,400 757 La-Z-Boy Chair Co. 14,600 442 Laclede Gas Co. 9,000 447 * Laclede Steel Co. 7,000 114 * Ladd Furniture, Inc. 58,900 493 * LAM Research Corp. 26,700 914 * Lamson & Sessions Co. 35,500 178 Landauer, Inc. 24,600 406 * Landmark Graphics Corp. 29,200 577 * Lands' End, Inc. 4,200 172 * Landstar System 28,700 434 * Lattice Semiconductor Corp. 19,900 430 Lawson Products, Inc. 13,100 342 * Lechters Corp. 24,300 279 Legg Mason Inc. 23,000 540 Lesco, Inc. 22,900 321 * Leslie Fay Co. 16,000 54 Liberty Bankcorp Inc. 13,900 469 Liberty Corp. 19,500 585 * Lifetime Hoan Corp. 4,500 60 Life Re Corp. 15,300 386 Life Technologies, Inc. 23,100 459 * Lincare Holdings Inc. 15,000 585 Lincoln Telecommunications Co. 13,900 502 * Lindsay Manufacturing Co. 12,625 412 * Liposome Co., Inc. 25,200 162 Liqui-Box Corp. 13,900 518 * Longhorn Steaks Inc. 33,300 283 Lufkin Industries 14,414 259 * M/A-Com, Inc. 64,800 575 MTS Systems Corp. 14,500 442 * MacFrugal's Bargains Close-Outs, Inc. 35,400 531 MacDermid, Inc. 3,700 103 The MacNeal-Schwendler Corp. 31,700 448 Madison Gas & Electric Co. 12,350 445 Magna Group 29,500 555 * Magnatek 21,800 289 Manitowoc Co., Inc. 11,600 367 * Marcam Corp. 3,000 36 * Marine Drilling Co., Inc. 40,500 314 Mark Twain Bancshares, Inc. 20,550 619 * Marshall Industries 10,300 509 * Maxim Integrated Products, Inc. 15,800 668 * Maxtor Corp. 65,000 341 Maybelline, Inc. 20,300 462 McDonald and Co. Investments, Inc. 29,160 456 * McGaw Inc. 28,900 267
12 15
Market Value Shares (000)+ - ------------------------------------------------------------------------------------------ Measurex Corp. 13,200 $ 238 * Medco Research, Inc. 18,400 207 Medex, Inc. 26,200 301 Media General, Inc. Class A 15,700 416 * Medic Computer Systems, Inc. 13,800 178 * Medical Care America 44,248 791 * Medimmune Inc. 21,300 461 Mediq, Inc. 62,300 288 * MEDSTAT Group, Inc. 17,110 233 Medusa Corp. 21,700 760 * Mental Health Management 6,537 28 Mentor Corp. 24,800 341 Mentor Graphics Corp. 55,300 608 Meredith Corp. 12,900 469 * Merisel, Inc. 29,100 413 Merrill Corp. 25,000 669 * Mesa, Inc. 33,800 245 Metricom 36,400 541 Metropolitan Financial Corp. 39,098 674 * Michaels Stores, Inc. 14,900 525 * Micronics Computers, Inc. 41,600 247 Mid Am Inc. 20,390 451 Mid-America Bancorp 5,300 103 Mid-American Waste Systems, Inc. 22,000 195 * Mid Atlantic Medical Services 14,400 391 * Mid-State Federal Savings Bank 9,995 397 Middlesex Water Co. 6,200 126 Midland Co. 4,900 218 * Midland Financial Group, Inc. 17,000 361 Midwest Grain Products 13,800 337 * Millicom, Inc. 38,600 965 Mine Safety Appliances Co. 12,100 514 * Mohawk Industries, Inc. 22,200 674 * Molecular Biosystems, Inc. 23,500 605 * Molten Metal Technology 22,800 519 The Money Store 12,800 307 Monk Austin, Inc. 100 1 * Morgan Products Ltd. 21,500 134 Mosinee Paper Corp. 9,000 207 * Mueller Indusries Inc. 10,800 344 * Musicland Stores Corp. 30,500 545 * Mutual Assurance Inc. 310 7 NBB Bancorp, Inc. 18,300 700 NBSC Corp. 1,100 22 N.S. Bancorp Inc. 18,200 601 N L Industries, Inc. 68,700 343 NYMAGIC, Inc. 6,600 196 * Nabors Industries, Inc. 67,600 634 NACCO Industries, Inc. Class A 9,200 425 * Namic U.S.A. Corp. 32,900 259 Nash-Finch Co. 16,100 314 Nashua Corp. 14,200 412 * Natec Resources, Inc. 28,800 29 National Bankcorp of Alaska Inc. 9,700 518 National Community Bancorp 16,600 579 National Computer Systems, Inc. 24,500 361 National Data Corp. 30,400 528 * National Education Corp. 71,000 462 * National Media Corp 60,400 310 * National Patent Development Corp. 101,800 344 National Penn Bancshares Inc. 2,354 89 * National Pizza Corp. Class A 20,100 126 * National Presto Industries, Inc. 4,600 243 * National Western Life Insurance Co. Class A 7,500 357 Nature's Sunshine Inc. 28,080 330 * Nautica Enterprises 17,937 496 * Nellcor Inc. 19,800 450 * Netframe Systems Inc. 19,900 321 * Network Equipment Technologies 38,900 306 * Network General Corp. 28,000 366 * Network Systems Corp. 33,200 278 Neutrogena Corp. 2,200 37 New England Business Service, Inc. 21,800 349 * News Image Industries Inc. 18,700 256 New Jersey Resources Corp. 20,100 585 * New Line Cinema Corp. 30,600 692 New York Bancorp Inc. 12,000 257 * Nichols Research Corp. 16,800 218 * Noble Drilling Corp. 22,700 210 * Nord Resources Corp. 43,100 205 * Nortek, Inc. 15,500 89 North American Mortgage 18,600 600 North Carolina Natural Gas Corp. 16,534 463 Northwest Natural Gas Co. 15,600 578 Northwestern Public Service Co. 17,800 572 * Novellus Systems, Inc. 16,600 593 * OEA, Inc. 17,800 510 * OHM Corp. 35,100 412 OMI Corp. 64,100 425 * Oak Industries, Inc. 19,600 343 Oakwood Homes Corp. 26,400 686 * Oceaneering International, Inc. 27,100 461 * Octel Communications Corp. 20,000 468 Oil-Dri Corp. of America 13,275 292 * Old America Stores 22,300 348 Old National Bancorp 19,856 730 Olsten Corp. 30,607 842 * Omega Environmental, Inc. 59,900 475 One Valley Bancorp of West Virginia Inc. 12,400 381 Oneida Ltd. 19,790 242 * Optical Radiation Corp. 16,000 256 * Orbital Sciences Corp. 37,200 698
13 16 STATEMENT OF NET ASSETS (continued)
Market Value Shares (000)+ - ------------------------------------------------------------------------------------------ Oregon Metallurgical Corp. 6,600 $ 33 * Organogenesis, Inc. 38,400 269 Oregon Steel Mills, Inc. 18,200 412 Orion Capital Corp. 14,000 616 O'Sullivan Corp. 15,600 174 Otter Tail Power Co. 12,800 430 Outboard Marine Corp. 22,300 413 * Outlook Graphic 27,800 341 Owens and Minor, Inc. 23,325 536 * Oxford Health Plan 7,100 579 * PS Group, Inc. 10,900 116 * Pacific Physician Services, Inc. 26,100 542 Pacific Scientific Co. 15,800 282 * Pacific Western BancShares 50,200 439 * Parker Drilling Co. 64,300 482 * Payless Cashways, Inc. 43,300 509 * Pec Israel Economic Corp. 21,500 677 * The Penn Traffic Co. 9,200 359 Penn Virginia Corp. 12,000 441 Pennsylvania Real Estate Investment Trust 21,100 533 Pentair, Inc. 21,150 738 Penwest Ltd. 17,050 350 * Peoples Telephone Co., Inc. 34,950 441 Peoples Westchester Savings Bank 17,600 711 Petroleum Heat & Power Co. Class B 28,800 569 * Petroleum Helicopters, Inc. 4,300 71 Petrolite Corp. 12,100 473 Phillips Jacobs 11,133 125 * Phycor, Inc. 20,100 492 * Physician Corp. of America 38,400 734 Piccadilly Cafeterias, Inc. 21,000 226 * Picturetel Inc. 16,700 290 Piedmont Natural Gas, Inc. 29,801 756 Pier 1 Imports Inc. 41,400 424 Pitt Des Moines, Inc. 7,100 202 Pittway Corp. Class A 12,200 308 Plains Petroleum Co. 19,300 533 * Platinum Technology, Inc. 32,300 311 * Plexus Corp. 28,700 423 Ply-Gem Industries, Inc. 24,200 327 * Pogo Producing Co. 33,500 632 Pope & Talbot, Inc. 12,800 277 * Powell Industries, Inc. 26,700 170 Precision Castparts Corp. 30,800 785 Premier Bancshares Corp. 15,300 295 * Premier Bancorp, Inc. 32,090 560 * Primedex Health Systems Inc. 69,950 289 * Primark Corp. 29,500 339 * Progress Software Corp. 12,100 688 Protective Life Corp. 13,800 688 * Protein Design Labs 37,200 523 Public Service Co. of New Mexico 49,900 574 Pulitzer Publishing Co. 9,470 302 Puritan-Bennett Corp. 12,600 211 * Pyramid Technology Corp. 24,300 525 * QMS, Inc. 31,800 290 * Quadrex Corp. 25,100 110 Quaker Chemical Corp. 5,500 92 Quaker State Corp. 31,100 435 Quanex Corp. 11,800 229 * Quantum Chemical Corp. 36,200 778 * Quantum Corp. 51,800 592 * Quantum Health Resources, Inc. 15,200 371 Quixote Corp. 23,100 344 * RPC Energy Services 41,700 328 Radiation Systems, Inc. 21,450 346 * Rasterops 42,800 383 * Read-Right Corp. 41,500 436 * Recognition International Inc. 28,100 443 Regal-Beloit Corp. 23,500 511 Reliable Life Insurance Co. Class A 3,300 180 Reliance Group Holdings 7,300 60 * Ren Corp. 42,300 412 * Repligen Corp. 33,500 218 * Research Industries Corp. 16,200 138 Resource Mortgage Capital Corp. 19,900 614 * Respironics, Inc. 21,300 386 * Revco Drug Stores, Inc. 37,900 512 * Rexnord Corp. 20,300 363 Richardson Electronics, Ltd. 14,500 83 * Riggs National Corp. 47,500 442 * Riser Foods, Inc. Class A 44,700 352 River Forest Bancorp, Inc. 8,700 318 * Robert Half International, Inc. 26,700 741 * Rochester Community Savings Bank 36,500 616 Rollins Environmental Services, Inc. 73,637 442 Rollins Truck Leasing 29,050 596 Roper Industries Inc. 12,000 425 * Rose's Stores Inc. Class B 48,700 44 * Ross Stores, Inc. 28,700 402 * Royal Appliance Manufacturing Co. 69,400 451 * Royce Laboratories, Inc. 99,700 185 Ruddick Corp. 24,600 507 Russ Berrie, Inc. 22,400 305 * Ryan's Family Steak Houses, Inc. 64,800 555 Rykoff-Sexton, Inc. 15,800 278 Ryland Group, Inc. 17,700 341 * SCI Systems, Inc. 25,500 430 SCOR U.S. Corp. 13,000 218
14 17
Market Value Shares (000)+ - ------------------------------------------------------------------------------------------ SEI Corp. 31,000 $ 612 SFFED Corp. 29,500 583 * SGI International 91,200 168 SPS Technologies, Inc. 14,900 413 SPI Pharmaceuticals 16,608 237 SPX Corp. 11,800 205 Safeguard Services, Inc. 31,500 421 * Safety First Inc. 12,200 242 * Saga Communications, Inc. 2,100 41 * Sahara Resorts, Inc. 13,500 314 St. Ives Laboratories, Inc. 10,300 101 St. Joseph Light & Power Co. 7,900 288 St. Mary Land & Exploration Co. 25,400 349 Saint Paul Bancorp, Inc. 22,700 690 * Salick Health Care, Inc. 22,400 353 * Santa Monica Bank 15,300 113 Savannah Foods & Industries, Inc. 29,900 486 Sbarro, Inc. 9,200 404 * Scherer Health 17,000 368 * Scholastic Corp. 15,300 734 * Sciclone Pharmaceuticals 23,700 441 * Scios Nova, Inc. 37,000 273 * The Score Board, Inc. 17,050 565 Scotsman Industries, Inc. 29,900 374 * Scotts Co. 24,100 440 Seafield Capital Corp. 13,500 478 Sealed Air Corp. 23,300 682 Sealright Co. 15,800 269 Selective Insurance Group 20,000 605 * Sepracor Inc. 47,000 405 Sequa Corp. Class A 17,500 582 * Sequent Computer Systems, Inc. 35,300 554 Shared Medical Systems Corp. 24,700 599 Shopko Stores, Inc. 39,700 427 * Shorewood Packaging 45,000 444 * Show Biz Pizza Time, Inc. 11,800 162 * Sierra Health Services 22,400 403 Sierra Pacific Resources 30,700 664 * Silicon Valley Group, Inc. 46,900 516 Simpson Industries, Inc. 29,800 522 Sizzler International 21,300 229 Skyline Corp. 28,900 488 * Skywest, Inc. 4,000 100 * Smith International, Inc. 44,700 486 * Smithfield Foods, Inc. 27,800 427 Snyder Oil Corp. 22,700 482 * Software Etc. Stores Inc. 19,800 416 * Software Publishing Corp. 27,450 165 * Solv-Ex Corp. 36,000 182 * Sonic Corp. 18,300 490 South Jersey Industries, Inc. 17,136 437 * Southdown, Inc. 13,300 309 * Southeastern Public Service Co. 4,000 98 Southern California Water Co. 8,100 383 Southern Indiana Gas & Electric 18,033 609 Southern National Corp. 35,700 732 Southwest Gas Corp. 37,100 645 Southwestern Energy Co. 29,800 607 * Spacelabs Medical 26,500 576 * Spartan Motors, Inc. 17,400 359 Spelling Entertainment 68,400 650 * Sports & Recreation 18,200 512 Standard Commercial Tobacco Co. 12,200 178 Standard Motor Products, Inc. 7,600 162 Standard Products Co. 19,725 661 The Standard Register Co. 2,400 44 Standex International Corp. 5,600 117 Stanhome, Inc. 23,500 667 L. S. Starrett Co. Class A 4,500 114 Steel Technologies, Inc. 23,150 483 * Stein Mart Inc. 20,250 471 Sterling Chemicals, Inc. 103,000 373 * Sterling Software, Inc. 16,196 389 Stewart Enterprises, Inc. Class A 14,100 539 Stone & Webster, Inc. 19,300 562 * Stone Container Corp. 66,325 481 Storage Equities, Inc. 42,700 619 Strawbridge & Clothier Class A 10,135 203 * Structural Dynamics Research Corp. 34,100 484 Suffolk Bancorp 7,400 161 Summit Bancorp 29,300 667 Summit Health Ltd. 62,400 398 * Summit Technology, Inc. 17,100 436 Sun Television & Appliances 19,300 511 * Sungard Data Systems 22,000 858 * Sunshine Mining Co. 174,100 392 Super Food Services, Inc. 42,300 449 * Sunrise Medical, Inc. 16,700 403 * Swift Transportation Co., Inc. 9,000 266 * Swing-n-Slide Corp. 37,200 367 * Sybron Corp. 26,400 736 * Symantec Corp. 32,400 632 * Symbol Technologies, Inc. 23,700 320 * Syncor International Corp. 18,500 294 * Synergen, Inc. 28,750 311 * Synopsys, Inc. 15,500 732 * Syratech Inc. 6,400 94 System Software Associates, Inc. 19,400 323 * Systems & Computer Technology Corp. 42,000 525 * TBC Corp. 33,300 437 TCA Cable Television, Inc. 18,200 470 TCF Financial Corp. 14,300 568 * ToHQ, Inc. 30,400 57
15 18 STATEMENT OF NET ASSETS (continued)
Market Value Shares (000)+ - ------------------------------------------------------------------------------------------ TNT Freightways 21,000 $ 483 TNP Enterprises, Inc. 21,300 373 T Squared Medical 41,500 249 * Tandycrafts, Inc. 24,800 350 Tasty Baking Co. Class A 20,900 285 * Tech Data Corp. 18,600 570 * Tech-Sym Corp. 12,800 240 * Tecnol Medical Products Inc. 32,800 488 * Tejas Gas Corp. 7,100 396 * Tejas Power Corp. Class A 9,900 93 Tejon Ranch Co. 18,600 274 * Telco Systems, Inc. 32,100 321 Teleflex Inc. 16,550 542 * Telios Pharmaceutical Inc. 61,300 329 * Tellabs, Inc. 13,500 847 Telxon Corp. 45,100 457 Tennant Co. 2,900 125 * Terra Industries, Inc. 106,600 506 * Tesoro Petroleum Corp. 52,400 393 * Tetra Technologies Inc. 52,900 370 Texas Industries, Inc. 9,660 243 * Theratech, Inc. 24,400 342 * Thermedics, Inc. 29,000 707 * Thermo Cardiosystems Inc. 20,000 613 * Thermo Process Systems 23,000 207 Thiokol Corp. 22,700 508 Tiffany & Co. 15,550 459 * Timberland Co. 14,600 858 * Tokheim Corp. 11,200 134 * Toll Brothers, Inc. 32,700 474 The Topps Co., Inc. 50,425 378 The Toro Co. 5,200 132 Total System Services, Inc. 15,600 454 * Trans World Music Corp. 9,300 124 Transco Energy Co. 47,000 799 Trenwick Group Inc. 12,800 602 * Trimble Navigation Ltd. 35,900 433 Trust Co. Bancorp 37,600 564 Trustco Bank 11,918 542 Trustmark Corp. 8,300 451 * Tucson Electric Power Co. 174,500 654 * Tuesday Morning, Inc. 29,300 385 Tultex Corp. 27,800 229 Tyco Toys, Inc. 38,300 512 * UNC, Inc. 43,100 286 UNR Industries, Inc. 51,900 347 * USG Corp. 43,100 921 USLICO Corp. 16,800 294 * Unicare Financial Corp. 16,600 365 * Union Corp. 4,800 59 Union Planters Corp. 20,730 601 United Carolina Bancshare Corp. 16,800 428 United Cities Gas Co. 25,906 521 United Companies Finance Corp. 17,455 1,025 United Dominion Realty 42,700 699 United Fire & Casualty Co. 10,100 376 United Industrial Corp. 12,100 79 * United Insurance Cos., Inc. 18,600 453 United Missouri Bancshares 13,470 527 * United Retail 28,500 328 * U.S. Bioscience 52,100 501 * U.S. Long Distance Corp. 33,500 645 * U.S. Robotics, Inc. 18,300 622 U.S. Shoe Corp. 51,700 530 United States Trust Corp. 9,800 537 United Water Resources, Inc. 22,800 351 United Wisconsin 12,200 351 Univar Corp. 28,400 341 * Universal Health Services Class B 25,500 418 * VLSI Technology, Inc. 40,400 689 Valhi, Inc. 9,600 47 Valley Bancorp 23,900 863 Valmont Industries, Inc. 22,400 339 Value City Department Stores, Inc. 28,300 470 Value Line, Inc. 11,300 452 * Varco International, Inc. 63,300 451 Varlen Corp. 8,300 317 * Vencor, Inc. 17,000 387 * Ventritex Inc. 20,600 747 Venture Stores, Inc. 18,800 374 Versa Technology, Inc. 17,100 261 * Vicor Corp. 16,900 296 * Vicorp Restaurants, Inc. 21,200 384 Victoria Bank 15,500 434 * Viewlogic Systems, Inc. 16,100 400 Vigoro Corp. 20,300 513 * Viratek, Inc. 31,500 437 * Vital Signs, Inc. 20,200 346 * Vivra, Inc. 14,450 499 * Vmark Software 29,100 469 WD-40 Co. 8,150 387 * Waban, Inc. 37,600 564 Wackenhut Corp. 2,500 34 * Wainoco Oil Corp. 91,300 388 Wallace Computer Services, Inc. 26,500 712 Warner Insurance Services, Inc. 26,250 158 Washington Energy Co. 26,769 502 Washington National Corp. 18,048 429 Washington Real Estate Investment Trust 33,350 734 Watts Industries Class A 12,200 532 Waverly, Inc. 12,400 220 * Weatherford International, Inc. 58,100 726 Del E. Webb Corp. 18,300 220
16 19
Market Value Shares (000)+ - ------------------------------------------------------------------------------------------ Werner Enterprises, Inc. 18,900 $ 463 West Co., Inc. 17,100 417 * Western Bank 1,500 22 Western Investment Real Estate Trust 25,700 363 * Western Publishing Group, Inc. 23,200 361 * Western Waste Industries 24,400 430 Wheatly TXT Corp. 34,000 340 Whitney Holdings 10,200 388 * Whittaker Corp. 30,300 409 Wicor, Inc. 17,900 586 * Williams Sonoma, Inc. 4,050 100 Wilshire Oil Co. of Texas 30,525 210 * Windmere Corp. 53,700 443 * Winnebago Industries, Inc. 52,200 359 * Wisconsin Central Transportation Corp. 9,800 458 Wiser Oil Co. 25,300 424 Wolohan Lumber Co. 19,390 347 Woodhead Industries, Inc. 25,800 400 * World Corp. 47,900 180 * Worldtex Inc. 67,300 421 Wyle Laboratories 22,700 392 * Wyman Gordon Corp. 48,200 223 * Xoma Corp. 18,400 106 York Financial Corp. 9,100 201 * Zebra Technologies Class A 12,700 568 * Zenith Electronics Corp. 11,800 74 * Zenith Laboratories 5,300 368 Zenith National Insurance Corp. 15,100 428 Zero Corp. 12,200 168 * Zilog Inc. 20,850 732 Zions Bancorp. 14,000 592 Zurn Industries, Inc. 15,800 508 - ------------------------------------------------------------------------------------------ TOTAL COMMON STOCKS (Cost $366,323) 424,324 - ------------------------------------------------------------------------------------------ TEMPORARY CASH INVESTMENTS (2.7%) - ------------------------------------------------------------------------------------------
Face Amount (000) --------- U.S. TREASURY BILL--NOTE D 2.955%, 12/23/93 $ 200 199 REPURCHASE AGREEMENT Collateralized by U.S. Government Obligations in a Pooled Cash Account 3.39%, 10/1/93 11,569 11,569 - ------------------------------------------------------------------------------------------ TOTAL TEMPORARY CASH INVESTMENTS (Cost $11,768) 11,768 - ------------------------------------------------------------------------------------------ TOTAL INVESTMENTS (101.0%) (Cost $378,091) 436,092 - ------------------------------------------------------------------------------------------
Market Value (000)+ - ------------------------------------------------------------------------------------------ OTHER ASSETS AND LIABILITIES (-1.0%) - ------------------------------------------------------------------------------------------ Other Assets--Notes C and E $ 8,994 Liabilities--Note E (13,247) -------- (4,253) - ------------------------------------------------------------------------------------------ NET ASSETS (100%) - ------------------------------------------------------------------------------------------ Applicable to 26,614,965 outstanding $.001 par value shares (authorized 40,000,000 shares) $431,839 NET ASSET VALUE PER SHARE $16.23 ==========================================================================================
+ See Note A to Financial Statements. * Non-Income Producing Securities. (1) The combined market value of common stocks and New York Stock Exchange Composite Index, Russell 2000 Index and Standard & Poor's Midcap 400 Index futures contracts represents 100.0% of net assets.
- ------------------------------------------------------------------------------------------ AT SEPTEMBER 30, 1993, NET ASSETS CONSISTED OF: - ------------------------------------------------------------------------------------------ Amount Per (000) Share -------- -------- Paid in Capital--Note F $347,952 $13.07 Undistributed Net Investment Income--Note F 3,644 .14 Accumulated Net Realized Gains--Note F 22,163 .84 Unrealized Appreciation of Investments 58,080 2.18 - ------------------------------------------------------------------------------------------ NET ASSETS $431,839 $16.23 - ------------------------------------------------------------------------------------------
17 20 STATEMENT OF OPERATIONS
Year Ended September 30, 1993 (000) - ------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,873 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358 - ------------------------------------------------------------------------------------------------------------------- Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,231 - ------------------------------------------------------------------------------------------------------------------- EXPENSES The Vanguard Group--Note B Investment Advisory Services . . . . . . . . . . . . . . . . . . . . . . . $ 59 Administration and Operations . . . . . . . . . . . . . . . . . . . . . . . 342 Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . . . 76 477 ----- Taxes (other than income taxes)--Note A . . . . . . . . . . . . . . . . . . . 24 Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . . . 6 - ------------------------------------------------------------------------------------------------------------------- Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 578 - ------------------------------------------------------------------------------------------------------------------- Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . 4,653 - ------------------------------------------------------------------------------------------------------------------- REALIZED NET GAIN--Note C Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,597 Options Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 977 - ------------------------------------------------------------------------------------------------------------------- Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . 22,606 - ------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)--Notes C and D Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,230 Options Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 - ------------------------------------------------------------------------------------------------------------------- Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . 51,362 - ------------------------------------------------------------------------------------------------------------------- Net Increase in Net Assets Resulting from Operations . . . . . . . . . $78,621 ===================================================================================================================
18 21 STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED Year Ended SEPTEMBER 30, 1993 September 30, 1992 (000) (000) - ------------------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net Investment Income . . . . . . . . . . . . . . . . . . . . $ 4,653 $ 2,808 Realized Net Gain--Note C . . . . . . . . . . . . . . . . . . 22,606 2,372 Change in Unrealized Appreciation (Depreciation)--Notes C and D 51,362 2,165 - ------------------------------------------------------------------------------------------------------------------- Net Increase in Net Assets Resulting from Operations . . . 78,621 7,345 - ------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS (1) Net Investment Income . . . . . . . . . . . . . . . . . . . . (3,245) (1,817) Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . (2,705) (2,927) - ------------------------------------------------------------------------------------------------------------------- Total Distributions . . . . . . . . . . . . . . . . . . . . (5,950) (4,744) - ------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (2) Issued -- Regular . . . . . . . . . . . . . . . . . . . . . 134,318 86,380 -- In Lieu of Cash Distributions . . . . . . . . . . 5,199 4,216 -- Exchange . . . . . . . . . . . . . . . . . . . . 86,107 51,757 Redeemed -- Regular . . . . . . . . . . . . . . . . . . . . . (24,260) (21,958) -- Exchange . . . . . . . . . . . . . . . . . . . . (43,946) (32,684) - ------------------------------------------------------------------------------------------------------------------- Net Increase from Capital Share Transactions . . . . . . . 157,418 87,711 - ------------------------------------------------------------------------------------------------------------------- Total Increase . . . . . . . . . . . . . . . . . . . . . . 230,089 90,312 - ------------------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Year . . . . . . . . . . . . . . . . . . . . . . 201,750 111,438 - ------------------------------------------------------------------------------------------------------------------- End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . $431,839 $201,750 =================================================================================================================== (1) Distributions Per Share Net Investment Income . . . . . . . . . . . . . . . . . . $ .18 $ .18 Realized Net Gain . . . . . . . . . . . . . . . . . . . . $ .15 $ .29 - ------------------------------------------------------------------------------------------------------------------- (2) Shares Issued and Redeemed Issued . . . . . . . . . . . . . . . . . . . . . . . . . . 14,929 10,654 Issued in Lieu of Cash Distributions . . . . . . . . . . . 379 372 Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . (4,663) (4,322) - ------------------------------------------------------------------------------------------------------------------- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,645 6,704 - ------------------------------------------------------------------------------------------------------------------- (3) Undistributed Net Investment Income . . . . . . . . . . . $ 3,644 $ 1,988 - -------------------------------------------------------------------------------------------------------------------
19 22 FINANCIAL HIGHLIGHTS
Year Ended September 30, ------------------------ For a Share Outstanding Throughout Each Year(1) 1993 1992 1991 1990(2) 1989 - ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . $12.63 $12.03 $8.55 $11.88 $11.96 ------ ------ ------- ------ ------ INVESTMENT ACTIVITIES Net Investment Income . . . . . . . . . . . . . . . . .20 .19 .20 17 .10 Net Realized and Unrealized Gain (Loss) on Investments . . . . . . . . . . . . 3.73 .88 3.60 (3.46) 2.13 ------ ------ ------- ------ ------ TOTAL FROM INVESTMENT ACTIVITIES . . . . . . . . 3.93 1.07 3.80 (3.29) 2.23 - ------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income . . . . . . . . (.18) (.18) (.18) (.04) (.14) Distributions from Realized Capital Gains . . . . . . (.15) (.29) (.14) -- (2.17) ------ ------ ------- ------ ------ TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (.33) (.47) (.32) (.04) (2.31) - ------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Year . . . . . . . . . . . . . $16.23 $12.63 $12.03 $8.55 $11.88 =================================================================================================================== Total Return(3) . . . . . . . . . . . . . . . . . . . +31.60% +9.34% +45.91% -27.73% +18.83% - ------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------ Net Assets, End of Year (Millions) . . . . . . . . . . $431 $202 $111 $40 $20 Ratio of Expenses to Average Net Assets . . . . . . . . .18% .18% .21% .31% 1.00% Ratio of Net Investment Income to Average Net Assets . 1.47% 1.65% 2.11% 1.91% .65% Portfolio Turnover Rate . . . . . . . . . . . . . . . . 26% 26% 33% 40% 160% - -------------------------------------------------------------------------------------------------------------------
(1) Adjusted to reflect a 3-for-1 stock split as of February 23, 1990. (2) Prior to September 11, 1989, Schroder Capital Management International, Inc. provided investment advisory services to the Fund. Effective September 11, 1989, The Vanguard Group, Inc. provides investment advisory services on an at-cost basis. (3) Total return figures do not reflect the 1% transaction fee on purchases or the annual account maintenance fee of $10. 20 23 NOTES TO FINANCIAL STATEMENTS Vanguard Small Capitalization Stock Fund is registered under the Investment Company Act of 1940 as a diversified open-end investment company. A. The following significant accounting policies are in conformity with generally accepted accounting principles for investment companies. Such policies are consistently followed by the Fund in the preparation of financial statements. 1. SECURITY VALUATION: Common stocks listed on an exchange are valued at the latest quoted sales prices as of 4:00 PM on the valuation date; securities not traded on the valuation date and securities not listed are valued at the mean of the latest quoted bid and asked prices. Temporary cash investments are valued at amortized cost which approximates market value. 2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for Federal income taxes is required in the financial statements. 3. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard Group of Investment Companies, transfers uninvested cash balances into a Pooled Cash Account, the daily aggregate of which is invested in repurchase agreements secured by U.S. Government obligations. Securities pledged as collateral for repurchase agreements are held by the Fund's custodian bank until maturity of the repurchase agreement. Provisions of the agreement ensure that the market value of this collateral is sufficient in the event of default; however, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. 4. FUTURES AND OPTIONS: The Fund may utilize index futures contracts and options to a limited extent. The primary risks associated with the use of futures contracts and options are imperfect correlation between the change in market value of the securities held by the Fund and the prices of futures contracts and options, and the possibility of an illiquid market. Futures contracts and purchased options are valued based upon their quoted daily settlement prices. The premium received for a written option is recorded as an asset with an equal liability which is marked to market based on the option's quoted daily settlement price. Fluctuations in the value of such instruments are accounted for as unrealized appreciation (depreciation) until terminated at which time realized gains and losses are recognized. Unrealized appreciation (depreciation) related to open futures contracts and options is required to be treated as realized gain (loss) for Federal income tax purposes. 5. OTHER: Security transactions are accounted for on the date the securities are purchased or sold. Costs used in determining realized gains and losses on sales of investment securities are those of specific securities sold. Dividend income and distributions to shareholders are recorded on the ex-dividend date. B. The Vanguard Group, Inc. furnishes at cost investment advisory, corporate management, administrative, marketing and distribution services. The costs of such services are allocated to the Fund under methods approved by the Board of Directors. At September 30, 1993, the Fund had contributed capital of $68,000 to Vanguard (included in Other Assets), representing .3% of Vanguard's capitalization. The Fund's officers and directors are also officers and directors of Vanguard. C. During the year ended September 30, 1993, the Fund made purchases of $234,421,000 and sales of $79,178,000 of investment securities other than U.S. Government securities and temporary cash investments. At September 30, 1993, unrealized appreciation of investment securities for financial reporting and Federal income tax purposes aggregated $58,001,000 of which $84,711,000 related to appreciated securities and $26,710,000 related to depreciated securities. 21 24 NOTES TO FINANCIAL STATEMENTS (continued) D. During the year ended September 30, 1993, the Fund wrote the following options on the Wilshire 5000 and Russell 2000 Indexes: - ----------------------------------------------------------------------------
Number of Premiums Contracts Received Written (000) - ---------------------------------------------------------------------------- Options open at September 30, 1992 -- -- Options written 700 $ 235 Options closed (360) (131) Options exercised (340) (104) ----- ----- Options open at September 30, 1993 -- -- - ----------------------------------------------------------------------------
At September 30, 1993, the aggregate settlement value of open New York Stock Exchange Composite Index, Russell 2000 Index and Standard & Poor's Midcap 400 Index futures contracts expiring in December 1993, the relaxed unrealized appreciation and the market value of securities deposited as initial margin were $7,657,000, $79,000 and $199,000, respectively. E. The market value of securities on loan to broker/dealers at September 30, 1993, was $6,269,000 for which the Fund had received cash collateral of $6,606,000. F. Effective in 1993, generally accepted accounting principles require that differences between undistributed net investment income or accumulated net realized capital gains for financial reporting and tax purposes, if permanent, be reclassified to or from paid in capital. In connection with the adoption of this accounting method, the Fund has reclassified prior years' permanent differences of $248,000 from paid in capital to undistributed net investment income and $7,249,000 from accumulated net realized gains to paid in capital. These reclassifications have no effect on net assets or net asset values per share. 22 25 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors Vanguard Small Capitalization Stock Fund In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Small Capitalization Stock Fund (the "Fund") at September 30, 1993, the results of its operations, the changes in its net assets and the financial highlights of the respective periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereinafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE Thirty South Seventeenth Street Philadelphia, Pennsylvania 19103 October 25, 1993 SPECIAL 1993 TAX INFORMATION (UNAUDITED) FOR VANGUARD SMALL CAPITALIZATION STOCK FUND, INC. Corporate shareholders should note that for the fiscal year ended September 30, 1993, 47.5% of the investment income (i.e., dividend income plus short-term capital gains, if any) qualifies for the intercorporate dividends received deduction. 23 26 DIRECTORS AND OFFICERS JOHN C. BOGLE, Chairman and Chief Executive Officer Chairman and Director of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. JOHN J. BRENNAN, President President and Director of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc Rorer Inc.; Director of Sun Company, Inc. and Immune Response Corporation; Trustee of the Universal Health Realty Income Trust. BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and Massachusetts Mutual Life Insurance Co. BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton University; Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker Fentress & Co., and The Southern New England Telephone Company. ALFRED M. RANKIN, JR., President and Chief Executive Officer of NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company, and The Standard Products Company. JOHN C. SAWHILL, President and Chief Executive Officer of The Nature Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and President of New York University; Director of Pacific Gas and Electric Company and NACCO Industries. JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. J. LAWRENCE WILSON, Chairman and Director of Rohm & Haas Company; Director of Cummins Engine Company and Vanderbilt University; Trustee of the Culver Educational Foundation. OTHER FUND OFFICERS RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary of each of the investment companies in The Vanguard Group. KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.; Controller of each of the investment companies in The Vanguard Group. OTHER VANGUARD GROUP OFFICERS JEREMY G. DUFFIELD Senior Vice President Planning & Development JAMES H. GATELY Senior Vice President Institutional IAN A. MACKINNON Senior Vice President Fixed Income Group VINCENT S. MCCORMACK Senior Vice President Operations RALPH K. PACKARD Senior Vice President Chief Financial Officer 24 27 toward those of the 1970s. However, the current level of inflation suggests that future real returns may prove to be satisfactory. Looking forward, the main risks to the investor are two: (1) that yields on financial assets will rise sharply, reducing the prices of stocks and bonds alike; and (2) that inflation, presently at moderate levels, will accelerate. SOME COURSES OF ACTION What, if any, present action should be taken by investors to deal with these two major risks? Should your allocation of assets among stock funds, bond funds, and money market funds be adjusted? Here are some reasonable courses of action to consider: . For long-term investors who have built a substantial balanced portfolio of stock, bond, and money market funds, stay the course. Even if withdrawing from the stock market proves to be justified, the next decision--when to return--will one day be required. "Being right twice" is no mean challenge. . For long-term investors gradually accumulating assets for, say, retirement, stay your present course. Continue to invest regularly. By doing so, you buy more shares of a mutual fund when its price falls, and fewer shares when its price rises, virtually assuring a reasonable average cost. . For risk-averse investors who are highly confident that stock prices are "too high," make only marginal--not "all or nothing"--changes in your portfolio balance. Given the perils of predicting the future, any changes should be limited to, say, 15 percentage points. That is, if your normal portfolio allocation is 60% in stock funds, it might be reduced to 45%; if 85%, to 70%. . For investors who simply must have more income, never lose sight of the added principal risk involved in shifting from money market funds to bond funds. Long-term bond funds provide a generous and durable income stream, but their prices are highly volatile. Short-term and intermediate-term bond funds offer a "middle way" of increasing income with more modest risk to principal. . For investors who are tempted to find an "easy way" to higher returns, never forget that risk and reward go hand in hand. Precipitously replacing certificates of deposit with broad-based common stock funds verges on the irrational. Funds investing in other securities markets--emerging nations, international stocks and bonds, and small U.S. companies--carry their own special risks. Generally, limit such alternative investments to, say, 20% of your total portfolio. For all investors, be prepared for sharp interim swings in stock and bond prices. The central tenet of investing is "prices fluctuate," and sensible long-term investors simply must take such fluctuations in their stride. Successful investing is as much a function of your own discipline and equanimity as it is of the returns available in the securities markets. THREE ESSENTIAL PRINCIPLES As we confront the brave new world of investing that may well lie ahead in the coming decade--and it is important to think in decade-length terms--we would underscore three caveats: 1. Have "rational expectations" for future returns. At prices prevailing today, it seems highly unlikely that the returns enjoyed by investors in the past decade will be repeated in the coming decade. 2. Maintain a balanced portfolio consisting of stock, bond, and money market funds. Each asset class has its own risk and reward characteristics. By allocating your resources among the three asset classes according to your own requirements, you can build a portfolio providing appropriate elements of capital appreciation, capital conservation, and current income. 3. In balancing risk against reward, be sure to consider cost. Many mutual funds carry hefty sales charges or high expense ratios, or both. Other factors held equal, expenses reduce returns, dollar for dollar. Put another way, high-cost funds must select investments with higher prospective gross returns--which entail higher risks--to match the net returns earned by low-cost funds. This brief Annual Report essay can provide only an elementary look at the challenges investors face today. History can give us perspective, but it cannot give us performance. Famed British economist Lord Keynes had it right when he said, "the inevitable never happens. It is the unexpected always." 28 THE VANGUARD FAMILY OF FUNDS AGGRESSIVE GROWTH FUNDS Vanguard Explorer Fund Vanguard Small Capitalization Stock Fund Vanguard Specialized Portfolios GROWTH FUNDS Vanguard International Equity Index Fund Vanguard International Growth Portfolio Vanguard/Morgan Growth Fund Vanguard/PRIMECAP Fund Vanguard U.S. Growth Portfolio GROWTH AND INCOME FUNDS Vanguard Convertible Securities Fund Vanguard Equity Income Fund Vanguard Index Trust Vanguard Quantitative Portfolios Vanguard/Trustees' Equity Fund Vanguard/Windsor Fund Vanguard/Windsor II BALANCED FUNDS Vanguard Asset Allocation Fund Vanguard Balanced Index Fund Vanguard STAR Fund Vanguard/Wellington Fund INCOME FUNDS Vanguard Admiral Funds Vanguard Bond Index Fund Vanguard Fixed Income Securities Fund Vanguard Preferred Stock Fund Vanguard/Wellesley Income Fund TAX-FREE INCOME FUNDS Vanguard Municipal Bond Fund Vanguard State Tax-Free Funds (CA, FL, NJ, NY, OH, PA) MONEY MARKET FUND Vanguard Money Market Reserves [VANGUARD LOGO] Vanguard Financial Center Valley Forge, Pennsylvania 19482 New Account Information 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739 This Report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus. All Funds in the Vanguard Family are offered by prospectus only. Q480-9/93 29 EDGAR Appendix This appendix describes components of the printed version of this report that do not translate into a format acceptable to the EDGAR system. The cover of the printed version of this report features the flags of The United States of America and Vanguard flying from a halyard. A bar chart called "A Tale of Two Decades" appears on the inside front cover. This chart illustrates Average Annual Total Return, in nominal and real terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades since 1973. A running head featuring the Vanguard flag logo appears at the top of pages one through 24. A photograph of John C. Bogle appears at the upper-right of page one. A line chart of the Indexed Value (Standard & Poor's Growth Index and Standard & Poor's Value Index) of the U.S. Growth Portfolio for the Fiscal Years 1988 through 1993 appears at the upper-right of page two. Line charts illustrating cumulative performance of the Vanguard U.S. Growth Portfolio and the Vanguard International Portfolio compared to (i) the S&P 500 Index and (ii) Average Growth and International Funds for the Fiscal Years 1984 through 1993 appear on page four. -----END PRIVACY-ENHANCED MESSAGE-----