<PAGE> 1
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
The total return of Vanguard Explorer Fund was +20.1% during the six
months ended April 30, the first half of our 1996 fiscal year. During this
period, the bullish sentiment surrounding the stock market shifted from an
environment that favored large blue-chip stocks to one in which smaller
capitalization stocks led the way, a trend distinctly beneficial to the Fund.
The table below compares Explorer Fund's total return (capital change
plus reinvested dividends) with that of the average small company mutual fund
and the Russell 2000 Index, the most widely recognized unmanaged benchmark for
small capitalization stocks:
<TABLE>
<CAPTION>
- ------------------------------------------------------
TOTAL RETURN
----------------
SIX MONTHS ENDED
APRIL 30, 1996
- ------------------------------------------------------
<S> <C>
VANGUARD EXPLORER FUND +20.1%
- ------------------------------------------------------
AVERAGE SMALL-CAP FUND +20.2%
RUSSELL 2000 INDEX +18.4
- ------------------------------------------------------
</TABLE>
The Fund's return is based on net asset values of $51.05 per share on October
31, 1995, and $56.45 on April 30, 1996, with the latter figure adjusted to take
into account the reinvestment of an annual dividend of $.24 per share from net
investment income and a distribution of $4.00 per share from net realized
capital gains. These payments were the result of our operations during 1995 and
were made on December 18, 1995.
THE PERIOD IN REVIEW
Not content to rest on the laurels of last year's near record-breaking equity
returns, the broad stock market continued to advance during the past six
months. Stocks, after taking a breather in October 1995 (the only month in the
past 17 with a negative total return), climbed higher in each successive month
of the semi-annual period. This advance came despite the pressure of rising
interest rates, which often is accompanied by stock market weakness. In a
volatile environment, the yield on long-term U.S. Treasury bonds rose from 6.2%
on October 31, 1995, to 6.8% on April 30, 1996.
Although the Federal Reserve lowered short-term interest rates in
December and January, the bond market fretted over the apparent strength of the
U.S. economy and the possibility of an increase in inflation. Since the end of
January, the performance of the stock and bond markets has "decoupled," as
long-term Treasury bonds lost a total of more than 8%, while stocks continued
to creep higher. It remains to be seen whether the stock market has enough
earnings growth momentum to withstand the competition for investors' dollars
that higher-yielding bonds might provide.
As we mentioned at the outset of this letter, the relative performance
of large-cap and small-cap stocks seemed to reach an "inflection point" midway
through the semi-annual fiscal period. For the full period, small-cap stocks,
which had been laggards for nearly two years, gained considerable ground versus
their large-cap cousins (+18.4% versus +13.8%). In this environment, Explorer
Fund outpaced the return of the Russell 2000 Index and essentially matched the
performance of the average small company mutual fund. The Fund's
outperformance of the Russell Index can be attributed largely to three factors:
(1) a double weighting (22% of the Fund's net assets versus 11% for the Index)
in health-care stocks, one of the best-performing sectors during the period;
(2) underweightings in the lagging financial and utilities sectors; and (3)
good stock selection in the capital goods and transportation groups.
On April 30, Explorer Fund's assets comprised 87% equities and 13%
short-term cash reserves, virtually identical to our portfolio structure at
fiscal year-end. The regular reports from our two advisers --Wellington
Management Company and Granahan Investment Management--are presented on pages 3
and 4 of this Report.
Six months ago, in Explorer Fund's Annual Report, we counseled that
"staying the course" with an investment in small-capitalization stocks often
proves wiser than guessing about whether small-cap or large-cap stocks will
provide market dominance.
(continued)
1
<PAGE> 2
Indeed, the past few months have rewarded those investors who followed this
advice and maintained their small-cap exposure. In any event, the fiscal year
is off to an exceptional start, and we look forward to reporting on the full
year in further detail in our 1996 Annual Report six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------------
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
- ---------------------------
John J. Brennan
President
May 15, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED MARCH 31, 1996) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
-------------------------------
INCEPTION TOTAL CAPITAL INCOME
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
--------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
VANGUARD EXPLORER FUND 12/11/67 +27.35% +16.62% +10.35% +9.66% +0.69%
</TABLE>
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.
2
<PAGE> 3
REPORT FROM WELLINGTON MANAGEMENT COMPANY
The first half of fiscal 1996 has been a strong period for stock markets.
While the economy continues to grow, the strength and consistency of this
growth continue to be debated. The consumer's performance so far in 1996
is mixed, with both spending and debt levels increasing. With so many
conflicting signals in the economy, individual company fundamentals are more
important, as the economic tailwind of the last couple of years is no longer
assured to continue.
While the first half of this most recent semi-annual period was marked
by the portfolio's underperformance versus the Russell 2000 Index, the balance
of the period was strongly positive for both small company stocks in absolute
terms, and for the portfolio relative to the Index. For the six months ended
April 30, 1996, our benchmark index, the Russell 2000, was up +18.4%, which was
significantly better than the +13.8% turned in by the S&P 500 which is
comprised predominantly of larger capitalization stocks. As noted in the
Message To Shareholders, the Fund outperformed both indexes with a return of
+20.1% for the past six months.
In the early months of 1996, the earnings progress of our holdings has
been encouraging, and positive performance has come from diversified sources.
The five stocks with the biggest positive impact on the portfolio for the
six-month period came from a wide range of industries. The largest contributor
to the portfolio was Prepaid Legal Services, a company which services the legal
needs of its prepaid plan beneficiaries. Prepaid Legal Services returned more
than +190% during the first six months of the fiscal year. Noble Drilling Corp.
was also a strong performer, with a return of +151% as the energy service
sector made tremendous gains in the beginning of the calendar year. A holding
in the information technology sector, IKOS Systems Inc., was another strong
performer. Rounding out the top five were a software company, Compuware Corp.,
and another oil field service provider, Falcon Drilling Co.
Our worst performers during the first half of the fiscal year included
some biotechnology names. This area as a whole has been a very positive
contributor, but the risk with individual names is high, and disappointments
are inevitable. We sold both AutoImmune Inc., and ImmuLogic Pharmaceutical on
the basis of unfavorable clinical results. Other poor performers included
Merisel, Musicland Stores, and Norton McNaughton, all of which were eliminated
due to disappointing fundamental developments.
Overall, we manage the portfolio by selecting "one company at a time,"
with an eye toward diversification at both the sector and the company level.
The portfolio's largest exposures are in information technology and health
care. This decision is not the result of a "top down" sector judgment, but
rather the fallout of a one-at-a-time company selection process.
In building the portfolio, we continue to focus on companies with
defensible niches, growing markets, and managements that are both talented and
shareholder oriented. As it always has, the portfolio will continue to focus on
small, growing companies. The weighted median market capitalization of the
portfolio is $493 million, which is similar to that of the Russell 2000 Index,
and we expect it will remain so. We will also continue to focus on building the
portfolio one company at a time, a process we believe is central in identifying
those stocks that offer excellent opportunity yet may be overlooked by the
market.
We know that the markets have been very favorable for small companies
and, while we continue to see good opportunity in this sector, we expect that
the next twelve months may not provide as easy an environment for small
companies to raise money as the last twelve have. This means that we will place
a higher importance on balance sheet strength, which represents a company's
ability to grow without accessing outside capital.
Respectfully,
Kenneth L. Abrams, Senior Vice President
Portfolio Manager
Wellington Management Company
May 15, 1996
3
<PAGE> 4
REPORT FROM GRANAHAN INVESTMENT MANAGEMENT, INC.
The past six months ended April 30, 1996, has been a period of strong growth
for small companies. During this period, Explorer Fund's performance was in
excess of the +18.4% return of small capitalization stocks, as measured by the
Russell 2000 Index (see A Message to Shareholders).
PORTFOLIO COMMENTS
Our portfolio showed good returns during these six months and, importantly, our
companies in the portfolio are now beginning to experience acceleration in
their earnings growth trends as well.
First, on the performance side, our biggest contributors were from
diverse industry sectors. Best performers included Anchor Gaming (proprietary
games and Colorado casinos), Centocor and Genetics Institute (biotechnology),
Itron and Dionex (specialized instruments for utilities and industrial users),
and Input/Output (3D seismic systems for oil and gas exploration), to name a
few. The majority of these companies have strong earnings trends currently and
more of the same is expected.
On the negative side, we had underperformance in companies including
Broderbund, Maxis, and Expert Software in PC consumer software, and Diamond
Multimedia and Number Nine Visual in PC graphics accelerator components; we
have eliminated Number Nine Visual and increased position sizes in Expert
Software and a few of the retailers in this out-of-favor area.
We mentioned above that we are seeing earnings begin to accelerate in
our portfolio companies. For a little history on the subject, our companies'
earnings growth on average typically has been between 20% to 30% per year. In
1994 it was above that range and, as we wrote in last year's Annual Report,
1995 saw a cooling off from that level--actually down to about 20% at its low
point. Recently, we have seen earnings of our companies re-accelerate and, if
the current momentum continues, we will exceed our forecast of last October for
a 25% average earnings gain in 1996.
There are three components to this recent strengthening: First, our
purchases of new names since last October have emphasized companies with
earnings growing faster than the 20% rate, including many in the fast growing
business software and services sector. Second, several of our existing
holdings such as Sofamor/Danek, Fidelity National Financial, and PC Docs are
enjoying rebounds from depressed earnings levels of a year ago. Third, we are
seeing accelerating earnings trends in many of our existing holdings such as
Anchor Gaming, Acxiom (database management for direct marketing firms), Play By
Play (licensed toy and specialty items), and Southern Energy Homes
(manufactured homes).
With regard to outsourcing services, we should note that this growing
trend has generated growth opportunities for many of our companies. These range
from CompuCom Systems (provider of a growing number of MIS outsource services)
to On Assignment (placement of scientific and other temporary personnel), and
Cohr, Inc. (centralized purchasing and equipment maintenance for hospitals).
OUTLOOK
The goal is to position the portfolio in small companies with above-average
earnings growth prospects over the long term. The majority of these companies
have already demonstrated this capability, i.e., Core Growers, supplemented
with either Pioneers that are earlier on in their development or Special
Situations that offer turn-around earnings growth potential. On a current
basis, we are seeing strong earnings growth in the portfolio as we noted above,
with the latest 12 months' reported earnings for our companies now showing
earnings growth of about 35%.
As for valuation, the PE (price/earnings) on these latest 12 months'
earnings has moved up from the low 20s to 25, which is toward the high end of
our historical range of 14 to 30. In our view, this becomes a problem only if
interest rates go higher. That picture is mixed currently; in the October 1995
to April 1996 time period, long rates have increased while short rates have
decreased slightly.
Respectfully,
John J. Granahan, President
Granahan Investment Management, Inc. May 15, 1996
4
<PAGE> 5
SPECIAL NOTICE TO SHAREHOLDERS
NEW AGREEMENT TO REDUCE INVESTMENT ADVISORY FEES
We are pleased to announce that the Board of Directors of Vanguard
Explorer Fund has reached agreement with Wellington Management Company (WMC),
one of the Fund's investment advisers, on a revised investment advisory
agreement. The revised agreement involves a reduction in the annual rate of
advisory fees to be paid to WMC. Given the assets of $872,946,000 currently
assigned to WMC, the dollar amount of the annual fee would decline from
$2,407,000 to $1,934,000, a reduction of $473,000. The new effective annual fee
rate paid to WMC would equal 0.222% of its current assets and would decline
further if its assets under management were to continue to grow.
Under the terms of the new agreement, the Fund will pay WMC a basic
advisory fee at the end of each fiscal quarter based on the average month-end
net assets managed by WMC during the quarter. The quarterly rate is applied
according to the following annual fee schedule:
<TABLE>
<CAPTION>
- -----------------------------------------------
ANNUAL BASIC
NET ASSETS FEE RATE
- -----------------------------------------------
<S> <C>
FIRST $500 MILLION 0.25%
NEXT $250 MILLION 0.20
NEXT $250 MILLION 0.15
OVER $1 BILLION 0.10
- -----------------------------------------------
</TABLE>
Both the current and revised agreements provide that the basic fee may be
increased or decreased by applying an incentive/penalty fee adjustment based on
the investment performance of the WMC-managed assets relative to the Russell
2000 Small Company Stock Index. The following table sets forth the
incentive/penalty adjustment to the basic advisory fee payable by the Fund to
WMC under the new advisory agreement.
<TABLE>
<CAPTION>
- --------------------------------------------------------
CUMULATIVE 36-MONTH PERFORMANCE
VERSUS THE RUSSELL 2000 PERFORMANCE FEE
SMALL COMPANY STOCK INDEX ADJUSTMENT*
- --------------------------------------------------------
<S> <C>
LESS THAN -12% -0.50 X BASIC FEE
BETWEEN -12% AND -6% -0.25 X BASIC FEE
BETWEEN -6% AND 6% 0.00 X BASIC FEE
BETWEEN 6% AND 12% 0.25 X BASIC FEE
MORE THAN 12% 0.50 X BASIC FEE
- --------------------------------------------------------
</TABLE>
* For purposes of this calculation, the basic fee is calculated by applying a
quarterly rate based on the annual basic fee rate using average assets over
the same 36-month period over which the performance is measured.
This revised investment advisory agreement replaces the Fund's current
agreement with the adviser dated October 31, 1994, and will go into effect on
August 1, 1996. (Under the interpretations of the Securities and Exchange
Commission, the new incentive/penalty fee will not be fully operable until the
quarter ending July 31, 1999; until that date, the fee will be calculated
according to certain transition rules.) Until the effective date, the adviser
has agreed to waive its advisory fees to the extent necessary to abide by the
new fee schedule. For the fiscal year ended October 31, 1995, the Fund paid
approximately $1,653,000 to WMC for investment advisory services.
The adviser, located at 75 State Street, Boston, Massachusetts, is a
professional investment advisory firm which provides services to 12 investment
companies of The Vanguard Group. Under the terms of its investment advisory
agreement with the Fund, WMC agrees to manage the investment and reinvestment
of its assigned portion of the Fund and to continuously review, supervise, and
administer the Fund's investment program in coordination with the Fund's other
adviser. The advisers discharge their responsibilities subject to the control
of the officers and directors of the Fund.
5
<PAGE> 6
SPECIAL NOTICE TO SHAREHOLDERS
NEW AGREEMENT TO REDUCE INVESTMENT ADVISORY FEES
We are pleased to announce that the Board of Directors of Vanguard Explorer
Fund has reached agreement with Granahan Investment Management, Inc., one of
the Fund's investment advisers, on a revised investment advisory agreement. The
revised agreement involves a reduction in the annual rate of advisory fees to
be paid to Granahan. Given the assets of $1.0 billion currently assigned to
Granahan, the dollar amount of the annual fee would decline from $2,836,000 to
$2,399,000, a reduction of $437,000. The new effective annual fee rate paid to
Granahan would equal 0.234% of its current assets and would decline further if
its assets under management were to continue to grow.
Under the terms of the new agreement, the Fund will pay Granahan a basic
advisory fee at the end of each fiscal quarter, based on the average month-end
net assets managed by Granahan during the quarter. The quarterly rate is
applied according to the following annual fee schedule:
<TABLE>
<CAPTION>
- ------------------------------------------------
ANNUAL BASIC
NET ASSETS FEE RATE
- ------------------------------------------------
<S> <C>
FIRST $500 MILLION 0.30%
NEXT $250 MILLION 0.20
NEXT $250 MILLION 0.15
OVER $1 BILLION 0.10
- ------------------------------------------------
</TABLE>
Both the current and revised agreements provide that the basic fee may be
increased or decreased by applying an incentive/penalty fee adjustment based on
the investment performance of the Granahan-managed assets relative to the
Russell 2000 Small Company Stock Index.
This revised investment advisory agreement replaces the Fund's current
agreement with the adviser dated February 28, 1990, and will go into effect on
August 1, 1996. Until the effective date, the adviser has agreed to waive its
advisory fees to the extent necessary to abide by the new fee schedule. For the
fiscal year ended October 31, 1995, the Fund paid approximately $1,869,000 to
Granahan for investment advisory services.
The adviser, located at 275 Wyman Street, Waltham, Massachusetts, is a
professional investment advisory firm founded in 1985. Under the terms of its
investment advisory agreement with the Fund, Granahan agrees to manage the
investment and reinvestment of its assigned portion of the Fund and to
continuously review, supervise, and administer the Fund's investment program in
coordination with the Fund's other adviser. The advisers discharge their
responsibilities subject to the control of the officers and directors of the
Fund.
6
<PAGE> 7
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD EXPLORER FUND for the 25-year period ended April 30, 1996. During the
period illustrated, stock prices fluctuated widely; these results should not be
considered a representation of the dividend income or capital gain or loss that
may be realized from an investment made in the Fund today.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA* TOTAL INVESTMENT RETURN**
- ------------------------------------------------------------------------------------------------------------------------------------
Explorer Fund Russell 2000+
Value with Income -------------------------------- -------------
October 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Return
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1972 $13.46 -- $.09 $ 13.59 +34.9% +1.3% +36.2% +21.9%
- ------------------------------------------------------------------------------------------------------------------------------------
1973 11.91 -- -- 12.02 -11.5 0.0 -11.5 0.0
- ------------------------------------------------------------------------------------------------------------------------------------
1974 7.19 -- .14 7.37 -39.6 +0.9 -38.7 -28.7
- ------------------------------------------------------------------------------------------------------------------------------------
1975 8.13 -- .13 8.49 +13.1 +2.1 +15.2 +25.9
- ------------------------------------------------------------------------------------------------------------------------------------
1976 8.35 -- .05 8.78 + 2.8 +0.7 + 3.5 +20.1
- ------------------------------------------------------------------------------------------------------------------------------------
1977 9.77 -- .06 10.35 +17.0 +0.8 +17.8 - 6.1
- ------------------------------------------------------------------------------------------------------------------------------------
1978 12.32 -- .02 13.05 +26.0 +0.1 +26.1 + 6.3
- ------------------------------------------------------------------------------------------------------------------------------------
1979 16.09 -- .20 17.30 +30.6 +1.9 +32.5 +15.3
- ------------------------------------------------------------------------------------------------------------------------------------
1980 25.86 -- .24 28.19 +60.7 +2.3 +63.0 +55.3
- ------------------------------------------------------------------------------------------------------------------------------------
1981 28.05 -- .30 30.91 + 8.5 +1.1 + 9.6 + 4.1
- ------------------------------------------------------------------------------------------------------------------------------------
1982 28.91 $4.01 .50 37.91 +20.5 +2.2 +22.7 +14.8
- ------------------------------------------------------------------------------------------------------------------------------------
1983 38.35 .58 .24 51.65 +35.2 +1.0 +36.2 +38.3
- ------------------------------------------------------------------------------------------------------------------------------------
1984 31.10 1.66 .64 44.49 -15.3 +1.4 -13.9 - 3.2
- ------------------------------------------------------------------------------------------------------------------------------------
1985 32.56 .20 .38 47.50 + 5.4 +1.4 + 6.8 +15.8
- ------------------------------------------------------------------------------------------------------------------------------------
1986 31.59 1.29 .33 48.44 + 1.0 +1.0 + 2.0 +22.2
- ------------------------------------------------------------------------------------------------------------------------------------
1987 25.06 3.27 .02 42.91 -11.5 +0.1 -11.4 -13.6
- ------------------------------------------------------------------------------------------------------------------------------------
1988 29.64 1.96 .11 55.24 +28.2 +0.5 +28.7 +27.1
- ------------------------------------------------------------------------------------------------------------------------------------
1989 30.76 1.59 .32 61.29 + 9.8 +1.2 +11.0 +15.6
- ------------------------------------------------------------------------------------------------------------------------------------
1990 22.62 1.01 .37 47.24 -23.9 +1.0 -22.9 -27.3
- ------------------------------------------------------------------------------------------------------------------------------------
1991 36.75 -- .34 77.77 +62.5 +2.1 +64.6 +58.6
- ------------------------------------------------------------------------------------------------------------------------------------
1992 41.23 -- .26 87.85 +12.2 +0.8 +13.0 + 9.5
- ------------------------------------------------------------------------------------------------------------------------------------
1993 49.37 .78 .13 107.42 +21.9 +0.4 +22.3 +32.4
- ------------------------------------------------------------------------------------------------------------------------------------
1994 45.99 5.17 .14 112.24 + 4.2 +0.3 + 4.5 - 0.3
- ------------------------------------------------------------------------------------------------------------------------------------
1995 51.05 2.26 .17 131.84 +17.0 +0.5 +17.5 +18.3
- ------------------------------------------------------------------------------------------------------------------------------------
1996 (4/30) 56.45 4.00 .24 158.38 +19.6 +0.5 +20.1 +18.4
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL +1,486.9% +1,476.2%
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +11.9% +11.9%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted for 2-for-1 stock split, December 2, 1978.
** Includes reinvestment of income dividends and any capital gains
distributions for both the Fund and the Index.
+ Standard & Poor's 500 Index through 1979; Russell 2000 Index thereafter.
Note: The initial net asset value was $9.98 on October 31, 1971, the beginning
of the period illustrated. No adjustment has been made for income taxes payable
by shareholders on reinvested income dividends and capital gains distributions.
7
<PAGE> 8
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
April 30, 1996
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (86.5%)
- -------------------------------------------------------------------------------------------
BASIC MATERIALS (1.0%)
* Liposome Co., Inc. 300,000 $ 7,350
* Lydall, Inc. 484,700 11,390
* Scios, Inc. 400,000 1,900
----------
SECTOR TOTAL 20,640
----------
- -------------------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (5.8%)
* American Buildings Co. 215,000 5,402
* American Homestar Corp. 343,125 7,592
* Brooks Automation, Inc. 346,000 5,017
* Catalytica, Inc. 300,000 1,163
* The Cherry Corp. Class A 354,500 3,279
Elcor Corp. 241,600 5,798
* Hirsch International Corp. Class A 114,000 1,796
* Newpark Resources, Inc. 210,550 6,606
Oakwood Homes Corp. 252,900 11,286
Pacific Scientific Co. 191,000 3,772
* Palm Harbor Homes, Inc. 250,000 6,938
* Redman Industries, Inc. 500,000 9,875
* Rohr, Inc. 200,000 3,650
* Security Dynamics
Technologies, Inc. 158,500 13,235
* Southern Energy Homes, Inc. 468,500 7,965
* Tetra Technologies, Inc. 245,000 4,808
* UCAR International, Inc. 100,000 4,100
Valmont Industries, Inc. 507,000 16,224
----------
SECTOR TOTAL 118,506
----------
- -------------------------------------------------------------------------------------------
CONSUMER CYCLICAL (17.1%)
* Anchor Gaming 449,000 19,756
* Au Bon Pain Co., Inc. 300,000 2,362
* Autocam Corp. 214,960 2,579
* Best Buy, Inc. 550,000 10,588
* Borg-Warner Security Corp. 1,000,000 11,625
* Broderbund Software, Inc. 168,000 7,350
Callaway Golf Co. 250,000 6,687
* Catalina Marketing Corp. 175,000 13,628
* Catherines Stores 300,000 2,588
* Chancellor Broadcasting Co.
Class A 200,000 5,000
* The Cheesecake Factory 50,000 1,287
* Chicago Miniature Lamp, Inc. 253,000 10,183
Coachmen Industries, Inc. 331,200 9,274
* Day Runner, Inc. 100,000 3,075
* Desktop Data, Inc. 150,000 5,850
* Digital Generation Systems 25,000 281
* Discount Auto Parts Inc. 180,500 5,302
* Egghead, Inc. 750,000 7,219
Ellett Brothers, Inc. 93,000 558
* Ethan Allen Interiors Inc. 330,000 8,580
* General Nutrition Cos., Inc. 400,000 7,800
* Good Guys, Inc. 820,000 7,278
* The Gymboree Corp. 330,000 8,539
Harman International
Industries, Inc. 100,000 4,725
Intelligent Electronics Inc. 1,054,300 6,458
*(1) Iwerks Entertainment, Inc. 600,000 6,150
* JPE, Inc. 179,000 1,790
* Lands' End, Inc. 100,000 1,975
Marcus Corp. 411,000 11,457
(1) McGrath Rent Corp. 394,900 8,046
Mercantile Stores Co., Inc. 150,000 9,356
* National Auto Credit Co. 176,000 2,508
* Office Depot, Inc. 200,000 4,475
* People's Choice TV Corp. 350,000 4,988
* Planet Hollywood International,
Inc. Class A 200,000 5,000
*(1) Platinum Entertainment, Inc. 265,000 3,147
* Playboy Enterprises Inc. Class B 720,500 8,556
* Play By Play Toy & Novelties, Inc. 235,600 2,945
* Prime Hospitality Corp. 700,000 10,587
* Quality Dining, Inc. 273,500 8,889
* Red Lion Hotels, Inc. 193,200 4,250
* Renters Choice, Inc. 662,000 14,067
*(1) Rex Stores Corp. 464,000 7,250
Richfood Holdings, Inc. 120,000 3,915
Rival Manufacturing Co. 232,200 5,341
* Spectrum Holobyte 358,600 2,555
* Sports & Recreation 778,900 5,647
Sturm, Ruger & Co., Inc. 153,000 6,177
* Ultimate Electronics, Inc. 208,000 1,118
* Urban Outfitters, Inc. 300,000 9,900
* VWR Scientific Products Corp. 588,000 7,938
* Valuevision International, Inc.
Class A 700,000 5,469
Warnaco Group 300,000 7,875
* Westcott Communications 114,200 2,427
Winnebago Industries, Inc. 387,000 3,289
----------
SECTOR TOTAL 345,659
----------
- -------------------------------------------------------------------------------------------
CONSUMER STAPLES (2.1%)
* Boston Beer Co., Inc. Class A 250,000 4,719
Bridgford Foods Corp. 194,700 1,655
* Canandaigua Wine Co., Inc.
Class A 130,000 3,932
* Celestial Seasonings, Inc. 200,000 4,400
Chiquita Brands International, Inc. 300,000 4,387
* Hain Food Group, Inc. 334,500 1,108
* Robert Mondavi Corp. 100,000 2,675
* National Dentex Corp. 150,000 3,038
* Pete's Brewing Co. 200,000 3,975
* Sylvan, Inc. 200,000 2,475
* Whole Food Markets, Inc. 446,000 9,087
----------
SECTOR TOTAL 41,451
----------
- -------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY (2.7%)
* ENSCO International, Inc. 26,600 $ 798
* Falcon Drilling Co., Inc. 250,000 6,719
* Kirby Corp. 583,000 10,275
* Marine Drilling Co., Inc. 478,500 4,725
* Noble Drilling Corp. 982,500 14,738
* Smith International, Inc. 100,000 2,975
* 3-D Geophysical, Inc. 156,000 1,833
Tidewater, Inc. 288,400 12,257
----------
SECTOR TOTAL 54,320
----------
- -------------------------------------------------------------------------------------------
FINANCIAL (8.4%)
Astoria Financial Corp. 150,000 7,987
Bancorp Hawaii, Inc. 200,000 7,250
* Castle & Cooke, Inc. 400,000 6,500
Cenfed Financial Corp. 147,730 3,250
Charter One Financial 130,000 4,534
Chateau Properties, Inc. 200,000 4,425
* Cityscape Financial Corp. 120,000 5,250
* Dime Bancorp, Inc. 300,000 3,675
Fidelity National Financial, Inc. 433,646 5,854
* First Federal Financial Corp. 457,000 7,369
Green Point Financial Corp. 200,000 5,775
* HF Bancorp, Inc. 200,000 1,925
Inter-Regional Financial
Group, Inc. 482,400 10,553
Legg Mason Inc. 152,000 4,370
Long Island Bancorp, Inc. 252,600 7,010
Manufactured Home
Communities, Inc. 397,350 7,500
Mercury Finance Co. 912,416 10,493
NAC Re Corp. 290,000 9,498
North American Mortgage Co. 200,000 3,375
Peoples Bank of Bridgeport 250,000 5,312
* Physicians Health Services, Inc. 250,000 8,063
The Quick & Reilly Group, Inc. 322,297 9,830
Redwood Trust, Inc. 82,000 1,866
* Resource Bancshares Mortgage
Group, Inc. 250,000 3,156
Sun Communities, Inc. 475,000 12,409
Thornburg Mortgage Asset Corp. 85,100 1,351
Walden Residential Properties, Inc. 275,000 5,809
Westcorp, Inc. 300,000 5,887
----------
SECTOR TOTAL 170,276
----------
- -------------------------------------------------------------------------------------------
HEALTH CARE (17.1%)
* Advanced Magnetics, Inc. 197,300 4,094
* Alliance Pharmaceutical Corp. 600,000 10,875
Alpharma Inc. Class A 169,500 4,153
* Amylin Pharmaceuticals, Inc. 818,000 7,771
* Apria Healthcare 300,000 10,200
Arrow International, Inc. 171,000 6,754
* Athena Neurosciences, Inc. 400,000 7,650
Ballard Medical Products 549,000 10,911
Bergen Brunswig Corp. Class A 14,000 381
* Beverly Enterprises Inc. 700,000 8,488
* Bio-Rad Labs, Inc. Class A 258,300 12,011
* Biotechnology General 350,000 2,297
* Bio-Vascular, Inc. 370,000 3,607
*(1) Caretenders Healthcorp 178,600 1,161
* Cell Genesys, Inc. 620,000 5,347
* Centocor, Inc. 150,000 6,000
* Cohr, Inc. 174,500 3,839
Collagen Corp. 204,700 4,145
* Cytotherapeutics, Inc. 238,000 3,511
* FHP International Corp. 331,800 9,788
* Gelman Sciences, Inc. 294,025 7,828
* Genesis Health Ventures Inc. 225,000 6,666
* Genetics Institute Inc.
Depository Shares 141,142 10,021
* Genome Therapeutics Corp. 286,000 2,753
* Grancare Inc. 605,800 10,904
* Haemonetics Corp. 839,700 16,164
* Healthdyne Information
Enterprises, Inc. 601,700 3,009
* Healthdyne Technologies, Inc. 350,786 4,473
* Heartport Inc. 19,400 689
* Integra Lifesciences 320,000 3,840
* Isomedix, Inc. 278,300 4,453
Kinetic Concepts, Inc. 750,000 11,063
Life Technologies, Inc. 300,000 8,475
* Ligand Pharmaceuticals Class B 300,000 4,387
* Living Centers of America, Inc. 59,900 2,216
* Magainin Pharmaceuticals 400,000 4,700
* Magellan Health Services Corp. 726,000 15,609
* Martek Biosciences Corp. 40,000 1,380
Minntech Corp. 185,077 3,331
* Multicare Cos., Inc. 287,000 8,144
* NABI, Inc. 786,225 9,631
* Pathogenesis Corp. 303,000 5,454
* Patterson Dental Co. 295,500 8,791
* Perrigo Co. 500,000 6,250
* Protein Design Labs 330,000 8,663
* Sangstat Medical Corp. 119,000 1,993
* Sofamor/Danek Group Inc. 347,300 11,374
Sullivan Dental Products, Inc. 294,500 3,276
* Sybron Corp. 320,000 8,080
* Systemed Inc. 800,000 2,250
* Target Therapeutics, Inc. 144,000 7,776
* Theratech, Inc. 245,000 5,635
* Vencor, Inc. 450,000 15,188
----------
SECTOR TOTAL 347,449
----------
- -------------------------------------------------------------------------------------------
TECHNOLOGY (25.8%)
* A+ Network, Inc. 300,000 4,275
* Acres Gaming, Inc. 100,000 662
</TABLE>
9
<PAGE> 10
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
* Actel Corp. 200,000 $ 3,700
* Active Voice Corp. 100,000 1,600
* Acxiom Corp. 389,500 10,565
* Advent Software, Inc. 264,000 6,996
* Affiliated Computer Services, Inc. 62,800 2,967
* American Paging, Inc. 10,600 98
* American Telecasting, Inc. 355,000 5,236
* Applied Voice Technology, Inc. 153,000 1,989
* Aspect Telecommunications 195,000 11,164
* Atria Software, Inc. 98,000 5,341
* Auspex Systems, Inc. 150,000 2,869
BGS Systems, Inc. 155,000 4,650
* BISYS Group, Inc. 300,000 11,325
BMC Industries, Inc. 497,400 13,305
* BMC Software, Inc. 130,000 7,914
*(1) Bachman Information
Systems, Inc. 854,400 8,010
* Boole & Babbage Inc. 467,600 12,041
* Centigram Communications 330,000 7,714
* Cognos Inc. 87,500 5,862
* CompuCom Systems, Inc. 556,000 5,351
* Computer Products, Inc. 70,000 1,120
* Compuware Corp. 400,000 11,400
* Concord EFS, Inc. 367,000 12,111
*(1) Conductus, Inc. 400,000 5,100
* CyCare Systems, Inc. 80,000 2,920
* DH Technology, Inc. 372,150 8,932
* DST Systems, Inc. 108,900 4,002
Dallas Semiconductor Corp. 600,000 11,700
* Data Translation, Inc. 175,000 4,200
* Davox Corp. 200,000 4,925
* Diamond Multimedia
Systems, Inc. 327,700 7,004
* Digitran Systems, Inc. 185,700 93
* Dionex Corp. 619,000 22,593
* Documentum, Inc. 70,000 3,150
*(1) Encad, Inc. 324,000 11,097
* Executone Information Systems 1,155,000 3,609
*(1) Expert Software Inc. 383,000 4,883
* FTP Software, Inc. 270,600 2,604
* FileNet Corp. 99,750 5,536
* Gemstar International Group Ltd. 20,300 670
* Gilat Satellite Networks Ltd. 250,000 5,813
* Highwaymaster
Communications, Inc. 300,000 2,588
* IDX Systems Corp. 116,900 4,296
* IFR Systems, Inc. 237,225 3,618
* IKOS Systems, Inc. 300,000 7,313
* ITI Technologies, Inc. 200,000 5,400
* Information Resources, Inc. 233,900 3,362
* Input/Output, Inc. 463,500 16,107
* International Cabletel, Inc. 256,666 7,507
* Itron, Inc. 150,000 8,737
* Lanvision Systems, Inc. 100,000 1,837
* MDL Information Systems, Inc. 300,000 8,213
* MapInfo Corp. 242,000 3,146
* Maxis, Inc. 380,000 9,120
* Mercury Interactive Corp. 325,000 4,388
* Micrografx, Inc. 450,600 7,210
* MobileMedia Corp. 250,000 4,938
*(1) Natural Microsystems Corp. 260,000 9,490
* NetStar, Inc. 90,000 1,687
* Orcad, Inc. 260,000 3,445
* PC Docs Group International, Inc. 402,500 8,251
*(1) Peoples Telephone Co., Inc. 1,225,000 2,986
* Pinnacle Systems, Inc. 220,000 5,610
* Policy Management Systems Corp. 200,000 9,400
* Recoton Corp. 309,150 5,642
* Remedy Corp. 126,000 9,702
* Shiva Corp. 160,000 9,560
* Spacetec IMC Corp. 180,000 2,565
* Sterling Commerce, Inc. 8,300 291
* Sterling Electronics Corp. 266,680 4,633
* Sterling Software, Inc. 150,000 11,663
* Stratus Computer, Inc. 175,000 4,922
* SunGard Data Systems, Inc. 346,000 11,505
* Symbol Technologies, Inc. 100,000 4,625
* Synopsys, Inc. 144,000 5,940
TSI, Inc. 138,750 2,393
* Tegal Corp. 150,000 1,538
Teleflex Inc. 107,000 4,962
* 3D Systems Corp. 306,666 6,172
* 3DO Co. 300,000 2,662
* Trescom International, Inc. 200,000 3,800
* Trident International, Inc. 140,000 2,415
* Triple P NV 58,800 456
* Videoserver, Inc. 100,000 3,300
* Visio Corp. 251,000 9,413
* Zebra Technologies Class A 347,000 8,588
----------
SECTOR TOTAL 522,492
----------
- -------------------------------------------------------------------------------------------
TRANSPORT & SERVICES (4.3%)
Air Express International Corp. 897,150 24,896
* America West Airlines, Inc. 300,000 6,300
* Boyd Brothers Transportation, Inc. 186,000 1,302
Expeditors International of
Washington, Inc. 391,300 11,348
Frozen Food Express
Industries, Inc. 361,282 4,516
Harper Group, Inc. 101,000 1,919
* Heartland Express, Inc. 213,522 6,245
* M.S. Carriers Inc. 355,000 6,745
* Midwest Express Holdings, Inc. 254,000 8,350
* RailTex, Inc. 246,000 5,843
* Swift Transportation Co., Inc. 400,000 7,500
* Trans World Airlines 117,900 2,107
----------
SECTOR TOTAL 87,071
----------
- -------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS (2.2%)
American List Corp. 130,800 $ 4,071
* Asyst Technologies, Inc. 200,000 6,900
* Intelliquest Information
Group, Inc. 94,500 3,615
May & Speh, Inc. 100,000 1,325
* NFO Research Inc. 429,750 9,777
* On Assignment, Inc. 107,000 3,504
* Prepaid Legal Services, Inc. 570,000 11,044
* Rent-Way, Inc. 291,000 3,601
* Sykes Enterprises, Inc. 4,500 160
Wackenhut Corp. Class B 25,001 500
----------
SECTOR TOTAL 44,497
----------
- -------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $1,293,933) 1,752,361
- -------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (.4%)
- -------------------------------------------------------------------------------------------
AMC Entertainment $1.75
(Cost $5,214) 185,000 8,278
- -------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (13.4%)
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
--------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.32%, 5/1/96
(Cost $270,712) $270,712 270,712
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(Cost $1,569,859) 2,031,351
- -------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.3%)
- -------------------------------------------------------------------------------------------
Other Assets--Note C 21,361
Liabilities (27,425)
----------
(6,064)
- -------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------
Applicable to 35,879,571 outstanding
$.001 par value shares
(authorized 100,000,000 shares) $2,025,287
- -------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $56.45
===========================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
(1) Considered an affiliated company as the Fund owns more than 5% of the
outstanding voting securities of such company.
<TABLE>
<CAPTION>
- ----------------------------------------------------
AT APRIL 30, 1996, NET ASSETS CONSISTED OF:
- ----------------------------------------------------
Amount Per
(000) Share
---------- ------
<S> <C> <C>
Paid in Capital $1,498,871 $41.78
Undistributed Net
Investment Income 1,345 .04
Accumulated Net
Realized Gains 63,579 1.77
Unrealized Appreciation
of Investments--Note D 461,492 12.86
- ----------------------------------------------------
NET ASSETS $2,025,287 $56.45
- ----------------------------------------------------
</TABLE>
11
<PAGE> 12
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1996
(000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,923
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,818
- -------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,741
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,053
Performance Adjustments . . . . . . . . . . . . . . . . . . . . . . . . 150 2,203
-------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . . . . . 3,025
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . . 167 3,192
-------
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . . . . 57
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . . 26
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . 3
- -------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 5,577
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . 3,164
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON
INVESTMENT SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . . . . . . 64,468
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 251,514
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . . $319,146
===================================================================================================================
</TABLE>
12
<PAGE> 13
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
APRIL 30, 1996 October 31, 1995
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . $ 3,164 $ 6,622
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . 64,468 117,328
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . 251,514 85,259
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . 319,146 209,209
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . (7,088) (4,173)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . (118,130) (55,488)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . (125,218) (59,661)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430,514 411,707
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . 122,486 58,533
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . (197,601) (256,155)
- -------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . . . . . . . . . . . . . 355,399 214,085
- -------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . 549,327 363,633
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . 1,475,960 1,112,327
- -------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . $2,025,287 $1,475,960
===================================================================================================================
(1) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,359 8,774
Issued in Lieu of Cash Distributions . . . . . . . . . . . . 2,493 1,402
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . (3,882) (5,452)
- -------------------------------------------------------------------------------------------------------------------
6,970 4,724
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended October 31,
SIX MONTHS ENDED --------------------------------------------------
For a Share Outstanding Throughout Each Period APRIL 30, 1996 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $51.05 $45.99 $49.37 $41.23 $36.75 $22.62
-------- -------- ------- -------- -------- --------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .10 .24 .16 .14 .15 .26
Net Realized and Unrealized Gain
on Investments . . . . . . . . . . . . . . 9.54 7.25 1.77 8.91 4.59 14.21
-------- -------- ------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS . . . . 9.64 7.49 1.93 9.05 4.74 14.47
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.24) (.17) (.14) (.13) (.26) (.34)
Distributions from Realized Capital Gains . . (4.00) (2.26) (5.17) (.78) -- --
-------- -------- ------- -------- -------- --------
TOTAL DISTRIBUTIONS . . . . . . . . . . (4.24) (2.43) (5.31) (.91) (.26) (.34)
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period . . . . . . . . . $56.45 $51.05 $45.99 $49.37 $41.23 $36.75
=========================================================================================================================
Total Return . . . . . . . . . . . . . . . . . . +20.12% +17.46% +4.49% +22.28% +12.95% +64.64%
- -------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . $2,025 $1,476 $1,112 $802 $519 $381
Ratio of Total Expenses to Average Net Assets . . .65%* .68% .70% .73% .69% .56%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . .37%* .52% .39% .32% .38% .85%
Portfolio Turnover Rate . . . . . . . . . . . . . 55%* 66% 82% 51% 43% 49%
Average Commission Rate Paid . . . . . . . . . . $.0428+ N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Represents total commissions paid on portfolio securities divided by the total
number of shares purchased or sold on which commissions were charged. This
disclosure is required by the SEC beginning in 1996.
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
Vanguard Explorer 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: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of the New York Stock Exchange
(generally 4:00 PM) on the valuation date; securities not traded are valued
at the mean of the latest quoted bid and asked prices. Securities not
listed are valued at the latest quoted bid prices. Temporary cash
investments are valued at 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, 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 a custodian bank until maturity of each
repurchase agreement. Provisions of each agreement require 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.
4. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
B. Under the terms of contracts which expire July 31, 1996, the Fund pays
Granahan Investment Management, Inc. and Wellington Management Company a basic
investment advisory fee calculated at an annual percentage rate of the average
net assets of the Fund. The basic fee thus computed is subject to quarterly
adjustments based on performance relative to the Russell 2000 Index. For the
six months ended April 30, 1996, the aggregate investment advisory fee
represented an effective annual base rate of .24 of 1% of Fund average net
assets before an increase of $150,000 (an annual rate of .02 of 1%) based on
performance. The base fee reflects a fee waiver of $278,000 (an annual rate of
.04 of 1%).
C. The Vanguard Group furnishes at cost 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 April 30,
1996, the Fund had contributed capital of $196,000 to Vanguard (included in
Other Assets), representing 1.0% of Vanguard's capitalization. The Fund's
directors and officers are also directors and officers of Vanguard.
D. During the six months ended April 30, 1996, the Fund made purchases of
$568,795,000 and sales of $414,088,000 of investment securities other than U.S.
Government securities and temporary cash investments.
At April 30, 1996, unrealized appreciation for financial reporting and Federal
income tax purposes aggregated $461,492,000, of which $525,776,000 related to
appreciated securities and $64,284,000 related to depreciated securities.
15
<PAGE> 16
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income
Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Portfolio
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[THE VANGUARD GROUP LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1 (800) 662-7447 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.
Q242-4/96
VANGUARD
EXPLORER FUND
SEMI-ANNUAL REPORT
APRIL 30, 1996
