<PAGE>
VANGUARD(R)
EXPLORER
FUND
Annual Report
October 31, 1999
[SHIP GRAPHIC]
[A MEMBER OF THE VANGUARD GROUP]
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FELLOW SHAREHOLDERS:
TWO ROADS DIVERGED IN A WOOD, AND I--I TOOK THE ONE LESS TRAVELED BY,
AND THAT HAS MADE ALL THE DIFFERENCE.
I can think of no better words than those of Robert Frost to begin this special
letter to our shareholders, who have placed such extraordinary trust in me and
in Vanguard over the past quarter century. When the firm was founded 25 years
ago, we deliberately took a new road to managing a mutual fund enterprise.
Instead of having the funds controlled by an outside management company with its
own financial interests, the Vanguard funds--there were only 11 of them
then--would be controlled by their own shareholders and operate solely in their
financial interests. The outcome of our unprecedented decision was by no means
certain. We described it then as "The Vanguard Experiment."
Well, I guess it's fair to say it's an experiment no more. During the
past 25 years, the assets we hold in stewardship for investors have grown from
$1 billion to more than $500 billion, and I believe that our reputation for
integrity, fair-dealing, and sound investment principles is second to none in
this industry. Our staggering growth--which I never sought--has come in
important part as a result of the simple investment ideas and basic human values
that are the foundation of my personal philosophy. I have every confidence that
they will long endure at Vanguard, for they are the right ideas and right
values, unshakable and eternal.
While Emerson believed that "an institution is the lengthened shadow of
one man," Vanguard today is far greater than any individual. The Vanguard crew
has splendidly implemented and enthusiastically supported our founding ideas and
values, and deserves the credit for a vital role in forging our success over the
years. It is a dedicated crew of fine human beings, working together in an
organization that is well prepared to press on regardless long after I am gone.
Creating and leading this enterprise has been an exhilarating run. Through it
all, I've taken the kudos and the blows alike, enjoying every moment to the
fullest, and even getting a second chance at life with a heart transplant three
years ago. What more could a man ask?
While I shall no longer be serving on the Vanguard Board, I want to
assure you that I will remain vigorous and active in a newly created Vanguard
unit, researching the financial markets, writing, and speaking. I'll continue to
focus whatever intellectual power and ethical strength I possess on my mission
to assure that mutual fund investors everywhere receive a fair shake. In the
spirit of Robert Frost:
BUT I HAVE PROMISES TO KEEP, AND MILES TO GO BEFORE I SLEEP, AND MILES
TO GO BEFORE I SLEEP.
You have given me your loyalty and friendship over these long years,
and I deeply appreciate your thousands of letters of support. For my part, I
will continue to keep an eagle eye on your interests, for you deserve no less.
May God bless you all, always.
/S/
JCB
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CONTENTS
REPORT FROM THE CHAIRMAN 1
AFTER-TAX RETURNS REPORT 5
THE MARKETS IN PERSPECTIVE 6
REPORT FROM THE ADVISERS 8
FUND PROFILE 10
PERFORMANCE SUMMARY 12
FINANCIAL STATEMENTS 13
REPORT OF INDEPENDENT ACCOUNTANTS 25
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[PHOTO OF JOHN J. BRENNAN]
REPORT FROM THE CHAIRMAN
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Small-capitalization stocks provided solid total returns during the 12 months
ended October 31, 1999, and Vanguard Explorer Fund earned 25.1% for its 1999
fiscal year.
The table at right compares the Explorer Fund's total return (capital
change plus reinvested dividends) for the fiscal year with those of the average
small-capitalization growth mutual fund and the unmanaged Russell 2000 Index, a
measure of small-cap stocks. The table also provides the total return for the
Small Company Growth Fund Stock Index, which is based on the stocks held by the
nation's largest small-cap mutual funds. As you can see, your fund's return
easily outpaced the returns of its index benchmarks but fell well short of the
return of its average peer, which generally held a bigger stake in the
market-leading technology sector.
TOTAL RETURNS
FISCAL YEAR ENDED
OCTOBER 31, 1999
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Vanguard Explorer Fund 25.1%
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Average Small-Cap Growth Fund* 46.3%
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Russell 2000 Index 14.9%
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Small Company Growth Fund Stock Index 16.6%
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*Derived from data provided by Lipper Inc.
The fund's total return is based on net asset values of $49.60 per
share on October 31, 1998, and $61.49 per share on October 31, 1999, and is
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. We
estimate that the fund will make a distribution of approximately $8.00 per share
from net realized capital gains in December 1999.
FINANCIAL MARKETS IN REVIEW
The fiscal year ended October 31 comprised two distinctly different halves. For
most of the first half, stock prices worldwide were rebounding strongly from a
slump in the summer of 1998 that had been prompted by economic crises in Asia,
Russia, and parts of Latin America. The stock market's comeback was aided by a
pickup in global economic activity and by interest rate reductions by the
Federal Reserve Board that fall. These developments--and the continued
ebullience of the U.S. economy--erased investors' fears that the troubles abroad
would depress business activity and profits at home. Even though interest rates
rose during the six months from October 31 through April 30, the stock market,
as measured by the Wilshire 5000 Total Market Index, gained 22.8% and the S&P
500 Index was up 22.3%.
However, during the second half of our fiscal year, most stock prices
stagnated or fell (with the notable exception of technology stocks). The
Wilshire 5000 advanced 2.3% during the second half, bringing its full-year
return to 25.7%. The S&P 500's second-half return of 2.7% brought it to an
identical 25.7% return for our fiscal year. Large-capitalization growth stocks
were the strongest market sector, led by simply stupendous gains for a number of
technology stocks, such as QUALCOMM (700%), Sun Microsystems (263%), Cisco
Systems (135%), Microsoft (75%), and Intel (74%). The growth stocks within the
S&P 500 gained 31.6%, while value stocks within the index returned 19.0% as a
group.
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Overall, small-cap stocks were left in the wake of the big stocks: The
Russell 2000 Index gained 14.9% for the 12 months. However, the difference
between the returns of the index's growth and value stocks was enormous. The
index's growth component--led by the 70% return of technology stocks--gained
29.3%, versus a paltry 0.7% return for the index's value stocks. As with large
stocks, the gains of small stocks were concentrated in the first half of the
year: The Russell 2000 Index advanced 15.2% in the first six months, but
declined -0.3% thereafter.
One drag on the stock market in general was a strong uptrend in
interest rates that began in February. The Federal Reserve encouraged this move,
acting in late June and again in August to boost short-term interest rates by a
total of 0.5 percentage point. Fears of a global economic slump were supplanted
by worries that economic growth--especially in the United States--was so strong
that it would cause wages and commodity prices to surge, pushing up inflation.
For the full year, yields on long-term U.S. Treasury bonds rose
significantly. The yield on the 30-year Treasury increased exactly 1 percentage
point (100 basis points) to 6.16% on October 31, 1999. Bond prices, which move
in the opposite direction from interest rates, fell during the year. The Lehman
Brothers Aggregate Bond Index, a benchmark for taxable bonds, eked out a return
of just 0.5% for the year, as its interest income of 6.2% only barely offset
price declines of -5.7%.
FISCAL 1999 PERFORMANCE OVERVIEW
Vanguard Explorer Fund's return of 25.1% for the 12 months was excellent on an
absolute basis and relative to unmanaged small-cap indexes, but it trailed the
astonishing 46.3% return of the average small-cap growth mutual fund.
Both the fund's advantage over the indexes and its shortfall versus the
average peer can be explained by the performance of small technology stocks,
which, as noted earlier, advanced 70% during the fiscal year. Simply put, the
more tech stocks you owned the better your return. Relative to the Russell 2000
Index, the Explorer Fund had a heavier stake in technology shares (17% of the
fund's average assets, versus 15% for the index). However, your fund's
commitment to technology was about half that of the average small-cap stock
fund.
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TOTAL ASSETS MANAGED
AS OF OCTOBER 31, 1999
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Granahan Investment Management, Inc. $1,139 46%
WELLINGTON MANAGEMENT COMPANY, LLP 712 29
Chartwell Investment Partners 280 11
Vanguard Core Management Group 244 10
Cash Reserve* 109 4
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Total $2,484 100%
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*This cash reserve is invested in equity index futures to simulate investment in
stocks; each adviser may also maintain a modest cash reserve.
Our outperformance against the Russell 2000 Index was also the result
of excellent stock selection by our advisers within the financial services
group, the utilities sector, and the consumer discretionary sector--which at 29%
of Explorer's stock holdings represents the fund's biggest sector weighting. On
the negative side, our relatively big stake in the poorly-performing health-care
segment (15% of stock holdings, versus 9% in the index) hurt our return.
Four investment advisers select stocks for the Explorer Fund. The table
above shows the share of assets supervised by each at the end of the fiscal
year.
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LONG-TERM PERFORMANCE OVERVIEW
An annual review of a mutual fund's record should also include a look at its
longer-term performance. The adjacent table presents the average annual returns
of the Explorer Fund and its comparative benchmarks for the past ten years. It
also presents the results of hypothetical $10,000 investments made a decade ago
in the fund, the average fund in its peer group, the Russell 2000 Index, and the
Small Company Growth Fund Stock Index.
As you can see, your fund's return came up short versus its average
peer but compared favorably with those of its unmanaged index benchmarks. Over
this period, a $10,000 initial investment in the Explorer Fund would have grown
to $33,534, compared with $44,666 in the average small-cap growth fund. During
the past decade, the fund's average peer tended to invest in stocks that are
larger than those held by Explorer, a powerful advantage during a stretch that
was very favorable to larger stocks. (The large-cap DOMINATED S&P 500 INDEX
RECORDED AN ANNUALIZED RETURN OF 17.8% DURING THE DECADE, 11/2 times the return
of the small-cap Russell 2000 Index.) Explorer stays true to its small-cap
charter, so topping the return of our unmanaged market index is no small feat.
An index does not incur the operating and transaction costs that all mutual
funds must bear, and therefore is immune to the drag these costs place on a
fund's return. We are aided in our quest for superior performance by our low
costs. Vanguard Explorer Fund's expense ratio (annual expenses as a percentage
of average net assets) was 0.74% in fiscal 1999, nearly 1 percentage point less
than the 1.63% charged by our average peer (based on Lipper Inc. data).
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TOTAL RETURNS
10 YEARS ENDED OCTOBER 31, 1999
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AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
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Vanguard Explorer Fund 12.9% $33,534
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Average Small-Cap Growth Fund 16.1% $44,666
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Russell 2000 Index 11.7% $30,114
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Small Company Growth Fund Stock Index* 11.5% $29,780
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*Russell 2000 Index through July 1997;
Small Company Growth Fund Stock Index thereafter.
Though the past decade was generally a good one for the equity markets,
investors must be aware that stocks--particularly small-cap stocks--can be
volatile. Indeed, Vanguard Explorer Fund's ten-year record includes a gain of
64.6% (fiscal 1991) as well as a decline of -22.9% (fiscal 1990). Investing in
the financial markets can be rewarding, but there is no guarantee that the ride
will be smooth.
IN SUMMARY
The divergences in the U.S. stock market in fiscal 1999 between returns for
small and large stocks--and between first- and second-half results--are useful
reminders of the market's unpredictability.
Given the risk of wide short-term fluctuations in returns from
different segments of the financial markets, I repeat our longstanding
recommendation that investors hold balanced, diversified portfolios of stock
funds, bond funds, and short-term reserves in proportions suitable to their own
investment time horizons, goals, and financial situa-
3
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tions Such diversification can lessen some of the jolts you're sure to encounter
on the road toward your financial goals. In short, I advise preparing an
investment plan and sticking with it.
John J. Brennan
Chairman and Chief Executive Officer
November 17, 1999
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A Note of Thanks to Our Founder
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As you may have read on the inside cover of our report, our founder, John C.
Bogle, is retiring December 31, 1999, as Senior Chairman of our Board after
nearly 25 years of devoted service to Vanguard and our shareholders. Vanguard
investors have Jack to thank for creating a truly mutual mutual fund company
that operates solely in the interest of its fund shareholders. And mutual fund
investors everywhere have benefited from his energetic efforts to improve this
industry. Finally, on a personal note, I am forever grateful to Jack for giving
me the opportunity to join this great company in 1982.
4
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A REPORT ON YOUR FUND'S AFTER-TAX RETURNS
Beginning with this annual report, Vanguard is pleased to provide a review of
the Explorer Fund's after-tax performance. The figures on this page demonstrate
the considerable impact that federal income taxes can have on a fund's
return--an important consideration for investors who own mutual funds in taxable
accounts. While the pretax return is most often used to tally a fund's
performance, the fund's after-tax return, which accounts for taxes on
distributions of capital gains and income dividends, is a better representation
of the return that many investors actually received. If you own the Explorer
Fund in a tax-deferred account such as an individual retirement account or a
401(k), this information does not apply to you. Such accounts are not subject to
current taxes.
The table below presents the pretax and after-tax returns for your fund
and an appropriate peer group of mutual funds. Two things to keep in mind:
o The after-tax return calculations use the top federal income tax
rates in effect at the time of each distribution. The tax burden, therefore,
would be somewhat less, and the after-tax return somewhat more, for those in
lower tax brackets.
o The peer funds' returns are based on data from Morningstar, Inc.
(Elsewhere in this report, returns for comparable mutual funds are based on data
from Lipper Inc., which differ somewhat.)
<TABLE>
<CAPTION>
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AVERAGE ANNUAL RETURNS: PRETAX AND AFTER-TAX
PERIODS ENDED OCTOBER 31, 1999
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<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX
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Vanguard Explorer Fund 25.1% 24.8% 12.9% 11.0% 12.9% 11.3%
Average Small Growth Fund* 49.3 48.0 15.2 12.9 15.2 13.1
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*Based on data from Morningstar, Inc.
</TABLE>
As you can see, the Explorer Fund's pretax total return of 25.1% for
the 12 months ended October 31, 1999, was reduced by taxes to 24.8%. In other
words, for investors in the highest tax bracket, the fund's pretax return was
cut by just 0.3 percentage point. In comparison, the average small growth fund
earned a much higher pretax return of 49.3% and an after-tax return of 48.0%, a
difference of 1.3 percentage points.
Over the ten years ended October 31, 1999, the Explorer Fund lost less
to taxes (1.6 percentage points) than the average fund in Morningstar's
small-growth category (2.1 percentage points). However, Explorer's total return,
both before and after taxes, was lower.
We must stress that because many interrelated factors affect how
tax-friendly a fund may be, it's very difficult to predict tax efficiency. A
fund's tax efficiency can be influenced by its turnover rate, the types of
securities it holds, the accounting practices it uses when selling shares, and
the net cash flow it receives.
Finally, it's important to understand that our calculation does not
reflect the tax effect of your own investment activities. Specifically, you may
incur additional capital gains taxes--thereby lowering your after-tax return--if
you decide to sell all or some of your shares.
A NOTE ABOUT OUR CALCULATIONS: Pretax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.
5
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THE MARKETS IN PERSPECTIVE
YEAR ENDED OCTOBER 31, 1999
Caution followed exuberance in the U.S. stock market during the fiscal year
ended October 31, 1999. Improving economic conditions during the first half of
the year set off a raucous rally from the lows of summer 1998, when fears of a
global economic slump swept world markets. However, during the second half of
the fiscal year, interest rates kept rising, pulling down bond prices and
tempering the stock market's optimism. The notion of a global slump was replaced
by worries that economic growth might be so strong as to threaten a surge in
inflation.
U.S. STOCK MARKETS
A booming U.S. economy and solid increases in corporate earnings lifted the U.S.
stock market, especially during the first half of the fiscal year. The nation's
economic output increased by about 4% during the year. Consumer spending, which
accounts for roughly two-thirds of economic activity, powered the expansion.
Americans spent virtually every dollar they earned, encouraged by rising wealth
from a long bull market, plentiful employment, and rising incomes. (After-tax
personal income rose about 5% during the year; unemployment fell to a 30-year
low of 4.1% of the workforce in October.
<TABLE>
<CAPTION>
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AVERAGE ANNUAL RETURNS
PERIODS ENDED OCTOBER 31, 1999
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1 YEAR 3 YEARS 5 YEARS
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STOCKS
<S> <C> <C> <C>
S&P 500 Index 25.7% 26.5% 26.0%
Russell 2000 Index 14.9 9.4 12.6
Wilshire 5000 Index 25.7 23.8 23.8
MSCI EAFE Index 23.4 12.5 9.5
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BONDS
Lehman Aggregate Bond Index 0.5% 6.2% 7.9%
Lehman 10 Year Municipal Bond Index -1.2 5.2 7.0
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 4.6 5.0 5.2
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Other
Consumer Price Index 2.6% 2.0% 2.4%
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</TABLE>
From October 31, 1998, through April 30, 1999, the stock market rose
22.8%, as measured by the Wilshire 5000 Total Market Index. Investor confidence,
already high due to the booming economy, was bolstered by easier monetary
policy--the Federal Reserve cut short-term interest rates in November 1998 for
the third time in less than two months. But by summer, the Fed reversed course,
twice boosting its target for short-term interest rates to slow the economy and
reduce inflationary pressures.
Higher interest rates helped take the steam out of the stock market's
rally during the second half of the fiscal year, even though estimates of
corporate earnings kept rising. Higher rates tend to hurt stocks because many
investors use current interest rates to discount the value of a stock's
projected earnings and dividends. The higher the rate, the more future earnings
are discounted, and the less investors will pay for the stock now. After a
second-half gain of 2.3%, the Wilshire 5000 Index recorded a 25.7% return for
the full fiscal year.
Big stocks outperformed small stocks in fiscal 1999, and growth stocks
outpaced value stocks. The S&P 500 Index, which is dominated by
large-capitalization stocks, gained
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25.7%, while the small-cap Russell 2000 Index was up 14.9%. Growth stocks--whose
high prices in relation to earnings, book value, and dividends indicate high
expectations for future growth--lost none of their appeal, despite soaring
valuations for many. Both large- and small-cap growth issues gained roughly 30%,
while value stocks within the S&P 500 Index were up 19.0%, and the Russell
2000's value stocks had a scant 0.7% return.
The growth/value gap was due partly to the incredible performance of
technology stocks, most of which are classified as growth issues. Within the S&P
500 Index, tech stocks gained 67% during the fiscal year. Advances of about 30%
were recorded by retailers and other consumer-discretionary stocks and by the
utilities sector, where gains were concentrated in telecommunications stocks.
The only sector with a loss was consumer staples (-8%), where food and beverage
company stocks suffered from falling profits.
Other laggards were the auto & transportation sector (+6%) and health-care
stocks (+9%).
U.S. BOND MARKETS
Rapid economic growth was a help to the stock market but a hindrance to bonds.
Investors worried that, with unemployment so low, growth above the 2.5% to 3%
range would cause wages and prices to accelerate. Indeed, inflation did rise a
bit, although the Consumer Price Index was up a relatively modest 2.6% during
the 12-month period.
As mentioned, the Fed sought to combat inflationary pressures by
increasing short-term interest rates by a quarter-point on June 30 and again on
August 24. The bond market was already pushing up rates well before the Fed
acted. Yields of long-term U.S. Treasury bonds began rising significantly in
February. By fiscal year-end, the 30-year Treasury bond's yield was 6.16%, up
precisely 1 percentage point for the year. The 10-year Treasury's yield rose
1.41 percentage points, from 4.61% to 6.02%. Short-term interest rates didn't
rise as far, and 3-month Treasury bill yields were up 0.77 point to 5.09% at
fiscal year-end.
Rising interest rates mean lower prices for existing bonds, of course.
Price declines were higher for longer-term bonds, which are most sensitive to
changing rates. For the taxable bond market as a whole, as measured by the
Lehman Aggregate Bond Index, prices fell -5.7%, resulting in a total return of
just 0.5% for the fiscal year. High-yield (junk) bonds and mortgage-backed
securities posted higher returns than Treasuries.
INTERNATIONAL STOCK MARKETS
International markets soared in local currencies during the 12 months ended
October 31, with European stocks gaining 22.7% and Pacific-region stocks
advancing 37.8%. The U.S. dollar rose in value against most European currencies
but fell against the Japanese yen. For U.S. investors, the upshot of these
currency fluctuations was to trim returns from Europe to 12.7% in dollar terms
and to boost returns from the Pacific to 50.5%.
In the major developed international markets, U.S. investors earned
23.4%, as measured by the Morgan Stanley Capital International Europe,
Australasia, Far East (EAFE) Index. The bull markets in most nations stemmed
from a renewed appetite for risk on the part of investors encouraged by clear
signs of expanding business activity and generally easier monetary policy. Japan
and the rest of Asia, which were hit hardest by currency and economic crises in
1997 and 1998, saw the biggest gains. In Japan, massive government spending
programs appeared to be working--at least in the short run--to lift that nation
out of a recession.
Emerging markets, as measured by the Select Emerging Markets Free
Index, gained 34.1% for U.S. investors, as local returns of better than 70% were
cut nearly in half by weaker currencies in Latin America and eastern Europe.
7
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REPORT FROM THE ADVISERS
During the fiscal year ended October 31, 1999, Vanguard Explorer Fund recorded a
total return of 25.1%. This result was better than the returns for our unmanaged
index benchmarks--the Russell 2000 Index of small-capitalization stocks, which
gained 14.9%, and the Small Company Growth Fund Stock Index, which had a 16.6%
return. However, we lagged well behind the 46.3% return of the average small-cap
growth fund.
Although large-capitalization stocks in general continued to outperform
small-cap issues during the fiscal year ended October 31, the disparity was not
wide among large and small growth stocks. The growth component of the large-cap
Standard & Poor's 500 Index had a return of 31.6%, not far ahead of the 29.3%
return for the growth stocks in the Russell 2000 Index.
The gains among small-cap growth stocks were concentrated, to a
remarkable degree, in the technology and biotechnology groups. The technology
companies within the Russell 2000 Index were up 70%, with particularly powerful
increases for stocks related to the burgeoning Internet phenomenon. While the
biotechnology companies soared, other health-care stocks generally struggled,
and the broad health-care group gained less than 6%.
The economic and financial environment remained friendly to small-cap
stocks. Companies have had little trouble raising capital to finance their
growth (initial public offerings of stock have been abundant), inflation is
still relatively tame, and interest rates, though up from a year ago, are still
at reasonable levels by past standards. All of these factors are changeable, and
therefore bear watching, but there is no shortage of interesting investment
ideas.
Explorer Fund's biggest percentage gains came from the utilities
sector, where we had a small stake in fast-growing telecommunications-related
companies that returned an astounding 167%. Our technology holdings, which
accounted for about 17% of assets during the year, gained nearly 79%. Our
biggest sector weighting, the consumer-discretionary group, was up 21% for the
year. Financial-services stocks generally lagged the market, although our
holdings in this group--a significant sector for the fund--gained about 12% for
the year versus a 3% return for the financial stocks in the index. Our
selections in the materials & processing group had a tough year, declining about
- -9%. In relation to the Russell 2000 Index, we had subpar selections in health
care (our holdings gained 1%, versus 6% for the index) and producer-durables
companies (13% versus 21%).
CHANGES IN THE FUND'S HOLDINGS
During fiscal 1999, Explorer Fund had four significant changes in the sector
weightings of its holdings. Our allocations to the financial-services and
health-care groups fell by 5.4 and 5.3 percentage points, respectively, while
our commitments to the technology and consumer-discretionary groups rose by 8.3
and 5.6 points, respectively.
The decreases in our financial and health-care weightings reflected
both the lagging performance of
================================================================================
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.
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8
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these sectors and sales of some positions. However, within the health-care group
we added a number of biotechnology stocks because of their important role in
developing new drugs. In the emerging field of genomics, where companies are
making important discoveries related to the human genome, our holdings include
PE-Celera Genomics, Gene Logic, and Genset.
The technology sector's growth within the fund was due both to the
sector's powerful performance and to the addition of a number of names. We've
done well with some companies that are benefiting from the huge growth of
Internet activity. Our biggest gainer was RealNetworks, which provides streaming
media content over the 'Net. A number of our tech holdings are companies that
supply infrastructure to facilitate e-commerce or that otherwise derive their
revenue from serving Internet-based companies. These "derivative" plays seem to
us to have more reasonable valuations than pure Internet stocks. Examples
include Advanced Fibre Communications, PairGain Technologies, and such new names
as Bluestone Software, Proxicom, Silknet, Terayon, RSA Security, and WatchGuard.
Another powerful boost for the fund during the year came from stocks
positioned to benefit from deregulation in the telephone and cable-television
industries. EchoStar Communications, the satellite broadcaster, was a prime
example, appreciating more than 800%. In the same vein, Pegasus Communications,
which markets another satellite TV service, and LodgeNet Entertainment, which
provides cable service to hotels, were strong contributors to the fund.
In the consumer-discretionary category, a diverse group that includes
retailing, entertainment, and publishing stocks, our increased weighting was due
to new or augmented positions in a bevy of attractive stocks. Among this group
were Pacific Sunwear, Zale, Ames Department Stores, and NCO Group.
LOOKING FORWARD
In our letter a year ago, we wrote of "signs that the market is beginning to
recognize the compelling values in many small-cap stocks." The market certainly
did notice a fairly narrow group of "haves" (primarily technology and
biotechnology stocks). But a larger group of "have nots" did not attract much
interest. The question now is whether the market's focus in the small-cap arena
will remain narrow or broaden to other sectors. A broadening would seem to be in
order--more than two-thirds of our companies are reporting higher earnings. And
some beaten-down sectors, notably companies providing health-care services, seem
to offer compelling values.
However, to a remarkable degree, the small-cap segment of the market
has been rewarding not profits but, rather, revenue growth and even the mere
prospect of growth. Through the first ten months of calendar 1999, stocks of
companies that had reported losses were outperforming by a wide margin (41%
versus 8%) those stocks with positive earnings. A significant element in this
odd situation is the market's warm embrace of speculative Internet stocks.
GRANAHAN INVESTMENT MANAGEMENT, INC.
WELLINGTON MANAGEMENT COMPANY, LLP
CHARTWELL INVESTMENT PARTNERS
VANGUARD CORE MANAGEMENT GROUP
November 15, 1999
9
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FUND PROFILE
EXPLORER FUND
This Profile provides a snapshot of the fund's characteristics as of October 31,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 11.
PORTFOLIO CHARACTERISTICS
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EXPLORER RUSSELL 2000
- --------------------------------------------------------------------------------
Number of Stocks 589 1,919
Median Market Cap $1.0B $0.7B
Price/Earnings Ratio 19.9x 16.9x
Price/Book Ratio 3.1x 2.3x
Yield 0.4% 1.4%
Return on Equity 15.4% 13.7%
Earnings Growth Rate 21.9% 14.0%
Foreign Holdings 0.8% 0.0%
Turnover Rate 79% --
Expense Ratio 0.74% --
Cash Reserves 4.9% --
INVESTMENT FOCUS
- --------------------------------------------------------------------------------
[grid]
STYLE GROWTH
MARKET CAP SMALL
VOLATILITY MEASURES
- --------------------------------------------------------------------------------
Explorer S&P 500
- --------------------------------------------------------------------------------
R-Squared 0.62 1.00
Beta 0.98 1.00
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
- --------------------------------------------------------------------------------
Mettler-Toledo International Inc. 1.3%
Pacific Sunwear of California 1.3
Investment Technology Group, Inc. 1.2
EchoStar Communications Corp. 1.1
Zale Corp. 1.0
CSG Systems International, Inc. 1.0
Rational Software Corp. 0.9
RealNetworks, Inc. 0.9
Ames Department Stores, Inc. 0.9
Tidewater Inc. 0.8
- --------------------------------------------------------------------------------
Top Ten 10.4%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- --------------------------------------------------------------------------------
October 31, 1998 October 31, 1999
--------------------------------------------------
Explorer Explorer Russell 2000
Auto & Transportation 5.9% 7.3% 3.6%
Consumer Discretionary 23.4 29.0 17.3
Consumer Staples 0.3 0.1 2.6
Financial Services 16.9 11.5 21.4
Health Care 20.0 14.7 9.0
Integrated Oils 0.1 0.0 0.1
Other Energy 1.9 1.7 3.1
Materials & Processing 4.4 2.8 9.2
Producer Durables 7.5 7.6 8.2
Technology 13.6 21.9 18.0
Utilities 5.1 2.4 6.5
Other 0.9 1.0 1.0
- --------------------------------------------------------------------------------
10
<PAGE>
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 securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
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 35%.) 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 past year. 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.
11
<PAGE>
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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: OCTOBER 31, 1979-OCTOBER 31, 1999
- --------------------------------------------------------------------------------
EXPLORER FUND RUSSELL 2000
Fiscal Capital Income Total Total
Year Return Return Return Return
- --------------------------------------------------------------------------------
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 24.7 0.4 25.1 14.9
- --------------------------------------------------------------------------------
See Financial Highlights table on page 22 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: OCTOBER 31, 1989-OCTOBER 31, 1999
-----------------------------------------------------------------------
198910 10000 10000 10000
199001 9146 9122 9221
199004 9497 9808 9558
199007 10250 10593 9812
199010 7708 8107 7271
199101 9673 10338 8866
199104 11330 11796 10524
199107 11776 12492 10751
199110 12691 13450 11532
199201 14676 15329 12842
199204 13434 13936 12321
199207 13323 13715 12312
199210 14335 14224 12625
199301 15817 16444 14541
199304 14947 15603 14263
199307 15885 16776 15194
199310 17528 18235 16717
199401 18390 19588 17248
199404 17526 18257 16377
199407 16873 17315 15904
199410 18315 18716 16665
199501 18003 18991 16212
199504 19204 20446 17559
199507 21340 24498 19869
199510 21513 23985 19719
199601 22714 26059 21067
199604 25841 30554 23351
199607 23603 27725 21242
199610 25379 29794 22993
199701 26352 32683 25059
199704 23857 27028 23363
199707 28939 35238 28334
199710 30184 36247 29737
199801 29077 35987 29588
199804 32740 40245 33269
199807 28607 35689 28990
199810 26797 30535 26216
199901 31096 38830 29686
199904 30916 37532 30190
199907 33888 42295 31138
199910 33534 44666 30114
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1999
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years Final Value of a
$10,000 Investment
- --------------------------------------------------------------------------------
Explorer Fund 25.14% 12.86% 12.86% $33,534
Average Small-Cap
Growth Fund* 46.28 19.00 16.14 44,666
Russell 2000 Index 14.87 12.56 11.65 30,114
- --------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1999*
- --------------------------------------------------------------------------------
10 YEARS
--------------------------------
Inception
Date 1 Year 5 Years Capital Income Total
- --------------------------------------------------------------------------------
Explorer 12/11/1967 30.21% 12.33% 11.50% 0.66% 12.16%
Fund
- --------------------------------------------------------------------------------
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
12
<PAGE>
FINANCIAL STATEMENTS
OCTOBER 31, 1999
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, but may differ because certain
investments or transactions may be treated differently for financial statement
and tax purposes. 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.
- --------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (90.5%)+
- --------------------------------------------------------------------------------
AUTO & TRANSPORTATION (6.6%)
Tidewater Inc. 700,000 $ 21,000
o M.S. Carriers, Inc. 726,200 20,515
Polaris Industries, Inc. 465,600 16,267
Air Express International Corp. 550,000 14,644
o Heartland Express, Inc. 1,020,733 13,844
Wabash National Corp. 791,900 12,571
C.H. Robinson Worldwide, Inc. 293,500 9,924
o Swift Transportation Co., Inc . 507,600 8,851
o Covenant Transport, Inc. 545,000 8,379
Werner Enterprises, Inc. 500,000 7,969
Oshkosh Truck Corp. 245,000 7,365
o Atlas Air, Inc. 200,000 5,400
o Mesaba Holdings, Inc. 425,800 4,897
o Forward Air Corp. 138,200 4,068
Skywest, Inc. 50,600 1,256
o Landstar System 25,800 1,045
o Tower Automotive, Inc. 57,500 938
o Monaco Coach Corp. 38,100 895
Airborne Freight Corp. 38,500 828
o Stoneridge,Inc. 49,700 770
Borg-Warner Automotive, Inc. 17,000 671
Meritor Automotive, Inc. 38,600 654
o Mesa Air Group Inc. 86,300 485
o Halter Marine Group, Inc. 60,100 327
Petroleum Helicopters, Inc. 29,200 285
Pittston BAX Group 33,600 248
o Old Dominion Freight Line, Inc. 19,200 241
Wynn's International Inc. 12,800 199
o BE Avionics Inc. 13,700 138
o AirTran Holdings, Inc. 27,200 124
o National R. V. Holdings, Inc. 4,100 84
--------------------
164,882
--------------------
- --------------------------------------------------------------------------------
CONSUMER DISCRETIONARY (26.3%)
ADVERTISING AGENCIE (0.2%)
o Catalina Marketing Corp. 14,000 1,311
o Valassis Communications, Inc. 30,300 1,303
o ADVO, Inc. 36,600 647
o Snyder Communications, Inc. 26,500 338
CABLE TELEVISION SERVICES (2.1%)
o EchoStar Communications Corp. 460,000 28,462
o Insight Communications Co., Inc. 600,000 14,175
o PrimaCom AG 330,000 8,745
CASINOS & GAMBLING (1.0%)
Dover Downs Entertainment, Inc. 805,700 12,790
o Hollywood Park, Inc. 570,000 9,868
o MGM Grand, Inc. 46,871 2,390
o Scientific Games Holdings Corp. 46,400 806
COMMERCIAL INFORMATION SERVICES (0.1%)
o QRS Corp. 15,100 840
o Bell & Howell Co. 29,200 821
CONSUMER ELECTRONICS (0.5%)
o Activision, Inc. 496,300 7,010
o Proxicom, Inc. 48,500 3,722
Harman International Industries, Inc. 25,300 1,034
o Acclaim Entertainment Inc. 115,152 820
13
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
o MindSpring Enterprises, Inc. 21,000 539
o CNET, Inc. 5,200 245
CONSUMER PRODUCTS (0.8%)
Tupperware Corp. 540,900 10,717
o The Topps Co., Inc. 574,900 5,641
o The Yankee Candle Company, Inc. 102,000 1,556
o Blyth Industries, Inc. 43,900 1,100
o Sunglass Hut International, Inc. 76,700 925
Block Drug Co. Class A 13,000 453
Matthews International Corp. 700 18
COSMETICS
o Nu Skin Enterprises, Inc. 40,500 448
EDUCATION--SERVICES (0.4%)
o Learning Tree International, Inc. 400,000 7,350
o Sylvan Learning Systems, Inc. 69,500 899
o Education Management Corp. 50,600 481
o Computer Learning Centers, Inc. 51,920 159
ELECTRICAL--HOUSEHOLD APPLIANCES (0.3%)
o Gemstar International Group Ltd. 81,200 7,054
ENTERTAINMENT (1.4%)
O(1) LodgeNet Entertainment Corp. 700,000 12,862
o On Command Corp. 450,000 7,734
o AMC Entertainment, Inc. 500,000 6,187
o SFX Entertainment, Inc. 143,900 5,028
o Speedway Motorsports, Inc. 40,500 1,767
International Speedway Corp. 21,598 1,115
Gaylord Entertainment Co. Class A 66 2
FUNERAL PARLORS & CEMETERY
Stewart Enterprises, Inc. Class A 36,400 173
HOTEL/MOTEL (0.5%)
The Marcus Corp. 731,800 10,291
o Choice Hotel International, Inc. 86,300 1,294
o American Skiing Co. 73,000 342
HOUSEHOLD FURNISHINGS (1.0%)
Oneida Ltd. 648,700 15,366
o Furniture Brands International Inc. 350,000 6,781
Ethan Allen Interiors, Inc. 31,050 1,104
o Mohawk Industries, Inc. 30,400 697
o Department 56 Inc. 32,900 625
Westpoint Stevens, Inc. 31,900 604
o Ladd Furniture Inc. 10,600 212
JEWELRY--WATCHES & GEMS (0.5%)
(1) Movado Group, Inc. 539,000 11,858
Tiffany & Co. 15,400 916
LEISURE TIME (0.6%)
o Premier Parks Inc. 206,900 5,987
o Action Performance Cos., Inc. 253,000 5,147
o Vail Resorts Inc. 56,900 1,266
o Bally Total Fitness Holding Corp. 35,200 847
o Musicland Stores Corp. 97,800 764
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
MISCELLANEOUS BUSINESS & CONSUMER DISCRETIONARY (0.3%)
E.W. Scripps Co. Class A 170,000 7,852
PRINTING & COPYING SERVICES
o Mail-Well, Inc. 39,500 528
PUBLISHING--MISCELLANEOUS (0.4%)
o Playboy Enterprises, Inc. Class B 330,000 8,456
Meredith Corp. 26,900 960
o Consolidated Graphics, Inc. 18,600 372
PUBLISHING--NEWSPAPERS (0.3%)
Central Newspapers, Inc. 165,000 7,085
RADIO & TELEVISION BROADCASTING (1.3%)
o Pegasus Communications Corp. Class A 422,830 18,710
o Emmis Communications, Inc. 78,300 5,647
o Salem Communications Corp. 142,100 3,535
o Spanish Broadcasting System, Inc. 65,460 1,743
o Westwood One, Inc. 30,250 1,395
o King World Productions, Inc. 28,100 1,089
o World Wrestling Federation 11,300 273
Entertainment, Inc.
RENT/LEASE SERVICES--CONSUMER (0.4%)
O RENT-A-CENTER, INC. 476,675 8,729
o Dollar Thrifty Automotive Group, Inc. 47,500 802
RESTAURANTS (1.4%)
o CEC Entertainment Inc. 397,550 12,746
o Papa John's International, Inc. 153,500 5,737
o NPC International Class A 416,500 4,998
o Outback Steakhouse 174,750 4,019
o Mortons Restaurant Group 121,900 2,118
o Brinker International, Inc. 40,700 949
o The Cheesecake Factory 30,200 925
Darden Restaurants Inc. 45,200 862
o Taco Cabana 95,100 826
o Jack in the Box Inc. 33,300 801
o Landry's Seafood Restaurants, Inc. 100,300 752
o Lone Star Steakhouse & Saloon, Inc. 91,900 735
CKE Restaurants Inc. 41,919 283
o Rainforest Cafe, Inc. 33,150 149
RETAIL (8.9%)
o Pacific Sunwear of California 1,035,200 31,250
o Zale Corp. 613,100 25,674
o Ames Department Stores, Inc. 694,250 21,999
o BJ's Wholesale Club, Inc. 533,000 16,423
o Urban Outfitters, Inc. 725,000 15,950
o ShopKo Stores, Inc. 629,000 15,764
o Lands' End, Inc. 200,000 15,387
o MP3.com, Inc. 300,000 14,550
o The Dress Barn, Inc. 684,100 12,164
Russ Berrie and Co., Inc. 543,000 10,453
o PETCO Animal Supplies, Inc. 715,000 8,267
14
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
o Linens `n Things, Inc. 175,600 6,980
o Tweeter Home Entertainment Group, Inc. 123,100 5,263
o School Specialty, Inc. 325,800 4,826
o The Children's Place Retail Stores, Inc. 105,800 2,757
o Trans World Entertainment Corp. 164,095 1,702
Intimate Brands, Inc. 29,000 1,189
o PETsMART, Inc. 282,700 1,095
o O'Reilly Automotive, Inc. 22,200 968
Jostens Inc. 45,700 965
o Genesco, Inc. 70,600 935
o USA Networks, Inc. 20,700 933
o Footstar Inc. 26,500 927
Ross Stores, Inc. 42,600 879
o Finlay Enterprises, Inc. 43,700 524
Fred's, Inc. 41,125 493
o Micro Warehouse Inc. 36,600 444
Pier 1 Imports Inc. 73,050 434
o Spiegel, Inc. Class A 27,800 403
o Piercing Pagoda, Inc. 48,150 397
Blair Corp. 24,900 367
o Discount Auto Parts Inc. 23,600 336
Hancock Fabrics, Inc. 39,700 164
o Jo-Ann Stores, Inc. Class A 5,400 75
SERVICES--COMMERCIAL (3.3%)
o NCO Group, Inc. 430,300 18,234
o Latitude Communications, Inc. 285,000 9,120
O(1) TETRA Technologies, Inc. 1,000,000 8,313
Manpower Inc. 200,000 7,025
o Heidrick & Struggles International, Inc. 266,600 6,132
o Safety-Kleen Corp. 500,000 5,719
Pennzoil-Quaker State Co. 441,400 5,214
o The Corporate Executive Board Co. 117,600 4,439
o Diamond Technology Partners Inc. 53,600 3,464
Penton Media, Inc. Class A 168,200 3,112
o MDC Communications Corp. 212,500 2,178
o Dendrite International, Inc. 53,500 1,679
o Copart, Inc. 45,300 1,042
o MAXIMUS, Inc. 41,800 969
o Interim Services, Inc. 52,000 855
o Modis Professional Services Inc. 70,700 791
o ACNielson Corp. 34,900 768
o Metro One Telecommunications, Inc. 32,800 508
o Labor Ready, Inc. 49,350 503
o Wackenhut Corrections Corp. 37,700 483
o Startek, Inc. 9,400 427
Pittston Brink's Group 22,000 422
o Meta Group, Inc. 25,900 372
Circle.com 6,625 96
o The IT Group, Inc. 6,000 59
o Media Metrix, Inc. 680 32
SHOES (0.2%)
o Finish Line, Inc. 268,900 1,857
o Timberland Co. 25,600 1,264
o Kenneth Cole Productions, Inc. 25,400 994
K-Swiss, Inc. 9,600 124
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
TOYS (0.3%)
o JAKKS Pacific, Inc. 200,000 8,200
VENDING & FOOD SERVICE
o Coinmach Laundry Corp. 43,500 511
WHOLESALERS (0.1%)
o United Stationers, Inc. 45,700 1,165
o Daisytek International Corp. 45,500 756
--------------------
652,476
--------------------
CONSUMER STAPLES (0.1%)
o Ralcorp Holdings, Inc. 51,700 1,008
Universal Corp. 33,200 780
SuperValu Inc. 23,893 502
o Ben & Jerry's Homemade, Inc. Class A 29,500 498
Pilgrim's Pride Corp. 10,500 95
--------------------
2,883
--------------------
FINANCIAL SERVICES (10.4%)
Investment Technology Group, Inc. 1,163,921 30,698
Sun Communities, Inc. REIT 605,000 19,284
o The Profit Recovery Group
International, Inc. 436,500 17,978
Manufactured Home Communities, Inc. REIT 699,250 16,301
Heller Financial, Inc. 645,828 15,338
Annuity and Life Re (Holdings), Ltd. 576,500 13,548
o Concord EFS, Inc. 499,175 13,509
o BISYS Group, Inc. 254,400 12,974
Regency Realty Corp. REIT 600,000 11,888
City National Corp. 274,700 10,645
o Affiliated Computer Services, Inc. Class A 260,000 9,880
Cullen/Frost Bankers, Inc. 300,000 8,663
Federal Realty Investment Trust REIT 400,000 7,275
Raymond James Financial, Inc. 350,000 7,088
Jefferies Group, Inc. 325,000 6,927
First Washington Realty Trust, Inc. REIT 300,000 6,131
Fidelity National Financial, Inc. 317,810 4,986
o Security First Technologies Corp. 111,600 4,485
Saul Centers, Inc. REIT 262,000 3,717
o Labranche & Co. Inc. 261,600 3,499
o CheckFree Holdings Corp. 90,000 3,364
o Pinnacle Holdings Inc. REIT 124,800 2,995
Webster Financial Corp. 47,800 1,368
o Silicon Valley Bancshares 36,000 1,178
The PMI Group Inc. 22,400 1,162
o XTRA Corp. 25,100 1,043
Hudson United Bancorp 32,463 1,021
Washington Federal Inc. 44,560 1,017
Investors Financial Services Corp. 26,600 984
o Cort Business Services Corp. 48,300 981
Chicago Title Corp. 21,000 925
o First Federal Financial Corp. 57,500 920
Legg Mason Inc. 25,200 917
Reinsurance Group of America, Inc. 27,400 911
o PEC Israel Economic Corp. 25,000 903
15
<PAGE>
- --------------------------------------------------------------------------------
EXPLORER FUND MARKET
ALUE*
SHARES (000)
- --------------------------------------------------------------------------------
o Golden State Bancorp Inc. 42,600 889
AmerUs Life Holdings, Inc. 35,890 866
McGrath Rent Corp. 49,000 833
Nationwide Financial Services, Inc. 21,600 818
Hartford Life, Inc. 14,200 742
Commonwealth Bancorp 41,800 705
FINOVA Group, Inc. 15,900 701
Phoenix Investment Partners Ltd. 81,100 684
o Data Transmission Network Corp. 27,800 683
WestAmerica Bancorporation 19,700 678
Jack Henry & Associates 17,900 651
Corus Bankshares Inc. 23,500 645
Philadelphia Consolidated Holding Corp. 44,300 642
MeriStar Hospitality Corp. REIT 39,100 628
o ITLA Capital Corp. 41,400 626
Stifel Financial Corp. 46,798 509
o Billing Concepts Corp. 83,100 415
o Columbia Banking System, Inc. 30,187 396
o Imperial Credit 73,400 395
o Farm Family Holdings, Inc. 10,100 393
BSB Bancorp, Inc. 15,000 331
MMI Cos., Inc. 39,300 322
o Acceptance Insurance Cos. Inc. 18,400 266
Sovereign Bancorp, Inc. 30,000 264
Trenwick Group Inc. 8,000 163
o National Equipment Services, Inc. 12,500 132
o Local Financial Corp. 14,000 129
o Arcadia Financial Ltd. 27,400 110
o AmeriTrade Holding Corp. 6,000 97
Community First Bankshares 3,400 65
Franklin Bank N.A. 5,620 46
Haven Bancorp, Inc. 2,800 45
InterWest Bancorp Inc. 2,000 37
--------------------
259,409
--------------------
HEALTH CARE (13.3%)
o QLT PhotoTherapeutics Inc. 481,000 20,382
o Genzyme Corp. 459,500 17,576
o Vertex Pharmaceuticals, Inc. 600,500 17,189
o Human Genome Sciences, Inc. 195,000 17,038
o Forest Laboratories, Inc. 355,000 16,286
DENTSPLY International Inc. 697,900 16,183
o Caremark Rx, Inc. 3,000,000 14,625
o Patterson Dental Co. 321,375 14,482
Arrow International, Inc. 481,200 13,053
o PE Corp.-Celera Genomics Group 325,000 12,716
o IDX Systems Corp. 635,000 11,589
o Biogen, Inc. 129,000 9,562
O (1)Matria Healthcare, Inc. 2,025,000 8,163
o United Payors & United Providers, Inc. 450,000 7,566
Varian Medical Systems, Inc. 344,000 7,246
o I-STAT Corp. 500,000 7,062
o Foundation Health Systems
Class A 957,700 6,345
o BioChem Pharma Inc. 300,000 6,169
o Protein Design Labs, Inc. 150,000 6,009
o Gene Logic Inc. 815,000 5,247
o Acuson Corp. 500,000 5,187
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
o Genset ADR 600,000 5,175
o MedQuist, Inc. 151,465 4,847
o Manor Care, Inc. 300,000 4,725
o Gilead Sciences, Inc. 73,700 4,657
o Coventry Health Care Inc. 800,000 4,600
o Beverly Enterprises, Inc. 1,133,900 4,465
o PathoGenesis Corp. 293,000 4,395
o Province Healthcare Co. 221,400 3,570
o Cell Genesys, Inc. 388,500 3,302
o Cephalon, Inc. 195,000 3,169
o United Therapeutics Corp. 98,500 2,967
o Invitrogen Corp. 117,300 2,932
o Triangle Pharmaceuticals, Inc. 175,000 2,844
o Eclipse Surgical Technologies, Inc. 300,000 2,794
O (1)American Healthcorp Inc. 478,700 2,693
o Eclipsys Corp . 168,305 2,672
o Abgenix, Inc. 55,500 2,463
o The Liposome Co., Inc. 295,000 2,323
o Lincare Holdings, Inc. 55,900 1,572
o LeukoSite, Inc. 55,000 1,530
o Trigon Healthcare, Inc. 48,600 1,379
o Universal Health Services Class B 46,300 1,360
o IDEC Pharmaceuticals Corp. 10,300 1,197
Alpharma, Inc. Class A 30,400 1,070
o KeraVision, Inc. 100,000 1,050
o Apria Healthcare 65,000 1,028
o Roberts Pharmaceuticals 31,300 1,009
o Quest Diagnostics, Inc. 35,900 1,005
Jones Pharma, Inc. 29,750 922
Cooper Cos., Inc. 33,900 847
Minntech Corp. 80,600 836
o Sola International Inc. 59,400 832
o Medicis Pharmaceutical Corp. 27,000 824
o King Pharmaceuticals, Inc. 26,200 793
o Priority Healthcare Corp. Class B 38,500 772
o Rehabcare Corp. 39,300 766
o Renal Care Group, Inc. 38,700 721
o Chirex, Inc. 25,400 718
o Magellan Health Services, Inc. 109,600 664
o STERIS Corp. 48,700 648
Mallinckrodt, Inc. 16,100 546
o Henry Schein, Inc. 40,700 529
o Mid Atlantic Medical Services, Inc. 92,400 502
o Laser Vision Centers, Inc. 54,000 464
o Pediatrix Medical Group, Inc. 47,800 424
o American Retirement Corp. 76,200 376
o Res-Care, Inc. 16,000 233
o IDEXX Laboratories Corp. 14,100 213
o AmeriPath, Inc. 28,600 212
o Trex Medical Corp. 61,600 185
o Pharmaceutical Product Development, Inc. 14,400 145
o PhyCor, Inc. 35,900 90
o Bio-Rad Laboratories, Inc. Class A 1,900 46
o Sunquest Information Systems, Inc. 3,000 40
o ResMed Inc. 900 31
o Assisted Living Concepts Inc. 3,500 4
--------------------
329,851
--------------------
16
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
INTEGRATED OILS
o Tesoro Petroleum Corp. 65,000 788
--------------------
OTHER ENERGY (1.6%)
St. Mary Land & Exploration Co. 415,000 10,583
o Chieftain International, Inc. 349,900 6,692
o Noble Drilling Corp. 300,000 6,656
o Weatherford International, Inc. 109,000 3,692
o Varco International, Inc. 225,600 2,383
o Spinnaker Exploration Co. 100,840 1,487
o Basin Exploration Inc. 85,100 1,399
o UTI Energy Corp. 60,050 1,152
o Marine Drilling Co., Inc. 60,900 986
o Pride International Inc. 68,600 943
o Evergreen Resources, Inc. 39,400 852
o Veritas DGC Inc. 47,500 668
o Seitel, Inc. 57,400 456
Helmerich & Payne, Inc. 17,000 405
o SEACOR SMIT Inc. 8,500 389
Vintage Petroleum, Inc. 25,000 272
o Santa Fe Snyder Corp. 22,110 191
o Eagle Geophysical, Inc. 3,222 1
--------------------
39,207
--------------------
MATERIALS & PROCESSING (2.6%)
o Cytec Industries, Inc. 409,500 10,570
Cambrex Corp. 325,000 9,831
Nagase & Co., Ltd. 1,718,000 7,425
o Freeport-McMoRan Copper &
Gold Inc. Class B 425,000 7,092
o Fairfield Communities, Inc. 501,500 6,143
Wellman, Inc. 400,000 6,025
Valmont Industries, Inc. 321,100 5,579
OM Group, Inc. 32,600 1,223
Optical Coating Laboratory, Inc. 10,000 1,069
Corn Products International, Inc. 28,900 941
AK Steel Corp. 52,304 906
o Sunterra Corp. 84,700 847
o U.S. Can Corp. 43,100 840
Spartech Corp. 26,000 744
Commonwealth Industries Inc. 65,900 659
Lilly Industries Inc. Class A 45,500 611
Owens Corning 25,600 525
o Shorewood Packaging Corp. 36,400 462
o Catellus Development Corp. 36,400 428
BMC Industries, Inc. 69,700 405
Universal Forest Products, Inc. 20,900 303
o Stillwater Mining Co. 13,800 278
Chesapeake Corp. of Virginia 7,700 231
Ferro Corp. 9,500 194
USEC Inc. 13,400 121
Northland Cranberries, Inc. 15,700 82
Ethyl Corp. 11,600 48
o American Pad & Paper Co. 107,600 40
o Nortek, Inc. 800 25
--------------------
63,734
--------------------
PRODUCER DURABLES (6.9%)
o Mettler-Toledo International Inc. 1,104,410 32,925
o American Power Conversion Corp. 791,000 17,748
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
o Plantronics, Inc. 233,400 13,668
o Palm Harbor Homes, Inc. 683,108 11,527
o American Tower Corp. Class A 500,000 9,531
o Polycom, Inc. 172,500 8,625
Clayton Homes Inc. 733,300 7,425
Lindsay Manufacturing Co. 338,850 6,883
Donaldson Co., Inc. 271,000 6,301
o Terayon Communications Systems, Inc. 135,000 5,906
o PRI Automation, Inc. 124,000 4,976
o DuPont Photomasks, Inc. 98,900 4,896
o Terex Corp. 150,000 3,966
o E-Tek Dynamics, Inc. 49,300 3,285
o LTX Corp. 190,275 3,009
o American Homestar Corp. 823,220 3,267
o Crown Castle International Corp. 126,500 2,435
o Aspect Telecommunications Corp. 68,400 1,723
Ametek Aerospace Products Inc. 81,700 1,614
o Credence Systems Corp. 27,200 1,241
o Interdigital Communications Corp. 185,800 1,034
o Oak Industries, Inc. 24,800 1,017
Pittway Corp. Class A 30,200 997
o Knoll, Inc. 35,900 992
Mark IV Industries, Inc. 49,300 949
Graco, Inc. 27,800 931
Diebold, Inc. 35,300 927
o Kulicke & Soffa Industries, Inc. 29,500 868
o Electro Scientific Industries, Inc. 15,500 837
Herman Miller, Inc. 37,900 822
o Antec Corp. 16,900 820
o Dionex Corp. 17,300 769
o Com21, Inc. 56,700 751
X-Rite Inc. 121,100 742
o Gardner Denver Inc. 57,100 689
MDC Holdings, Inc. 43,700 683
Inter-Tel, Inc. 41,600 660
o Esterline Technologies Corp. 47,000 646
Cohu, Inc. 34,000 642
NACCO Industries, Inc. Class A 12,800 594
Standard Pacific Corp. 52,700 567
Pulte Corp. 24,400 491
o inTEST Corp. 52,500 469
o Veeco Instruments, Inc. 13,100 445
Superior Telecom Inc. 21,750 338
o Osmonics, Inc. 32,600 326
Cordant Technologies, Inc. 8,000 249
Standex International Corp. 10,500 217
o Electroglas, Inc. 7,000 193
o Triumph Group, Inc. 5,000 120
o Dynatech Corp. 12,650 75
o GTS Duratek, Inc. 5,900 34
Belden, Inc. 1,800 33
o Transcrypt International, Inc. 8,400 32
--------------------
170,910
--------------------
TECHNOLOGY (19.8%)
o CSG Systems International, Inc. 724,500 24,859
o Rational Software Corp. 538,700 23,029
o RealNetworks, Inc. 206,700 22,672
o Advanced Fibre Communications, Inc. 850,000 18,594
17
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
o Sterling Software, Inc. 813,300 17,842
o Semtech Corp. 444,100 17,015
o PairGain Technologies, Inc. 1,167,600 14,303
o Cognos Inc. 460,800 13,075
o Macrovision Corp. 209,000 11,835
o RSA Security Inc. 330,000 11,715
o MicroStrategy Inc. 120,000 11,595
o Wind River Systems Inc. 532,000 10,840
o Acxiom Corp. 631,840 10,425
o Exchange Applications, Inc. 373,000 10,164
o Sensormatic Electronics Corp. 665,700 10,069
o S3, Inc. 1,000,000 10,000
o Avant! Corp. 766,500 9,869
o Remedy Corp. 228,500 9,826
o SeaChange International, Inc. 468,000 8,892
o Mercury Interactive Corp. 106,215 8,617
o Macromedia, Inc. 130,000 8,377
o Electronics for Imaging, Inc. 175,600 7,079
o NVIDIA Corp. 300,000 6,638
o SMART Modular Technologies, Inc. 178,400 6,623
o Maxtor Corp. 1,196,200 6,579
o Aspen Technologies, Inc. 500,000 6,375
o Micromuse Inc. 58,200 6,220
o Silknet Software, Inc. 77,500 6,200
o ANADIGICS, Inc. 160,800 6,191
o Sawtek Inc. 144,200 5,912
o Bluestone Software Inc. 157,000 5,789
o PSINet, Inc. 159,500 5,742
o Concurrent Computer Corp. 470,900 5,415
o Trimble Navigation Ltd. 330,000 5,363
o Extreme Networks, Inc. 63,700 5,116
o Oak Technology, Inc. 1,000,000 4,750
o Quantum Corp.- Hard Disk Drive 700,000 4,288
o Transaction Systems Architects, Inc 135,200 4,157
o UNOVA, Inc. 300,000 3,994
o MTI Technology Corp. 225,500 3,819
o TriQuint Semiconductor, Inc. 47,250 3,780
o Maxwell Technologies, Inc. 350,000 3,719
o SERENA Software, Inc. 195,400 3,664
o CAIS Internet, Inc. 300,000 3,562
o Galileo Technology Ltd. 136,985 3,134
o New Era of Networks, Inc. 94,000 3,049
o Genesys Telecommunications
Laboratories, Inc. 61,000 2,997
o BindView Development Corp. 92,300 2,769
o Rhythms NetConnections Inc. 87,900 2,566
o The Cherry Corp. 203,100 2,437
o Luminant Worldwide Corp. 61,100 2,391
o Remec, Inc. 228,000 2,380
o Best Software, Inc. 110,800 2,223
o Documentum, Inc. 75,400 2,139
o Inet Technologies, Inc. 53,040 2,029
o MMC Networks, Inc. 61,300 1,954
o Legato Systems, Inc. 36,200 1,946
o Juniper Networks, Inc. 6,800 1,874
o ISS Group, Inc. 46,100 1,758
o WatchGuard Technologies, Inc. 100,000 1,688
o Kopin Corp. 38,600 1,621
o InterVU Inc. 28,400 1,558
o Digex, Inc. 50,900 1,457
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
o Network Solutions, Inc. Class A 12,200 1,446
o BroadVision, Inc. 19,500 1,423
o eShare Technologies, Inc. 275,800 1,345
o Alliant Techsystems, Inc. 21,600 1,328
o Sapient Corp. 10,100 1,292
o Aspect Development, Inc. 35,200 1,245
o Open Market, Inc. 68,500 1,216
o Technology Solutions Co. 58,950 1,208
o Symantec Corp. 25,100 1,199
o Ariba, Inc. 7,500 1,162
o Kronos, Inc. 25,000 1,122
o Sybase, Inc. 82,800 1,118
o American Management Systems, Inc. 43,100 1,115
o National Instruments Corp. 36,525 1,098
o Allied Riser Communications Corp. 58,680 1,060
o Progress Software Corp. 31,600 1,059
o VeriSign, Inc. 8,500 1,050
Symbol Technologies, Inc. 25,650 1,020
o Clarify, Inc. 13,000 1,004
o DII Group, Inc. 27,800 1,001
o Black Box Corp. 18,900 959
o Mastech Corp. 53,800 921
o TranSwitch Corp. 19,450 915
Lucent Technologies, Inc. 14,148 909
o Adtran, Inc. 24,400 906
o Anixter International Inc. 43,000 898
o SCI Systems, Inc. 18,000 889
o Safeguard Scientifics, Inc. 10,100 850
o Project Software & Development, Inc. 17,200 828
o Informix Corp. 106,800 814
o Tech-Sym Corp. 39,000 804
o Plexus Corp. 29,900 792
o Ciber, Inc. 48,500 791
o Akamai Technologies, Inc. 5,360 778
o SPSS, Inc. 41,000 728
Reynolds & Reynolds Class A 39,700 722
o Wall Data Inc. 83,000 680
o Triton PCS, Inc. 19,200 677
o RAVISENT Technologies Inc. 42,100 676
o Harmonic, Inc. 11,200 665
o Foundry Networks, Inc. 3,300 625
o VideoServer, Inc. 113,600 582
o Cyberoptics Corp. 27,700 514
o InVision Technologies, Inc. 141,500 495
o Predictive Systems, Inc. 10,270 447
Newport News Shipbuilding Inc. 14,400 437
o American Precision Industries Inc. 40,700 384
o FileNet Corp. 21,500 355
o Unigraphics Solutions Inc. 16,400 354
o CACI International, Inc. 15,900 341
o Xircom, Inc. 5,500 277
o Metro Information Services, Inc. 20,300 277
o Actel Corp. 13,000 245
o Planar Systems, Inc. 43,300 230
Computer Task Group, Inc. 16,200 205
o ESCO Electronics Corp. 16,300 191
o Alpha Industries, Inc. 2,600 144
o Aeroflex, Inc. 24,600 137
Chartered Semiconductor 3,500 116
18
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
Innovex, Inc. 10,700 86
Gerber Scientific, Inc. 4,000 75
o C-Cube Microsystems, Inc. 1,600 71
o Concord Communications, Inc. 1,300 68
--------------------
492,927
--------------------
UTILITIES (2.2%)
o McLeodUSA, Inc. Class A 400,000 17,850
o Gilat Satellite Networks Ltd. 200,000 10,425
o Allegiance Telecom, Inc. 70,000 4,830
o Illuminet Holdings, Inc. 68,060 3,131
o Focal Communications Corp. 145,300 3,006
o Adelphia Communications Corp. Class A 51,200 2,797
o Intermedia Communications Inc. 74,000 1,924
o Commonwealth Telephone Enterprises, Inc. 23,740 1,270
o Western Wireless Corp. Class A 23,900 1,264
o U.S. Cellular Corp. 13,200 1,168
o El Paso Electric Co. 113,300 1,034
RGS Energy Group Inc. 38,400 958
o Jones Intercable Inc. 17,400 950
o Price Communications Corp. 42,400 922
Avista Corp. 37,800 680
MidAmerican Energy Holdings Co. 18,200 612
o Rural Cellular Corp. Class A 8,100 488
o IXC Communications, Inc. 4,800 207
o UniSource Energy Corp. 17,800 205
NUI Corp. 1,900 47
Madison Gas & Electric Co. 1,500 31
Davel Communications, Inc. 3,300 15
--------------------
53,814
--------------------
OTHER (0.7%)
o Thermo Electron Corp. 600,000 8,100
Teleflex Inc. 232,300 7,913
Commercial Intertech Corp. 62,900 798
Kaman Corp. Class A 42,600 469
--------------------
17,280
--------------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $1,839,607) 2,248,161
- --------------------------------------------------------------------------------
Face
Amount
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (11.9%)+
- --------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.
(2) 5.63%, 1/19/2000 $ 5,600 5,525
FEDERAL NATIONAL MORTGAGE ASSN.
(2) 5.64%, 1/18/2000 1,700 1,678
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.24%, 11/1/1999 272,777 272,777
5.26%, 11/1/1999--Note G 16,578 16,578
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $296,566) 296,558
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (102.4%)
(COST $2,136,173) 2,544,719
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.4%
- --------------------------------------------------------------------------------
Other Assets--Note C $ 32,875
Liabilities--Note G (93,433)
(60,558)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 40,399,372 outstanding
$.001 par value shares of
beneficial interest
(unlimited authorization) $2,484,161
================================================================================
NET ASSET VALUE PER SHARE $61.49
================================================================================
*See Note A in Notes to Financial Statements.
oNon-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
95.1% and 7.3%, 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 $43,889,000.
(2)Securities with an aggregate value of $7,203,000 have been segregated as
initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
- --------------------------------------------------------------------------------
AT OCTOBER 31, 1999, NET ASSETS CONSISTED OF:
Amount Per
(000) Share
Paid in Capital $1,745,005 $43.19
Undistributed Net Investment Income 6,286 .16
Accumulated Net Realized Gains 326,135 8.07
Unrealized Appreciation (Depreciation)--Note F
Investment Securities 408,546 10.11
Futures Contracts (1,811) (.04)
- --------------------------------------------------------------------------------
Net Assets $2,484,161 $61.49
================================================================================
19
<PAGE>
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.
- --------------------------------------------------------------------------------
EXPLORER FUND
YEAR ENDED OCTOBER 31, 1999
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* 13,613
Interest 11,709
Security Lending 482
----------
Total Income 25,804
----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 5,278
Performance Adjustment 731
The Vanguard Group--Note C
Management and Administrative 10,703
Marketing and Distribution 411
Custodian Fees 121
Auditing Fees 10
Shareholders' Reports 139
Trustees' Fees and Expenses 4
----------
Total Expenses 17,397
Expenses Paid Indirectly--Note D (128)
----------
Net Expenses 17,269
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 8,535
- --------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold* 315,648
Futures Contracts ----------
REALIZED NET GAIN 334,544
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 187,165
Futures Contracts (9,396)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 177,769
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $520,84
================================================================================
*Dividend income and realized net loss from affiliated companies were $243,000
and $10,256,000, respectively.
20
<PAGE>
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.
- --------------------------------------------------------------------------------
Explorer Fund
Year Ended October 31,
1999 1998
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income 8,535 9,098
Realized Net Gain 334,544 2,444
Change in Unrealized Appreciation (Depreciation) 177,769 (282,104)
Net Increase (Decrease) in Net Assets
-------------------------
Resulting from Operations 520,848 (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 TRANSACTIONS1
Issued 581,427 763,144
Issued in Lieu of Cash Distributions 21,406 247,188
Redeemed (813,686) (842,473)
-------------------------
Net Increase (Decrease) from
Capital Share Transactions (210,853) 167,859
- --------------------------------------------------------------------------------
Total Increase (Decrease) 288,244 (353,983)
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 2,195,917 2,549,900
End of Year $2,484,161 2,195,917
================================================================================
1Shares Issued (Redeemed)
Issued 10,222 13,941
Issued in Lieu of Cash Distributions 403 4,672
Redeemed (14,495) (15,267)
-------------------------
Net Increase (Decrease)
in Shares Outstanding (3,870) 3,346
================================================================================
21
<PAGE>
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>
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EXPLORER FUND
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $49.60 $62.31 $55.44 $51.05 $45.99
- ------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .21 .21 .26 .26 .24
Net Realized and Unrealized Gain
(Loss) on Investments 12.18 (6.82) 9.71 8.37 7.25
Total from Investment Operations 12.39 (6.61) 9.97 8.63 7.49
DISTRIBUTIONS
Dividends from Net Investment Income (.20) (.25) (.27) (.24) (.17)
Distributions from Realized Capital Gains (.30) (5.85) (2.83) (4.00) (2.26)
Total Distributions (.50) (6.10) (3.10) (4.24) (2.43)
NET ASSET VALUE, END OF YEAR $61.49 $49.60 $62.31 $55.44 $51.05
============================================================================================================
TOTAL RETURN 25.14% -11.22% 18.93% 17.97% 17.46%
============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $2,484 $2,196 $2,550 $2,186 $1,476
Ratio of Total Expenses to Average Net Assets 0.74% 0.62% 0.62% 0.63% 0.68%
Ratio of Net Investment Income to
Average Net Assets 0.36% 0.37% 0.45% 0.51% 0.52%
Portfolio Turnover Rate 79% 72% 84% 51% 66%
============================================================================================================
</TABLE>
22
<PAGE>
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 CONTRACTS: 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 the Small Company Growth Fund Stock Index (an index of the stocks held by
the largest small-capitalization stock mutual funds). The basic fee of Chartwell
is
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
subject to quarterly adjustments based on performance relative to the Small
Company Growth Fund Stock Index. For the year ended October 31, 1999, the
aggregate investment advisory fee represented an effective annual basic rate of
0.22% of the fund's average net assets before an increase of $731,000 (0.03%)
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
$170,000 for the year ended October 31, 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 October 31, 1999, the fund had contributed capital of $530,000 to Vanguard
(included in Other Assets), representing 0.02% of the fund's net assets 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 security
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 management and 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 year ended
October 31, 1999, directed brokerage and custodian fee offset arrangements
reduced expenses by $113,000 and $15,000, respectively. The total expense
reduction represented an effective annual rate of 0.01% of the fund's average
net assets.
E. During the year ended October 31, 1999, the fund purchased $1,673,555,000 of
investment securities and sold $1,898,825,000 of investment securities, other
than temporary cash investments.
F. At October 31, 1999, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $408,546,000, consisting
of unrealized gains of $569,238,000 on securities that had risen in value since
their purchase and $160,692,000 in unrealized losses on securities that had
fallen in value since their purchase.
At October 31, 1999, the aggregate settlement value of open futures
contracts expiring in December 1999, and the related unrealized depreciation
were:
- --------------------------------------------------------------------------------
(000)
-----------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE DEPRECIATION
- --------------------------------------------------------------------------------
S&P MidCap 400 Index 174 $34,909 $ (336)
Russell 2000 Index 367 79,235 (1,475)
- --------------------------------------------------------------------------------
Unrealized depreciation on open futures contracts is required to be treated as
realized loss for tax purposes.
G. The market value of securities on loan to broker/dealers at October 31, 1999,
was $16,017,000, for which the fund held cash collateral of $16,578,000. Cash
collateral received is invested in repurchase agreements.
24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES OF
VANGUARD EXPLORER FUND
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Explorer Fund (the "Fund") at October 31, 1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
November 30, 1999
25
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL 1999 TAX INFORMATION (UNAUDITED)FOR VANGUARD EXPLORER FUND
This information for the fiscal year ended October 31, 1999, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $13,054,000 as capital gain dividends (from net
long-term capital gains) to shareholders in December 1998, all of which is
designated as a 20% rate gain distribution.
For corporate shareholders, 11.7% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
- --------------------------------------------------------------------------------
26
<PAGE>
THE VANGUARD FAMILY OF FUNDS
STOCK FUNDS
- --------------------------------------------------------------------------------
500 Index Fund
Aggressive Growth Fund
Capital Opportunity Fund
Convertible Securities Fund
Emerging Markets Stock
Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer Fund
Extended Market Index Fund*
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Index Fund*
Health Care Fund
Institutional Index Fund*
International Growth Fund
International Value Fund
Mid-Cap Index Fund*
Morgan Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund*
Small-Cap Index Fund*
Small-Cap Value Index Fund*
Tax-Managed Capital Appreciation Fund*
Tax-Managed Growth and Income Fund*
Tax-Managed International Fund
Tax-Managed Small-Cap Fund*
Total International Stock Index Fund
Total Stock Market Index Fund*
U.S. Growth Fund
Utilities Income Fund
Value Index Fund*
Windsor Fund
Windsor II Fund
BALANCED FUNDS
- --------------------------------------------------------------------------------
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy Conservative Growth Fund
LifeStrategy Growth Fund
LifeStrategy Income Fund
LifeStrategy Moderate Growth Fund
STAR Fund
Tax-Managed Balanced Fund
Wellesley Income Fund
Wellington Fund
BOND FUNDS
- --------------------------------------------------------------------------------
Admiral Intermediate-Term Treasury Fund
Admiral Long-Term Treasury Fund
Admiral Short-Term Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund*
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds(California, Florida, Massachusetts, New Jersey,
New York, Ohio, Pennsylvania
Total Bond Market Index Fund*
MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
Admiral Treasury Money Market Fund
Federal Money Market Fund
Prime Money Market Fund*
State Tax-Exempt Money Market Funds (California, New Jersey, New York, Ohio,
Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
- --------------------------------------------------------------------------------
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
*Offers Institutional Shares.
For information about Vanguard funds, including charges and expenses, obtain a
prospectus from The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482-2600.
Read it carefully before you invest or send money.
27
<PAGE>
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's nine board members are independent, meaning that
they have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers
for the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's
professional affiliations. Noted in parentheses is the year in which the Trustee
joined the Vanguard Board.
trustees
JOHN C. BOGLE (1967) 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 (1987) 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 (1998) Vice President, Chief Information Officer, and
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) 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 Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL (1991) 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. (1971) 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 (1985) Retired Chairman 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.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON Legal Department.
ROBERT A. DISTEFANO Information Technology.
JAMES H. GATELY Individual Investor Group.
KATHLEEN C. GUBANICH Human Resources.
IAN A. MACKINNON Fixed Income Group.
F. WILLIAM MCNABB III Institutional Investor Group.
MICHAEL S. MILLER Planning and Development.
RALPH K. PACKARD Chief Financial Officer.
GEORGE U. SAUTER Core Management Group.
<PAGE>
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
[SHIP]
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.
unless otherwise noted.
"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.
World Wide Web
www.vanguard.com
Fund Information
1-800-662-7447
Individual Account Services
1-800-662-2739
Institutional Investor Services
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q240-12/15/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
