<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-27203) UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 63
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 64
VANGUARD EXPLORER FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS AMENDMENT BECOME EFFECTIVE:
ON FEBRUARY 11, 2000, PURSUANT TO PARAGRAPH (B) OF RULE 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
WE HAVE ELECTED TO REGISTER AN INDEFINITE NUMBER OF SECURITIES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 OF THE INVESTMENT COMPANY ACT OF
1940. REGISTRANT FILED ITS RULE 24F-2 NOTICE FOR ITS FISCAL YEAR ENDED OCTOBER
31, 1999 WITH THE COMMISSION ON JANUARY 21, 2000.
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<TABLE>
VANGUARD EXPLORER FUND
CROSS REFERENCE SHEET
<S> <C> <C>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
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Item 1. Front and Back Cover Pages .................Front and Back Cover Pages
Item 2. Risk/Return: Investments, Risk, and
Performance ................................Fund Profile
Item 3. Risk/Return Summary: Fee Table .............Fee Table
Item 4. Investment Objectives, Principal Investment
Strategies, and Related Risks ..............A Word About Risk; Who Should Invest;
Primary Investment Strategies
Item 5. Management's Discussion of Fund
Performance ................................Herein incorporated by reference to
Registrant's Annual Report to Shareholders
dated October 31, 1999 filed with the
Securities & Exchange Commission's EDGAR
system December 27, 1999.
Item 6. Management, Organization, and Capital
Structure ..................................The Fund and Vanguard; Investment Advisers
Item 7. Shareholder Information ....................Share Price; Dividends, Capital Gains, and
Taxes; Investing with Vanguard
Item 8. Distribution Arrangements ..................Not Applicable
Item 9. Financial Highlights Information ...........Financial Highlights
FORM N-1A LOCATION IN STATEMENT OF ADDITIONAL
ITEM NUMBER INFORMATION
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Item 10. Cover Page and Table of Contents ...........Cover Page; Table of Contents
Item 11. Fund History ...............................Description of the Fund
Item 12. Description of the Fund and its Investments
and Risks ..................................Investment Policies; Description of the Fund;
Fundamental Investment Limitations
Item 13. Management of the Fund .....................Management of the Fund
Item 14. Control Persons and Principal Holders of
Securities .................................Management of the Fund
Item 15. Investment Advisory and Other Services .....Investment Advisory Services
Item 16. Brokerage Allocation and Other Practices ...Portfolio Transactions
Item 17. Capital Stock and Other Securities .........Description of the Fund
Item 18. Purchase, Redemption, and Pricing of Shares.Purchase of Shares; Redemption of Shares;
Share Price
Item 19. Taxation of the Fund .......................Description of the Fund
Item 20. Underwriters ...............................Not Applicable
Item 21. Calculation of Performance Data ............Yield and Total Return
Item 22. Financial Statements .......................Financial Statements
</TABLE>
<PAGE>
VANGUARD/(R)/
EXPLORER
FUND
Prospectus
February 11, 2000
This prospectus contains
financial data for the Fund
through the fiscal year
ended October 31, 1999.
[A MEMBER OF
THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD EXPLORER FUND
Prospectus
February 11, 2000
A Small-Company Growth Stock Mutual Fund
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CONTENTS
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1 FUND PROFILE 13 FINANCIAL HIGHLIGHT
3 ADDITIONAL INFORMATION 15 INVESTING WITH VANGUARD
4 A WORD ABOUT RISK 15 SERVICES AND ACCOUNT FEATURES
4 WHO SHOULD INVEST 16 TYPES OF ACCOUNTS
5 PRIMARY INVESTMENT STRATEGIES 17 BUYING SHARES
9 THE FUND AND VANGUARD 19 REDEEMING SHARES
9 INVESTMENT ADVISERS 22 TRANSFERRING REGISTRATION
11 DIVIDENDS, CAPITAL GAINS, AND TAXES 23 FUND AND ACCOUNT UPDATES
12 SHARE PRICE GLOSSARY (inside back cover)
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Explorer Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk/(R)/" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
FUND PROFILE
The following profile summarizes key features of Vanguard Explorer Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital growth.
INVESTMENT STRATEGIES
The Fund invests mainly in the stocks of small companies (which, at the time of
purchase, typically have a market value of less than $1-2 billion). These
companies are considered by the Fund's advisers to have above-average prospects
for growth. These companies often provide little or no dividend income.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the overall stock market. The Fund focuses on the stocks of smaller
companies. The Fund's performance could be hurt by:
- - Investment style risk, which is the chance that returns from
small-capitalization stocks will trail returns from other asset classes or
the overall stock market. Such stocks have generally exhibited significant
volatility due to several factors including smaller companies',
less-certain prospects for growth, and dividends.
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 -10.80%
1991 55.90%
1992 13.02%
1993 15.41%
1994 0.54%
1995 26.60%
1996 14.04%
1997 14.57%
1998 3.52%
1999 37.26%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 29.99% (quarter ended December 31, 1999) and the lowest return for a
quarter was -23.91% (quarter ended September 30, 1990).
<PAGE>
2
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
----------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
----------------------------------------------------------------------
Vanguard Explorer Fund 37.26% 18.64% 15.67%
Russell 2000 Index 21.26 16.69 13.40
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FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended October 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.71%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.74%
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that the operating expenses remain the same. The results apply
whether or not you redeem your investment at the end of each period.
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$76 $237 $411 $918
-------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
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PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Explorer Fund's expense ratio in fiscal year 1999 was 0.74%,
or $7.40 per $1,000 of average net assets. The average small-cap growth mutual
fund had expenses of 1.65%, or $16.50 per $1,000 of average net assets (derived
from data provided as of December 31, 1999 by Lipper Inc., which reports on the
mutual fund industry). Management expenses, which comprise one part of operating
expenses, include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
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<PAGE>
3
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PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS SUITABLE FOR IRAS
Distributed annually in December Yes
INVESTMENT ADVISERS MINIMUM INITIAL INVESTMENT
The Fund uses four advisers: $3,000; $1,000 for IRAs and custodial
- - Granahan Investment Management, accounts for minors
Inc., Waltham, Mass., since 1990
- - Wellington Management Company, NEWSPAPER ABBREVIATION
LLP, Boston, Mass., since 1967 Explr
- - Chartwell Investment Partners,
Berwyn, Pa., since 1997 VANGUARD FUND NUMBER
- - The Vanguard Group, Valley Forge, 024
Pa., since 1997
CUSIP NUMBER
INCEPTION DATE 921926101
December 11, 1967
TICKER SYMBOL
NET ASSETS AS OF OCTOBER 31, 1999 VEXPX
$2.48 billion
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<PAGE>
4
================================================================================
A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
Explorer Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in Vanguard Explorer Fund, you
should also take into account your personal tolerance for the daily fluctuations
of the stock market.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
================================================================================
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You wish to add a fund that focuses on small and/or emerging companies to
your existing holdings, which could include other stock investments as well
as bond, money market, and tax-exempt investments.
- - You are seeking growth of capital over the long term--at least five years.
- - You are not looking for dividend income.
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PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing-switching money into investments
when they expect prices to rise, and taking money out when they expect the
market to fall. As money is shifted in and out, a fund incurs expenses for
buying and selling securities. These costs are borne by all fund shareholders,
including the long-term investors who do not generate the costs. Therefore, the
Fund discourages short-term trading by, among other things, limiting the number
of exchanges it permits.
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THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short- term trading:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
<PAGE>
5
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PLAIN TALK ABOUT
GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies believed to have
above-average potential for growth in revenue and earnings. Reflecting the
market's high expectations for superior growth, such stocks typically have low
dividend yields and above-average prices in relation to such measures as
revenue, earnings, and book values. Value funds generally emphasize stocks of
companies from which the market does not expect strong growth. The prices of
value stocks typically are below-average in comparison to such factors as
earnings and book value, and these stocks typically have above-average dividend
yields. Growth and value stocks have, in the past, produced similar long-term
returns, though each category has periods when it outperforms the other. In
general, growth funds appeal to investors who will accept more volatility in
hopes of a greater increase in share price. Growth funds also may appeal to
investors with taxable accounts who want a higher proportion of returns to come
as capital gains (which may be taxed at lower rates than dividend income). Value
funds, by contrast, are appropriate for investors who want some dividend income
and the potential for capital gains, but are less tolerant of share-price
fluctuations.
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PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment advisers use in pursuit
of the Fund's objective, long-term growth in capital. It also explains how the
advisers implement these strategies. In addition, this section discusses several
important risks--market risk, investment style risk, and manager risk--faced by
investors in the Fund. The Board of Trustees oversees the management of the Fund
and may change the investment strategies in the interest of shareholders.
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PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies-and mutual funds that hold these stocks--can
be classified by the companies' market value, or capitalization. Market
capitalization changes over time, and there is no "official" definition of the
boundaries of large-, mid-, and small-cap stocks. Vanguard generally defines
large-capitalization (large-cap) funds as those holding stocks of companies
whose outstanding shares have a market value exceeding $12 billion; mid-cap
funds as those typically holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
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MARKET EXPOSURE
The Fund's primary strategy is to invest chiefly in the stocks of
small-capitalization companies that offer strong growth potential. These
companies typically provide little or no dividend income. The Fund may also
invest in securities that are convertible to common stocks.
<PAGE>
6
[FLAG]THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE POSSIBILITY THAT
STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK
MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS
OF FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
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U.S. STOCK MARKET RETURNS (1926-1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
Best 54.2% 24.1% 19.9% 17.7%
Worst -43.1 -12.4 -0.8 3.1
Average 13.1 10.7 11.0 11.0
- --------------------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1998. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 10.7%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928 through 1932) to 24.1% (from 1994
through 1998). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular.
Keep in mind that Vanguard Explorer Fund focuses on the stocks of smaller
companies. Small-cap stocks have historically been more volatile than--and at
times have performed quite differently from--the large-cap stocks found in the
S&P 500 Index. This is due to several factors, including smaller companies'
less-certain prospects for growth and dividends.
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PLAIN TALK ABOUT
FUND DIVERSIFICATION
In general, the more diversified a fund's stock holdings, the less likely it is
that a specific stock's poor performance will hurt the fund. One measure of a
fund's diversification is the percentage of its assets represented by its ten
largest holdings. The average U.S. equity mutual fund has about 30% of its
assets invested in its ten largest holdings, while some less-diversified mutual
funds have more than 50% of their assets invested in the stocks of just ten
companies.
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[FLAG]THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE POSSIBILITY
THAT RETURNS FROM STOCKS OF SMALL COMPANIES WILL TRAIL RETURNS FROM OTHER
ASSET CLASSES OR THE OVERALL STOCK MARKET. AS A GROUP, SMALL-CAPITALIZATION
STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN COMMON
STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS
SEVERAL YEARS.
<PAGE>
7
SECURITY SELECTION
Vanguard Explorer Fund employs four investment advisers, each of whom
independently chooses and maintains a portfolio of common stocks for the Fund.
The Fund's Board of Trustees decides the proportion of net assets to be managed
by each adviser and may change the proportions as circumstances warrant.
The four advisers use active investment management methods, which means
they buy and sell securities based on their judgments about companies and their
financial prospects, the prices of the securities, and about the stock market
and the economy in general.
Each adviser uses different processes to select securities for its portion
of the Fund's assets; however, each is committed to buying stocks of small
companies that, in the adviser's opinion, have strong growth potential.
Granahan Investment Management, Inc. (Granahan), which was responsible for
approximately 46% of the Fund's assets as of October 31, 1999, groups securities
into three categories as part of its selection process. The first category,
"core growth," emphasizes companies that have a well-known or established
product and, as a result, have a proven record of growth and a strong market
position. The second category, "pioneers," comprises companies that offer unique
products or technologies that may lead to new products or expansion into new
markets. Granahan judges "pioneer" stocks based on the estimated growth
potential compared to market value. The third category, "special value,"
includes companies that lack a record of strong growth but that, in the
adviser's view, are both undervalued in the market and likely to grow in the
next few years. "Core growth" stocks generally make up 50% to 80% of Granahan's
share of Fund assets, with the other two categories generally at 10% to 25%
each.
Wellington Management Company, LLP (Wellington Management), which was
responsible for approximately 29% of the Fund's assets as of October 31, 1999,
uses research and analysis of individual companies to select stocks that it
feels have exceptional growth potential relative to their valuation in the
marketplace.
Wellington Management considers each stock individually before purchase,
and continually monitors developments at these companies for comparison to
Wellington Management's expectations for growth. To help protect against risk,
the portfolio is broadly diversified both by number of stocks and by exposure to
a range of industries.
Chartwell Investment Partners (Chartwell), which was responsible for
approximately 11% of the Fund's assets as of October 31, 1999, uses a
research-driven process to choose stocks judged to have exceptional growth
potential and to be selling at reasonable prices.
After considering each stock individually before purchase, Chartwell
constantly monitors characteristics of its Fund holdings as a group. In doing
so, Chartwell uses computerized techniques to constantly evaluate its Fund's
holdings.
The fourth adviser, The Vanguard Group (Vanguard) employs a "quantitative"
investment approach. It uses computerized mathematical models to select a
sampling of stocks that, as a group, are expected to have returns and investment
characteristics similar to the Small Company Growth Fund Stock Index, which is
made up of stocks held by the nation's 25 largest small-company mutual funds.
Vanguard was responsible for approximately 10% of the Fund's assets as of
October 31, 1999.
The balance of Vanguard Explorer Fund's assets, about 4%, is held in cash
reserves and managed by Vanguard, which invests in stock index futures so that
the cash reserve portion of the Fund may achieve performance similar to that of
common stocks. This strategy is intended to keep the Fund more fully invested in
common stocks while retaining cash on hand to meet liquidity needs. See below
for more details on the Fund's policy on futures.
The Fund is generally managed without regard to tax ramifications.
<PAGE>
8
[FLAG]THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT THE
ADVISERS MAY DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 70%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of October 31, 1999, the average turnover rate for all
domestic stock funds was approximately 87%, according to Morningstar, Inc.
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of growth companies, the Fund may make
certain other kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, it reserves the right
to invest up to 20% of its assets in foreign securities. These securities may be
traded in U.S. or foreign markets. To the extent that it owns foreign stocks,
the Fund is subject to (1) country risk, which is the possibility that political
events (such as a war), financial problems (such as government default), or
natural disasters (such as an earthquake) will weaken a country's economy and
cause investments in that country to lose money; and (2) currency risk, which is
the possibility that Americans investing abroad could lose money because of a
rise in the value of the U.S. dollar versus foreign currencies.
The Fund may also invest, to a limited extent, in futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation under futures contracts will not
exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may invest up to 15% of its assets in restricted securities with
limited marketability or other illiquid securities.
<PAGE>
9
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $530 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
INVESTMENT ADVISERS
The Fund uses four investment advisers, each of which independently manages a
percentage of the Fund's assets subject to the control of the Trustees and
officers of the Fund. The advisers are:
- - Granahan Investment Management, Inc. (Granahan), 275 Wyman Street, Waltham,
MA 02154, is an investment advisory firm specializing in small-company
stock investments. Founded in 1985, Granahan managed about $1.4 billion in
assets as of October 31, 1999.
<PAGE>
10
- - Wellington Management Company, LLP (Wellington Management), 75 State
Street, Boston, MA 02109, is an investment advisory firm founded in 1928.
As of October 31, 1999, Wellington Management managed more than $217
billion in stock and bond portfolios.
- - Chartwell Investment Partners (Chartwell), 1235 Westlakes Drive, Suite 330,
Berwyn, PA 19312, is an investment advisory firm founded in 1997. As of
October 31, 1999, Chartwell managed about $3.3 billion in assets.
- - The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
provides at-cost investment advisory services to many Vanguard funds
through its Core Management and Fixed Income Groups. Founded in 1975,
Vanguard managed more than $345.6 billion in assets as of October 31, 1999.
The Fund pays three of its investment advisers--Granahan, Wellington
Management, and Chartwell--on a quarterly basis. For each adviser, the quarterly
fee is based on certain annual percentage rates applied to average net assets
managed by the adviser over the quarterly period. In addition, the quarterly
fees paid to each adviser are increased or decreased based upon the adviser's
performance in comparison to a benchmark index. For these purposes, the
cumulative investment performance of each adviser's portion of the Fund over a
trailing 36-month period is compared to the cumulative total return of the Small
Company Growth Fund Stock Index over the same period.
The Fund's most recent STATEMENT OF ADDITIONAL INFORMATION provides
complete details of how Granahan, Wellington Management, and Chartwell are
compensated. The Fund pays no advisory fees to Vanguard, since it provides
services to the Fund on an at-cost basis. For the fiscal year ended October 31,
1999, the Fund paid aggregate advisory fees and expenses representing an
effective annual rate of 0.25% of the Fund's average net assets for the year.
The Fund has authorized the advisers to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISERS
The individuals primarily responsible for Vanguard Explorer Fund are:
JOHN J. GRANAHAN, CFA, Founder and President of Granahan Investment Management,
Inc.; in investment management since 1963, with Granahan since 1985; adviser to
the Fund since 1990; B.A., St. Joseph's University; Graduate Fellow of Catholic
University of America.
KENNETH L. ABRAMS, Senior Vice President of Wellington Management Company, LLP;
in investment management since 1982, with Wellington Management since 1986;
adviser to the Fund since 1994; B.A. and M.B.A., Stanford University.
EDWARD N. ANTOIAN, CFA, Partner and one of the founders of Chartwell Investment
Partners; in investment management, managing equity funds, since 1984; cofounder
of Chartwell in 1997; adviser to the Fund since 1997; B.S., State University of
New York; M.B.A., University of Pennsylvania.
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Core
Management Group; has worked in investment management since 1985, primary
responsibility for Vanguard's stock indexing policy and strategy since joining
the company in 1987; A.B., Dartmouth College; M.B.A., University of Chicago.
- --------------------------------------------------------------------------------
<PAGE>
11
In the interest of obtaining better execution of a transaction, the
advisers may choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution of a
transaction, then the adviser is authorized to choose a broker who, in addition
to executing the transaction, will provide research services to the advisers or
the Fund. Also, the Fund may direct the advisers to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December. You can receive
distributions of income dividends or capital gains in cash, or you can have them
automatically reinvested in more shares of the Fund.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: on December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share
on December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
<PAGE>
12
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you whether or not you reinvest these amounts
in additional Fund shares.
- - Distributions declared in December--if paid to you by the end of
January--are taxable as if received in December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- - A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- - State and local income taxes may apply to any dividend or capital gains
distributions that you receive, as well as your gains or losses from any
sale or exchange of Fund shares.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not provide us with
your correct taxpayer identification number and certify that it is correct.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ------------------------------
NUMBER OF SHARES OUTSTANDING
<PAGE>
13
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is EXPLR.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
14
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
VANGUARD EXPLORER FUND
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
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%
Turnover Rate 79% 72% 84% 51% 66%
================================================================================
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $49.60 per share.
During the year, the Fund earned $0.21 per share from investment income
(interest and dividends) and $12.18 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $0.50 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($12.39 per share) minus the distributions ($0.50 per share)
resulted in a share price of $61.49 at the end of the year. This was an increase
of $11.89 per share (from $49.60 at the beginning of the year to $61.49 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 25.14% for the year.
As of October 31, 1999, the Fund had $2.484 billion in net assets. For the year,
its expense ratio was 0.74% ($7.40 per $1,000 of net assets); and its net
investment income amounted to 0.36% of its average net assets. It sold and
replaced securities valued at 79% of its net assets.
- --------------------------------------------------------------------------------
"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.
<PAGE>
15
- --------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOK ICON]. Please call us to request copies.
- --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
VANGUARD/(R)/ DIRECT DEPOSIT SERVICE [BOOK ICON]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD/(R)/ AUTOMATIC EXCHANGE SERVICE [BOOK ICON]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS/(R)/ [BOOK ICON]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS/(TM)/ [BOOK ICON]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT/(R)/ 1-800-662-6273 (ON-BOARD) [BOOK ICON]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD/(TM)/ WWW.VANGUARD.COM [COMPUTER ICON]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
<PAGE>
16
- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
* Only current Vanguard shareholders can open a new account online, by
exchanging shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOK ICON]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOK ICON]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOK ICON]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
<PAGE>
17
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
The Fund reserves the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance AT THAT TIME is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
- --------------------------------------------------------------------------------
BY MAIL TO . . . [ENVELOPE ICON]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-24
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [TELEPHONE ICON]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type).
<PAGE>
18
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.) Use Vanguard Fund Express (see
"Services and Account Features") to transfer assets from your bank account. Call
Client Services before your first use to verify that this option is available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
* You must obtain a Personal Identification Number (PIN) through Tele-Account
at least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE ICON]
Call Client Services to arrange your wire transaction. Wire transactions to
retirement accounts are only available for asset transfers and rollovers from
other financial institutions. Individual IRA contributions will not be accepted
by wire.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Explorer Fund-24
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.
- --------------------------------------------------------------------------------
<PAGE>
19
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
* May require a signature guarantee; see footnote on page 21.
When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- - In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and some other retirement accounts. If you sell shares of these
funds online, you will receive a redemption check at your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER ICON]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE ICON]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
<PAGE>
20
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number (PIN), if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE ICON]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
- - Traditional IRAs and Roth IRAs--call Client Services.
- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
<PAGE>
21
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, exchange
to another Vanguard fund, or Fund Express redemption.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FUND EXPRESS REDEMPTIONS
Vanguard will electronically transfer funds to your pre-linked checking or
savings account.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
* For instance, a signature guarantee must be provided by all registered
account shareholders when redemption proceeds are to be sent to a different
person or address. A signature guarantee may be obtained from most
commercial and savings banks, credit unions, trust companies, or member
firms of a U.S. stock exchange.
<PAGE>
22
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt the management of the Fund
and increase the Fund's costs for all shareholders, Vanguard limits account
activity as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
- - Your round trips through the Fund must be at least 30 days apart.
- - The Fund may refuse a share purchase at any time, for any reason.
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the Fund.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
<PAGE>
23
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the advisers, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK ICON]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in December and June for this Fund.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOK ICON]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The possibility that events such as political or financial troubles or natural
disasters will weaken a country's economy.
CURRENCY RISK
The possibility that an American's foreign investment will lose money because of
unfavorable currency exchange rate movements.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
DOLLAR-COST AVERAGING
Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO]
[THE VANGUARD GROUP/(R)/ LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Explorer Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORT TO
SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders. In these
reports, you will find a discussion of
the market conditions and
investment strategies that
significantly affected the Fund's
performance during the most recent
fiscal year.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are incorporated
by reference into (and are thus
legally a part of) this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA
19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-800-SEC-0330. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-6009.
Fund's Investment Company Act file
number: 811-1530
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P024N-02/11/2000
<PAGE>
VANGUARD/(R)/
EXPLORER
FUND
Participant Prospectus
February 11, 2000
This prospectus contains
financial data for the Fund
through the fiscal year
ended October 31, 1999.
[A MEMBER OF
THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD EXPLORER FUND
Participant Prospectus
February 11, 2000
A Small-Company Growth Stock Mutual Fund
- --------------------------------------------------------------------------------
CONTENTS
1 FUND PROFILE 11 DIVIDENDS, CAPITAL GAINS, AND TAXES
3 ADDITIONAL INFORMATION 11 SHARE PRICE
4 A WORD ABOUT RISK 12 FINANCIAL HIGHLIGHTS
4 WHO SHOULD INVEST 14 INVESTING WITH VANGUARD
5 PRIMARY INVESTMENT STRATEGIES 15 ACCESSING FUND INFORMATION BY COMPUTER
9 THE FUND AND VANGUARD GLOSSARY (inside back cover)
9 INVESTMENT ADVISERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Explorer Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk/(R)/" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
This prospectus is intended for participants in employer-sponsored retirement or
savings plans. Another version--for investors who would like to open a personal
investment account--can be obtained by calling Vanguard at 1-800-662-7447.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
FUND PROFILE
The following profile summarizes key features of Vanguard Explorer Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital growth.
INVESTMENT STRATEGIES
The Fund invests mainly in the stocks of small companies (which, at the time of
purchase, typically have a market value of less than $1-2 billion). These
companies are considered by the Fund's advisers to have above-average prospects
for growth. These companies often provide little or no dividend income.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the overall stock market. The Fund focuses on the stocks of smaller
companies. The Fund's performance could be hurt by:
- - Investment style risk, which is the chance that returns from
small-capitalization stocks will trail returns from other asset classes or
the overall stock market. Such stocks have generally exhibited significant
volatility due to several factors including smaller companies',
less-certain prospects for growth, and dividends.
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 -10.80%
1991 55.90%
1992 13.02%
1993 15.41%
1994 0.54%
1995 26.60%
1996 14.04%
1997 14.57%
1998 3.52%
1999 37.26%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 29.99% (quarter ended December 31, 1999) and the lowest return for a
quarter was -23.91% (quarter ended September 30, 1990).
<PAGE>
2
----------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
----------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
----------------------------------------------------------------------
Vanguard Explorer Fund 37.26% 18.64% 15.67%
Russell 2000 Index 21.26 16.69 13.40
----------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended October 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.71%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.74%
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that the operating expenses remain the same. The results apply
whether or not you redeem your investment at the end of each period.
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$76 $237 $411 $918
-------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Explorer Fund's expense ratio in fiscal year 1999 was 0.74%,
or $7.40 per $1,000 of average net assets. The average small-cap growth mutual
fund had expenses of 1.65%, or $16.50 per $1,000 of average net assets (derived
from data provided as of December 31, 1999 by Lipper Inc., which reports on the
mutual fund industry). Management expenses, which comprise one part of operating
expenses, include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
- --------------------------------------------------------------------------------
<PAGE>
3
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS INCEPTION DATE
Distributed annually in December December 11, 1967
INVESTMENT ADVISERS NET ASSETS AS OF OCTOBER 31, 1999
The Fund uses four advisers: $2.48 billion
- - Granahan Investment Management, Inc.,
Waltham, Mass., since 1990 NEWSPAPER ABBREVIATION
- - Wellington Management Company, LLP, Explr
Boston, Mass., since 1967
- - Chartwell Investment Partners, Berwyn, VANGUARD FUND NUMBER
Pa., since 1997 024
- - The Vanguard Group, Valley Forge, Pa.,
since 1997 CUSIP NUMBER
921926101
TICKER SYMBOL
VEXPX
- --------------------------------------------------------------------------------
<PAGE>
4
================================================================================
A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
Explorer Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in Vanguard Explorer Fund, you
should also take into account your personal tolerance for the daily fluctuations
of the stock market.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
================================================================================
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You wish to add a fund that focuses on small and/or emerging companies to
your existing holdings, which could include other stock investments as well
as bond, money market, and tax-exempt investments.
- - You are seeking growth of capital over the long term--at least five years.
- - You are not looking for dividend income.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing-switching money into investments
when they expect prices to rise, and taking money out when they expect the
market to fall. As money is shifted in and out, a fund incurs expenses for
buying and selling securities. These costs are borne by all fund shareholders,
including the long-term investors who do not generate the costs. Therefore, the
Fund discourages short-term trading by, among other things, limiting the number
of exchanges it permits.
- --------------------------------------------------------------------------------
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short- term trading:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
<PAGE>
5
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies believed to have
above-average potential for growth in revenue and earnings. Reflecting the
market's high expectations for superior growth, such stocks typically have low
dividend yields and above-average prices in relation to such measures as
revenue, earnings, and book values. Value funds generally emphasize stocks of
companies from which the market does not expect strong growth. The prices of
value stocks typically are below-average in comparison to such factors as
earnings and book value, and these stocks typically have above-average dividend
yields. Growth and value stocks have, in the past, produced similar long-term
returns, though each category has periods when it outperforms the other. In
general, growth funds appeal to investors who will accept more volatility in
hopes of a greater increase in share price. Growth funds also may appeal to
investors with taxable accounts who want a higher proportion of returns to come
as capital gains (which may be taxed at lower rates than dividend income). Value
funds, by contrast, are appropriate for investors who want some dividend income
and the potential for capital gains, but are less tolerant of share-price
fluctuations.
- --------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment advisers use in pursuit
of the Fund's objective, long-term growth in capital. It also explains how the
advisers implement these strategies. In addition, this section discusses several
important risks--market risk, investment style risk, and manager risk--faced by
investors in the Fund. The Board of Trustees oversees the management of the Fund
and may change the investment strategies in the interest of shareholders.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies-and mutual funds that hold these stocks--can
be classified by the companies' market value, or capitalization. Market
capitalization changes over time, and there is no "official" definition of the
boundaries of large-, mid-, and small-cap stocks. Vanguard generally defines
large-capitalization (large-cap) funds as those holding stocks of companies
whose outstanding shares have a market value exceeding $12 billion; mid-cap
funds as those typically holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
- --------------------------------------------------------------------------------
MARKET EXPOSURE
The Fund's primary strategy is to invest chiefly in the stocks of
small-capitalization companies that offer strong growth potential. These
companies typically provide little or no dividend income. The Fund may also
invest in securities that are convertible to common stocks.
<PAGE>
6
[FLAG]THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE POSSIBILITY THAT
STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK
MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS
OF FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
- --------------------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
Best 54.2% 24.1% 19.9% 17.7%
Worst -43.1 -12.4 -0.8 3.1
Average 13.1 10.7 11.0 11.0
- --------------------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1998. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 10.7%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928 through 1932) to 24.1% (from 1994
through 1998). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular.
Keep in mind that Vanguard Explorer Fund focuses on the stocks of smaller
companies. Small-cap stocks have historically been more volatile than--and at
times have performed quite differently from--the large-cap stocks found in the
S&P 500 Index. This is due to several factors, including smaller companies'
less-certain prospects for growth and dividends.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND DIVERSIFICATION
In general, the more diversified a fund's stock holdings, the less likely it is
that a specific stock's poor performance will hurt the fund. One measure of a
fund's diversification is the percentage of its assets represented by its ten
largest holdings. The average U.S. equity mutual fund has about 30% of its
assets invested in its ten largest holdings, while some less-diversified mutual
funds have more than 50% of their assets invested in the stocks of just ten
companies.
- --------------------------------------------------------------------------------
[FLAG]THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE POSSIBILITY
THAT RETURNS FROM STOCKS OF SMALL COMPANIES WILL TRAIL RETURNS FROM OTHER
ASSET CLASSES OR THE OVERALL STOCK MARKET. AS A GROUP, SMALL-CAPITALIZATION
STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN COMMON
STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS
SEVERAL YEARS.
<PAGE>
7
SECURITY SELECTION
Vanguard Explorer Fund employs four investment advisers, each of whom
independently chooses and maintains a portfolio of common stocks for the Fund.
The Fund's Board of Trustees decides the proportion of net assets to be managed
by each adviser and may change the proportions as circumstances warrant.
The four advisers use active investment management methods, which means
they buy and sell securities based on their judgments about companies and their
financial prospects, the prices of the securities, and about the stock market
and the economy in general.
Each adviser uses different processes to select securities for its portion
of the Fund's assets; however, each is committed to buying stocks of small
companies that, in the adviser's opinion, have strong growth potential.
Granahan Investment Management, Inc. (Granahan), which was responsible for
approximately 46% of the Fund's assets as of October 31, 1999, groups securities
into three categories as part of its selection process. The first category,
"core growth," emphasizes companies that have a well-known or established
product and, as a result, have a proven record of growth and a strong market
position. The second category, "pioneers," comprises companies that offer unique
products or technologies that may lead to new products or expansion into new
markets. Granahan judges "pioneer" stocks based on the estimated growth
potential compared to market value. The third category, "special value,"
includes companies that lack a record of strong growth but that, in the
adviser's view, are both undervalued in the market and likely to grow in the
next few years. "Core growth" stocks generally make up 50% to 80% of Granahan's
share of Fund assets, with the other two categories generally at 10% to 25%
each.
Wellington Management Company, LLP (Wellington Management), which was
responsible for approximately 29% of the Fund's assets as of October 31, 1999,
uses research and analysis of individual companies to select stocks that it
feels have exceptional growth potential relative to their valuation in the
marketplace.
Wellington Management considers each stock individually before purchase,
and continually monitors developments at these companies for comparison to
Wellington Management's expectations for growth. To help protect against risk,
the portfolio is broadly diversified both by number of stocks and by exposure to
a range of industries.
Chartwell Investment Partners (Chartwell), which was responsible for
approximately 11% of the Fund's assets as of October 31, 1999, uses a
research-driven process to choose stocks judged to have exceptional growth
potential and to be selling at reasonable prices.
After considering each stock individually before purchase, Chartwell
constantly monitors characteristics of its Fund holdings as a group. In doing
so, Chartwell uses computerized techniques to constantly evaluate its Fund's
holdings.
The fourth adviser, The Vanguard Group (Vanguard) employs a "quantitative"
investment approach. It uses computerized mathematical models to select a
sampling of stocks that, as a group, are expected to have returns and investment
characteristics similar to the Small Company Growth Fund Stock Index, which is
made up of stocks held by the nation's 25 largest small-company mutual funds.
Vanguard was responsible for approximately 10% of the Fund's assets as of
October 31, 1999.
The balance of Vanguard Explorer Fund's assets, about 4%, is held in cash
reserves and managed by Vanguard, which invests in stock index futures so that
the cash reserve portion of the Fund may achieve performance similar to that of
common stocks. This strategy is intended to keep the Fund more fully invested in
common stocks while retaining cash on hand to meet liquidity needs. See below
for more details on the Fund's policy on futures.
The Fund is generally managed without regard to tax ramifications.
<PAGE>
8
[FLAG]THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT THE
ADVISERS MAY DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 70%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of October 31, 1999, the average turnover rate for all
domestic stock funds was approximately 87%, according to Morningstar, Inc.
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of growth companies, the Fund may make
certain other kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, it reserves the right
to invest up to 20% of its assets in foreign securities. These securities may be
traded in U.S. or foreign markets. To the extent that it owns foreign stocks,
the Fund is subject to (1) country risk, which is the possibility that political
events (such as a war), financial problems (such as government default), or
natural disasters (such as an earthquake) will weaken a country's economy and
cause investments in that country to lose money; and (2) currency risk, which is
the possibility that Americans investing abroad could lose money because of a
rise in the value of the U.S. dollar versus foreign currencies.
The Fund may also invest, to a limited extent, in futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation under futures contracts will not
exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may invest up to 15% of its assets in restricted securities with
limited marketability or other illiquid securities.
<PAGE>
9
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $530 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
INVESTMENT ADVISERS
The Fund uses four investment advisers, each of which independently manages a
percentage of the Fund's assets subject to the control of the Trustees and
officers of the Fund. The advisers are:
- - Granahan Investment Management, Inc. (Granahan), 275 Wyman Street, Waltham,
MA 02154, is an investment advisory firm specializing in small-company
stock investments. Founded in 1985, Granahan managed about $1.4 billion in
assets as of October 31, 1999.
<PAGE>
10
- - Wellington Management Company, LLP (Wellington Management), 75 State
Street, Boston, MA 02109, is an investment advisory firm founded in 1928.
As of October 31, 1999, Wellington Management managed more than $217
billion in stock and bond portfolios.
- - Chartwell Investment Partners (Chartwell), 1235 Westlakes Drive, Suite 330,
Berwyn, PA 19312, is an investment advisory firm founded in 1997. As of
October 31, 1999, Chartwell managed about $3.3 billion in assets.
- - The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
provides at-cost investment advisory services to many Vanguard funds
through its Core Management and Fixed Income Groups. Founded in 1975,
Vanguard managed more than $345.6 billion in assets as of October 31, 1999.
The Fund pays three of its investment advisers--Granahan, Wellington
Management, and Chartwell--on a quarterly basis. For each adviser, the quarterly
fee is based on certain annual percentage rates applied to average net assets
managed by the adviser over the quarterly period. In addition, the quarterly
fees paid to each adviser are increased or decreased based upon the adviser's
performance in comparison to a benchmark index. For these purposes, the
cumulative investment performance of each adviser's portion of the Fund over a
trailing 36-month period is compared to the cumulative total return of the Small
Company Growth Fund Stock Index over the same period.
The Fund's most recent STATEMENT OF ADDITIONAL INFORMATION provides
complete details of how Granahan, Wellington Management, and Chartwell are
compensated. The Fund pays no advisory fees to Vanguard, since it provides
services to the Fund on an at-cost basis. For the fiscal year ended October 31,
1999, the Fund paid aggregate advisory fees and expenses representing an
effective annual rate of 0.25% of the Fund's average net assets for the year.
The Fund has authorized the advisers to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISERS
The individuals primarily responsible for Vanguard Explorer Fund are:
JOHN J. GRANAHAN, CFA, Founder and President of Granahan Investment Management,
Inc.; in investment management since 1963, with Granahan since 1985; adviser to
the Fund since 1990; B.A., St. Joseph's University; Graduate Fellow of Catholic
University of America.
KENNETH L. ABRAMS, Senior Vice President of Wellington Management Company, LLP;
in investment management since 1982, with Wellington Management since 1986;
adviser to the Fund since 1994; B.A. and M.B.A., Stanford University.
EDWARD N. ANTOIAN, CFA, Partner and one of the founders of Chartwell Investment
Partners; in investment management, managing equity funds, since 1984; cofounder
of Chartwell in 1997; adviser to the Fund since 1997; B.S., State University of
New York; M.B.A., University of Pennsylvania.
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Core
Management Group; has worked in investment management since 1985, primary
responsibility for Vanguard's stock indexing policy and strategy since joining
the company in 1987; A.B., Dartmouth College; M.B.A., University of Chicago.
- --------------------------------------------------------------------------------
<PAGE>
11
In the interest of obtaining better execution of a transaction, the
advisers may choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution of a
transaction, then the adviser is authorized to choose a broker who, in addition
to executing the transaction, will provide research services to the advisers or
the Fund. Also, the Fund may direct the advisers to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ------------------------------
NUMBER OF SHARES OUTSTANDING
<PAGE>
12
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is EXPLR.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
- --------------------------------------------------------------------------------
VANGUARD EXPLORER FUND
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
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%
Turnover Rate 79% 72% 84% 51% 66%
================================================================================
<PAGE>
13
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $49.60 per share.
During the year, the Fund earned $0.21 per share from investment income
(interest and dividends) and $12.18 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $0.50 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($12.39 per share) minus the distributions ($0.50 per share)
resulted in a share price of $61.49 at the end of the year. This was an increase
of $11.89 per share (from $49.60 at the beginning of the year to $61.49 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 25.14% for the year.
As of October 31, 1999, the Fund had $2.484 billion in net assets. For the year,
its expense ratio was 0.74% ($7.40 per $1,000 of net assets); and its net
investment income amounted to 0.36% of its average net assets. It sold and
replaced securities valued at 79% of its net assets.
- --------------------------------------------------------------------------------
"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.
<PAGE>
14
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- - If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Services Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m. Eastern
time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- - Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- - Make sure to read that fund's prospectus. Contact Participant Services,
toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
15
ACCESSING FUND INFORMATION BY COMPUTER
- --------------------------------------------------------------------------------
VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The possibility that events such as political or financial troubles or natural
disasters will weaken a country's economy.
CURRENCY RISK
The possibility that an American's foreign investment will lose money because of
unfavorable currency exchange rate movements.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
DOLLAR-COST AVERAGING
Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO]
[THE VANGUARD GROUP/(R)/ LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Explorer Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORT TO
SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders. In these
reports, you will find a discussion
of the market conditions and
investment strategies that
significantly affected the Fund's
performance during the most recent
fiscal year.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are incorporated
by reference into (and are thus
legally a part of) this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT SERVICES CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-800-SEC-0330. Reports
and other information about the
Fund are also available on the
SEC's website (www.sec.gov),
or you can receive copies of this
information, for a fee, by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-6009.
Fund's Investment Company Act
file number: 811-1530
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I024N-02/11/2000
<PAGE>
PART B
VANGUARD/(R)/ EXPLORER FUND
(THE FUND)
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 11, 2000
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus (dated February 11, 2000). To obtain the Prospectus or
the most recent Annual Report to Shareholders, which contains the Fund's
financial statements as hereby incorporated by reference, please call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
PAGE
----
DESCRIPTION OF THE FUND..........................................B-1
INVESTMENT POLICIES..............................................B-3
PURCHASE OF SHARES...............................................B-7
REDEMPTION OF SHARES.............................................B-8
SHARE PRICE......................................................B-8
YIELD AND TOTAL RETURN...........................................B-9
FUNDAMENTAL INVESTMENT LIMITATIONS...............................B-11
MANAGEMENT OF THE FUND...........................................B-12
INVESTMENT ADVISORY SERVICES.....................................B-15
PORTFOLIO TRANSACTIONS...........................................B-20
COMPARATIVE INDEXES..............................................B-21
FINANCIAL STATEMENTS.............................................B-23
DESCRIPTION OF THE FUND
ORGANIZATION
The Fund was originally known as the Explorer Fund, Inc. and was organized
as a Delaware corporation in 1967. The Fund merged into a Maryland corporation
in 1973, and was subsequently reorganized as a Delaware business trust in June
1998. Prior to its reorganization as a Delaware business trust, the Fund was
known as Vanguard Explorer Fund, Inc. The Fund is registered with the United
States Securities and Exchange Commission (the Commission) under the Investment
Company Act of 1940 (the 1940 Act) as an open-end, diversified management
investment company. It currently offers a single class of shares, but has the
ability to offer additional share classes. There is no limit on the number of
full and fractional shares that the Fund may issue.
SERVICE PROVIDERS
CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110, serves as the custodian. The custodian is
responsible for maintaining the Fund's assets and keeping all necessary accounts
and records.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Fund's independent accountants.
The accountants audit the Fund's financial statements and provide other related
services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Fund's transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
B-1
<PAGE>
CHARACTERISTICS OF THE FUND'S SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Fund's shares, other
than the possible future termination of the Fund. The Fund may be terminated by
reorganization into another mutual fund or by liquidation and distribution of
its assets. Unless terminated by reorganization or liquidation, the Fund will
continue indefinitely.
SHAREHOLDER LIABILITY. The Fund is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of the Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Fund obligation only if the Fund itself had no remaining
assets with which to meet such obligation. We believe that the possibility of
such a situation arising is extremely remote.
DIVIDEND RIGHTS. The Fund's shareholders are entitled to receive any
dividends or other distributions declared by the Fund. No shares have priority
or preference over any other shares of the Fund with respect to distributions of
the Fund. Distributions will be made from the assets of the Fund, and will be
paid ratably to all shareholders of the Fund according to the number of shares
of the Fund held by shareholders on the record date.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Fund that would adversely affect to a material
degree the rights and preferences of the shares of the fund; or (iii) the
Trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove Trustees upon the written request of shareholders
representing 10% or more of the Fund's net assets, and to change any fundamental
policy of the Fund. Shareholders of the Fund receive one vote for each dollar of
net asset value owned on the record date, and a fractional vote for each
fractional dollar of net asset value owned on the record date. Voting rights are
non-cumulative and cannot be modified without a majority vote.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the Fund's net assets.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with the
Fund's shares.
CONVERSION RIGHTS. There are no conversion rights associated with the
Fund's shares.
REDEMPTION PROVISIONS. The Fund's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Fund has no sinking fund provisions.
CALLS OR ASSESSMENT. The Fund's shares, when issued, are fully paid and
non-assessable.
TAX STATUS OF THE FUND
The Fund intends to qualify as a "regulated investment company" under Subchapter
M of the Internal Revenue Code. This special tax status means that the Fund will
not be liable for federal tax on income and capital gains distributed to
shareholders. In order to preserve its tax status, the Fund must comply with
certain requirements. If the Fund fails to meet these requirements in any
taxable year, it will be subject to tax on its taxable income at corporate
rates, and all distributions from earnings and profits, including any
distributions of net tax-exempt income and net long-term capital gains, will be
taxable to shareholders as ordinary income. In addition, the Fund could be
required to recognize unrealized gains, pay substantial taxes and interest, and
make substantial distributions before regaining its tax status as a regulated
investment company.
B-2
<PAGE>
INVESTMENT POLICIES
The following policies supplement the Fund's investment policies set forth in
the Prospectus.
REPURCHASE AGREEMENTS. The Fund, along with other members of The Vanguard
Group, may invest in repurchase agreements with commercial banks, brokers, or
dealers either for defensive purposes due to market conditions or to generate
income from its excess cash balances. A repurchase agreement is an agreement
under which the Fund acquires a fixed-income security (generally a security
issued by the U.S. Government or an agency thereof, a banker's acceptance, or a
certificate of deposit) from a commercial bank, broker, or dealer, subject to
resale to the seller at an agreed upon price and date (normally, the next
business day). A repurchase agreement may be considered a loan collateralized by
securities. The resale price reflects an agreed upon interest rate effective for
the period the instrument is held by the Fund and is unrelated to the interest
rate on the underlying instrument. In these transactions, the securities
acquired by the Fund (including accrued interest earned thereon) must have a
total value in excess of the value of the repurchase agreement and are held by a
custodian bank until repurchased. In addition, the Fund's Board of Trustees will
monitor the Fund's repurchase agreement transactions generally and will
establish guidelines and standards for review by the investment adviser of the
creditworthiness of any bank, broker, or dealer party to a repurchase agreement
with the Fund.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Fund not within the control
of the Fund and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Fund's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
LENDING OF SECURITIES. The Fund may lend its portfolio securities to
qualified institutional investors (typically brokers, dealers, banks or other
financial institutions) who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities, or completing arbitrage operations. By lending its portfolio
securities, the Fund attempts to increase its income through the receipt of
interest on the loan. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the account of
the Fund. The terms and the structure of such loans must be consistent with the
1940 Act, and the Rules and Regulations or interpretations of the Commission
thereunder. These provisions limit the amount of securities a fund may lend to
33 1/3% of the Fund's total assets, and require that (a) the borrower pledges
and maintains with the Fund collateral consisting of cash, a letter of credit,
or securities issued or guaranteed by the United States Government having a
value at all times not less than 100% of the value of the securities loaned, (b)
the borrower adds to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan
is made subject to termination by the Fund at any time, and (d) the Fund
receives reasonable interest on the loan (which may include the Fund's investing
any cash collateral in interest bearing short-term investments), any
distributions on the loaned securities and any increase in their market value.
Loan arrangements made by the Fund will comply with all other applicable
regulatory requirements, including the rules of the New York Stock Exchange,
which rules presently require the borrower, after notice, to redeliver the
securities within the normal settlement time of three business days. All
relevant facts and circumstances, including the creditworthiness of the broker,
dealer, or institution, will be considered in making decisions with respect to
the lending of securities, subject to review by the Fund's Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Trustees. In addition, voting rights pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
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VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an exemptive
order permitting the Fund to participate in Vanguard's interfund lending
program. This program allows the Vanguard funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions, including the requirement that no fund may borrow or
lend money through the program unless it receives a more favorable interest rate
than is available from a typical bank for a comparable transaction. In addition,
a fund may participate in the program only if and to the extent that such
participation is consistent with the fund's investment objective and other
investment policies. The Boards of Trustees of the Vanguard funds are
responsible for ensuring that the interfund lending program operates in
compliance with all conditions of the Commission's exemptive order.
TEMPORARY INVESTMENTS. The Fund may take temporary defensive measures that
are inconsistent with the Fund's normal fundamental or non-fundamental
investment policies and strategies in response to adverse market, economic,
political or other conditions. Such measures could include investments in (a)
highly liquid short-term fixed income securities issued by or on behalf of
municipal or corporate issuers, obligations of the U.S. Government and its
agencies, commercial paper, and bank certificates of deposit; (b) shares of
other investment companies which have investment objectives consistent with
those of the Fund; (c) repurchase agreements involving any such securities; and
(d) other money market instruments. There is no limit on the extent to which the
Fund may take temporary defensive measures. In taking such measures, the Fund
may fail to achieve its investment objective.
FUTURES CONTRACTS AND OPTIONS. The Fund may enter into futures contracts,
options, and options on futures contracts for several reasons: to maintain cash
reserves while simulating full investment, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when a futures contract
is priced more attractively than the underlying equity security or index.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified future
time and at a specified price. Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission (CFTC), a U.S.
Government agency. Assets committed to futures contracts will be segregated to
the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold" or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to the market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the underlying securities. The Fund intends to use futures contracts only for
bona fide hedging purposes.
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Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of the Fund's
portfolio. The Fund will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an increase
in the price of securities it intends to purchase. As evidence of this hedging
interest, the Fund expects that approximately 75% of its futures contract
purchases will be "completed;" that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Fund upon sale of open
futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of the underlying securities.
Restrictions on the Use of Futures Contracts. The Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the Fund's total assets. In addition, the Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund's total assets.
Risk Factors in Futures Transactions. Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability of the Fund to hedge its portfolio effectively.
The Fund will minimize the risk that it will be unable to close out a futures
contract by only entering into futures which are traded on national futures
exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due to both the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract. The Fund also bears the risk that the Advisers
will incorrectly predict future market trends. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, the Fund will
not be subject to the risks of loss frequently associated with futures
transactions. The Fund would presumably have sustained comparable losses if,
instead of the futures contract, it had invested in the underlying financial
instrument and sold it after the decline.
Utilization of futures transactions by a fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom a fund has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential
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<PAGE>
losses, because the limit may prevent the liquidation of unfavorable positions.
Futures contract prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of future positions and subjecting some futures traders to
substantial losses.
Federal Tax Treatment of Futures Contracts. The Fund is required for
federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on futures contracts held as of the end of the year
as well as those actually realized during the year. In most cases, any gain or
loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Furthermore, sales of futures
contracts which are intended to hedge against a change in the value of
securities held by the Fund may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition. The Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities, and other income derived with respect to its business of investing
in securities. It is anticipated that any net gain realized from the closing out
of futures contracts will be considered qualifying income for purposes of the
90% requirement.
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the payments.
FOREIGN INVESTMENTS. As indicated in the Prospectus, the Fund may invest up
to 20% of its assets in foreign securities and may engage in currency
transactions with respect to such investments. Investors should recognize that
investing in foreign companies involves certain special considerations which are
not typically associated with investing in U.S. companies.
Currency Risk. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Fund permit it to enter into
forward foreign currency exchange contracts in order to hedge holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.
Federal Tax Treatment of Non-U.S. Transactions. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option, or similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and nonequity options are generally
not subject to the special currency rules if they are or would be treated as
sold for their fair market value at year-end under the marking-to-market rules
applicable to other futures contracts unless an election is made to have such
currency rules apply. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not
part of a straddle. The Treasury Department issued regulations under which
certain transactions subject to the special currency rules that are part of a
"section 988 hedging transaction" (as defined in the Internal Revenue Code of
1986, as amended, and the Treasury regulations) will be integrated and treated
as a single transaction or otherwise treated consistently for purposes of the
Code. Any gain or loss attributable to the foreign currency component of a
transaction engaged in by the Fund which is not subject to
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<PAGE>
the special currency rules (such as foreign equity investments other than
certain preferred stocks) will be treated as capital gain or loss and will not
be segregated from the gain or loss on the underlying transaction. It is
anticipated that some of the non-U.S. dollar-denominated investments and foreign
currency contracts Vanguard Explorer Fund may make or enter into will be subject
to the special currency rules described above.
Country Risk. As foreign companies are not generally subject to uniform
accounting, auditing, and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers, and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the Fund will endeavor to achieve most favorable execution costs
in its portfolio transactions in foreign securities, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodial
arrangements of the Fund's foreign securities will be somewhat greater than the
expenses for the custodial arrangements for handling U.S. securities of equal
value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Fund receives from its foreign investments. However, these
foreign withholding taxes are not expected to have a significant impact on the
Fund, since it seeks long-term capital appreciation and any income should be
considered incidental.
ILLIQUID AND RESTRICTED SECURITIES. The Fund may invest up to 15% of its
net assets in illiquid securities. Illiquid securities are securities that may
not be sold or disposed of in the ordinary course of business within seven
business days at approximately the value at which they are being carried on the
Fund's books.
The Fund may invest in restricted, privately placed securities that, under
the Commission's rules, may be sold only to qualified institutional buyers.
Because these securities can be resold only to qualified institutional buyers,
they may be considered illiquid securities--meaning that they could be difficult
for the Fund to convert to cash if needed.
If a substantial market develops for a restricted security held by the
Fund, it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's Board of Trustees. This generally includes
securities that are unregistered that can be sold to qualified institutional
buyers in accordance with Rule 144A under the Securities Act of 1933. While the
Fund's investment adviser determines the liquidity of restricted securities on a
daily basis, the Board oversees and retains ultimate responsibility for the
adviser's decisions. Several factors the Board considers in monitoring these
decisions include the valuation of a security, the availability of qualified
institutional buyers, and the availability of information about the security's
issuer.
PURCHASE OF SHARES
The purchase price of shares of the Fund is the net asset value per share next
determined after the order is received. The net asset value per share is
calculated as of the close of the New York Stock Exchange (the Exchange) on each
day the Exchange is open for business. An order received prior to the close of
the Exchange (generally 4:00 P.M. Eastern time) will be executed at the price
computed on the date of receipt, and an order received after the close of the
Exchange will be executed at the price computed on the next day the Exchange is
open.
The Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interests of the Fund, and (iii) to
reduce or waive the minimum investment for, or any other restrictions on,
initial and subsequent investments for certain fiduciary accounts such as
employee benefit plans or under circumstances where certain economies can be
achieved in sales of the Fund's shares.
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TRADING SHARES THROUGH CHARLES SCHWAB
The Fund has authorized Charles Schwab & Co., Inc. (Schwab) to accept on its
behalf purchase and redemption orders under certain terms and conditions, Schwab
is also authorized to designate other intermediaries to accept purchase and
redemption orders on the Fund's behalf subject to those terms and conditions.
Under this arrangement, the Fund will be deemed to have received a purchase or
redemption order when Schwab or, if applicable, Schwab's authorized designee,
accepts the order in accordance with the Fund's instructions. Customer orders
that are properly transmitted to the Fund by Schwab, or if applicable, Schwab's
authorized designee, will be priced as follows.
Orders received by Schwab before 3 p.m. Eastern time on any business day,
will be sent to Vanguard that day and your share price will be based on the
Fund's net asset value calculated at the close of trading that day. Orders
received by Schwab after 3 p.m. Eastern time, will be sent to Vanguard on the
following business day and your share price will be based on the Fund's net
asset value calculated at the close of trading that day.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment (i)
during any period that the Exchange is closed, or trading on the Exchange is
restricted as determined by the Commission, (ii) during any period when an
emergency exists as defined by the rules of the Commission as a result of which
it is not reasonably practicable for the Fund to dispose of securities owned by
it, or fairly to determine the value of its assets, and (iii) for such other
periods as the Commission may permit.
No charge is made by the Fund for redemptions. Shares redeemed may be worth
more or less than what was paid for them, depending on the market value of the
securities held by the Fund.
If Vanguard determines that it would be detrimental to the best interests
of the remaining shareholders of the Fund to make payment wholly or partly in
cash, the Fund may pay the redemption price in whole or in part by a
distribution in kind of readily marketable securities held by the Fund in lieu
of cash in conformity with applicable rules of the Commission. Investors may
incur brokerage charges on the sale of such securities so received in payment of
redemptions. The Fund has made an election with the Commission to pay in cash
all redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the Fund
at the beginning of such period.
SIGNATURE GUARANTEES. To protect your account, the Fund, and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Fund to verify the identity of a person who has authorized
a redemption from your account. Signature guarantees are required in connection
with: (1) all redemptions, regardless of the amount involved, when the proceeds
are to be paid to someone other than the registered owner(s); and (2) share
transfer requests. These requirements are not applicable to redemptions in
Vanguard's prototype plans except in connection with: (1) distributions made
when the proceeds are to be paid to someone other than the plan participant; (2)
certain authorizations to effect exchanges by telephone; and (3) when proceeds
are to be wired. These requirements may be waived by the Fund in certain
instances.
Signature guarantees can be obtained from a bank, broker, or any other
guarantor that Vanguard deems acceptable. Notaries public are not acceptable
guarantors.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment (stock power) which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter of stock power.
SHARE PRICE
The Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, less all liabilities, by the total number
of shares outstanding. The net asset value is determined as of the close of the
Exchange (generally 4:00 p.m. Eastern time) on each day that the Exchange is
open for trading.
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Portfolio securities for which market quotations are readily available
(which include those securities listed on national securities exchanges, as well
as those quoted on the NASDAQ Stock Market) will be valued at the last quoted
sales price on the day the valuation is made. Such securities which are not
traded on the valuation date are valued at the mean of the bid and ask prices.
Price information on exchange-listed securities is taken from the exchange where
the security is primarily traded. Securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities.
Short term instruments (those with remaining maturities of 60 days or less)
may be valued at cost, plus or minus any amortized discount or premium, which
approximates market value.
Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, according to
the broadest and most representative market, available at the time the Fund is
valued. If events which materially affect the value of the Fund's investments
occur after the close of the securities markets on which such securities are
primarily traded, those investments may be valued by such methods as the Board
of Trustees deems in good faith to reflect fair value.
In determining the Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in calculating various benchmarking indexes. This
officially quoted exchange rate may be determined prior to or after the close of
a particular securities market. If such quotations are not available, the rate
of exchange will be determined in accordance with policies established in good
faith by the Board of Trustees.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect the fair value.
The share price for the Fund can be found daily in the mutual fund listings
of most major newspapers under the heading of Vanguard Funds.
YIELD AND TOTAL RETURN
The yield of the Vanguard Explorer Fund for the thirty-day period ended October
31, 1999 was 0.37%. The average annual total returns for the Fund for the one-,
five-, and ten-year periods ended October 31, 1999, were 25.14%, 12.86%, and
12.86%, respectively.
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return for
the periods of one year, five years, ten years or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over such periods
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)/1/N/ - 1
Where:
T =average annual total return
P =a hypothetical initial investment of $1,000
n =number of years
ERV =ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period
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AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding the
average annual compounded rate of return over the 1-, 5-, and 10-year periods
that would equate the initial amount invested to the after-tax value, according
to the following formulas:
P (1+T)/N/ = ATV
Where:
P =a hypothetical initial payment of $1,000
T =average annual after-tax total return
n =number of years
ATV =after-tax value at the end of the 1-, 5-, or 10-year
periods of a hypothetical $1,000 payment made at the
beginning of the time period, assuming no liquidation
of the investment at the end of the measurement
periods
Instructions:
1. Assume all distributions by the Fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the
period. Adjustments may be made for subsequent re-characterizations of
distributions.
2. Calculate the taxes due on distributions by the Fund by applying the
highest federal marginal tax rates to each component of the distributions
on the reinvestment date (e.g., ordinary income, short-term capital gain,
long-term capital gain, etc.). For periods after December 31, 1997, the
federal marginal tax rates used for the calculations are 39.6% for ordinary
income and short-term capital gains and 20% for long-term capital gains.
Note that the applicable tax rates may vary over the measurement period.
Assume no taxes are due on the portions of any distributions classified as
exempt interest or non-taxable (i.e., return of capital). Ignore any
potential tax liabilities other than federal tax liabilities (e.g., state
and local taxes).
3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the Fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees.
4. State the total return quotation to the nearest hundredth of one percent.
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P) - 1
Where:
C =cumulative total return
P =a hypothetical initial investment of $1,000
ERV =ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period
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SEC YIELDS
Yield is the net annualized yield based on a specified 30-day (or one month)
period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((A-B)/CD+1)/6/ - 1]
Where:
a =dividends and interest earned during the period
b =expenses accrued for the period (net of
reimbursements)
c =the average daily number of shares outstanding during
the period that were entitled to receive dividends
d =the maximum offering price per share on the last day of
the period
FUNDAMENTAL INVESTMENT LIMITATIONS
The Fund is subject to the following fundamental investment limitations, which
cannot be changed in any material way without the approval of the holders of a
majority of the Fund's outstanding voting shares. For these purposes, a
"majority" of shares means shares representing the lesser of: (i) 67% or more of
the votes cast to approve a change, so long as shares representing more than 50%
of the Fund's net asset value are present or represented by proxy; or (ii)
shares representing more than 50% of the Fund's net asset value.
BORROWING. The Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. The Fund may
borrow money through banks, or Vanguard's interfund lending program only, and
must comply with all applicable regulatory conditions. The Fund may not make any
additional investments whenever its outstanding borrowings exceed 5% of net
assets.
COMMODITIES. The Fund may not invest in commodities, except that the Fund
may invest in stock futures contracts, stock options, and options on stock
futures contracts. No more than 5% of the Fund's total assets may be used as
initial margin deposit for futures contracts, and no more than 20% of the Fund's
total assets may be invested in futures contracts or options at any time.
DIVERSIFICATION. With respect to 75% of its total assets, the Fund may not:
(i) purchase more than 10% of the outstanding voting securities of any one
issuer, or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.
ILLIQUID SECURITIES. The Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid.
INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. The Fund may not invest in a company for the purpose
of controlling its management.
INVESTMENT COMPANIES. The Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. The Fund may not lend money to any person except by purchasing fixed
income securities or by entering into repurchase agreements, by lending its
portfolio securities, or through Vanguard's interfund lending program.
MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.
PLEDGING ASSETS. The Fund may not pledge, mortgage, or hypothecate more
than 15% of its net assets.
REAL ESTATE. The Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate and bonds secured
by real estate.
SENIOR SECURITIES. The Fund may not issue senior securities, except in
compliance with the 1940 Act.
B-11
<PAGE>
UNDERWRITING. The Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.
None of these limitations prevents the Fund from participating in The
Vanguard Group (Vanguard). Because the Fund is a member of Vanguard, the Fund
may own securities issued by Vanguard, make loans to Vanguard, and contribute to
Vanguard's costs or other financial requirements. See "Management of the Fund"
for more information.
The investment limitations set forth above are considered at the time
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction.
MANAGEMENT OF THE FUND
OFFICERS AND TRUSTEES
The officers of the Fund manage its day-to-day operations and are responsible to
the Fund's Board of Trustees. The Trustees set broad policies for the Fund and
choose its officers. The following is a list of the Trustees and officers of the
Fund and a statement of their present positions and principal occupations during
the past five years. As a group, the Fund's Trustees and officers own less than
1% of the outstanding shares of the Fund. Each Trustee also serves as a Director
of The Vanguard Group, Inc., and as a Trustee of each of the funds administered
by Vanguard. The mailing address of the Trustees and officers of the Fund is
Post Office Box 876, Valley Forge, PA 19482.
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer, and
Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson & Johnson (Pharmaceuticals/Consumer Products), Director of Johnson &
Johnson*MERCK Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co. (Investment Management), The Jeffrey Co. (Holding Company), and Select
Sector SPDR Trust (Exchange-traded Mutual Fund).
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries,
Inc. (Machinery/Coal/ Appliances); and Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals).
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Procter & Gamble
Co., NACCO Industries (Machinery/Coal/Appliances), and Newfield Exploration Co.
(Energy); formerly, Director and Senior Partner of McKinsey & Co., and President
of New York University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Retired Chairman of Rohm & Haas Co. (Chemicals); Director of Cummins Engine Co.
(Diesel Engine Company), and The Mead Corp. (Paper Products); and Trustee of
Vanderbilt University.
B-12
<PAGE>
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.
ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
*Officers of the Fund are "interested persons" as defined in the 1940 Act.
THE VANGUARD GROUP
The Fund is a member of The Vanguard Group of Investment Companies, which
consists of more than 100 funds. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. (Vanguard), the Fund, and the other funds in The Vanguard
Group obtain at cost virtually all of their corporate management,
administrative, and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to several of the Vanguard funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the funds and also
furnishes the funds with necessary office space, furnishings, and equipment.
Each fund pays its share of Vanguard's total expenses, which are allocated among
the funds under procedures approved by the Board of Trustees of each fund. In
addition, each fund bears its own direct expenses, such as legal, auditing, and
custodian fees.
The funds' officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external adviser
for the funds.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1
under the 1940 Act. The Code is designed to prevent unlawful practices in
connection with the purchase or sale of securities by persons associated with
Vanguard. Under Vanguard's Code of Ethics certain officers and employees of
Vanguard who are considered access persons are permitted to engage in personal
securities transactions. However, such transactions are subject to procedures
and guidelines similar to, and in many cases more restrictive than, those
recommended by a blue ribbon panel of mutual fund industry executives.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the funds.
The Amended and Restated Funds' Service Agreement provides for the following
arrangement: (a) each Vanguard fund may be called upon to invest up to 0.40% of
its current net assets in Vanguard, and (b) there is no other limitation on the
dollar amount that each Vanguard fund may contribute to Vanguard's
capitalization. The amounts which each of the funds has invested are adjusted
from time to time in order to maintain the proportionate relationship between
each Fund's relative net assets and its contribution to Vanguard's capital. At
October 31, 1999, Vanguard Explorer Fund had contributed capital of $530,000 to
Vanguard, representing 0.02% of the Fund's net assets and 0.5% of Vanguard's
capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the funds by third parties.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
Vanguard, provides all distribution and marketing activities for the funds in
the Group. The principal distribution expenses are for advertising, promotional
materials, and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of The Vanguard Group. The
Trustees and officers of Vanguard determine the amount to be spent annually on
distribution activities, the manner and amount to be spent on each fund, and
whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the funds based upon their relative net assets. The remaining
one half of these expenses is allocated among the funds based upon each fund's
sales for the preceding 24 months relative to the total sales of the funds as a
group;
B-13
<PAGE>
provided, however, that no fund's aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
the average distribution expense rate for Vanguard, and that no fund shall incur
annual distribution expenses in excess of 0.20 of 1% of its average month-end
net assets.
During the fiscal years ended October 31, 1997, 1998, and 1999, Vanguard
Explorer Fund incurred the following approximate amounts of The Vanguard Group's
management (including transfer agency), distribution, and marketing expenses:
$9,263,000, $10,360,000, and $11,114,000, respectively.
INVESTMENT ADVISORY SERVICES
Vanguard provides investment advisory services to the Fund and several other
Vanguard funds. These services are provided on an at-cost basis from a money
management staff employed directly by Vanguard. The compensation and other
expenses of this staff are paid by the funds utilizing these services.
TRUSTEE COMPENSATION
The same individuals serve as Trustees of all Vanguard funds (with two
exceptions, which are noted in the table appearing on page B-15), and each fund
pays a proportionate share of the Trustees' compensation. The funds employ their
officers on a shared basis, as well. However, officers are compensated by
Vanguard, not the funds.
INDEPENDENT TRUSTEES. The funds compensate their independent Trustees--that
is, the ones who are not also officers of the fund--in three ways:
- - The independent Trustees receive an annual fee for their service to the
funds, which is subject to reduction based on absences from scheduled Board
meetings.
- - The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.
- - Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.
"INTERESTED" TRUSTEES. Mr. Brennan serves as a Trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of The Vanguard
Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Fund for each Trustee. In addition, the table shows
the total amount of benefits that we expect each Trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each Trustee by all Vanguard funds. All information shown is for the fiscal year
ended October 31, 1999.
B-14
<PAGE>
<TABLE>
VANGUARD EXPLORER FUND COMPENSATION TABLE
<S> <C> <C> <C> <C>
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM ALL VANGUARD
COMPENSATION AS PART OF THIS BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FROM THIS FUND FUND'S EXPENSES RETIREMENT TRUSTEES(1)
- ------------------------------------------------------------------------------------------------
John C. Bogle(2) None None None None
John J. Brennan None None None None
Barbara Barnes
Hauptfuhrer(2) $99 $13 $15,000 $0
JoAnn Heffernan Heisen $595 $33 $15,000 $80,000
Bruce K. MacLaury $615 $55 $12,000 $75,000
Burton G. Malkiel $599 $54 $15,000 $80,000
Alfred M. Rankin, Jr. $595 $40 $15,000 $80,000
John C. Sawhill $595 $50 $15,000 $80,000
James O. Welch, Jr. $595 $58 $15,000 $80,000
J. Lawrence Wilson $595 $42 $15,000 $80,000
- ---------
</TABLE>
(1) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 Vanguard funds (102
in the case of Mr. Malkiel; 93 in the case of Mr. MacLaury).
(2) Mr. Bogle and Mrs. Hauptfuhrer have retired from the funds' Board,
effective December 31, 1999 and December 31, 1998, respectively.
INVESTMENT ADVISORY SERVICES
The Fund currently employs four separate investment advisers, each of whom
manages the investment and reinvestment of a portion of the Fund's assets. Until
February 28, 1990, when the Fund acquired the assets of Explorer II, Wellington
Management Company, LLP was sole investment adviser to the Fund (then known
simply as Explorer Fund), and Granahan Investment Management, Inc. served as
sole investment adviser to Explorer II, the acquired Fund. Chartwell Investment
Partners and Vanguard were added as advisers on August 1, 1997.
The proportion of the net assets of the Fund managed by each adviser was
established by the Board of Trustees and may be changed in the future by the
Board of Trustees as circumstances warrant. Investors will be advised of any
substantive change in the proportions managed by each adviser. Because the Fund
uses four advisers it is possible that the advisers would purchase or sell the
same security at the same time. Such a situation might result in increased
brokerage costs or adverse tax consequences to the Fund. The Board of Trustees
monitors portfolio activity in order to minimize any possible adverse
consequences.
WELLINGTON MANAGEMENT COMPANY, LLP
The Fund has entered into an advisory agreement with Wellington Management
Company, LLP (Wellington Management) under which Wellington Management manages
the investment and reinvestment of a portion of the Fund's assets (the
Wellington Management Portfolio) and continuously reviews, supervises and
administers the Fund's investment program with respect to those assets. As of
October 31, 1999, Wellington Management managed approximately 29% of the Fund's
net assets. Wellington Management discharges its responsibilities subject to the
control of the officers and Trustees of the Fund.
Wellington Management is a professional investment counseling firm which
globally provides investment services to investment companies and other
institutions. Wellington Management is a Massachusetts limited liability
partnership of which the following persons are managing partners: Laurie A.
Gabriel, Duncan M. McFarland, and John R. Ryan. Wellington Management and its
predecessor organizations have provided investment advisory services to
investment companies since 1928 and to investment counseling clients since 1960.
B-15
<PAGE>
Kenneth L. Abrams, Senior Vice President of Wellington Management, serves
as portfolio manager of the assets of the Fund assigned to Wellington
Management. Mr. Abrams has been employed by Wellington Management since 1986 and
has served as portfolio manager of the Fund since 1994.
The Fund pays Wellington Management a Basic Fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end net assets of the Wellington
Management Portfolio for the quarter:
NET ASSETS RATE
---------- ----
First $500 million .................... .250%
Next $250 million ..................... .200%
Next $250 million ..................... .150%
Assets in excess of $1 billion ........ .100%
The Basic Fee, as provided above, shall be increased or decreased by
applying an incentive/penalty fee adjustment based on the investment performance
of the Wellington Management Portfolio relative to the investment performance of
the Small Company Growth Fund Stock Index (the Index). Prior to July 31, 1997,
Wellington Management's fees were calculated by using the Russell 2000 Index as
a performance benchmark. Beginning with the quarter ended October 31, 1997, the
"new" benchmark (Small Company Growth Fund Stock Index) was phased in over a
36-month period by calculating Wellington Management's incentive/penalty fee
based on the linked performance of new and old benchmarks.
The following table sets forth the adjustment factors to the base advisory
fee payable by the Fund to Wellington Management under the current investment
advisory agreement:
THREE-YEAR CUMULATIVE PERFORMANCE PERFORMANCE FEE
DIFFERENTIAL VERSUS THE INDEX ADJUSTMENT
----------------------------- ----------
Trails by -12% or more ..................... -0.50 X Basic Fee
Trails by more than -6% up to -12% ......... -0.25 X Basic Fee
Trails/exceeds from -6% through 6% ......... 0.00 X Basic Fee
Exceeds by more than 6% but less than 12% .. +0.25 X Basic Fee
Exceeds by 12% or more ..................... +0.50 X Basic Fee
The investment performance of the Wellington Management Portfolio for any
period, expressed as a percentage of the "Wellington Management Portfolio unit
value" at the beginning of such period, is the sum of: (i) the change in the
Wellington Management Portfolio unit value during such period; (ii) the unit
value of the Fund's cash distributions from the Wellington Management Portfolio
net investment income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within such period; and (iii)
the unit value of capital gains taxes paid or accrued during such period by the
Fund for undistributed realized long-term capital gains realized from the
Wellington Management Portfolio.
The Wellington Management Portfolio unit value is determined by dividing
the total net assets of the Wellington Management Portfolio by a given number of
units. Pursuant to the Fund's investment advisory agreement with Wellington
Management dated February 28, 1990, the number of units in the Wellington
Management Portfolio originally equaled the total shares outstanding of the Fund
on that date. As assets are added to or withdrawn from the Wellington Management
Portfolio, the number of units of the Wellington Management Portfolio is
adjusted based on the unit value of the Wellington Management Portfolio on the
day such changes are executed.
The investment record of the Index or Russell 2000 for any period,
expressed as a percentage of the Index or Russell 2000 at the beginning of such
period, is the sum of (i) the change in the level of the Index or Russell 2000
during such period and (ii) the value, computed consistently with the Index or
Russell 2000, of cash distributions having an ex-dividend date occurring within
such period made by companies whose securities comprise the Index or Russell
2000.
During the fiscal years ended October 31, 1997, 1998, and 1999, the Fund
paid Wellington Management the following advisory fees:
B-16
<PAGE>
1997 1998 1999
---- ---- ----
Basic Fee $1,950,387 $1,647,928 $1,588,542
Increase/(Decrease) for Performance (89,408) (288,253) 659,915
Adjustment ----------------------------------
Total $1,860,979 $1,359,675 $2,248,457
----------------------------------
----------------------------------
GRANAHAN INVESTMENT MANAGEMENT, INC.
On February 28, 1990, effective with the acquisition of the assets of Explorer
II, the Fund retained Granahan Investment Management, Inc. (Granahan) as a
second investment adviser. Under its advisory agreement with the Fund, Granahan
manages the investment and reinvestment of a portion of the Fund's assets (the
Granahan Portfolio) and continuously reviews, supervises, and administers the
Fund's investment program with respect to those assets. As of October 31, 1999,
Granahan managed approximately 46% of the Fund's net assets. Granahan discharges
its responsibilities subject to the control of the officers and Trustees of the
Fund.
Granahan Investment Management, Inc., is an investment advisory firm
specializing in small company stock investments. Mr. John Granahan is the
President and major stockholder of Granahan Investment Management, Inc.
The Fund pays Granahan a Basic Fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end net assets of the Granahan Portfolio
for the quarter:
NET ASSETS RATE
---------- ----
First $500 million ..................... .300%
Next $250 million ...................... .200%
Next $250 million ...................... .150%
Assets in excess of $1 billion ......... .100%
The Basic Fee paid to Granahan may be increased or decreased by applying an
adjustment formula based on the investment performance of the net assets of the
Granahan Portfolio relative to the investment performance of the Small Company
Growth Fund Stock Index (the Index). The incentive portion of the fee may be
earned even if the performance of the Granahan Portfolio for the period is
negative provided that the Portfolio's performance exceeds the Index by the
required percentage. Prior to July 31, 1997, Granahan's fees were calculated by
using the Russell 2000 Index as a performance benchmark. Beginning with the
quarter ended October 31, 1997, the "new" benchmark (Small Company Growth Fund
Stock Index) was phased in over a 36-month period by calculating Granahan's
incentive/penalty fee based on the linked performance of the new and old
benchmarks.
The following table sets forth the adjustment factors to the base advisory
fee payable by the Fund to Granahan under this investment advisory agreement:
CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE
DIFFERENTIAL VERSUS THE INDEX ADJUSTMENT
----------------------------- ----------
Trails by -12% or more ................... Decrease by .01875%
Trails by more than -6% up to -12% ....... Decrease by .009375%
Trails/exceeds from -6% through 6% ....... No Adjustment
Exceeds by more than 6% but less than 12%. Increase by .009375%
Exceeds by 12% or more ................... Increase by .01875%
The investment performance of the Granahan Portfolio for any period,
expressed as a percentage of the "Granahan Portfolio unit value" at the
beginning of such period, is the sum of: (i) the change in the Granahan
Portfolio unit value during such period; (ii) the unit value of the Fund's cash
distributions from the Granahan Portfolio net investment income and realized net
capital gains (whether long-term or short-term) having an ex-
B-17
<PAGE>
dividend date occurring within such period; and (iii) the unit value of capital
gains taxes paid or accrued during such period by the Fund for undistributed
realized long-term capital gains realized from the Granahan Portfolio.
The Granahan Portfolio unit value is determined by dividing the total net
assets of the Granahan Portfolio by a given number of units. Pursuant to the
Fund's investment advisory agreement with Granahan dated February 28, 1990, the
number of units in the Granahan Portfolio originally equalled the total shares
outstanding of the Fund on that date. As assets are added to or withdrawn from
the Granahan Portfolio, the number of units of the Granahan Portfolio is
adjusted based on the unit value of the Granahan Portfolio on the day such
changes are executed.
The investment record of the Index or Russell 2000 for any period,
expressed as a percentage of the Index or Russell 2000 at the beginning of such
period, is the sum of (i) the change in the level of the Index or Russell 2000
during such period and (ii) the value, computed consistently with the Index or
Russell 2000, of cash distributions having an ex-dividend date occurring within
such period made by companies whose securities comprise the Index or Russell
2000.
The Index shall not be fully operable as the performance benchmark used to
determine Granahan's performance fee adjustment until the quarter ending July
31, 2000. Until that date, Granahan's performance fee adjustment shall be
determined by linking the investment performance of the Index and that of the
Russell 2000 as follows:
1. QUARTER ENDED OCTOBER 31, 1997. Granahan's performance fee adjustment was
determined by linking the investment performance of the Russell 2000 for
the eleven quarters ended July 31, 1997 with that of the Index for the
quarter ended October 31, 1997.
2. QUARTER ENDED JANUARY 31, 1998. Granahan's performance fee adjustment was
determined by linking the investment performance of the Russell 2000 for
the ten quarters ended July 31, 1997 with that of the Index for the two
quarters ended January 31, 1998.
3. QUARTER ENDED APRIL 30, 1998. Granahan's performance fee adjustment was
determined by linking the investment performance of the Russell 2000 for
the nine quarters ended July 31, 1997 with that of the Index for the three
quarters ended April 30, 1998.
4. QUARTER ENDED JULY 31, 1998. Granahan's performance fee adjustment was
determined by linking the investment performance of the Russell 2000 for
the eight quarters ended July 31, 1997 with that of the Index for the four
quarters ended July 31, 1998.
5. QUARTER ENDED OCTOBER 31, 1998. Granahan's performance fee adjustment was
determined by linking the investment performance of the Russell 2000 for
the seven quarters ended July 31, 1997 with that of the Index for the five
quarters ended October 31, 1998.
6. QUARTER ENDED JANUARY 31, 1999. Granahan's performance fee adjustment was
determined by linking the investment performance of the Russell 2000 for
the six quarters ended July 31, 1997 with that of the Index for the six
quarters ended January 31, 1999.
7. QUARTER ENDED APRIL 30, 1999. Granahan's performance fee adjustment was
determined by linking the investment performance of the Russell 2000 for
the five quarters ended July 31, 1997 with that of the Index for the seven
quarters ended April 30, 1999.
8. QUARTER ENDED JULY 31, 1999. Granahan's performance fee adjustment was
determined by linking the investment performance of the Russell 2000 for
the four quarters ended July 31, 1997 with that of the Index for the eight
quarters ended July 31, 1999.
9. QUARTER ENDED OCTOBER 31, 1999. Granahan's performance fee adjustment was
determined by linking the investment performance of the Russell 2000 for
the three quarters ended July 31, 1997 with that of the Index for the nine
quarters ended October 31, 1999.
10. QUARTER ENDed JANUARY 31, 2000. Granahan's performance fee adjustment was
determined by linking the investment performance of the Russell 2000 for
the two quarters ended July 31, 1997 with that of the Index for the ten
quarters ending January 31, 2000.
B-18
<PAGE>
11. QUARTER ENDING APRIL 30, 2000. Granahan's performance fee adjustment shall
be determined by linking the investment performance of the Russell 2000 for
the quarter ended July 31, 1997 with that of the Index for the eleven
quarters ending April 30, 2000.
12. QUARTER ENDING JULY 31, 2000. The Index shall be fully operable.
During the fiscal years ended October 31, 1997, 1998, and 1999, the Fund
paid Granahan the following advisory fees:
1997 1998 1999
Basic Fee ---- ---- ----
Increase/(Decrease) for Performance $2,532,966 $2,508,538 $2,476,006
Adjustment (242,952) (479,000) 0
------------------------------------
Total $2,290,014 $2,029,538 $2,476,006
------------------------------------
CHARTWELL INVESTMENT PARTNERS
The Fund also employs Chartwell Investment Partners (Chartwell) under an
investment advisory agreement to manage the investment and reinvestment of
approximately 11% of the Fund's assets. Chartwell discharges its
responsibilities subject to the control of the officers and Trustees of the
Fund.
For the services provided by Chartwell under the advisory agreement the
Fund pays Chartwell a basic fee at the end of each fiscal quarter, calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the average month-end net assets of the Chartwell Portfolio for the quarter:
NET ASSETS RATE
---------- ----
First $250 million ......................... 0.40%
Next $250 million .......................... 0.30%
Assets in excess of $500 million ........... 0.20%
Effective with the quarter ended July 31, 1998 the Basic Fee, as provided
above, is increased or decreased by applying an incentive/penalty fee adjustment
based on the investment performance of the Chartwell Portfolio relative to the
investment performance of the Small Company Growth Fund Stock Index (the Index).
The following table sets forth the fee payable by the Fund to Chartwell based
upon the incentive/penalty adjustment:
THREE-YEAR CUMULATIVE PERFORMANCE PERFORMANCE FEE
DIFFERENTIAL VERSUS THE INDEX ADJUSTMENT
----------------------------- ----------
Trails by -12% or more ..................... -0.20 X Basic Fee
Trails by more than -6% up to -12% ......... -0.10 X Basic Fee
Trails/exceeds from -6% through 6% ......... 0.00 X Basic Fee
Exceeds by more than 6% but less than 12% .. +0.10 X Basic Fee
Exceeds by 12% or more ..................... +0.20 X Basic Fee
Through the quarter ending July 31, 2000, the incentive/penalty fee for
Chartwell will be calculated according to the following transition rules:
(A) AUGUST 1, 1997 THROUGH APRIL 30, 1998. Beginning with the quarter ended
October 31, 1997 and through the quarter ended April 30, 1998, there was no
Performance Fee Adjustment.
(B) MAY 1, 1998 THROUGH JULY 31, 2000. Beginning with the quarter ended July
31, 1998 and through the quarter ending July 31, 2000, the Performance Fee
Adjustment is computed based upon a comparison of the investment
performance of the Chartwell Portfolio and that of the Index over the
number of quarters that have elapsed between August 1, 1997 and the end of
the quarter for which the fee is computed. During this period, the number
of percentage points by which the investment performance of the Chartwell
Portfolio must exceed or trail the investment performance of the Index at
each Performance Fee Adjustment level shall be determined
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on the basis of a fraction applied to the performance differentials shown
in the above table. For each quarter, this fraction shall equal the number
of quarters elapsed since August 1, 1997 divided by twelve.
(C) ON AND AFTER JULY 31, 2000. For the quarter ending July 31, 2000 and
thereafter, the period used to calculate the Performance Fee Adjustment
shall be the 36 months through the end of the quarter for which the fee is
being computed and the number of percentage points used shall be as stated
in the table above.
The investment performance of the Fund, for any period, expressed as a
percentage of the "Chartwell Portfolio Unit Value" at the beginning of such
period, will be the sum of: (i) the change in the Chartwell Portfolio Unit Value
during such period; (ii) the unit value of the Fund's cash distributions from
the Fund's net investment income and realized net capital gains (whether
long-term or short-term) having an ex-dividend date occurring within such
period; and (iii) the unit value of taxes paid including withholding taxes and
capital gains taxes paid or accrued during such period by the Fund for
undistributed realized long-term capital gains realized from the Fund.
The Chartwell Portfolio Unit Value is determined by dividing the total net
assets of the Chartwell Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the Fund equalled the total shares
outstanding of the Fund. As assets are added to or withdrawn from the Chartwell
Portfolio, the number of units of the Chartwell Portfolio is adjusted based on
the unit value of the Chartwell Portfolio on the day such changes are executed.
For the period August 1, 1997 to October 31, 1997, and the fiscal years
ended October 31, 1998 and 1999, the Fund paid Chartwell Investment Partners the
following advisory fees:
AUG. 1-OCT. 31
1997 1998 1999
---- ---- ----
Basic Fee $202,329 $952,259 $1,042,721
Increase/(Decrease) for
Performance Adjustment 0 (71,146) 70,879
------------------------------------------
Total $202,329 $881,113 $1,113,600
------------------------------------------
THE VANGUARD GROUP, INC.
Vanguard's Core Management Group provides investment advisory services on an
at-cost basis with respect to 10% (as of October 31, 1999) of Vanguard Explorer
Fund's assets, and any cash reserves held by the Fund (4% as of October 31,
1999). Vanguard's Core Management Group is supervised by the officers of the
funds.
For the period August 1, 1997 to October 31, 1997, and the fiscal years
ended October 31, 1998 and 1999, the Fund incurred expenses for investment
advisory services provided by Vanguard in the following approximate amounts:
$2,000, $38,000, and $170,000, respectively.
DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS
The Fund's current agreements with Wellington Management, Granahan, Chartwell,
and Vanguard are renewable for successive one year periods, only if each renewal
is specifically approved by a vote of the Fund's Board of Trustees, including
the affirmative votes of a majority of the Trustees who are not parties to the
contract or "interested persons" (as defined in the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of considering such approval.
An agreement is automatically terminated if assigned, and may be terminated
without penalty at any time (1) either by vote of the Board of Trustees of the
Fund on 60 days' written notice to the adviser, or (2) by the adviser upon 90
days' written notice to the Fund.
PORTFOLIO TRANSACTIONS
The Advisers are authorized (with the approval of the Fund's Board of Trustees)
to select the brokers or dealers that will execute the purchases and sales of
portfolio securities for the Fund and direct the advisers to use their best
efforts to obtain the best available price and most favorable execution as to
all transactions for the Fund. The Advisers have undertaken to execute each
investment transaction at a price and commission which provides the most
favorable total cost or proceeds reasonably obtainable under the circumstances.
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In placing portfolio transactions, the Advisers will use their best
judgment to choose the broker most capable of providing the brokerage services
necessary to obtain the best available price and most favorable execution. The
full range and quality of brokerage services available will be considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research and statistical
information and provide other services in addition to execution services to the
Fund and/or the Advisers. The Advisers consider such information useful in the
performance of their obligations under the agreements but are unable to
determine the amount by which such services may reduce their expenses.
The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Trustees, the Advisers may cause the Fund to pay
a broker-dealer which furnishes research services a higher commission than that
which might be charged by another broker-dealer for effecting the same
transaction; provided that such commission is deemed reasonable in terms of
either that particular transaction or the overall responsibilities of the
Advisers to the Fund and the other funds in the Group.
Currently, it is the Fund's policy that the Advisers may at times pay
higher commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. The Advisers will only pay such higher
commissions if they believe this to be in the best interest of the Fund. Some
brokers or dealers who may receive such higher commissions in recognition of
brokerage services related to execution of securities transactions are also
providers of research information to the Advisers and/or the Fund. However, the
Advisers have informed the Fund that they generally will not pay higher
commission rates specifically for the purpose of obtaining research services.
During the fiscal years ended October 31, 1997, 1998, and 1999, the Fund
paid $3,057,037, $3,023,496, and $3,178,526 in brokerage commissions,
respectively.
Some securities considered for investment by the Fund may also be
appropriate for other Vanguard funds and/or clients served by each Adviser. If
purchase or sale of securities consistent with the investment policies of the
Fund and one or more of these other funds or clients served by the advisers are
considered at or about the same time, transactions in such securities will be
allocated among the several funds and clients in a manner deemed equitable by
the Advisers. Although there may be no specified formula for allocating such
transactions, the allocation methods used, and the results of such allocations,
will be subject to periodic review by the Fund's Board of Trustees.
COMPARATIVE INDEXES
Each of the investment company members of the Group, including Vanguard Explorer
Fund, may from time to time use one or more of the following unmanaged indexes
for comparative performance purposes:
SMALL COMPANY GROWTH FUND STOCK INDEX--is composed of the various domestic
common stocks that are held in the 25 largest small company stock mutual funds,
using year-end net assets, monitored by Morningstar, Inc. Under an agreement
with the Fund, Morningstar, Inc. determines the composition of the Index and
Vestek Systems calculates the monthly total return. Neither The Vanguard Group,
Inc., Wellington Management, Granahan, nor Chartwell are affiliated with
Morningstar or Vestek Systems in any way.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by
Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S 500/BARRA VALUE INDEX--consists of the stocks in the Standard
and Poor's 500 Composite Stock Price Index (S&P 500) with the lowest
price-to-book ratios, comprising 50% of the market capitalization of the S&P
500.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
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RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 EQUITY INDEX--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX--consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard & Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia, and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN LONG-TERM TREASURY BOND INDEX--is a market weighted index that contains
individually priced U.S. Treasury securities with maturities of ten years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S.
Treasury, agency, and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX--all publicly offered fixed rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than one year and with more than $100 million outstanding. This index
includes over 1,500 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX--is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $100 million
principal outstanding and maturity greater than ten years.
BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current coupon high-grade
general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average yield
of four high-grade, noncallable preferred stock issues.
NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It is
a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX--65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index, 12.5% Standard & Poor's Utilities Index, and 12.5% Standard & Poor's
Telephone Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market-weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass through
securities corporate rated BBB- or better. The index has a market value of over
$5 trillion.
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LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between one and five years. The index has a market value of over $1.6 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX--is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between five and
ten years. The index has a market value of over $800 billion.
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market-weighted
index that contains individually priced U.S. Treasury, agency and corporate
securities rated BBB- or better with maturities greater than ten years. The
index has a market value of over $1.1 trillion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE--the average performance of small
company growth funds as defined by Lipper Inc. Lipper defines a small company
growth fund as a fund that by prospectus or portfolio practice, limits its
investments to companies on the basis of the size of the company. From time to
time, Vanguard may advertise using the average performance and/or the average
expense ratio of the small company growth funds. (This fund category was first
established in 1982. For years prior to 1982, the results of the Lipper Small
Company Growth category were estimated using the returns of the funds that
constituted the Group at its inception.)
RUSSELL 3000 INDEX--consists of approximately the 3,000 largest stocks of
U.S.-domiciled companies commonly traded on the New York and American Stock
Exchanges or the NASDAQ over-the-counter market, accounting for over 90% of the
market value of publicly traded stocks in the U.S.
RUSSELL 2000 STOCK INDEX--is composed of approximately 2,000 small
capitalization stocks.
LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Inc.
LIPPER GENERAL EQUITY FUND AVERAGE--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Inc.
LIPPER FIXED INCOME FUND AVERAGE--an industry benchmark of average fixed income
funds with similar investment objectives and policies, as measured by Lipper
Inc.
FINANCIAL STATEMENTS
The Fund's audited Financial Statements for the year ended October 31, 1999,
including the financial highlights for each of the five fiscal years in the
period ended October 31, 1999, appearing in the Vanguard Explorer Fund 1999
Annual Report to Shareholders, and the report thereon of PricewaterhouseCoopers
LLP, independent accountants, also appearing therein, are incorporated by
reference in this Statement of Additional Information. For a more complete
discussion of the performance, please see the Fund's Annual Report to
Shareholders, which may be obtained without charge.
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SAI024-02/11/2000