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[PHOTO]
VANGUARD
EXPLORER FUND
Semiannual Report
April 30, 1997
[VANGUARDGROUP LOGO]
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[PHOTO]
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future. The montage
includes a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord
Nelson's flagship at The Battle of the Nile); a clock built circa 1816 in
Scotland, featuring a portrait of Nelson; and several views of our recently
completed campus, which is steeped in nautical imagery--from our buildings
named after Nelson's warships (Victory, Majestic, and Goliath are three shown),
to our artwork and ornamental compass rose.
CONTENTS
A Message To
Our Shareholders
1
Important Changes For
Vanguard Explorer Fund
3
The Markets
In Perspective
7
Report From
The Advisers
9
Performance
Summary
11
Financial
Statements
12
Directors And
Officers
Inside Back Cover
All comparative mutual fund data
are from Lipper Analytical Services, Inc.
or Morningstar unless otherwise noted.
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[PHOTO]
FELLOW SHAREHOLDER,
The rollicking bull market for large-capitalization stocks continued
during the six months ended April 30, 1997, and the blue-chip-dominated
Standard & Poor's 500 Composite Stock Price Index rose +14.7%.
Small-capitalization stocks, however, lagged far behind, with the Russell 2000
Index eking out a gain of but +1.6%, and its growth component actually down
- -7.3%. Explorer Fund fared only a touch better, with a return of -6.0%.
The following table presents the six-month returns of Explorer Fund
and of its two primary performance benchmarks: the average small-capitalization
growth fund--which declined during the period--and the unmanaged Russell 2000
Index, which rose just slightly. As you can see, the Fund's total return
(capital change plus reinvested dividends) fell well short of both comparative
standards, lagging the average competing fund by 2.6 percentage points and the
Index by 7.6 percentage points.
<TABLE>
<CAPTION>
- ---------------------------------------------------
TOTAL RETURN
SIX MONTHS ENDED
APRIL 30, 1997
- ---------------------------------------------------
<S> <C>
Vanguard Explorer Fund -6.0%
- ---------------------------------------------------
Average Small-Cap Growth Fund -3.4%
- ---------------------------------------------------
Russell 2000 Index +1.6%
- ---------------------------------------------------
</TABLE>
The Fund's return is based on a decrease in net asset value from
$55.44 per share on October 31, 1996, to $49.25 per share on April 30, 1997,
with the latter figure adjusted for our annual dividend of $0.27 per share paid
from net investment income and distributions totaling $2.83 paid from net
realized capital gains.
THE PERIOD IN REVIEW
The economic environment during the past six months featured strong economic
growth, rising corporate profits, and relatively low inflation. Yet profit
growth was strongest for very large corporations with the greatest clout in the
marketplace. Investors clearly favored the stocks of the biggest companies, and
investors in small-capitalization stocks may well wonder whether their
invitations to the party were lost.
Although it is not unusual for returns on small- and large-cap stocks
to diverge, the extent of the gap has been striking. The performance gap
between the S&P 500 Index and the Russell 2000 Index stands at 25 percentage
points for the past twelve months (+25.1% versus +0.1%) and at nearly 50
percentage points for the past 36 months (+91.4% versus +42.7%). This dichotomy
is truly remarkable.
Vanguard Explorer Fund's disappointing performance relative to the
Russell 2000 Index during the six months ended April 30 is partly due to a
large gap between returns on growth and value stocks. As noted above, the
Russell 2000 Growth Stock Index lost -7.3% in the period, while the Russell
2000 Value Stock Index gained +10.1%.
The Fund's performance versus the full Russell 2000 Index was hurt by
our underweighting in financial-services companies, the best-performing segment
of the Index. This sector, which includes banks and real estate investment
trusts, accounts for more than a quarter of the Index but made up just 16% of
the Fund's assets. Another reason we trailed the Index was our heavier
weighting (16% versus 10%) in technology stocks,
1
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
TOTAL ASSETS MANAGED
-----------------------------
$ MILLION PERCENT
- ------------------------------------------------------------------------------
<S> <C> <C>
Granahan Investment Management, Inc. $1,033 52%
Wellington Management Company, llp 889 44
Cash Reserve* 77 4
- ------------------------------------------------------------------------------
Total $1,999 100%
- ------------------------------------------------------------------------------
</TABLE>
*Each adviser also maintains a moderate cash reserve.
the worst-performing sector during the six months. We also were hurt by poor
stock selection in several sectors, notably financial-services and
producer-durable stocks. One bright spot was the excellent selection of
health-care stocks, a sector that provided solid gains for the Fund but losses
for the Index. The table above shows the distribution of Explorer's assets
between our two advisers as of April 30.
IN SUMMARY
It is a fact that, in part as a result of their lagging performance, the
valuations (price/earnings ratios) of small-cap stocks are at their lowest
levels relative to large-cap stocks in 15 years. While this statistic hardly
guarantees a prompt rebound, it does suggest that the worst damage may have
been done. In any event, although our results during the first half of fiscal
1997 were disappointing, we are optimistic about the long-term prospects of
Vanguard Explorer Fund in particular and of small-capitalization growth stocks
in general.
More troublesome is the fact that our longer-term record has not
measured up to our expectations. After careful deliberation, on May 16, the
board of directors approved several changes to the Fund, including plans to add
two investment advisers to our current lineup. Details of these changes are
provided on pages 3-6.
We note that small-capitalization stocks (and, for that matter,
Explorer Fund) have in the past gone through cycles of significant
underperformance and outperformance in relation to large-cap stock indexes.
Indeed, their relatively low correlation with large-cap stock funds is a
primary reason that funds holding small-cap growth stocks can help to further
diversify portfolios consisting of other stock funds, bond funds, and money
market funds. We are confident that such balanced portfolios will continue to
be reliable vessels for reaching long-term investment objectives.
/s/ John C. Bogle /s/ John J. Brennan
John C. Bogle John J. Brennan
Chairman of the Board President
May 16, 1997
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IMPORTANT CHANGES FOR VANGUARD EXPLORER FUND
The board of directors of Vanguard Explorer Fund has approved several
steps aimed at improving the Fund's performance relative to competing mutual
funds without changing its character as a portfolio that provides broadly
diversified exposure to small-capitalization growth stocks. These steps consist
of adding two investment advisers, altering one of the Fund's investment
practices, and changing the benchmark used to adjust advisory fees. All will
take effect August 1, 1997.
ADDITIONAL INVESTMENT ADVISERS
The two new advisers will join Explorer's current advisers, Granahan Investment
Management, Inc., and Wellington Management Company, llp, in managing the
Fund's assets. One of the new advisers, Chartwell Investment Partners, of
Berwyn, Pennsylvania, has a team that specializes in small-capitalization
growth stocks. Chartwell uses traditional, fundamental research to select 40 to
60 attractively valued stocks of small companies that have demonstrated strong
growth in profits.
The other new adviser, Vanguard Core Management Group, uses
computer techniques to select a sampling of stocks that, as a group, are
expected to have returns and investment characteristics similar to a specific
market standard. For Vanguard Explorer Fund, this market standard will be the
Small Company Growth Fund Stock Index, a composite portfolio of the holdings of
the nation's largest small-capitalization mutual funds.
Over time, we expect that 60% to 70% of the Fund's assets will
be managed by the two incumbent advisers, with the balance split between the
two new advisers. At current asset levels, the arrangement is expected to
result in an increase of slightly more than 0.01% in our competitively low
basic advisory fee rate of 0.23% of average net assets (a rise of about
$300,000 annually). Details of our advisory fee schedules are provided on pages
4 and 5.
INVESTMENT OF CASH RESERVES
Effective August 1, 1997, Vanguard Explorer Fund will exercise its authority to
use stock futures to keep the Fund more fully invested in common stocks while
retaining cash on hand to meet the liquidity needs of our portfolio managers or
for shareholder redemptions. With stocks expected to outperform cash over the
long term, the practice of maintaining a larger cash reserve acts as a drag on
a fund's performance. By using futures to maintain a substantially full
exposure to equities, Explorer Fund expects to improve its long-term
performance relative to its benchmark and competitors.
NEW INDEX BENCHMARK
The Small Company Growth Fund Stock Index will be adopted as the benchmark for
evaluating the returns achieved by Vanguard Explorer Fund's investment
advisers. The Index is based on the stocks held by the nation's largest
small-capitalization mutual funds. The quantitatively managed portfolio of
Vanguard Core Management Group will be based primarily on the weightings of the
stocks in the Index, and the portfolio's investment performance should
generally parallel that of the Index.
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The holdings of the Index will be determined by and its
performance will be calculated by Morningstar, Inc., an outside consultant.
This standard will be used to determine adjustments to fees paid to the
external advisers. (Vanguard Core Management Group provides its services on an
at-cost basis.)
Currently, incentive increases or penalty decreases to
advisory fees are based on the advisers' performance in relation to the Russell
2000 Index. The Fund's officers and directors believe that the new Small
Company Growth Fund Stock Index provides a more appropriate standard because of
its more-pronounced growth orientation.
The Fund pays each external investment adviser a basic fee at
the end of each fiscal quarter. The basic fee is calculated by applying a
quarterly rate, based on the annual rates in each adviser's fee schedule, to
each adviser's portion of the Fund's average month-end assets for the quarter.
The quarterly fee paid to GRANAHAN INVESTMENT MANAGEMENT, INC.
is based on the following annual rates:
<TABLE>
<CAPTION>
--------------------------------------
NET ASSETS RATE
--------------------------------------
<S> <C>
First $500 million 0.30%
Next $250 million 0.20
Next $250 million 0.15
Over $1 billion 0.10
--------------------------------------
</TABLE>
Granahan's quarterly advisory fee may be adjusted depending on the total return
of its portion of Explorer Fund compared with that of the benchmark Index. The
base fee may be increased or decreased by 0.0375% of average assets if the
total return of the Granahan portion of the Fund over the previous 36 months
exceeds or trails the benchmark by more than 6 percentage points. The base fee
may be increased or decreased by 0.075% of average assets if the total return
of the Granahan portion of the Fund over the previous 36 months exceeds or
trails the benchmark Index by more than 12 percentage points.
The Small Company Growth Fund Stock Index will be phased in as
the benchmark over the three-year period beginning August 1, 1997. (The Fund's
Statement of Additional Information contains relevant transition rules.) The
Fund's revised advisory agreement with Granahan will replace an agreement dated
August 1, 1996.
The quarterly fee paid to WELLINGTON MANAGEMENT COMPANY, LLP,
is based on the following annual rates:
<TABLE>
<CAPTION>
--------------------------------------
NET ASSETS RATE
--------------------------------------
<S> <C>
First $500 million 0.25%
Next $250 million 0.20
Next $250 million 0.15
Over $1 billion 0.10
--------------------------------------
</TABLE>
Wellington's quarterly advisory fee may be adjusted depending on the total
return of its portion of Explorer Fund compared with that of its Index
benchmark. The base
4
<PAGE> 7
fee may be increased or decreased by 25% if the total return on the Wellington
portion of the Fund over the previous 36 months exceeds or trails the Index
benchmark by 6 percentage points or more. The base fee may be increased or
decreased by 50% if the total return on the Wellington portion of the Fund over
the previous 36 months exceeds or trails the Index benchmark by 12 percentage
points or more.
The Small Company Growth Fund Stock Index will be phased in as
the benchmark over the three-year period beginning August 1, 1997. Until the
end of that period, the incentive/penalty will be calculated using certain
transition rules that are explained in the Fund's Statement of Additional
Information. The Fund's revised advisory agreement with Wellington Management
Company will replace an agreement dated August 1, 1996.
The quarterly fee to be paid to CHARTWELL INVESTMENT PARTNERS
is based on the following annual rates:
<TABLE>
<CAPTION>
--------------------------------------
NET ASSETS RATE
--------------------------------------
<S> <C>
First $250 million 0.40%
Next $250 million 0.30
Over $500 million 0.20
--------------------------------------
</TABLE>
Beginning May 1, 1998, Chartwell's quarterly advisory fee may be adjusted
depending on the total return of its portion of Explorer Fund compared with
that of the Small Company Growth Fund Stock Index. Under the agreement,
Chartwell's base fee may be increased or decreased by 10% if the total return
on its portion of the Fund over the previous 36 months exceeds or trails the
Index benchmark by more than 6 percentage points. The base fee may be increased
or decreased by 20% if the total return on its portion of the Fund over the
previous 36 months exceeds or trails the Index benchmark by 12 percentage
points or more. The incentive fee will be phased in over 36 months.
The Fund's advisory agreements with Granahan, Wellington
Management Company, and Chartwell will be dated August 1, 1997, and will expire
on July 31, 1999. After that date, the agreements are renewable for successive
one-year periods, if approved by the Fund's board of directors.
RELATED INFORMATION CONCERNING INVESTMENT ADVISERS
Granahan Investment Management, Inc., 275 Wyman Street, Waltham, MA 02154, is
an investment advisory firm specializing in small-company stock investments.
Founded in 1985, Granahan currently manages about $1.2 billion in assets. As of
April 30, 1997, Granahan managed 52% of Vanguard Explorer Fund's assets.
Wellington Management Company, llp, 75 State Street, Boston,
MA 02109, was founded in 1933. The investment advisory firm currently manages
more than $130 billion in stock and bond portfolios, including 15 Vanguard
funds. As of April 30, 1997, the firm managed 44% of the assets of Vanguard
Explorer Fund.
Chartwell Investment Partners, 1235 Westlakes Drive, Suite
330, Berwyn, PA 19312, is an investment advisory firm that was founded in 1997
by a team of experienced investment professionals who had been employees of
Delaware Management
5
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Company, of Philadelphia, Pennsylvania. Heading the small-capitalization growth
team at Chartwell is Edward N. Antoian, who had been portfolio manager of
Delaware Trend Fund and Delaware DelCap Fund. As of April 30, Chartwell had
about $350 million in assets under management.
Vanguard Core Management Group, P.O. Box 2600, Valley Forge,
PA 19482, provides investment advisory services to several Vanguard funds. The
group, headed by George U. Sauter since 1987, managed more than $70 billion in
total assets as of April 30, 1997. Its services are provided to the Fund on an
at-cost basis.
During the fiscal year ended October 31, 1996, Vanguard
Explorer Fund paid a total of approximately $4.7 million in fees to its
advisers, including base fees of $4.3 million and an incentive of $393,000.
6
<PAGE> 9
[PHOTO]
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 1997
U.S. EQUITY MARKETS
The U.S. stock market continued to perform solidly over the six months,
reflecting a confidence based on moderate economic growth, quiescent inflation,
and solid increases in corporate profits. While concern grew among some
investors that continued economic expansion could lead to higher inflation, as
of the period's end there was no confirmed sign that inflation had increased.
The inflation fears nonetheless led to an erratic upward drift in interest
rates amid the ongoing strong returns from domestic equities.
Those strong returns have, however, been concentrated in the
shares of large companies. The Standard & Poor's 500 Composite Stock Price
Index, for example, gained 14.7% over the six-month period, compared to a
meager 1.6% gain for the Russell 2000 Index. In April alone, the S&P 500 Index
beat the Russell 2000 Index by 5.7% (6.0% versus 0.3%). Larger companies have
outperformed their smaller-capitalization counterparts fairly consistently
since the end of 1993. There are a variety of theories as to why, including
better earnings growth, greater productivity, and fewer negative earnings
surprises.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 1997
------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 14.7% 25.1% 17.1%
Russell 2000 Index 1.6 0.1 13.7
MSCI-EAFE Index 1.7 -0.6 10.9
- ----------------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 1.7% 7.1% 7.4%
Lehman 10-Year Municipal
Bond Index 2.3 6.4 7.5
Salomon 90-Day U.S. Treasury Bills 2.6 5.2 4.5
- ----------------------------------------------------------------------------
OTHER
Consumer Price Index 1.2% 2.5% 2.8%
- ----------------------------------------------------------------------------
</TABLE>
*Average annual.
The recent gap in performance between large and small is particularly
noticeable in two sectors: technology and health care. Over the past six
months, technology issues in the S&P 500 Index have gained 26.3% while those in
the Russell 2000 Index have dropped -11.9%. In health care, the S&P's holdings
gained 17.6%, compared to a decline of -6.8% in the Russell 2000 Index. Within
these sectors, the larger companies' dominant products and the predictable
earnings they generate appear to be the primary difference.
Financial-services firms, by contrast, have generally fared well
regardless of size, with gains of 16.9% in the S&P 500 Index and 12.2% in the
Russell 2000 Index since October. The strength of the economy, which helps to
keep bad-debt levels at a minimum, and the overall growth of consumer credit
have helped these stocks greatly.
U.S. FIXED-INCOME MARKETS
The erratic rise in interest rates during the past six months reflected rising
and falling expectations regarding economic growth and inflation. During
November, investors seemed to expect a slowing of growth, and the 10-year U.S.
Treasury's yield declined from 6.38%
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<PAGE> 10
to 6.04%. The same note's yield then rose to 6.67% in late January, riding a
perception that growth was markedly stronger than analysts had expected. Then
the pattern repeated itself, with the 10-year's rate falling to 6.26% in
mid-February and rising to 6.90% at the end of March. In April, the consensus
seemed to be shifting again, with the 10-year Treasury yield falling to 6.72%.
There is a simple explanation for this interest rate seesaw. Many
investors consider it a paradox that the economy has continued to expand at a
robust pace accompanied by strong job growth and low unemployment--but no
increase in inflation. Bond investors have therefore been particularly
sensitive to economic reports that might reveal inflation to be creeping up at
last. The data have been variable, tilting the consensus back and forth between
expectations of higher or continued stable inflation rates. The most recent
releases depict an exceptionally strong economy. For example, the U.S. economy
expanded at a 5.6% rate in the first quarter with no inflationary pressures
(e.g., declining producer prices and an increase of only 2.4% in employment
costs).
The net result for bond investors has been mediocre returns. The 1.7%
generated by the Lehman Brothers Aggregate Bond Index over the past six months,
for example, consists of an income return of 3.4% and a capital decline of
- -1.7%, reflecting the modest increase in interest rates. During this period,
investors who favored shorter-maturity and higher-quality issues achieved
somewhat better returns. Mortgage-backed securities performed well on a
relative basis, as higher rates led to fewer mortgage refinancings. Municipal
issues also tended to perform better than their taxable counterparts.
INTERNATIONAL EQUITY MARKETS
With the dollar strengthening by 10% to 16% against most major currencies, U.S.
investors who held foreign equities faced a headwind during the past six
months. (The major exception was the pound sterling, which was effectively
unchanged against the dollar.) The Morgan Stanley Capital International-Europe,
Australasia, Far East Index gained 1.7% in dollar terms, while in local terms
the return was 11.2%. Those who favored Europe over the Pacific region did not
feel the pain as much, due to the strong (23.1%) return generated by the local
markets. For U.S. investors, European markets provided 11.9%. The strength of
the European markets can be attributed to several factors, including (1)
ongoing efforts to lower government deficits consistent with the Maastricht
Treaty guidelines, (2) improving economic growth, and (3) a greater commitment
by corporate executives to increasing "shareholder value."
Investors with a focus in the Pacific markets were less fortunate, as
illustrated by the weak Japanese market, which fell -3.2% (a -13.2% drop for
dollar-based investors). Despite positive news, including reports of growth in
exports, lower inventories, and higher industrial production, the focus in the
Japanese market has been the poor quality of many banks' balance sheets and the
likely effects of an increase in the consumption tax. However, according to
some observers, the level of economic activity seems to be improving now in
Japan.
8
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[PHOTO]
REPORT FROM THE ADVISERS
Vanguard Explorer Fund produced a return of -6.0% in the first half of our
fiscal year, the six months ended April 30, 1997. It was a disappointing result
in what was, quite simply, a very difficult environment for
small-capitalization growth stocks, the segment of the stock market in which we
invest.
While the Standard & Poor's 500 Composite Stock Price Index, which is
dominated by large-cap stocks, produced a 14.7% return during the six months,
the Russell 2000 Index of small-cap stocks managed a gain of only 1.6%.
However, even within the Russell 2000 Index, there was a striking divergence
between the growth component, which provided a total return of -7.3%, and the
value component, which provided a 10.1% return.
While some of our holdings declined because they reported earnings
that were below expectations, the major factor in our negative return was the
market's pervasive devaluing of small-cap stocks. By and large, the stocks we
held achieved excellent performance by such fundamental measures as revenue and
earnings growth. Yet the price/earnings ratio for the Fund's holdings has
fallen to less than 19 times the latest 12 months' earnings from its level of
about 22 times earnings when fiscal 1997 started six months ago.
In short, the market today is paying substantially less for each
dollar of earnings of small-cap growth stocks than it was paying last October
31. The reduction in valuations was particularly evident in technology and
media, both of which performed poorly during the six months and all of which
represent bigger portions of Explorer Fund than of the Russell 2000 Index.
In the technology sector, our returns also were hurt by several stocks
that were punished severely for earnings shortfalls. Our job, of course, is to
distinguish between earnings shortfalls caused by short-term aberrations and
those that signal more permanent change. During the past six months, we
eliminated several technology holdings, including Shiva (products that allow
remote access to computer networks), Red Brick (database management), Pure
Atria (software development tools), and Broderbund and Expert Software (both
makers of software). We had some winners among tech stocks, including Dallas
Semiconductor and Gilat Satellite Networks.
Small-cap telecommunications stocks continued to suffer during the
period because of uncertainty about the final shape of the industry's
deregulation. Among our holdings in this sector that saw significant price
declines were Trescom International, LodgeNet Entertainment, and Western
Wireless. We will continue to monitor telecommunications reform and plan to
proceed very cautiously in this sector.
Our best performance during the half-year came in the health-care
sector, which was one of the weakest sectors for the Russell 2000 Index. Among
our standouts here were Vencor Inc., Magellan Health Services, Sofamor/Danek,
and Sullivan Dental. The Fund also benefited from takeovers of several
holdings, including Target Therapeutics, Genetics Institute, and Gelman. A
loser in the sector was Alliance Pharmaceutical, whose stock price suffered
after one of its proposed drugs had a setback in clinical trials.
INVESTMENT PHILOSOPHY
The Fund reflects a belief that superior long-term investment results can be
achieved by selecting a very diversified group of small-company stocks with
prospects for above-average growth.
9
<PAGE> 12
Among the additions to the Fund during the period were two cigar
manufacturers, General Cigar Holdings and Consolidated Cigars. The demographic
outlook for cigars, which have been "rediscovered" by younger consumers, is
quite encouraging. We also have added several regional brokerage companies,
including Jefferies Group, Raymond James Financial, and McDonald and Co.
Investments. With the relaxation of restrictions that kept commercial banks
from entering the brokerage industry, we expect more consolidation in this
industry in the next few years. Indeed, the purchase of Alex Brown by Banker's
Trust has underlined the attractiveness of regional brokerage franchises.
The negative return during the first half of fiscal 1997 was painful.
However, the sharp reduction in valuations for small-cap growth stocks should
augur well for future performance. Our companies, on balance, are showing good
growth in earnings and we continue to find no shortage of exciting investment
opportunities. We will continue to focus, one company at a time, on evaluating
these opportunities and selecting the best of them for Explorer Fund.
Granahan Investment Management, Inc.
Wellington Management Company, LLP
May 12, 1997
10
<PAGE> 13
PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Fund. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Fund could lose money.>>
EXPLORER FUND
Total Investment Returns: October 31, 1976-April 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
EXPLORER FUND RUSSELL 2000*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
1977 17.0% 0.8% 17.8% -6.1%
1978 26.0 0.1 26.1 6.3
1979 30.6 1.9 32.5 15.3
1980 60.7 2.3 63.0 55.3
1981 8.5 1.1 9.6 4.1
1982 20.5 2.2 22.7 14.8
1983 35.2 1.0 36.2 38.3
1984 -15.3 1.4 -13.9 -3.2
1985 5.4 1.4 6.8 15.8
1986 1.0 1.0 2.0 22.2
1987 -11.5 0.1 -11.4 -13.6
1988 28.2 0.5 28.7 27.1
1989 9.8 1.2 11.0 15.6
1990 -23.9 1.0 -22.9 -27.3
1991 62.5 2.1 64.6 58.6
1992 12.2 0.8 13.0 9.5
1993 21.9 0.4 22.3 32.4
1994 4.2 0.3 4.5 -0.3
1995 17.0 0.5 17.5 18.3
1996 17.4 0.6 18.0 16.6
1997** -6.4 0.4 -6.0 1.6
- --------------------------------------------------------------------
</TABLE>
*S&P 500 Index through 1979; Russell 2000 Index thereafter.
**Six months ended April 30, 1997.
See Financial Highlights table on page 18 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1997*
- ----------------------------------------------------------------------------------------
INCEPTION 10 YEARS
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Explorer Fund 12/11/67 -0.59% 11.38% 9.35% 0.73% 10.08%
- ----------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
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[PHOTO]
FINANCIAL STATEMENTS
APRIL 30, 1997 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, preferred stocks, bonds,
etc.) and by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Fund's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the Fund
to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a
table displaying the composition of the Fund's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the Fund had available to distribute to shareholders as income dividends
or capital gains as of the statement date. Any Accumulated Net Realized Losses,
and any cumulative excess of distributions over net income or net realized
gains, will appear as negative balances. Unrealized Appreciation (Depreciation)
is the difference between the market value of the Fund's investments and their
cost, and reflects the gains (losses) that would be realized if the Fund were
to sell all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- -----------------------------------------------------------------------------------
<S> <C> <C>
- -----------------------------------------------------------------------------------
COMMON STOCKS (88.4%)
AUTO & TRANSPORTATION (8.4%)
Air Express International Corp. 1,041,450 $ 35,409
#(1) Boyd Brothers
Transportation, Inc. 186,000 953
Coachmen Industries, Inc. 330,000 5,651
Expeditors International of
Washington, Inc. 712,600 17,815
Frozen Food Express
Industries, Inc. 262,282 2,328
Harper Group, Inc. 500,000 11,750
# Heartland Express, Inc. 601,033 12,547
# Hvide Marine, Inc. Class A 442,900 7,419
# Kirby Corp. 683,800 12,479
# M.S. Carriers Inc. 355,000 6,834
# Mark VII Inc. 89,000 2,492
#(1) Midwest Express Holdings, Inc. 324,000 13,365
# Offshore Logistics, Inc. 450,100 7,933
Pittston Burlington Group 52,700 1,199
#(1) RailTex, Inc. 472,000 7,552
# Simon Transportation
Services, Inc. 171,500 2,916
# Swift Transportation Co., Inc. 400,000 11,400
# Trans World Airlines, Inc. 334,000 2,422
Werner Enterprises, Inc. 285,300 5,421
-----------
167,885
-----------
CONSUMER DISCRETIONARY (15.4%)
# Action Performance Cos., Inc. 400,000 10,450
# American Residential
Services, Inc. 200,000 3,775
BGS Systems, Inc. 310,000 8,990
# Borg-Warner Security Corp. 1,140,000 15,818
Callaway Golf Co. 250,000 7,469
# Carmike Cinemas, Inc. Class A 300,000 9,300
# Catalina Marketing Corp. 251,400 7,919
# Catalytica, Inc. 390,300 2,732
Claire's Stores, Inc. 730,000 13,961
# The Dress Barn, Inc. 323,600 4,328
Ethan Allen Interiors Inc. 375,000 16,594
# Filene's Basement Corp. 410,800 2,413
# GT Interactive Software Corp. 932,800 5,947
# The Good Guys, Inc. 334,000 2,004
# Guest Supply, Inc. 300,000 2,850
# The Gymboree Corp. 400,000 11,050
Harman International
Industries, Inc. 100,000 3,825
# Healthdyne Information
Enterprises, Inc. 900,000 2,250
# ITI Technologies, Inc. 283,000 4,210
#(1) Iwerks Entertainment, Inc. 780,000 3,315
# JPE, Inc. 133,700 886
# Jones Apparel Group, Inc. 100,000 4,175
# Jumbosports Inc. 900,000 4,163
# LodgeNet Entertainment Corp. 578,000 5,202
(1) Marcus Corp. 620,000 13,795
Mercantile Stores Co., Inc. 150,000 7,388
# Metro Networks, Inc. 262,300 6,656
# Micro Warehouse Inc. 200,000 3,425
# NFO Research Inc. 390,750 7,131
#(1) Platinum Entertainment, Inc. 400,000 2,150
# Playboy Enterprises Inc. Class B 720,500 9,997
# Play-By-Play Toys &
Novelties, Inc. 177,600 2,264
# Prepaid Legal Services, Inc. 465,000 6,626
# Prime Hospitality Corp. 500,000 8,313
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -----------------------------------------------------------------------------------
<S> <C> <C>
# Renters Choice, Inc. 750,000 $ 10,500
#(1) Rex Stores Corp. 464,000 4,698
# Right Management Consultants 155,000 1,550
# RockShox, Inc. 535,000 7,891
# Service Experts Inc. 489,300 10,887
# Sonic Corp. 548,500 7,199
Sturm, Ruger & Co., Inc. 246,000 3,782
Team Rental Group, Inc. 220,000 4,950
# TETRA Technologies, Inc. 279,400 6,321
# Tuesday Morning, Inc. 164,500 4,647
# United Payors & United
Providers, Inc. 220,000 2,695
# Urban Outfitters, Inc. 694,000 8,502
# Vistana, Inc. 391,000 3,714
Warnaco Group 300,000 8,550
-----------
307,257
-----------
CONSUMER STAPLES (1.3%)
# Celestial Seasonings, Inc. 200,000 4,450
# Consolidated Cigar Holdings Inc. 64,100 1,474
# General Cigar Holdings, Inc. 2,400 57
# Robert Mondavi Corp. 277,600 10,341
# Sylvan, Inc. 275,000 2,578
# Whole Foods Market, Inc. 340,000 7,820
-----------
26,720
-----------
ENERGY (4.2%)
# American Oilfield Divers, Inc. 295,000 2,655
# Falcon Drilling Co., Inc. 250,000 9,562
# Newpark Resources, Inc. 358,000 16,065
# Noble Drilling Corp. 700,000 12,162
# SEACOR Holdings, Inc. 100,000 4,300
# Smith International, Inc. 297,100 14,075
Tidewater, Inc. 200,000 8,025
# Trico Marine Services, Inc. 350,000 12,337
# Unit Corp. 575,000 4,887
-----------
84,068
-----------
FINANCIAL SERVICES (15.0%)
# Affiliated Computer Services, Inc. 275,000 7,150
# BISYS Group, Inc. 227,700 7,286
Cenfed Financial Corp. 163,823 4,526
Charter One Financial 111,500 4,962
Compass Bancshares Inc. 150,000 4,444
# Compdent Corp. 355,000 5,680
# Concord EFS, Inc. 332,500 6,567
# E*TRADE Group, Inc. 360,000 5,355
Fidelity National Financial, Inc. 562,010 6,955
# First Federal Financial Corp. 470,000 10,986
Frontier Insurance Group, Inc. 81,700 4,208
Green Point Financial Corp. 120,000 6,645
# Imperial Credit 300,000 4,313
Interra Financial, Inc. 615,100 22,528
# Investment Technology
Group, Inc. 757,500 13,824
Jefferies Group, Inc. 113,500 5,264
Legg Mason Inc. 205,300 9,752
Long Island Bancorp, Inc. 167,900 5,667
MMI Cos., Inc. 254,900 5,576
Manufactured Home
Communities, Inc. REIT 599,250 12,584
McDonald and Co.
Investments, Inc. 130,000 4,680
(1) McGrath RentCorp 779,800 11,307
NAC Re Corp. 290,000 11,238
North American Mortgage Co. 500,000 9,063
Peoples Bank of Bridgeport 250,000 7,438
Peoples Heritage Financial
Group Inc. 112,800 3,525
# Policy Management
Systems Corp. 200,000 8,700
Quick & Reilly Group, Inc. 682,545 15,101
Raymond James Financial, Inc. 295,500 6,907
Reinsurance Group of
America, Inc. 75,000 3,731
# Rent-Way, Inc. 299,900 3,036
Resource Bancshares Mortgage
Group, Inc. 267,500 3,478
Sun Communities, Inc. REIT 495,000 15,840
# SunGard Data Systems, Inc. 253,000 11,227
Thornburg Mortgage Asset Corp. 100,800 1,940
# United Dental Care, Inc. 305,000 6,710
Walden Residential Properties,
Inc. REIT 497,300 10,941
Westcorp 400,000 6,000
Wilmington Trust Corp. 100,000 4,300
-----------
299,434
-----------
HEALTH CARE (17.9%)
# Advanced Magnetics, Inc. 197,300 2,318
# Alliance Pharmaceutical Corp. 600,000 4,575
# Alpha Beta Tech 300,000 2,438
# Amylin Pharmaceuticals, Inc. 500,000 5,125
# Anesta Corp. 300,000 4,088
# Angeion Corp. 250,000 1,000
# Apria Healthcare 300,000 5,063
Arrow International, Inc. 307,000 9,440
# Atria Communities, Inc. 440,000 4,785
Ballard Medical Products 611,100 11,611
# Beverly Enterprises, Inc. 635,900 9,221
# Bio-Rad Laboratories, Inc.
Class A 392,550 9,372
# Bio-Vascular, Inc. 146,000 785
# Cell Genesys, Inc. 620,000 2,790
# Centocor, Inc. 310,000 8,719
# Cohr, Inc. 263,000 5,786
# Creative Biomolecules, Inc. 683,000 5,165
# CytoTherapeutics, Inc. 343,000 2,144
DENTSPLY International 240,000 11,820
# Genesis Health Ventures Inc. 483,000 14,430
# Genome Therapeutics Corp. 520,600 3,189
# Genzyme Corp. 100,000 2,300
# GranCare Inc. 603,400 4,676
# Haemonetics Corp. 1,038,600 17,267
# Harborside Healthcare Corp. 199,000 2,289
# Heartstream, Inc. 350,000 2,844
# Healthdyne Technologies, Inc. 569,880 8,263
# IDX Systems Corp. 250,000 7,438
Kinetic Concepts, Inc. 757,000 10,977
Life Technologies, Inc. 200,000 5,075
# Ligand Pharmaceuticals Class B 300,000 3,000
# Magainin Pharmaceuticals, Inc. 476,500 3,455
# Magellan Health Services Corp. 750,000 19,688
# Matria Healthcare, Inc. 906,800 3,514
McKesson Corp. 200,000 14,475
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- -----------------------------------------------------------------------------------
<S> <C> <C>
# MedPartners Inc. 400,000 $ 7,300
# Multicare Cos., Inc. 450,000 8,381
# NABI 1,051,225 6,307
# National Dentex Corp. 81,200 1,380
# PacifiCare Health Systems, Inc.
Class B 61,600 4,936
# Pathogenesis Corp. 368,000 9,568
# Patterson Dental Co. 309,250 10,283
# Physio-Control
International Corp. 200,000 2,500
# Scios, Inc. 400,000 1,875
#(1) Sibia Neurosciences, Inc. 453,200 3,172
# Sofamor/Danek Group Inc. 561,300 21,891
Sullivan/Dental Products, Inc. 436,500 6,438
# Sybron International Corp. 550,000 18,288
# Talbert Medical Management
Corp. Rights Exp. 5/20/97 16,516 285
# TheraTech, Inc. 524,000 4,782
# Vencor, Inc. 500,000 20,813
-----------
357,324
-----------
MATERIALS & PROCESSING (2.5%)
# American Buildings Co. 111,900 2,770
BMC Industries, Inc. 169,500 4,915
# Chieftain International, Inc. 183,800 3,676
# International Imaging
Materials, Inc. 130,000 2,129
# Lydall, Inc. 521,800 10,566
UNR Industries, Inc. 584,500 3,580
Valmont Industries, Inc. 552,000 21,804
-----------
49,440
-----------
PRODUCER DURABLES (7.2%)
# American Homestar Corp. 362,906 5,897
# American Power
Conversion Corp. 117,700 2,266
Applied Power, Inc. 324,600 13,755
# Brightpoint, Inc. 439,500 9,614
# Cuno Inc. 390,800 5,373
# The Cherry Corp. Class A 454,500 4,772
# Dionex Corp. 400,000 19,500
Donaldson Co., Inc. 270,000 9,247
# Executone Information Systems 1,057,000 2,147
# Fairfield Communities, Inc. 130,000 3,380
# Gilat Satellite Networks Ltd. 400,000 12,550
# Gulfstream Aerospace Corp. 362,500 9,244
#(1) Hirsch International Corp.
Class A 357,500 6,256
# IFR Systems, Inc. 30,225 491
# Oak Industries, Inc. 200,000 3,750
# Palm Harbor Homes, Inc. 428,150 9,847
# PhoneTel Technologies, Inc. 575,000 1,330
# PictureTel Corp. 450,900 3,945
# The Shaw Group, Inc. 382,900 5,169
# Southern Energy Homes, Inc. 692,750 7,187
# Tegal Corp. 250,000 1,562
# UCAR International, Inc. 100,000 4,200
# Verilink Corp. 458,400 2,808
-----------
144,290
-----------
TECHNOLOGY (13.6%)
# ACE*COMM Corp. 300,000 3,450
# Acxiom Corp. 720,000 9,450
# Advent Software, Inc. 277,500 6,868
# ANADIGICS, Inc. 136,000 3,774
# Arbor Software Corp. 427,000 10,461
# Auspex Systems, Inc. 250,000 2,000
# Avid Technology, Inc. 340,000 6,587
# Aware, Inc. 121,500 1,230
# Boole & Babbage Inc. 726,750 14,898
# Brooks Automation, Inc. 66,000 899
# Cadence Design Systems, Inc. 150,000 4,800
#(1) Cayenne Software Inc. 1,000,000 3,250
# Cognos Inc. 234,300 5,916
#(1) Conductus, Inc. 400,000 2,700
# DH Technology, Inc. 342,450 4,623
# DST Systems, Inc. 280,000 7,945
Dallas Semiconductor Corp. 300,000 10,950
# Davox Corp. 212,700 7,019
# Diamond Multimedia
Systems, Inc. 305,000 2,097
# Documentum, Inc. 234,500 4,162
# ESS Technology, Inc. 390,000 5,314
# Harmonic Lightwaves, Inc. 337,000 5,518
# HighwayMaster
Communications, Inc. 300,000 3,225
# Ikos Systems, Inc. 300,000 4,950
# Ingram Micro, Inc. 313,100 7,123
# Kronos, Inc. 198,400 4,166
# Lightbridge, Inc. 293,500 2,054
# Mechanical Dynamics, Inc. 261,500 1,732
# Mercury Interactive Corp. 350,000 4,200
#(1) Natural Microsystems Corp. 520,000 10,790
# Oak Technology, Inc. 707,000 5,656
# Orcad, Inc. 312,000 2,535
# Pinnacle Systems, Inc. 230,500 3,515
# PLATINUM technology, Inc. 310,000 3,720
# Premenos Technology Corp. 550,000 3,575
# Rational Software Corp. 250,000 3,437
# Remedy Corp. 118,000 3,820
# S3, Inc. 1,038,100 9,862
# Security Dynamics
Technologies, Inc. 219,000 5,530
# Speedfam International, Inc. 176,000 4,268
# Sterling Electronics Corp. 274,749 3,228
# Sterling Software, Inc. 340,000 10,370
# Structural Dynamics
Research Corp. 660,000 13,777
Symbol Technologies, Inc. 150,000 4,856
#(1) Trident International, Inc. 382,000 7,544
# VWR Scientific Products Corp. 460,000 6,900
# VideoServer, Inc. 360,000 5,895
# Visio Corp. 204,000 10,200
# Xionics Document
Technologies, Inc. 123,000 1,414
-----------
272,253
-----------
UTILITIES (1.9%)
# CableVision Systems Corp.
Class B 155,000 4,882
# McLeod, Inc. 217,000 3,960
# NTL Inc. 256,666 5,005
#(1) Peoples Telephone Co., Inc. 1,200,200 3,676
# Trescom International, Inc. 449,800 2,361
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -----------------------------------------------------------------------------------
<S> <C> <C>
# Tucson Electric Power Co. 952,200 $ 13,569
# Western Wireless Corp. 438,400 4,494
-----------
37,947
-----------
OTHER (1.0%)
Memtec Ltd. ADR 316,400 7,198
Teleflex Inc. 201,000 11,608
# Total Control Products, Inc. 185,000 1,434
-----------
20,240
-----------
- -----------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $1,525,402) 1,766,858
- -----------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.5%)
- -----------------------------------------------------------------------------------
AMC Entertainment Cvt. $1.75
(COST $9,438) 300,000 9,900
- -----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- -----------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (12.3%)
- -----------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.31%, 5/1/97
(COST $247,590) $247,590 247,590
- -----------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.2%)
(COST $1,782,430) 2,024,348
- -----------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.2%)
- -----------------------------------------------------------------------------------
Other Assets--Note C 14,442
Liabilities (39,344)
- -----------------------------------------------------------------------------------
(24,902)
- -----------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------
Applicable to 40,596,286 outstanding
$.001 par value shares
(authorized 100,000,000 shares) $1,999,446
===================================================================================
NET ASSET VALUE PER SHARE $49.25
===================================================================================
</TABLE>
*See Note A in Notes 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.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------
<S> <C> <C>
AT APRIL 30, 1997, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------
Paid in Capital $1,762,409 $43.41
Undistributed Net
Investment Income 2,258 .06
Accumulated Net Realized Losses (7,139) (.18)
Unrealized Appreciation--Note E 241,918 5.96
- -----------------------------------------------------------------------------------
NET ASSETS $1,999,446 $49.25
===================================================================================
</TABLE>
15
<PAGE> 18
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
EXPLORER FUND
SIX MONTHS ENDED APRIL 30, 1997
(000)
- -------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 4,812
Interest 6,818
----------
Total Income 11,630
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 2,262
Performance Adjustment (76)
The Vanguard Group--Note C
Management and Administrative 4,061
Marketing and Distribution 276
Taxes (other than income taxes) 83
Custodian Fees 7
Auditing Fees 5
Shareholders' Reports 86
Annual Meeting and Proxy Costs 11
Directors' Fees and Expenses 4
----------
Total Expenses 6,719
- -------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 4,911
- -------------------------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT SECURITIES SOLD (6,254)
- -------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES (125,605)
- -------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(126,948)
=================================================================================================
</TABLE>
16
<PAGE> 19
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. The amounts shown as
Distributions to shareholders from the Fund's net income and capital gains may
not match the amounts shown in the Operations section, because distributions
are determined on a tax basis and may be made in a period different from the
one in which the income was earned or the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount
shareholders invested in the Fund, either by purchasing shares or by
reinvesting distributions, as well as the amounts redeemed. The corresponding
numbers of Shares Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Explorer Fund
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 1997 OCT. 31, 1996
(000) (000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 4,911 $ 9,837
Realized Net Gain (Loss) (6,254) 111,853
Change in Unrealized Appreciation (Depreciation) (125,605) 157,545
-------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations (126,948) 279,235
-------------------------------
DISTRIBUTIONS
Net Investment Income (10,671) (7,088)
Realized Capital Gain (111,849) (118,130)
-------------------------------
Total Distributions (122,520) (125,218)
-------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 341,820 916,013
Issued in Lieu of Cash Distributions 120,573 122,486
Redeemed (399,557) (482,398)
-------------------------------
Net Increase from Capital Share Transactions 62,836 556,101
- --------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) (186,632) 710,118
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 2,186,078 1,475,960
-------------------------------
End of Period $1,999,446 $2,186,078
====================================================================================================================
(1)Shares Issued (Redeemed)
Issued 6,436 17,091
Issued in Lieu of Cash Distributions 2,264 2,493
Redeemed (7,534) (9,063)
-------------------------------
Net Increase in Shares Outstanding 1,166 10,521
====================================================================================================================
</TABLE>
17
<PAGE> 20
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the
Fund; and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Fund for one year. Finally, the table lists the Fund's Average Commission
Rate Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Explorer Fund
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------
THROUGHOUT EACH PERIOD APRIL 30, 1997 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $55.44 $51.05 $45.99 $49.37 $41.23 $36.75
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .13 .26 .24 .16 .14 .15
Net Realized and Unrealized Gain (Loss)
on Investments (3.22) 8.37 7.25 1.77 8.91 4.59
---------------------------------------------------------------------
Total from Investment Operations (3.09) 8.63 7.49 1.93 9.05 4.74
---------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.27) (.24) (.17) (.14) (.13) (.26)
Distributions from Realized Capital Gains (2.83) (4.00) (2.26) (5.17) (.78) --
---------------------------------------------------------------------
Total Distributions (3.10) (4.24) (2.43) (5.31) (.91) (.26)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $49.25 $55.44 $51.05 $45.99 $49.37 $41.23
==================================================================================================================================
TOTAL RETURN -5.99% 17.97% 17.46% 4.49% 22.28% 12.95%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,999 $2,186 $1,476 $1,112 $802 $519
Ratio of Total Expenses to
Average Net Assets 0.62%* 0.63% 0.68% 0.70% 0.73% 0.69%
Ratio of Net Investment Income to
Average Net Assets 0.45%* 0.51% 0.52% 0.39% 0.32% 0.38%
Portfolio Turnover Rate 74%* 51% 66% 82% 51% 43%
Average Commission Rate Paid $.0447 $.0424 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
18
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
Vanguard Explorer Fund is registered under the Investment Company Act of 1940
as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally
accepted accounting principles for mutual funds. The Fund consistently follows
such policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at
the latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Securities not listed on an exchange 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 to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
5. OTHER: Dividend income is recorded on the ex-dividend date.
Security transactions are accounted for on the date securities are bought or
sold. Costs used to determine realized gains (losses) on the sale of investment
securities are those of the specific securities sold.
B. Granahan Investment Management, Inc. and Wellington Management
Company, llp provide investment advisory services to the Fund for fees
calculated at an annual percentage rate of average net assets. The basic fees
of each adviser are subject to quarterly adjustments based on performance
relative to the Russell 2000 Index. For the six months ended April 30, 1997,
the aggregate investment advisory fee represented an effective annual basic
rate of 0.21% of average net assets before a decrease of $76,000 (an annual
rate of 0.01%) based on performance.
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, 1997, the Fund had contributed capital of $169,000 to
Vanguard (included in Other Assets), representing 0.8% 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, 1997, the Fund purchased
$706,905,000 of investment securities and sold $746,646,000 of investment
securities, other than temporary cash investments.
E. At April 30, 1997, net unrealized appreciation of investment
securities for financial reporting and federal income tax purposes was
$241,918,000, consisting of unrealized gains of $412,513,000 on securities that
had risen in value since their purchase and $170,595,000 in unrealized losses
on securities that had fallen in value since their purchase.
19
<PAGE> 22
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer Inc.;
Director of Sun Company, Inc., Westinghouse Electric Corp., and Global
Health Care Partners/DLJ Merchant Banking Partners.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Ikon Business Solutions, Inc., Raytheon Co., Knight-Ridder, Inc., and
Massa-chusetts Mutual Life Insurance Co.; Trustee Emerita of Wellesley
College.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich
Co., and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co.
and President of New York University; Director of Pacific Gas and
Electric Co., Procter & Gamble Co., and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
and Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
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.
RICHARD F. HYLAND, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President,
Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President, Institutional.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARDGROUP(R) LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
http://www.vanguard.com [email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1997 Vanguard Marketing Corporation, Distributor
20
<PAGE> 23
[PHOTO]
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Growth and Income Portfolio
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
Aggressive Growth Funds
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard International Value Portfolio
INDEX FUNDS
VANGUARD INDEX TRUST
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q242-4/97
