<PAGE> 1
VANGUARD
EXPLORER FUND
[PHOTO]
SEMIANNUAL
REPORT
APRIL 30, 1999
[THE VANGUARD GROUP LOGO]
<PAGE> 2
AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August 1,
1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle
for our company.
- - The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped to
shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with clients;
and a focus on long-term investing. To our great regret, Mr. Morgan died on
September 2, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of Vanguard
Wellington Fund. It is the nation's oldest balanced mutual fund, and one of
only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[GRAPHIC]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
3
REPORT FROM
THE ADVISERS
5
PERFORMANCE SUMMARY
7
FUND PROFILE
8
FINANCIAL STATEMENTS
10
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
During the six months ended April 30, 1999, small- capitalization stocks bounced
back smartly from their recent slump, and Vanguard Explorer Fund enjoyed a
healthy first half of its fiscal year. The fund's total return for the period
was +15.4%, which was a hair shy of the average small-cap growth fund's +15.6%
return, but above the returns of its relevant market indexes.
The adjacent table compares the six-month total return (capital change
plus reinvested dividends) of Explorer Fund with those of its primary
benchmarks: the average small-cap growth fund, the Russell 2000 Index, and the
Small Company Growth Fund Stock Index, which is based on the stocks held by the
nation's largest small-cap mutual funds.
<TABLE>
<CAPTION>
- --------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 1999
- --------------------------------------------------------
<S> <C>
Vanguard Explorer Fund +15.4%
- --------------------------------------------------------
Average Small-Cap Growth Fund +15.6%
- --------------------------------------------------------
Russell 2000 Index +15.2%
- --------------------------------------------------------
Small Company Growth Fund Stock Index +10.8%
- --------------------------------------------------------
</TABLE>
The fund's return is based on an increase in net asset value from $49.60
per share on October 31, 1998, to $56.69 per share on April 30, 1999, adjusted
for a dividend of $0.20 per share paid from net investment income and a
distribution of $0.30 per share paid from net realized capital gains.
THE PERIOD IN REVIEW
A remarkable domestic economic environment--in which rapid growth in business
activity and high employment coexisted with tame inflation--set the stage for
the U.S. stock market's surge during the six months ended April 30. The overall
stock market, as measured by the Wilshire 5000 Equity Index, gained +22.8%, just
ahead of the +22.3% showing of the best-known benchmark for large-cap stocks,
the Standard & Poor's 500 Composite Stock Price Index. Once again, however,
small-cap stocks lagged the overall market, a trend that has now continued for
some three years.
The +15.2% gain in the Russell 2000 Index was not evenly shared by its
growth and value stocks. The growth component of the Index boasted a +25.7%
return, while the value side claimed an advance of just +4.4%. Clearly,
small-cap growth stocks enjoyed a prosperous six months.
The strength of the economy's expansion was worrisome to bond investors,
who are ever-vigilant for signs that inflation may accelerate. Inflation is the
bondholder's bane because it erodes the value of future interest and principal
payments. (Inflation also erodes the value of future stock dividends and
earnings, but stockholders, unlike bondholders, can hope to benefit if higher
prices for goods and services also translate into higher corporate profits.)
Interest rates rose moderately during the period, with the yield of the
benchmark 30-year U.S. Treasury bond ending the half-year at 5.66%, 50 basis
points above the bond's 5.16% yield at the beginning of the period. As interest
rates rose, of course, bond prices declined. During the half-year, these price
declines shaved 2.3 percentage points
1
<PAGE> 4
from the return of the Lehman Brothers Aggregate Bond Index, offsetting most of
its interest income and resulting in a total return of +0.7%.
PERFORMANCE OVERVIEW
Explorer Fund's +15.4% total return for the period fell squarely between the
+15.6% earned by the average small-cap growth fund and the +15.2% return of the
Russell 2000 Index, and was well ahead of the +10.8% return of the Small Company
Growth Fund Stock Index. The fund fared well on the strength of its advisers'
selection of technology and utilities stocks; in those sectors, Explorer handily
outpaced the Russell 2000 Index, more than doubling the return (+62.5% versus
+25.6%) of the stocks in the latter category. On the negative side, the fund's
health-care stocks did not perform as well as those of our benchmark (-2.4%
versus +5.0%).
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
TOTAL ASSETS MANAGED
AS OF APRIL 30, 1999
--------------------
$ MILLION PERCENT
- ----------------------------------------------------------------
<S> <C> <C>
Granahan Investment Management, Inc. $1,074 48%
Wellington Management Company, LLP 640 28
Chartwell Investment Partners 263 11
Vanguard Core Management Group 237 10
Cash Reserve* 76 3
- ----------------------------------------------------------------
Total $2,290 100%
- ----------------------------------------------------------------
</TABLE>
*This cash reserve is invested in equity index futures to simulate investment in
stocks; each adviser may also maintain a modest cash reserve.
As you know, four advisers select stocks for Explorer Fund. The table
above shows the share of Explorer's assets managed by each adviser as of April
30.
IN SUMMARY
During the semiannual period, the stock market once again demonstrated its
unpredictability. While value and growth stocks battled it out for supremacy
within the large-cap arena, growth stocks were clearly the darlings of the
reinvigorated small-cap realm--a market that during its 1998 fiscal year lagged
the returns of large stocks by an average of more than 30 percentage points
(-11.8% for small-caps versus +22.0% for large stocks). What's more, price
fluctuations were substantial, both for individual stocks and for broader
sections of the market.
The volatility of the market, we believe, validates our oft-repeated
recommendation that investors hold a broadly diversified portfolio comprising
both growth and value stock funds as well as bond and money market funds. Each
investor's mix of assets should reflect his or her investment goals, time
horizon, and tolerance for the ever-present risks of investing. Once such a
program is in place, we believe that sticking with it--"staying the course"--is
a sound investment approach.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
May 19, 1999
2
<PAGE> 5
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 1999
[PHOTO]
Global stock markets chalked up solid gains during the six months ended April
30, 1999, aided by the efforts of central banks around the world to ease
monetary policy and lower short-term interest rates.
The remarkably strong U.S. economy helped out by playing locomotive for
the world's economies, soaking up record volumes of imported goods. Indeed, the
United States was the only major nation whose policymakers and bondholders had
to ponder whether growth was too rapid. Concern about a potential surge in
inflation was one reason that interest rates rose modestly and bond prices
generally slipped in the United States.
U.S. STOCK MARKETS
Stock prices soared during the half-year, reflecting both the domestic economy's
strength and the investing public's confidence in future growth of the economy
and corporate profits. The overall market, as measured by the Wilshire 5000
Equity Index, rose 22.8% during the six months ended April 30, while the S&P 500
Index, a proxy for large-capitalization stocks, gained 22.3%.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 1999
---------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 22.3% 21.8% 26.9%
Russell 2000 Index 15.2 -9.3 13.0
Wilshire 5000 Index 22.8 17.0 24.5
MSCI EAFE Index 15.4 9.8 9.0
- ----------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.7% 6.3% 8.0%
Lehman 10-Year Municipal Bond Index 1.5 7.1 7.5
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.8 5.2
- ----------------------------------------------------------------------------
OTHER
Consumer Price Index 1.3% 2.3% 2.4%
- ----------------------------------------------------------------------------
</TABLE>
*Annualized.
The midsummer shock of 1998--when the overall stock market fell by more
than 20%--seemed to be quickly forgotten by investors. Most apparently
overlooked the fact that corporate earnings were flat to slightly lower,
focusing instead on the potential for future earnings. Investors' confidence was
bolstered by the market's quick rebound from its summer stumble and by a general
easing of monetary policy by the world's central banks. The Federal Reserve
Board made three separate quarter-percentage-point reductions in short-term
interest rates during autumn 1998. Central banks in Europe, Asia, and Latin
America also cut rates. These actions lessened fears that the major economies
would be dragged down by the lingering effects of the economic crisis that
struck emerging markets beginning in mid-1997.
U.S. consumers demonstrated their confidence in economic conditions by
spending freely, boosting sales of cars, houses, and goods in stores. And why
shouldn't they have been happy? U.S. gross domestic product grew by an annual
rate of 4.1% in the first three months of 1999, and the nation's unemployment
rate closed the period at 4.3%.
Improved prospects for global growth were a key factor in the continuing
advance of technology stocks (up nearly 42% for the six months) and the
resurgence of some value-stock sectors, such as materials & processing (up 27%)
and energy (integrated oil
3
<PAGE> 6
companies rose 22%; "other energy" stocks gained 23%). Retailers and other
companies in the consumer-discretionary sector gained 34%, reflecting the
strength of consumer spending. Not all consumer-related stocks benefited,
however. Consumer-staples companies, locked in tough price competition and still
feeling the effects of falling profits from overseas operations, were the
worst-performing group in the half-year, down 3%.
U.S. BOND MARKETS
For bond investors, the powerful economic expansion evident during the
November-April period was too much of a good thing. Economists confessed to
puzzlement that the expansion was not triggering an acceleration in wages or
consumer prices. But with oil prices rising, U.S. economic growth expanding at a
4.1% annual pace, and unemployment at 4.3% of the labor force, the lowest point
since February 1970, bond market participants figured that inflation was bound
to accelerate eventually. (This view gained credence shortly after the period's
end, when the Consumer Price Index was reported to have risen 0.7% in April, the
biggest monthly increase in eight years.)
Despite the Fed's actions to cut short-term interest rates, yields on
U.S. Treasury issues increased over the six months by one-half to three-quarters
of a percentage point. The yield of the 30-year Treasury bond rose 50 basis
points, to 5.66% on April 30 from 5.16% six months earlier. The yield of the
10-year Treasury rose to 5.35% from 4.61%. Very short-term rates didn't rise as
far: Yields on 3-month T-bills rose 22 basis points to 4.54% on April 30. Bond
prices, which move in the opposite direction from interest rates, fell. The
Lehman Brothers Aggregate Bond Index, a benchmark for investment-grade taxable
bonds, earned just 0.7%, as falling prices offset most of the index's 3.0%
interest income for the six-month period.
Municipal bonds suffered only slight price declines and outperformed
Treasury securities--a turnaround from the previous six months, when Treasuries
were bid up by investors seeking a safe haven during the summer 1998 market
turmoil.
Not all bond prices fell during the half-year. For high-yield issues, the
strong economy was a tonic. These bonds had suffered considerably during the
market turmoil of summer 1998, as investors feared a global economic downturn
would result in higher defaults by weaker companies. But when economic growth
turned out to be stronger than expected, high-yield bond prices rebounded,
augmenting the bonds' interest income. The Lehman High Yield Index returned 8.3%
during the half-year.
INTERNATIONAL STOCK MARKETS
Overseas stock markets posted gains during the period, despite lingering
economic weakness in Asia and sluggish growth in most of Europe's developed
economies. Crises in some key developing markets, including those of Brazil and
Russia, appeared to be easing as the semiannual period drew to a close. Overall,
the developed markets outside the United States gained 15.4% in U.S.-dollar
terms, as measured by the Morgan Stanley Capital International Europe,
Australasia, Far East (EAFE) Index. Stocks in Europe and Asia were boosted by
mergers and takeover activity and by signs that corporations were focusing more
intently on increasing shareholder value.
The biggest gains were in the Pacific region and in emerging markets, the
bourses that had suffered the biggest declines during 1997 and 1998. The Pacific
region gained 27.4%, despite a continuing recession in Japan, while the MSCI
Select Emerging Markets Free Index rose 30.8%. European stocks were up nearly
20% in local currencies, but these gains were cut to 10.9% for U.S. investors
because of the dollar's gains against the euro, a common currency adopted by 11
nations, and other European currencies.
4
<PAGE> 7
REPORT FROM THE ADVISERS
[PHOTO]
Vanguard Explorer Fund's fiscal half-year, the six months ended April 30, 1999,
was rewarding, as small-capitalization stocks joined in a stock market surge led
by large-cap stocks. The fund's 15.4% return was in line with the 15.6% gain of
the average small-cap growth fund and ahead of both the Russell 2000 Index and
the Small Company Growth Fund Stock Index, which earned 15.2% and 10.8%,
respectively.
THE ENVIRONMENT FOR SMALL-CAP STOCKS
Small-cap stocks enjoyed a solid rebound during the half-year from the sharp
declines suffered in the fiscal year ended October 31, 1998. Many of the fund's
gains came early in the period. In both the small- and large-cap segments of the
stock market, the gains during the period were concentrated in a relatively
short list of stocks--three out of five stocks in the Russell 2000 Index of
small-cap stocks produced negative returns during the first four months of
calendar 1999.
Curiously, profitability has not been a requisite for big share-price
gains: 18 of the 20 top-performing issues in the Russell 2000 Index of small-cap
stocks are not profitable. Most of these companies have passed $1.5 billion in
market capitalization, moving them out of the small-cap arena (which we define
as a company with a market value of up to $1 billion) and into the mid-cap
realm.
Our holdings are registering, on average, earnings gains at an annualized
rate that is slightly above 10%. This is not an astounding rate, although it is
higher than that shown by the stock market in general.
During the first half of our fiscal year, utilities stocks were our
strongest performers, gaining nearly 63% as a group due to our emphasis on
satellite and cable-television providers and utilities benefiting from
deregulation of telephone and cable-television service. Among our strong
performers were EchoStar Communications, Montana Power (recently eliminated),
and TCA Cable, which is being acquired by Cox Communications, as well as
telecommunications providers McLeodUSA and NTL.
Our two largest industry weightings--consumer discretionary and
technology--were also strong performers, with gains of about 24% and 34%,
respectively. Big contributors to results in the consumer sector included BJ's
Wholesale Club and Ames Department Stores, as well as Speedway Motorsports, a
track owner. Among technology stocks, winners included RealNetworks and
BroadVision (positions we have since trimmed to take profits).
Sectors that hurt our performance included health-care stocks (down 2.4%)
and materials & processing companies (down 3.4%). Health-care stocks have been
weighed down by concerns about legislative efforts to control medical care
costs.
CHANGES IN THE FUND'S HOLDINGS
There were no big shifts in industry-group exposures for Explorer Fund during
the half-year. The most substantial changes were in health-care (down to 14.1%
of our stock holdings as of April 30 from 20.0% at
5
<PAGE> 8
the beginning of the fiscal year), consumer discretionary (up from 23.2% to
28.2%), and financial services (down to 14.3% from 17.0%).
Our health-care exposure declined largely because of holdings that were
acquired or sold in response to takeover proposals. Such holdings included
Sofamor Danek, Agouron Pharmaceuticals, and Ballard Medical. We're closely
eyeing the sector, however, because many decent health-care franchises are
selling at their lowest prices in three to five years.
New names in the consumer-discretionary sector include JAKKS Pacific, a
toymaker that makes wrestling action figures, and Tupperware, the venerable
maker of plastic housewares.
Given the strength of the U.S. economy, there has been renewed interest
in cyclical stocks, such as specialty-chemical makers Cytec Industries and
Cambrex, and in trucking firms such as M.S. Carriers, Swift Transportation, and
Werner Enterprises. We've modestly boosted our commitment to transportation
stocks, including the addition of a new holding, Atlas Air.
LOOKING FORWARD
We believe that the strong domestic economy, which features the twin blessings
of low inflation and low interest rates, bodes well for small-cap stocks,
including a number of cyclical companies that haven't previously participated in
the market's impressive upward climb. We have some concerns about the mania for
Internet stocks, which is making it harder for non-Internet stocks to get
financing and to even be noticed by investors. However, we are finding plenty of
new investment ideas, and we are convinced good values are still to be found in
the small-cap universe.
We believe our holdings can generate above-average earnings growth this
year and next, as well as over the long term.
Granahan Investment Management, Inc.
Wellington Management Company, LLP
Chartwell Investment Partners
Vanguard Core Management Group
May 13, 1999
INVESTMENT PHILOSOPHY
The fund reflects a belief that superior long-term investment results can be
achieved by selecting a diversified group of small-company stocks with prospects
for above-average growth.
6
<PAGE> 9
PERFORMANCE SUMMARY
EXPLORER FUND
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 an investment in the fund could
lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: OCTOBER 31, 1978-APRIL 30, 1999
- ----------------------------------------------------------
EXPLORER FUND RUSSELL
2000*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
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 18.4 0.5 18.9 29.3
1998 -11.6 0.4 -11.2 -11.8
1999** 14.9 0.5 15.4 15.2
- ----------------------------------------------------------
</TABLE>
*S&P 500 Index through 1979; Russell 2000 Index thereafter.
**Six months ended April 30, 1999.
See Financial Highlights table on page 19 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1999*
- ---------------------------------------------------------------------------------------------
10 YEARS
INCEPTION --------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Explorer Fund 12/11/1967 -12.38% 10.56% 11.13% 0.66% 11.79%
- ---------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
7
<PAGE> 10
FUND PROFILE
EXPLORER FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
EXPLORER RUSSELL 2000
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 565 1,871
Median Market Cap $0.9B $0.8B
Price/Earnings Ratio 21.1x 18.9x
Price/Book Ratio 3.0x 2.5x
Yield 0.3% 1.4%
Return on Equity 16.4% 14.4%
Earnings Growth Rate 20.5% 15.2%
Foreign Holdings 0.2% 0.0%
Turnover Rate 70%* --
Expense Ratio 0.71%* --
Cash Reserves 5.5% --
</TABLE>
*Annualized.
INVESTMENT FOCUS
- ------------------------------
[BAR GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------
EXPLORER S&P 500
- ----------------------------------------------------
<S> <C> <C>
R-Squared 0.69 1.00
Beta 1.10 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------------------
<S> <C>
RealNetworks, Inc. 1.6%
Investment Technology Group 1.6
BJ's Wholesale Club, Inc. 1.3
Mettler-Toledo International Inc. 1.3
Plantronics, Inc. 1.2
Pairgain Technologies, Inc. 1.2
American Power Conversion Corp. 1.1
EchoStar Communications Corp. 1.1
Pacific Sunwear of California 1.1
Genzyme Corp. 1.0
- -------------------------------------------------------
Top Ten 12.5%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ------------------------------------------------------------------------------------
APRIL 30, 1998 APRIL 30, 1999
- ------------------------------------------------------------------------------------
EXPLORER EXPLORER RUSSELL 2000
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 5.7% 6.1% 4.3%
Consumer Discretionary 25.1 28.2 18.7
Consumer Staples 1.2 0.3 2.3
Financial Services 15.8 14.3 23.7
Health Care 16.5 14.1 8.7
Integrated Oils 0.1 0.3 0.3
Other Energy 3.1 1.9 2.6
Materials & Processing 4.6 4.2 8.9
Producer Durables 8.2 7.1 6.8
Technology 14.4 17.5 14.2
Utilities 4.2 4.6 8.7
Other 1.1 1.4 0.8
- ------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing instruments. This
figure does not include cash invested in futures contracts to simulate stock
investments.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
INVESTMENT FOCUS. This grid indicates the focus of a fund in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come from
each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 30%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
9
<PAGE> 12
FINANCIAL STATEMENTS
APRIL 30, 1999 (UNAUDITED)
[PHOTO]
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, 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)
- -----------------------------------------------------------------------
COMMON STOCKS (91.2%)+
- -----------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (5.6%)
- - M.S. Carriers, Inc. 580,500 $ 18,503
Tidewater Inc. 565,000 14,973
Air Express International Corp. 600,000 13,125
Polaris Industries, Inc. 321,300 12,109
- - Heartland Express, Inc. 862,733 12,024
- - Swift Transportation Co., Inc. 557,600 10,246
C.H. Robinson Worldwide, Inc. 289,500 8,667
Werner Enterprises, Inc. 428,750 8,253
- - Mesaba Holdings, Inc. 425,800 6,201
- - Covenant Transport, Inc. 450,500 6,194
- - Atlas Air, Inc. 100,000 2,900
- - Coach USA, Inc. 80,400 1,910
AAR Corp. 88,550 1,682
- - Forward Air Corp. 55,100 1,226
- - Tower Automotive, Inc. 48,800 1,122
Borg-Warner Automotive, Inc. 17,000 965
Airborne Freight Corp. 28,900 925
- - Landstar System 23,000 895
- - Stoneridge,Inc. 49,700 832
- - Atlantic Coast Airlines Holdings 26,200 809
- - Mark VII, Inc. 48,200 687
- - Halter Marine Group, Inc. 102,800 623
Meritor Automotive, Inc. 21,700 460
Wynn's International Inc. 23,400 392
Petroleum Helicopters, Inc. 29,200 372
Wabash National Corp. 21,900 343
Pittston BAX Group 33,600 300
- - Old Dominion Freight Line, Inc. 19,200 216
- - National R. V. Holdings, Inc. 4,100 106
----------
127,060
----------
CONSUMER DISCRETIONARY (25.7%)
ADVERTISING AGENCIES (0.2%)
- - Catalina Marketing Corp. 14,000 1,196
- - Valassis Communications, Inc. 20,200 1,131
- - Snyder Communications, Inc. 26,500 778
- - ADVO, Inc. 36,600 723
CASINOS & GAMBLING (0.9%)
Dover Downs Entertainment, Inc. 810,000 13,517
- - MGM Grand, Inc. 148,186 6,520
- - Scientific Games Holdings Corp. 46,400 742
COMMERCIAL INFORMATION SERVICES (0.4%)
- - QRS Corp. 159,200 8,756
- - Bell & Howell Co. 16,500 552
CONSUMER ELECTRONICS (2.6%)
- - Plantronics, Inc. 399,100 26,939
- - ITI Technologies, Inc. 394,000 10,490
- - Activision, Inc. 700,000 7,306
- - Recoton Corp. 280,000 4,480
- - LoJack Corp. 454,500 3,522
- - Concur Technologies, Inc. 72,600 2,623
Harman International
Industries, Inc. 26,900 1,236
- - MindSpring Enterprises, Inc. 9,000 872
- - Object Design, Inc. 235,000 845
- - CNET, Inc. 2,600 334
- - Acclaim Entertainment Inc. 6,952 45
CONSUMER PRODUCTS (1.3%)
Tupperware Corp. 730,000 17,292
(1) Movado Group, Inc. 470,600 11,353
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -----------------------------------------------------------------------
<S> <C> <C>
- - Samsonite Corp. 11,386 $ 68
Matthews International Corp. 700 19
COSMETICS
BeautiControl Cosmetics 91,700 481
- - Revlon, Inc. Class A 9,600 220
EDUCATION--SERVICES (0.2%)
Strayer Education, Inc. 78,300 2,711
- - Education Management Corp. 50,600 1,009
- - Computer Learning Centers, Inc. 51,920 234
ELECTRICAL--HOUSEHOLD APPLIANCES (0.1%)
- - REX Stores Corp. 221,400 3,625
ENTERTAINMENT (1.6%)
- - Speedway Motorsports, Inc. 280,000 12,145
- - Loews Cineplex
Entertainment Corp. 751,300 9,485
- - AMC Entertainment, Inc. 500,000 8,844
- -(1)LodgeNet Entertainment Corp. 700,000 5,950
International Speedway Corp. 17,000 875
- - Penske Motorsports, Inc. 7,000 254
Gaylord Entertainment Co. Class A 7,066 219
HOTEL/MOTEL (0.8%)
(1)The Marcus Corp. 986,200 12,266
- - Sun International Hotels Ltd. 122,300 5,175
- - American Skiing Co. 73,000 374
HOUSEHOLD FURNISHINGS (1.0%)
Oneida Ltd. 738,000 17,804
- - Westpoint Stevens, Inc. 31,900 1,093
Ethan Allen Interiors, Inc. 20,700 1,049
- - Blyth Industries, Inc. 43,900 999
- - Department 56 Inc. 32,900 890
Crown Crafts, Inc. 17,000 98
JEWELRY--WATCHES & GEMS
Tiffany & Co. 10,600 890
LEISURE TIME (1.8%)
- - Action Performance Cos., Inc. 394,000 13,347
- - Vistana, Inc. 639,000 9,505
- - Premier Parks Inc. 243,900 8,430
- - Trans World Entertainment Corp. 367,950 5,634
- - Bally Total Fitness Holding Corp. 47,400 1,149
- - Vail Resorts Inc. 56,900 1,102
- - Family Golf Centers, Inc. 150,000 1,078
- - Musicland Stores Corp. 49,800 542
MISCELLANEOUS BUSINESS &
CONSUMER DISCRETIONARY (0.4%)
E.W. Scripps Co. Class A 170,000 8,500
PRINTING & COPYING SERVICES
- - Mail-Well, Inc. 39,500 516
- - World Color Press, Inc. 7,000 179
PUBLISHING--MISCELLANEOUS (0.6%)
- - Playboy Enterprises, Inc. Class B 355,000 11,427
Meredith Corp. 26,900 987
- - Consolidated Graphics, Inc. 18,600 793
PUBLISHING--NEWSPAPERS (0.2%)
Central Newspapers, Inc. 165,000 5,600
RADIO & TELEVISION BROADCASTERS (1.2%)
- - Pegasus Communications Corp.
Class A 323,600 13,268
- - King World Productions, Inc. 264,900 9,338
- - Emmis Communications, Inc. 91,100 4,099
- - Metro Networks, Inc. 23,100 1,039
- - Hearst-Argyle Television Inc. 17,104 436
- - Clear Channel Communications, Inc. 26 2
RENT/LEASE SERVICES--CONSUMER (0.4%)
- - Rent-A-Center, Inc. 239,800 7,434
- - Budget Group, Inc. 50,500 628
RESTAURANTS (1.9%)
- - CEC Entertainment Inc. 435,300 16,324
- - Outback Steakhouse 174,950 6,265
- - Papa John's International, Inc. 133,200 5,353
- - NPC International Class A 218,500 3,933
- - Mortons Restaurant Group 157,800 2,683
- - Landry's Seafood
Restaurants, Inc. 277,300 2,253
- - Brinker International, Inc. 40,700 1,124
- - Lone Star Steakhouse &
Saloon, Inc. 91,900 999
- - Sbarro, Inc. 34,600 906
- - The Cheesecake Factory 30,200 846
- - Foodmaker, Inc. 33,300 803
CKE Restaurants Inc. 41,919 686
Darden Restaurants Inc. 14,200 317
- - Rainforest Cafe, Inc. 33,150 182
RETAIL (7.4%)
- - BJ's Wholesale Club, Inc. 1,083,000 28,767
- - Pacific Sunwear of California 650,000 24,111
- - Lands' End, Inc. 400,000 15,300
- - Ames Department Stores, Inc. 428,750 14,979
- - Urban Outfitters, Inc. 689,700 13,363
Russ Berrie and Co., Inc. 480,200 13,025
- - The Dress Barn, Inc. 834,100 12,199
- - Linens 'n Things, Inc. 162,900 7,453
- - PETCO Animal Supplies, Inc. 550,000 7,219
- - School Specialty, Inc. 250,500 4,728
- - Micro Warehouse Inc. 253,600 4,295
- - The Gymboree Corp. 405,000 4,202
- - The Children's Place
Retail Stores, Inc. 96,600 3,502
- - USA Networks, Inc. 75,900 2,837
- - Autonation Inc. 114,700 1,642
- - Tweeter Home Entertainment
Group, Inc. 54,500 1,615
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- -----------------------------------------------------------------------
<S> <C> <C>
- - O'Reilly Automotive, Inc. 22,200 $ 1,016
Ross Stores, Inc. 21,300 978
- - CDW Computer Centers, Inc. 10,900 975
- - Genesco, Inc. 89,700 975
- - Footstar Inc. 26,500 896
- - Nu Skin Enterprises, Inc. 40,500 752
Jostens Inc. 33,700 722
Pier 1 Imports Inc. 73,050 539
- - Discount Auto Parts Inc. 23,600 538
Fred's, Inc. 41,125 481
- - Piercing Pagoda, Inc. 48,150 463
Blair Corp. 24,900 454
Hancock Fabrics, Inc. 45,300 286
- - 99 Cents Only Stores 4,750 224
- - Circuit City Stores, Inc.-
CarMax Group 47,000 211
- - Jo-Ann Stores, Inc. Class A 5,400 87
- - Handleman Co. 3,000 42
SERVICES--COMMERCIAL (2.0%)
- - Getty Images, Inc. 434,300 11,292
- -(1)TETRA Technologies, Inc. 1,000,000 9,375
- - Safety-Kleen Corp. 375,000 5,953
- - Allied Waste Industries, Inc. 261,865 4,632
- - The Corporate Executive
Board Co. 139,800 3,932
- - Heidrick & Struggles
International, Inc. 105,400 1,469
- - Labor Ready, Inc. 37,000 1,452
- - NCO Group, Inc. 31,300 1,021
- - ACNielson Corp. 34,900 973
Norrell Corp. 59,500 893
- - Copart, Inc. 46,700 846
- - Wackenhut Corrections Corp. 37,700 700
- - Romac International, Inc. 62,100 699
- - Interim Services, Inc. 39,500 686
Pittston Brink's Group 22,000 580
- - Metro One
Telecommunications, Inc. 32,800 535
Penton Media, Inc. Class A 15,100 359
- - APAC Teleservices, Inc. 103,500 336
- - Waste Industries, Inc. 17,300 320
- - Meta Group, Inc. 25,900 236
Viad Corp. 3,500 116
- - PalEx, Inc. 18,100 113
- - Rural/Metro Corp. 7,400 60
SHOES (0.5%)
The Stride Rite Corp. 821,100 9,597
- - Finish Line, Inc. 117,100 1,764
- - Kenneth Cole Productions, Inc. 32,800 906
- - Shoe Carnival, Inc. 15,000 227
TEXTILES--APPAREL--MANUFACTURING
St. John Knits, Inc. 26,600 723
- - Fruit of the Loom Inc. Class A 36,100 386
- - Tarrant Apparel Group, Inc. 1,100 52
TOYS (0.1%)
- - JAKKS Pacific, Inc. 100,000 2,137
WHOLESALERS (0.1%)
- - United Stationers, Inc. 86,900 1,483
- - Daisytek International Corp. 45,500 762
----------
589,227
----------
CONSUMER STAPLES (0.3%)
- - American Italian Pasta Co. 105,500 2,835
- - Ralcorp Holdings, Inc. 50,200 922
Universal Corp. 28,200 717
Richfood Holdings, Inc. 29,000 363
Longs Drug Stores, Inc. 10,000 344
- - General Cigar Holdings, Inc. 30,800 260
Casey's General Stores 16,700 221
Pilgrim's Pride Corp. 10,500 196
Nash-Finch Co. 19,100 181
----------
6,039
----------
FINANCIAL SERVICES (13.0%)
Investment Technology
Group, Inc. 1,040,122 36,014
Sun Communities, Inc. REIT 605,000 21,175
Manufactured Home
Communities, Inc. REIT 699,250 17,700
- - Concord EFS, Inc. 520,050 17,357
- - BISYS Group, Inc. 313,400 15,905
Fidelity National Financial, Inc. 724,610 13,224
Legg Mason Inc. 350,000 12,206
Heller Financial, Inc. 431,600 11,707
City National Corp. 278,400 10,753
Regency Realty Corp. REIT 485,000 10,488
Annuity and Life Re
(Holdings), Ltd. 507,400 10,021
- - Affiliated Computer Services, Inc.
Class A 260,000 9,945
Federal Realty Investment
Trust REIT 400,000 9,550
Peoples Bank Bridgeport 270,000 8,505
- - Policy Management
Systems Corp. 270,000 8,488
Cullen/Frost Bankers, Inc. 150,000 8,091
- - Advent Software, Inc. 127,500 7,857
Raymond James Financial, Inc. 348,600 7,517
- - The Profit Recovery Group
International, Inc. 200,000 7,300
First Washington Realty Trust,
Inc. REIT 300,000 6,431
- - Healthcare Financial Partners, Inc. 139,100 4,695
- - Rental Service Corp. 190,900 4,307
Saul Centers, Inc. REIT 262,000 4,274
- - Scottish Annuity &
Life Holdings, Ltd. 300,000 3,000
Investors Financial Services Corp. 37,900 1,379
- - Cort Business Services Corp. 55,400 1,278
- - United Rentals, Inc. 40,906 1,220
Nationwide Financial Services, Inc. 24,800 1,150
Hudson United Bancorp 31,763 1,124
- - Golden State Bancorp Inc. 42,600 1,046
Philadelphia Consolidated
Holding Corp. 42,300 1,044
- - Billing Concepts Corp. 83,100 1,028
- - Banctec, Inc. 61,500 999
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -----------------------------------------------------------------------
<S> <C> <C>
- - First Federal Financial Corp. 54,400 $ 942
McGrath Rent Corp. 49,000 931
NAC Re Corp. 16,700 910
MeriStar Hospitality Corp. REIT 39,100 899
Astoria Financial Corp. 17,700 887
The PMI Group Inc. 15,800 882
Ohio Casualty Corp. 22,700 843
XTRA Corp. 19,600 811
AmerUs Life Holdings, Inc. 35,890 803
Phoenix Investment Partners Ltd. 81,100 801
Protective Life Corp. 19,800 776
FINOVA Group, Inc. 15,900 768
Hartford Life, Inc. 14,200 743
Corus Bankshares Inc. 23,500 729
WestAmerica Bancorporation 19,700 657
- - The Dialog Corp. PLC 86,800 656
- - ITLA Capital Corp. 41,400 652
- - Silicon Valley Bancshares 36,100 634
Washington Federal Inc. 27,760 614
MMI Cos., Inc. 39,300 609
Jack Henry & Associates 17,900 591
- - Data Transmission Network Corp. 27,800 587
- - Columbia Banking System, Inc. 28,750 489
Stifel Financial Corp. 46,798 474
LandAmerica Financial Group, Inc. 16,600 465
Sovereign Bancorp, Inc. 30,000 409
BSB Bancorp, Inc. 15,000 385
Advest Group, Inc. 18,000 365
- - Farm Family Holdings, Inc. 10,400 338
Omega Healthcare Investors,
Inc. REIT 10,400 274
- - AmeriTrade Holding Corp. 2,000 267
Franklin Bank N.A. 23,020 259
Trenwick Group Inc. 8,000 224
- - ContiFinancial Corp. 18,500 113
----------
297,565
----------
HEALTH CARE (12.8%)
- - Genzyme Corp. 605,000 22,839
DENTSPLY International Inc. 697,900 18,276
- - Biogen, Inc. 177,000 16,826
- - Centocor, Inc. 375,000 16,641
- - Forest Laboratories, Inc. 355,000 15,798
- - MedPartners, Inc. 3,000,000 15,750
Arrow International, Inc. 619,800 13,946
- - Patterson Dental Co. 321,375 11,590
- - Gilead Sciences, Inc. 208,200 9,590
- -(1)Matria Healthcare, Inc. 1,839,700 8,394
- - Acuson Corp. 550,000 8,388
- - Foundation Health Systems
Class A 500,000 6,906
- - United Payors & United
Providers, Inc. 391,000 6,891
- - Sunrise Assisted Living, Inc. 153,600 6,144
- - Beverly Enterprises, Inc. 908,900 5,908
- - MedQuist, Inc. 166,900 5,716
- - Province Heathcare Co. 252,100 5,609
- - Human Genome Sciences, Inc. 150,000 5,550
- - Coventry Health Care Inc. 600,000 5,513
Varian Medical Systems, Inc. 300,000 5,156
- - Aviron 265,000 5,002
- - PSS World Medical, Inc. 500,000 4,875
- - I-STAT Corp. 465,000 4,795
- - Magellan Health Services, Inc. 868,400 4,722
- - Eclipsys Corp. 190,205 4,185
- - Pharmaceutical Product
Development, Inc. 143,170 4,170
- - The Liposome Co., Inc. 330,000 4,125
- - American Retirement Corp. 243,200 4,043
- - PathoGenesis Corp. 293,000 3,846
- - IDX Systems Corp. 235,000 3,819
- - Cell Genesys, Inc. 470,000 2,350
- - Medical Manager Corp. 75,700 2,157
- - Health Management Associates
Class A 125,200 1,956
- - Sangstat Medical Corp. 130,000 1,885
- - QLT PhotoTherapeutics Inc. 39,500 1,805
- - Universal Health Services Class B 34,200 1,772
- - Cambridge Heart, Inc. 225,000 1,744
- - Lincare Holdings, Inc. 55,900 1,656
- - INCYTE Pharmaceuticals, Inc. 83,700 1,512
Minntech Corp. 83,600 1,076
- - Inhale Therapeutic Systems 37,100 1,067
- - Henry Schein, Inc. 40,700 1,066
- - Trigon Healthcare, Inc. 32,100 1,019
- - Quintiles Transnational Corp. 24,150 980
- - Mid Atlantic Medical
Services, Inc. 106,400 971
- - Agouron Pharmaceuticals, Inc. 16,100 951
- - Pediatrix Medical Group, Inc. 47,800 905
Jones Pharma, Inc. 27,900 896
- - STERIS Corp. 48,700 864
- - Renal Care Group, Inc. 38,700 808
- - Res-Care, Inc. 42,300 783
Alpharma, Inc. Class A 26,500 782
- - Medicis Pharmaceutical Corp. 32,150 782
- - Cooper Cos., Inc. 45,600 718
- - Genesis Health Ventures Inc. 102,400 710
Cardinal Health, Inc. 11,722 701
- - Rehabcare Corp. 39,300 653
- - Roberts Pharmaceuticals 38,100 648
- - Laser Vision Centers, Inc. 15,000 632
Mallinckrodt, Inc. 16,100 565
- - Coulter Pharmaceutical, Inc. 26,900 541
- - Concentra Managed Care 39,200 532
- - ADAC Laboratories 73,000 529
- - Sierra Health Services 36,750 459
- - Apria Healthcare 28,800 450
- - Eclipse Surgical Technologies, Inc. 50,000 447
- - Trex Medical Corp. 75,400 372
- - MIM Corp. 123,100 362
- - Hologic, Inc. 40,000 273
- - Integrated Health Services, Inc. 39,200 189
Bergen Brunswig Corp. Class A 9,817 187
- - PhyCor, Inc. 35,900 180
- - Sola International Inc. 4,400 65
- - Bio-Rad Laboratories, Inc. Class A 1,900 53
- - Guilford Pharmaceuticals, Inc. 2,400 26
- - ResMed Inc. 900 24
- - Assisted Living Concepts Inc. 3,500 10
- - FPA Medical Management, Inc. 127,500 1
----------
294,127
----------
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- -----------------------------------------------------------------------
<S> <C> <C>
INTEGRATED OILS (0.3%)
Pennzoil-Quaker State Co. 441,400 $ 5,711
- - Tesoro Petroleum Corp. 47,700 540
Giant Industries, Inc. 43,000 414
----------
6,665
----------
OTHER ENERGY (1.7%)
- - Noble Drilling Corp. 600,000 11,775
- - Chieftain International, Inc. 326,800 5,903
St. Mary Land & Exploration Co. 291,700 5,615
Weatherford International, Inc. 90,000 3,049
- - Core Laboratories N.V. 157,000 2,826
- - Varco International, Inc. 211,900 2,397
- - Pride International Inc. 139,200 1,627
- - Marine Drilling Co., Inc. 86,200 1,482
- - Seitel, Inc. 65,700 1,142
- - Global Industries Ltd. 90,700 1,117
- - Veritas DGC Inc. 47,500 962
- - Evergreen Resources, Inc. 39,400 896
- - Trico Marine Services, Inc. 67,500 536
- - Calpine Corp. 6,200 264
- - Stolt Comex Seaway SA 13,600 170
- - SEACOR SMIT Inc. 1,800 95
----------
39,856
----------
MATERIALS & PROCESSING (3.9%)
Elcor Corp. 389,800 15,056
- - Cytec Industries, Inc. 400,000 11,375
General Cable Corp. 731,400 10,880
- - Service Experts, Inc. 564,800 9,143
Cambrex Corp. 250,000 6,406
Valmont Industries, Inc. 331,100 5,546
Wellman, Inc. 384,500 5,503
- - Stillwater Mining Co. 193,800 5,487
- - Fairfield Communities, Inc. 323,200 4,161
OM Group, Inc. 33,400 1,215
- - American Buildings Co. 32,500 1,170
Owens Corning 25,600 912
- - Sunterra Corp. 84,700 911
Wausau-Mosinee Paper Corp. 50,720 837
- - Mohawk Industries, Inc. 25,500 822
Lilly Industries Inc. Class A 45,500 796
- - Armco, Inc. 149,400 766
- - U.S. Can Corp. 45,000 762
Commonwealth Industries Inc. 66,300 638
BMC Industries, Inc. 69,700 623
Spartech Corp. 26,000 618
Optical Coating Laboratory, Inc. 10,000 616
Northland Cranberries, Inc. 70,400 563
- - Catellus Development Corp. 36,400 560
- - The Carbide/Graphite Group, Inc. 39,300 511
N L Industries, Inc. 35,400 418
Chesapeake Corp. of Virginia 10,700 348
National Steel Corp. Class B 33,400 313
Culp, Inc. 33,800 279
Freeport-McMoRan Copper &
Gold Inc. Class B 15,100 231
- - Zoltek Cos., Inc. 30,900 214
- - American Pad & Paper Co. 107,600 188
Lindberg Corp. 13,600 160
- - Unifi, Inc. 9,000 126
- - Buckeye Technology, Inc. 5,400 78
Belden, Inc. 1,800 35
Schnitzer Steel Industries, Inc.
Class A 1,800 26
- - Nortek, Inc. 800 23
----------
88,316
----------
PRODUCER DURABLES (6.4%)
- - Mettler-Toledo International Inc. 1,097,210 28,665
- - American Power
Conversion Corp. 770,500 25,427
- - Palm Harbor Homes, Inc. 693,108 13,949
- - Oak Industries, Inc. 253,500 10,584
- - American Homestar Corp. 870,150 6,091
Donaldson Co., Inc. 261,000 5,840
- - Com21, Inc. 184,500 5,743
- - CUNO Inc. 300,800 5,508
- - DuPont Photomasks, Inc. 119,200 5,215
- - Republic Services, Inc. Class A 214,100 4,402
Lindsay Manufacturing Co. 203,050 4,328
- - Gemstar International Group Ltd. 39,900 4,204
- - Kellstrom Industries, Inc. 185,935 3,428
- - PRI Automation, Inc. 101,800 2,526
- - Novellus Systems, Inc. 36,700 1,734
- - Vivid Technologies, Inc. 394,500 1,504
Mark IV Industries, Inc. 65,700 1,174
- - Antec Corp. 41,400 1,123
- - Gardner Denver Inc. 58,600 1,044
Ametek Aerospace Products Inc. 43,200 986
Scotsman Industries, Inc. 47,700 963
Graco, Inc. 29,600 932
- - Knoll, Inc. 37,100 890
Herman Miller, Inc. 43,100 859
Diebold, Inc. 35,300 849
Pittway Corp. Class A 30,200 797
Standard Pacific Corp. 52,700 728
- - Dionex Corp. 17,300 709
- - Kulicke & Soffa Industries, Inc. 29,500 675
- - Esterline Technologies Corp. 47,000 664
- - Orbital Sciences Corp. 29,300 617
- - Electro Scientific Industries, Inc. 15,500 591
Inter-Tel, Inc. 41,600 577
Pulte Corp. 24,400 552
Superior Telecom Inc. 21,750 542
- - Veeco Instruments, Inc. 13,100 504
Pentair, Inc. 8,000 376
Oakwood Homes Corp. 25,500 354
- - Interdigital Communications Corp. 76,000 347
Cordant Technologies, Inc. 7,500 346
- - inTEST Corp. 52,500 345
- - Osmonics, Inc. 32,600 308
- - GTS Duratek, Inc. 33,900 174
- - Dynatech Corp. 12,650 41
- - Thermo Instrument Systems, Inc. 3,000 39
- - Scott Technologies, Inc. 2,000 37
- - ORBIT/FR, Inc. 12,600 22
- - Transcrypt International, Inc. 8,400 19
----------
147,332
----------
TECHNOLOGY (16.0%)
- - RealNetworks, Inc. 165,850 36,736
- - PairGain Technologies, Inc. 2,079,100 26,638
- - Rational Software Corp. 613,700 18,181
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -----------------------------------------------------------------------
<S> <C> <C>
- - Acxiom Corp. 678,840 $ 17,141
- - Sterling Software, Inc. 809,200 16,740
- -(1)VideoServer, Inc. 1,155,500 13,433
- - Avant! Corp. 871,200 11,761
- - Pinnacle Systems, Inc. 204,000 11,093
- - American Tower Corp. Class A 500,000 10,594
- - Cognos Inc. 425,800 10,246
- - Semtech Corp. 280,000 9,135
- - Exchange Applications, Inc. 280,000 8,260
- - Genesys Telecommunications
Laboratories, Inc. 460,000 8,223
- - BroadVision, Inc. 131,600 7,641
- - Electronics for Imaging, Inc. 156,300 7,395
- - Advanced Fibre
Communications, Inc. 900,000 6,863
- - Melita International Corp. 523,700 6,481
- - CSG Systems International, Inc. 165,800 6,404
- - Macrovision Corp. 134,500 6,322
- - Atmel Corp. 322,900 5,893
- - Wind River Systems, Inc. 375,000 5,625
- - Transaction Systems
Architects, Inc. 171,500 5,563
- - Mercury Interactive Corp. 184,600 5,203
- - Caere Corp. 505,500 5,181
- - Maxtor Corp. 905,200 5,120
- - Remedy Corp. 270,700 4,737
- - Legato Systems, Inc. 116,900 4,727
- - Aspect Development, Inc. 422,700 4,623
- - PSINet, Inc. 82,300 4,156
- - Micromuse Inc. 120,600 4,153
- - The Cherry Corp. Class A 302,500 4,122
- - Rhythms NetConnections Inc. 43,900 3,622
- - SeaChange International, Inc. 350,000 3,500
- - PMC Sierra Inc. 36,300 3,480
- - BMC Software, Inc. 78,991 3,402
- - Remec, Inc. 244,500 3,163
- - Extreme Networks, Inc. 47,100 2,611
- - Oak Technology, Inc. 865,000 2,568
- - SERENA Software, Inc. 236,000 2,419
- - Applied Micro Circuits Corp. 45,000 2,399
- - Best Software, Inc. 175,300 2,268
- - MTI Technology Corp. 265,500 2,190
- - Veritas Software Corp. 23,775 1,688
- - Sensormatic Electronics Corp. 133,600 1,603
- - InVision Technologies, Inc. 241,500 1,540
- - Alliant Techsystems, Inc. 17,800 1,457
- - SPR Inc. 258,475 1,357
- - National Instruments Corp. 36,650 1,246
- - Sapient Corp. 18,200 1,142
- - Black Box Corp. 33,200 1,137
- - Symantec Corp. 56,800 1,129
- - DII Group, Inc. 34,100 1,057
- - American Management
Systems, Inc. 30,500 1,048
EG&G, Inc. 32,500 1,016
- - TranSwitch Corp. 22,300 981
- - IKOS Systems, Inc. 155,200 951
- - Anixter International Inc. 59,500 937
- - Ciber, Inc. 48,500 915
- - Sanmina Corp. 13,600 903
- - Comverse Technology, Inc. 13,950 895
- - Tech-Sym Corp. 39,000 856
- - Ascend Communications, Inc. 8,575 829
- - Safeguard Scientifics, Inc. 10,100 818
Symbol Technologies, Inc. 17,100 817
- - VeriSign, Inc. 6,700 771
- - Siebel Systems, Inc. 19,552 752
- - Project Software &
Development, Inc. 33,500 737
- - VLSI Technology, Inc. 39,000 736
- - SCI Systems, Inc. 19,100 727
- - Informix Corp. 86,400 626
- - Adtran, Inc. 35,900 624
- - Complete Business Solutions, Inc. 26,367 590
- - Burr-Brown Corp. 21,700 575
- - American Precision Industries Inc. 40,700 468
- - Technology Solutions Co. 58,950 468
- - Metro Information Services, Inc. 20,300 438
- - SMART Modular
Technologies, Inc. 28,400 380
Newport News Shipbuilding Inc. 14,400 377
- - Cyberoptics Corp. 30,900 363
- - Planar Systems, Inc. 43,300 319
Computer Task Group, Inc. 16,200 302
- - CHS Electronics, Inc. 58,200 295
- - SPSS, Inc. 15,600 269
- - Symix Systems, Inc. 31,400 247
Autodesk, Inc. 7,656 228
- - Mpath Interactive, Inc. 5,200 205
- - Intelligroup, Inc. 19,700 133
- - Xircom, Inc. 5,500 124
- - MetaCreations Corp. 12,200 84
- - Aspen Technologies, Inc. 9,700 83
- - Concord Communications, Inc. 1,300 58
- - ENCAD, Inc. 6,900 42
- - Plexus Corp. 900 30
- - Kronos, Inc. 800 27
----------
365,412
----------
UTILITIES (4.2%)
- - EchoStar Communications Corp. 243,100 24,386
TCA Cable TV, Inc. 354,000 17,634
- - McLeodUSA, Inc. Class A 200,000 11,213
- - Gilat Satellite Networks Ltd. 200,000 10,400
- - NTL Inc. 120,000 9,150
- - Adelphia Communications Corp.
Class A 89,800 6,129
- - Intermedia Communications Inc. 172,000 5,536
- - Metrocall, Inc. 440,710 1,377
Aliant Communications, Inc. 26,400 1,168
- - Jones Intercable Inc. 21,400 992
- - Commonwealth Telephone
Enterprises, Inc. 25,940 979
- - SkyTel Communications, Inc. 55,200 945
- - El Paso Electric Co. 113,300 906
- - U.S. Cellular Corp. 18,900 897
Nevada Power Co. 32,600 841
- - IXC Communications, Inc. 18,000 713
New Jersey Resources Corp. 18,800 693
Rochester Gas & Electric Corp. 26,600 678
Avista Corp. 37,800 567
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- -----------------------------------------------------------------------
<S> <C> <C>
KN Energy, Inc. 26,850 $ 554
- - Western Wireless Corp. Class A 6,100 250
- - UniSource Energy Corp. 17,800 192
Davel Communications, Inc. 15,000 122
Madison Gas & Electric Co. 1,500 28
----------
96,350
----------
OTHER (1.3%)
Teleflex Inc. 400,000 17,425
- - Thermo Electron Corp. 600,000 9,638
Commercial Intertech Corp. 66,300 849
- - PEC Israel Economic Corp. 25,000 761
Kaman Corp. Class A 42,600 559
GenCorp, Inc. 7,100 164
----------
29,396
----------
- -----------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $1,731,120) 2,087,345
- -----------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK
- -----------------------------------------------------------------------
- -(2)SGW Holding Corp.
0.00% Cvt. Pfd.
(COST $5,000) 483,840 968
- -----------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------
FACE
AMOUNT
(000)
- -----------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (10.5%)+
- -----------------------------------------------------------------------
U.S. TREASURY BILL
(3) 4.35%, 7/1/1999 $ 4,500 4,467
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.89%, 5/3/1999 209,582 209,582
4.91%, 5/3/1999--Note G 27,353 27,353
- -----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $241,402) 241,402
- -----------------------------------------------------------------------
TOTAL INVESTMENTS (101.7%)
(COST $1,977,522) 2,329,715
- -----------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------
MARKET
VALUE*
(000)
- -----------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (-1.7%)
- -----------------------------------------------------------------------
Other Assets--Note C $ 41,901
Liabilities--Note G (81,365)
-----------
(39,464)
- -----------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------
Applicable to 40,400,132 outstanding
$.001 par value shares of
beneficial interest
(unlimited authorization) $2,290,251
=======================================================================
NET ASSET VALUE PER SHARE $56.69
=======================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security.
+ The fund invests a portion of its cash reserves in equity markets through
the use of index futures contracts. After giving effect to futures
investments, the fund's effective common stock and temporary cash
investment positions represent 94.5% and 7.2%, respectively, of net assets.
See Note F in Notes to Financial Statements.
(1) Considered an affiliated company as the fund owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $60,771,000.
(2) Restricted Security.
(3) Security segregated as initial margin for open futures contracts.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AT APRIL 30, 1999, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,745,316 $43.20
Undistributed Net
Investment Income 3,912 .10
Accumulated Net Realized Gains 183,186 4.53
Unrealized Appreciation--Note F
Investment Securities 352,193 8.72
Futures Contracts 5,644 .14
- ----------------------------------------------------------
NET ASSETS $2,290,251 $56.69
==========================================================
</TABLE>
16
<PAGE> 19
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. If the
fund invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
EXPLORER FUND
SIX MONTHS ENDED APRIL 30, 1999
(000)
- ----------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 8,599
Interest 5,304
Security Lending 272
----------
Total Income 14,175
----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 2,592
Performance Adjustment 155
The Vanguard Group--Note C
Management and Administrative 4,991
Marketing and Distribution 234
Custodian Fees 55
Auditing Fees 4
Shareholders' Reports 88
Trustees' Fees and Expenses 2
----------
Total Expenses 8,121
Expenses Paid Indirectly--Note D (107)
----------
Net Expenses 8,014
- ----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 6,161
- ----------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold* 177,191
Futures Contracts 14,404
- ----------------------------------------------------------------------------------------------------
REALIZED NET GAIN 191,595
- ----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 130,812
Futures Contracts (1,941)
- ----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 128,871
- ----------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $326,627
====================================================================================================
</TABLE>
*Dividend income and realized net loss from affiliated companies were $124,000
and $5,000, respectively.
17
<PAGE> 20
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
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, 1999 OCT. 31, 1998
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 6,161 $ 9,098
Realized Net Gain 191,595 2,444
Change in Unrealized Appreciation (Depreciation) 128,871 (282,104)
----------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 326,627 (270,562)
----------------------------------
DISTRIBUTIONS
Net Investment Income (8,697) (10,298)
Realized Capital Gain (13,054) (240,982)
----------------------------------
Total Distributions (21,751) (251,280)
----------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 278,796 763,144
Issued in Lieu of Cash Distributions 21,406 247,188
Redeemed (510,744) (842,473)
----------------------------------
Net Increase (Decrease) from Capital Share Transactions (210,542) 167,859
- -------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 94,334 (353,983)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 2,195,917 2,549,900
----------------------------------
End of Period $2,290,251 $2,195,917
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 5,201 13,941
Issued in Lieu of Cash Distributions 404 4,672
Redeemed (9,474) (15,267)
----------------------------------
Net Increase (Decrease) in Shares Outstanding (3,869) 3,346
=========================================================================================================================
</TABLE>
18
<PAGE> 21
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
EXPLORER FUND
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------
THROUGHOUT EACH PERIOD APRIL 30, 1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $49.60 $62.31 $55.44 $51.05 $45.99 $49.37
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .15 .21 .26 .26 .24 .16
Net Realized and Unrealized Gain (Loss)
on Investments 7.44 (6.82) 9.71 8.37 7.25 1.77
-------------------------------------------------------------------------
Total from Investment Operations 7.59 (6.61) 9.97 8.63 7.49 1.93
-------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.20) (.25) (.27) (.24) (.17) (.14)
Distributions from Realized Capital Gains (.30) (5.85) (2.83) (4.00) (2.26) (5.17)
-------------------------------------------------------------------------
Total Distributions (.50) (6.10) (3.10) (4.24) (2.43) (5.31)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $56.69 $49.60 $62.31 $55.44 $51.05 $45.99
===============================================================================================================================
TOTAL RETURN 15.37% -11.22% 18.93% 17.97% 17.46% 4.49%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $2,290 $2,196 $2,550 $2,186 $1,476 $1,112
Ratio of Total Expenses to
Average Net Assets 0.71%* 0.62% 0.62% 0.63% 0.68% 0.70%
Ratio of Net Investment Income to
Average Net Assets 0.54%* 0.37% 0.45% 0.51% 0.52% 0.39%
Portfolio Turnover Rate 70%* 72% 84% 51% 66% 82%
===============================================================================================================================
</TABLE>
*Annualized.
19
<PAGE> 22
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: Equity securities 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. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair 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. FUTURES: The fund uses S&P MidCap 400 and Russell 2000 Index futures
contracts to a limited extent, with the objectives of maintaining full exposure
to the stock market while maintaining liquidity. The fund may purchase or sell
futures contracts to achieve a desired level of investment, whether to
accommodate portfolio turnover or cash flows from capital shares transactions.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks held by the fund and the
prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
6. 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., Wellington Management Company, LLP, and
Chartwell Investment Partners provide investment advisory services to the fund
for fees calculated at an annual percentage rate of average net assets. The
basic fees of Granahan and Wellington are subject to quarterly adjustments based
on performance for the preceding three years relative to the Russell 2000 Index
and an index of the stocks held by the largest small-capitalization stock mutual
funds. For the six months ended April 30, 1999, the aggregate investment
advisory fee
20
<PAGE> 23
represented an effective annual basic rate of 0.23% of the fund's average net
assets before an increase of $155,000 (0.01%) based on performance.
The Vanguard Group provides investment advisory services to a portion of
the fund on an at-cost basis; the fund paid Vanguard advisory fees of $79,000
for the six months ended April 30, 1999.
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 Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At April 30, 1999, the fund had contributed capital of $350,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net
assests and 0.5% of Vanguard's capitalization. The fund's Trustees and officers
are also Directors and officers of Vanguard.
D. Vanguard has asked the fund's investment advisers to direct certain fund
trades, subject to obtaining the best price and execution, to brokers who have
agreed to rebate to the fund part of the commissions generated. Such rebates are
used solely to reduce the fund's administrative expenses. The fund's custodian
bank has also agreed to reduce its fees when the fund maintains cash on deposit
in the non-interest-bearing custody account. For the six months ended April 30,
1999, directed brokerage and custodian fee offset arrangements reduced expenses
by $101,000 and $6,000, respectively. The total expense reduction represented an
effective annual rate of 0.01% of the fund's average net assets.
E. During the six months ended April 30, 1999, the fund purchased $718,977,000
of investment securities and sold $910,206,000 of investment securities, other
than temporary cash investments.
F. At April 30, 1999, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $352,193,000, consisting
of unrealized gains of $519,281,000 on securities that had risen in value since
their purchase and $167,088,000 in unrealized losses on securities that had
fallen in value since their purchase.
At April 30, 1999, the aggregate settlement value of open futures
contracts expiring in June 1999, and the related unrealized appreciation were:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
(000)
------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE APPRECIATION
----------------------------------------------------------------------
<S> <C> <C> <C>
S&P MidCap 400 Index 108 $21,389 $1,473
Russell 2000 Index 257 55,647 4,171
----------------------------------------------------------------------
</TABLE>
G. The market value of securities on loan to broker/dealers at April 30, 1999,
was $24,604,000, for which the fund held cash collateral of $27,353,000. Cash
collateral received is invested in repurchase agreements.
21
<PAGE> 24
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & Johnson-Merck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
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, Banco Bilbao Gestinova, Baker Fentress &
Co., The Jeffrey Co., and Southern New England Telecommunications 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.,
NACCO Industries, and Newfield Exploration Co.
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. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell
Company is the owner of trademarks and copyrights relating to the
Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are
trademarks of Wilshire Associates.
<PAGE> 25
VANGUARD
MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
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
www.vanguard.com
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 you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
Q242-06/16/1999
(C) 1999 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing
Corporation, Distributor.
