-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DZAfnM7Qs3M163lPfJrhu247Wc/PIvdljvEdUxjusy0G3VEB6/GrIVKa1g3jC7K0 /cQGo/VYamrJImPrrgLgvw== 0000932471-01-500559.txt : 20020413 0000932471-01-500559.hdr.sgml : 20020413 ACCESSION NUMBER: 0000932471-01-500559 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011031 FILED AS OF DATE: 20011221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD EXPLORER FUND CENTRAL INDEX KEY: 0000034066 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510106626 STATE OF INCORPORATION: PA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-01530 FILM NUMBER: 1820526 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 FORMER COMPANY: FORMER CONFORMED NAME: EXPLORER FUND INC DATE OF NAME CHANGE: 19900305 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD EXPLORER FUND INC DATE OF NAME CHANGE: 19920703 N-30D 1 explorer2001.txt VANGUARD EXPLORER FUND ANNUAL REPORT VANGUARD EXPLORER(TM) FUND Annual Report * October 31, 2001 STOCK [SHIP ON THE OCEAN] [THE VANGUARD GROUP(R) LOGO] PERSPECTIVE Maintaining a long-term investment perspective isn't easy. Perhaps that's why it has proven to be so rewarding. With news, information, and opinion constantly bombarding us, the temptation to buy or sell--to do something--is powerful. Yet such activity is often counterproductive. Emotions can lead us to big mistakes, like jumping into a hot investment we know little about or selling a sound long-term holding when it sags for a while. The actions we recommend are quite simple. First, take the time to decide on a mix of stocks, bonds, and cash investments that makes sense for you. Take into account your investment time horizon, your goals, and your ability and willingness to ride out market fluctuations. Write this mix down--it's your investment plan. Second, use low-cost, widely diversified mutual funds to carry out your asset allocation. Third, stick with your plan, unless there's a major change in your time horizon, goals, or financial situation. Don't "play the market"--and if you feel you must, don't risk more than a tiny percentage of your assets. Finally, if market news, the opinions of "experts," or the hope of a big score tempts you to act, consult your plan. It may help you keep a long-term perspective. - -------------------------------------------------------------------------------- CONTENTS LETTER FROM THE CHAIRMAN 1 REPORT FROM THE ADVISERS 6 FUND PROFILE 9 GLOSSARY OF INVESTMENT TERMS 10 PERFORMANCE SUMMARY 11 YOUR FUND'S AFTER-TAX RETURNS 12 FINANCIAL STATEMENTS 13 - -------------------------------------------------------------------------------- SUMMARY * Vanguard Explorer Fund returned -16.2%, reflecting the overall weakness in growth stocks of all sizes. * With good stock selection in several sectors and a relatively small commitment to technology, your fund experienced a less severe decline than its comparative measures. * The broad market, led by the tech sector, plummeted during the 12 months. LETTER FROM THE CHAIRMAN [PHOTO OF JOHN J. BRENNAN] JOHN J. BRENNAN Fellow Shareholder, Although the effects of the September 11 terrorist attacks accelerated the deterioration of the U.S. economy, the stock market's decline was well under way before the tragedy, and equities were hammered during the 12 months ended October 31, 2001. vanguard explorer fund posted a fiscal-year return of -16.2% that, while very disappointing in absolute terms, was considerably better than the returns of its comparative measures and the broad market. The table below compares the total return (capital change plus reinvested dividends) of your fund with those of its average mutual fund peer and its unmanaged benchmark index, the Russell 2000 Growth Index, which we consider to be the "best fit" for the fund. It also presents the return of the overall U.S. stock market, as measured by the Wilshire 5000 Total Market Index. - ------------------------------------------------ 2001 TOTAL RETURNS FISCAL YEAR ENDED OCTOBER 31 - ------------------------------------------------ VANGUARD EXPLORER FUND -16.2% Average Small-Cap Growth Fund* -29.0 Russell 2000 Growth Index -31.5 Wilshire 5000 Index -25.6 - ------------------------------------------------ *Derived from data provided by Lipper Inc. The fund's return is based on a decrease in net asset value from $77.28 per share on October 31, 2000, to $51.91 per share on October 31, 2001, and is adjusted for a dividend of $0.25 per share paid from net investment income and a distribution of $13.91 per share paid from net realized capital gains. If you own Vanguard Explorer Fund in a taxable account, please see page 12 for a review of the fund's after-tax returns. We should note that soon after the end of the fiscal year, we introduced Admiral(TM) Shares for the Explorer Fund. This is a separate share class that carries a lower expense ratio for the benefit of shareholders with large or long-standing accounts who bring economy of scale and lower costs to the fund. For more information on the new share class, visit Vanguard.com. ECONOMIC OVERVIEW The U.S. economy had slowed markedly even before the terrorist attacks of September 11. The economic reports that arrived over the ensuing month and a half indicated that the reaction to the attacks had pushed the economy into recession: Output of goods and services fell, unemployment soared, and consumer spending--which had been propping up the economy's growth--waned. The nation's gross domestic product, adjusted for inflation, fell at an annual rate of -1.1% during the third quarter of 2001, a period that included 1 the first few weeks after the attacks but did not reflect their full impact. It was the first quarterly decline in GDP in more than eight years. Corporate profits plunged, as many companies saw their revenues fall even while expenses were rising. Many companies responded by laying off employees. The unemployment rate climbed to 5.4% in October--the highest level in almost five years. The job losses spread beyond manufacturing to the service sector. Travel-related industries were hit especially hard. Consumer spending, which accounts for two-thirds of U.S. economic activity, declined sharply after the attacks. For much of the past year, consumers' willingness to open their pocketbooks had offset the steep declines in business spending that were curbing economic growth. Companies especially cut spending on high-tech equipment and software. Heavy spending on such products had helped to fuel the economic boom and bull market of the late 1990s. In light of the worsening economic picture and the terrorist attacks, the Federal Reserve Board accelerated its campaign to bolster the economy by reducing interest rates. The Fed cut its target for the federal funds rate--the rate at which banks make overnight loans to each other--three times after September 11 (including a 50-basis-point cut on November 6, a few days after your fund's fiscal year-end). In doing so, the Fed reached several milestones: the lowest federal funds rate in four decades (2.00%); the biggest total rate reduction in a calendar year (450 basis points, or 4.50 percentage points); and the highest number of rate cuts in a year (ten), matching the total for 1991. - ----------------------- TRADE DECELERATED TO THE POINT THAT THE WORLD BANK SAID THAT THERE WAS A POTENTIAL FOR A GLOBAL RECESSION. - ----------------------- Central banks abroad also cut short-term interest rates. Like the Fed, most of them saw recession, not inflation, as the major threat. Japan, in fact, seemed mired in its fourth recession in a decade. (Its financial markets as well as its economy were in the doldrums: Tokyo's blue-chip Nikkei 225 stock index fell near an 18-year low in mid-September.) With U.S. demand for imports down, economies elsewhere were feeling the effects as well. Trade decelerated to the point that the World Bank said in late October that there was a potential for a global recession. FINANCIAL MARKETS IN REVIEW The events of September 11 closed U.S. stock markets for four days, their longest interruption since World War I. When the markets reopened, stocks plunged, with broad indexes coming close to three-year lows on September 21. The picture brightened a bit after that, and by October 31 stocks had mostly recovered to their pre-attack levels. But the last-minute surge was not enough to offset months of steep declines during the fiscal year. For the 12 months, the Wilshire 5000 Index returned -25.6%. The story was much the same in overseas markets. 2 Value stocks--those with comparatively low prices relative to earnings and other measures--held up better than growth stocks for the 12 months, although both groups generated losses. Growth stocks, particularly technology shares, had some strong interim rallies, including one during the last weeks of the fiscal year. But the overall trend was down. The tech-heavy Nasdaq Composite Index posted a dismal 12-month return of -49.3%. - -------------------------------------------------------------------------------- MARKET BAROMETER AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED OCTOBER 31, 2001 ------------------------------ ONE THREE FIVE YEAR YEARS YEARS - -------------------------------------------------------------------------------- STOCK S&P 500 Index (Large-caps) -24.9% 0.0% 10.0% Russell 2000 Index (Small-caps) -12.7 5.6 6.1 Wilshire 5000 Index (Entire market) -25.6 0.4 8.8 MSCI EAFE Index (International) -24.9 -3.6 0.6 - -------------------------------------------------------------------------------- BONDS Lehman Aggregate Bond Index (Entire market) 14.6% 7.3% 8.0% Lehman 10 Year Municipal Bond Index 10.2 5.6 6.8 Salomon Smith Barney 3-Month U.S. Treasury Bill Index 4.8 5.0 5.1 - -------------------------------------------------------------------------------- CPI Consumer Price Index 2.1% 2.7% 2.3% - -------------------------------------------------------------------------------- Falling stock values, the floundering economy, and the Fed's rate cuts boosted bonds during the 12 months. Rising prices led to a stellar 14.6% return for the Lehman Brothers Aggregate Bond Index, a broad barometer of the taxable U.S. bond market. Long-term bonds got a further boost when the Treasury Department announced on the final day of the fiscal year that it would no longer issue 30-year bonds, once considered bellwethers for the U.S. bond market. FISCAL 2001 PERFORMANCE OVERVIEW While it may provide little consolation, the Explorer Fund's 12-month return of - -16.2% was almost 13 percentage points better than that of its average peer, more than 15 percentage points higher than that of the Russell 2000 Growth Index, and ahead of the broad market by more than 9 percentage points. In relative terms, your fund turned in an impressive performance. Two factors contributed to Explorer's outperformance: favorable sector weightings and, more notably, solid stock selection. During a horrible period for stocks, a moderate decline--as opposed to a severe one--is a plus. In the health care sector, your fund's stock picks returned about -9%, which was considerably better than the -28% return of the health care issues within the benchmark index. In the consumer discretionary group (i.e., retailers, restaurants, entertainment providers), Explorer's stocks fell -3%, compared with the nearly -13% decline in the index sector's stocks. Technology stocks--at about 18% of the fund's assets, on average--were Explorer's third-largest sector commitment after health care and consumer discretionary stocks. However, this weighting was about 3 percentage points lower than that of the Russell 2000 Growth Index, and was considerably 3 smaller than those of many of our mutual fund peers. This underweighting proved beneficial as tech shares plunged during the 12 months. Stock selection also played a role here. Our tech stocks returned a dismal -53%, but that result was 7 percentage points higher than the return of the index's tech shares. Your fund had positive returns in some sectors--financial services, consumer staples, and transportation--and outperformed the benchmark index in those areas. However, the three sectors together accounted for less than 17% of the fund's assets on average and did not have as much of an impact on overall performance. - -------------------------------------------------------------------------------- FUND ASSETS MANAGED OCTOBER 31, 2001 --------------------------------- $ MILLION PERCENTAGE - -------------------------------------------------------------------------------- Granahan Investment Management, Inc. $1,459 36% Wellington Management Company, LLP 1,003 25 Vanguard Quantitative Equity Group 522 13 Grantham, Mayo, Van Otterloo & Co. LLC 482 12 Chartwell Investment Partners 340 9 Cash Investments* 190 5 - -------------------------------------------------------------------------------- Total $3,996 100% - -------------------------------------------------------------------------------- *This cash is invested by The Vanguard Group in equity index futures to simulate investment in stocks; each adviser may also maintain a modest cash position. As you know, the fund's assets are divided among five seasoned investment advisers. The table above shows the allocation among advisers at fiscal year-end. For further details on the fund's holdings, please see the Report from the Advisers on page 6. LONG-TERM PERFORMANCE OVERVIEW We believe that while a 12-month period can be helpful in evaluating a fund's performance, it is not an adequate gauge of success for a long-term investment. The table below shows the annualized returns over the past decade for your fund and its comparative measures, as well as the results of a hypothetical $10,000 initial investment in each. Here, your fund also has an impressive record: Its annualized return of 12.2% nudged out that of the broad market and was double the return of the Russell 2000 Growth Index. However, your fund slightly lagged its average competitor during this period. - -------------------------------------------------------------------------------- TOTAL RETURNS TEN YEARS ENDED OCTOBER 31, 2001 -------------------------------- AVERAGE FINAL VALUE OF ANNUAL A $10,000 RETURN INITIAL INVESTMENT - -------------------------------------------------------------------------------- VANGUARD EXPLORER FUND 12.2% $31,558 Average Small-Cap Growth Fund 12.6 32,653 Russell 2000 Growth Index 6.1 18,067 Wilshire 5000 Index 12.0 30,999 - -------------------------------------------------------------------------------- The reason for the shortfall is the same reason that your fund outpaced its peers in the past fiscal year: the tech bubble. Tech shares, including the most speculative of Internet companies, were the driving force in the stock market boom of the late 1990s. Loading up on these issues meant higher returns, 4 and that is exactly what many of our competitors did. That high-risk strategy, of course, backfired as the bubble burst after March 2000, but it was enough to give our peers a slight leg up over this ten-year period. Overall, the Explorer Fund's more diversified portfolio lagged as tech soared, but held up better when the sector plummeted. We're confident that our long-term record will improve relative to our peers. Our confidence is based on the skills of our advisers and on the cost advantage that Vanguard provides. Your fund's expense ratio (annual expenses as a percentage of average net assets) of 0.72%, or $7.20 per $1,000 of assets, is less than half that of our average peer (1.60%, or $16.00 per $1,000). While this difference may seem small, over time it can have a great impact on the fund's bottom line. IN SUMMARY The past 12 months have been tumultuous both for the financial markets and for the nation as a whole. Just as no one could have predicted the events of September 11, there is no way to foresee with certainty what lies ahead for the stock market. Uncertainty is always present in the financial markets and occasional downturns are simply going to occur. Today--as always--we recommend a simple strategy for dealing with these risks en route to long-term financial goals: Hold a portfolio diversified across market segments and asset classes--stocks, bonds, and short-term investments--in proportions appropriate for your objectives, time horizon, and risk tolerance. Once you have such a portfolio in place, stay the course. Thank you for your loyalty and trust. We look forward to reporting to you six months hence. Sincerely, /S/ JOHN J. BRENNAN John J. Brennan Chairman and Chief Executive Officer November 12, 2001 5 REPORT FROM THE ADVISERS VANGUARD EXPLORER FUND could not escape the stock market's plunge during the 2001 fiscal year, registering a -16.2% total return for the 12 months ended October 31. Although this result, the fund's biggest decline since 1990, was certainly disappointing, it was far better than the losses suffered by the average small-capitalization growth fund (-29.0%) and by our unmanaged benchmark, the Russell 2000 Growth Index (-31.5%). THE INVESTMENT ENVIRONMENT Small-cap growth stocks continued a descent that began in March 2000. For fiscal year 2001, growth stocks trailed value stocks in all capitalization groups, but the gap was especially wide in the smaller-cap realm: The Russell 2000 Growth Index trailed its value counterpart by a staggering 40 percentage points (-31.5% versus +8.8%). As the economy downshifted first to a slow growth pace and then to outright recession, investor expectations soured for such growth-stock sectors as computer technology, Internet services, biotechnology, fiber optics, and telecommunications. Corporate profits and business investment had been falling--dragging stock prices with them--for several months before the September 11 terrorist attacks. And the profit shortfalls were worse for small companies than large ones. Compared with third-quarter 2000, profits in third-quarter 2001 fell -35% for the Russell 2000 Index of small stocks, versus - -22% for the large-cap Standard & Poor's 500 Index. The September attacks added an entirely new dimension to the economic uncertainty, as virtually every company had to reassess business conditions. The attacks have crippled the airline industry, damaged consumer confidence, and resulted in the loss of tens of thousands of jobs. On the positive side, the Federal Reserve Board has aggressively cut interest rates, inflation is tame, and businesses have been restructuring and reducing excess inventories. THE FUND'S SUCCESSES A discussion of "successes" in a bear market like that of the past fiscal year has to be couched in terms of our results versus competing funds and the market indexes. In an absolute sense, we had positive returns from only three sectors: * Consumer staples, which returned 37%. Unfortunately, we held, on average, only about 1% of assets in this group, mostly in food companies. ------------------------------- INVESTMENT PHILOSOPHY THE FUND REFLECTS A BELIEF THAT SUPERIOR LONG-TERM INVESTMENT RESULTS CAN BE ACHIEVED BY SELECTING A DIVERSIFIED GROUP OF SMALL-COMPANY STOCKS WITH PROSPECTS FOR ABOVE-AVERAGE GROWTH. ------------------------------- 6 * Financial services stocks, which made up about 11% of fund assets on average, earned about 14%. * Auto & transportation stocks, which accounted for nearly 5% of assets on average, eked out a return of just under 1%. The Explorer Fund did achieve significant margins of superiority during the past year relative to its comparative standards, besting the average small-cap growth fund by nearly 13 percentage points and the benchmark index by more than 15 points. The broad diversification of Explorer's holdings--more than 800 individual names selected by five advisers with different stock-picking methods--helped to mute some of the volatility for which small-cap growth stocks are famous. Explorer's holdings outpaced the stocks in the Russell 2000 Growth Index in all but two categories--"other energy" and utilities, where together we had, on average, only about 6% of assets. In each of the fund's three largest industry weightings, our stocks significantly outpaced those of the index, although we stress that these were relative "victories," meaning we suffered smaller losses: * Health care stocks, where the fund held nearly 22% of its assets on average, returned about -9% for the fund, versus -28% for the index. Good results were obtained from such holdings as Isis Pharmaceuticals, Cubist Pharmaceuticals, SangStat, Barr Laboratories, and DENTSPLY, as well as hospital companies Community Health Systems and LifePoint Hospitals. * Consumer discretionary companies (21% of assets, on average)-- primarily retailers, restaurant chains, and media or entertainment concerns--declined -3%, versus a -13% return for the index. Among our better performers in this group were Blockbuster, Furniture Brands International, Circuit City, and PETsMART. * Technology stocks (18% of assets, on average), the small-cap arena's worst performers, lost about -53% for the fund, while declining a bit more than -60% within the index. It helped that the fund had a lighter stake in technology than the index (about 21%, on average). With our average tech stock losing more than half its value, we had few gainers. A notable one was Semtech, a manufacturer of analog computer chips used in desktop computers. THE FUND'S SHORTFALLS Although we fared better than most peers in the technology sector, we suffered horrendous losses in this group (-53%) and in the utilities sector (-51%). Indeed, more than 85% of the fund's -16.2% decline in fiscal 2001 was due to our tech and utilities holdings. Among our many poor tech performers were REMEC, SONICblue, IDX, MatrixOne, Avant!, and BSQUARE. In the utilities sector, where, fortunately, we had only about 1% of assets on average for the year, losers included Focal Communications, Allegiance Telecom, and Mediacom. 7 Airline stocks, which had suffered from a significant slowing in demand earlier in the year, were simply devastated by the September 11 terrorist attacks and their aftermath. Losses from airlines offset some nice gains from trucking companies in the transportation group. And although our financial stocks gained in general, we had losses in the group, including Homestore.com, an Internet real estate firm, and lease financier GATX. THE FUND'S POSITION We are still underweighted in tech, compared with our benchmark index. We enter the new fiscal year with 16.4% of our stock holdings in technology, compared with a 20.1% weighting for the sector in the Russell 2000 Growth Index. The technology stakes for both the fund and the index are down about 8 percentage points from a year ago because of the sector's big losses. The only other industry groups where the fund's stake is lower than those of the index by more than 1 percentage point are health care and producer durables. The fund's industry weightings are more than 1 percentage point higher than the index's in three sectors: auto & transportation (5.1% of the fund's stocks versus a 1.8% index weighting), consumer discretionary (23.1% versus 19.9%), and financial services (12.9% versus 10.8%). Given the similarity of sector holdings for the fund and the index, we expect that variations between Explorer's performance and that of the index will continue to stem primarily from stock selection. If the economy recovers during 2002--as many analysts and investors expect--small-company growth stocks should see strong earnings growth by late 2002 or early 2003. However, the stresses of a weaker economy can be expected to result in failures for many companies, so in selecting stocks our emphasis has been on companies with relatively strong balance sheets and good earnings prospects. By historical standards, the current valuations of small-cap growth stocks--or of stocks in general--can't be characterized as cheap relative to earnings, book value, or other measures. However, on balance, the Explorer Fund's holdings have lower price/earnings and price/book valuations than those of stocks in our benchmark index or in many peer funds. Yet we expect these holdings to benefit nicely from the eventual resumption of economic growth. Granahan Investment Management, Inc. Wellington Management Company, LLP Vanguard Quantitative Equity Group Grantham, Mayo, Van Otterloo & Co. LLC Chartwell Investment Partners November 13, 2001 8 FUND PROFILE AS OF OCTOBER 31, 2001 FOR EXPLORER FUND This Profile provides a snapshot of the fund's characteristics, compared where appropriate to both an unmanaged index that we consider a "best fit" for the fund and a broad market index. Key terms are defined on page 10. - --------------------------------------------------------------- PORTFOLIO CHARACTERISTICS BEST WILSHIRE FUND FIT* 5000 - --------------------------------------------------------------- Number of Stocks 876 1,262 6,148 Median Market Cap $1.0B $0.7B $32.7B Price/Earnings Ratio 44.2x 53.6x 27.1x Price/Book Ratio 2.4x 2.9x 3.0x Yield 0.1% 0.4% 1.4% Return on Equity 13.6% 15.5% 22.8% Earnings Growth Rate 17.9% 20.4% 14.8% Foreign Holdings 1.1% 0.0% 0.0% Turnover Rate 77% -- -- Expense Ratio 0.72% -- -- Cash Investments 4.3% -- -- - --------------------------------------------------------------- - --------------------------------------------------------------- TEN LARGEST HOLDINGS (% of total net assets) Investment Technology Group, Inc. 1.0% (securities brokers & services) Mettler-Toledo International Inc. 1.0 (electronics) Maxtor Corp. 0.9 (computer technology) DENTSPLY International Inc. 0.9 (medical) Tidewater Inc. 0.8 (transportation) Clayton Homes Inc. 0.7 (materials & construction) Callaway Golf Co. 0.7 (leisure) Sun Communities, Inc. REIT 0.7 (real estate) Pier 1 Imports Inc. 0.7 (retail) Equity Residential Properties Trust REIT 0.6 (real estate) - --------------------------------------------------------------- Top Ten 8.0% - --------------------------------------------------------------- - --------------------------------------------------------------- VOLATILITY MEASURES BEST WILSHIRE FUND FIT* FUND 5000 - --------------------------------------------------------------- R-Squared 0.94 1.00 0.61 1.00 Beta 0.79 1.00 1.20 1.00 - --------------------------------------------------------------- - --------------------------------------------------------------- SECTOR DIVERSIFICATION (% of common stocks) BEST WILSHIRE FUND FIT* 5000 - --------------------------------------------------------------- Auto & Transportation 5.1% 1.8% 2.0% Consumer Discretionary 23.1 19.9 13.7 Consumer Staples 1.6 2.0 6.9 Financial Services 12.9 10.8 20.1 Health Care 22.3 24.0 15.2 Integrated Oils 0.0 0.1 3.8 Other Energy 4.7 5.0 2.4 Materials & Processing 3.7 3.5 3.2 Producer Durables 8.1 9.4 3.2 Technology 16.4 20.1 15.7 Utilities 1.8 2.7 8.6 Other 0.3 0.7 5.2 - --------------------------------------------------------------- - ----------------------------------- INVESTMENT FOCUS [GRID] MARKET CAP SMALL STYLE GROWTH - ----------------------------------- *Russell 2000 Growth Index. [COMPUTER] VISIT OUR WEBSITE WWW.VANGUARD.COM FOR REGULARLY UPDATED FUND INFORMATION. 9 GLOSSARY OF INVESTMENT TERMS BETA. A measure of the magnitude of a fund's past share-price fluctuations in relation to the ups and downs of the fund's "best fit" index benchmark and an overall market index. Each index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 would have seen its share price rise or fall by 12% when the index rose or fell by 10%. - -------------------------------------------------------------------------------- CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash equivalents"--highly liquid, short-term, interest-bearing securities. This figure does not include cash invested in futures contracts to simulate stock investment. - -------------------------------------------------------------------------------- EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the past five years for the stocks now in a fund. - -------------------------------------------------------------------------------- EXPENSE RATIO. The percentage of a fund's average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors. - -------------------------------------------------------------------------------- FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks or American Depositary Receipts of companies based outside the United States. - -------------------------------------------------------------------------------- MEDIAN MARKET CAP. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund's stocks, weighted by the proportion of the fund's assets invested in each stock. Stocks representing half of the fund's assets have market capitalizations above the median, and the rest are below it. - -------------------------------------------------------------------------------- PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds. - -------------------------------------------------------------------------------- PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company's future growth. - -------------------------------------------------------------------------------- R-SQUARED. A measure of how much of a fund's past returns can be explained by the returns from the market in general, as measured by the fund's "best fit" index benchmark and by an overall market index. If a fund's total returns were precisely synchronized with an index's returns, its R-squared would be 1.00. If the fund's returns bore no relationship to the index's returns, its R-squared would be 0. - -------------------------------------------------------------------------------- RETURN ON EQUITY. The annual average rate of return generated by a company during the past five years for each dollar of shareholder's equity (net income divided by shareholder's equity). For a fund, the weighted average return on equity for the companies whose stocks it holds. - -------------------------------------------------------------------------------- TURNOVER RATE. An indication of the fund's trading activity. Funds with high turnover rates incur higher transaction costs and are more likely to distribute capital gains (which are taxable to investors). - -------------------------------------------------------------------------------- YIELD. A snapshot of a fund's income from interest and dividends. The yield, expressed as a percentage of the fund's net asset value, is based on income earned over the past 30 days and is annualized, or projected forward for the coming year. The index yield is based on the current annualized rate of dividends paid on stocks in the index. - -------------------------------------------------------------------------------- 10 PERFORMANCE SUMMARY AS OF OCTOBER 31, 2001 FOR EXPLORER FUND All of the data on this page represent past performance, which cannot be used to predict future returns that may be achieved by the fund. Note, too, that both share price and return can fluctuate widely. An investor's shares, when redeemed, could be worth more or less than their original cost. - --------------------------------------------------------------- CUMULATIVE PERFORMANCE October 31, 1991-October 31, 2001 [MOUNTAIN CHART, SCALE $5,000 TO $55,000] AVERAGE EXPLORER SMALL-CAP RUSSELL 2000 WILSHIRE QUARTER FUND GROWTH FUND GROWTH INDEX 5000 INDEX - --------------------------------------------------------------- 199110 10000 10000 10000 10000 199201 11564 11207 11202 10653 199204 10586 10225 10051 10673 199207 10498 10064 9683 10945 199210 11295 10575 9964 10974 199301 12463 12036 11332 11775 199304 11778 11462 10644 11792 199307 12516 12310 11421 12216 199310 13812 13557 12721 12925 199401 14491 14338 13026 13352 199404 13810 13412 12191 12581 199407 13295 12706 11571 12731 199410 14431 13915 12605 13249 199501 14185 13901 12128 13215 199504 15132 15020 13255 14454 199507 16815 17977 15473 16055 199510 16951 17832 15200 16661 199601 17898 19074 16088 18124 199604 20362 22446 18471 19103 199607 18598 20345 15940 18414 199610 19997 22151 17225 20294 199701 20764 23923 18500 22540 199704 18799 19856 15969 22472 199707 22803 25858 19966 27105 199710 23783 26949 20872 26705 199801 22911 26342 20115 28242 199804 25798 29566 22949 32192 199807 22541 26189 19704 31723 199810 21115 22702 17563 30655 199901 24502 28423 21566 35945 199904 24361 27573 22083 37704 199907 26703 31037 22563 37544 199910 26423 33208 22705 38525 200001 33492 44155 29256 41061 200004 36368 44957 29014 42157 200007 36358 45776 27331 41613 200010 37669 45983 26375 41648 200101 38391 43413 24761 39616 200104 36075 37090 21803 36200 200107 35759 37546 20961 35353 200110 31558 32653 18067 30999 - --------------------------------------------------------------- - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED OCTOBER 31, 2001 ------------------------------ FINAL VALUE ONE FIVE TEN OF A $10,000 YEAR YEARS YEARS INVESTMENT - -------------------------------------------------------------------------------- Explorer Fund -16.22% 9.55% 12.18% $31,558 Average Small-Cap Growth Fund* -28.99 8.07 12.56 32,653 Russell 2000 Growth Index -31.50 0.96 6.09 18,067 Wilshire 5000 Index -25.57 8.84 11.98 30,999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------- TOTAL INVESTMENT RETURNS (%) October 31, 1991-October 31, 2001 [BAR CHART, SCALE -45% TO 60%] RUSSELL 2000 FISCAL YEAR TOTAL RETURN GROWTH INDEX - -------------------------------------------------------------- 1992 13.0% -0.4% 1993 22.3 27.7 1994 4.5 -0.9 1995 17.5 20.6 1996 18.0 13.3 1997 18.9 21.2 1998 -11.2 -15.9 1999 25.1 29.3 2000 42.6 16.2 2001 -16.2 -31.5 - -------------------------------------------------------------- - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS for periods ended September 30, 2001 This table presents average annual total returns through the latest calendar quarter--rather than through the end of the fiscal year. Securities and Exchange Commission rules require that we provide this information. TEN YEARS ONE FIVE ---------------------------- INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL - -------------------------------------------------------------------------------- Explorer Fund 12/11/1967 -24.78% 7.50% 11.23% 0.45% 11.68% - -------------------------------------------------------------------------------- *Derived from data provided by Lipper Inc. Note: See Financial Highlights table on page 25 for dividend and capital gains information for the past five years. 11 YOUR FUND'S AFTER-TAX RETURNS This table presents returns for your fund both before and after taxes. The after-tax returns for the fund are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund's distributions, and (2) assuming that an investor paid taxes on the fund's distributions and sold all shares at the end of each period. Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. (In the example that assumes all fund shares were sold, a negative pre-tax total return translates into a higher after-tax return. This is because the calculation assumes that the investor received a tax deduction for the loss incurred on the sale.) Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes. Finally, keep in mind that a fund's performance--whether before or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED OCTOBER 31, 2001 ONE YEAR FIVE YEARS TEN YEARS --------------------------------------- EXPLORER FUND Returns Before Taxes -16.22% 9.55% 12.18% Returns After Taxes on Distributions -21.53 6.51 9.71 Returns After Taxes on Distributions and Sale of Fund Shares -8.24 6.90 9.38 - -------------------------------------------------------------------------------- 12 FINANCIAL STATEMENTS OCTOBER 31, 2001 STATEMENT OF NET ASSETS This Statement provides a detailed list of the fund's holdings, including each security's market value on the last day of the reporting period. Securities are grouped and subtotaled by asset type (common stocks, bonds, etc.) and by industry sector. Other assets are added to, and liabilities are subtracted from, the value of Total Investments to calculate the fund's Net Assets. Finally, Net Assets are divided by the outstanding shares of the fund to arrive at its share price, or Net Asset Value (NAV) Per Share. At the end of the Statement of Net Assets, you will find a table displaying the composition of the fund's net assets. Because all income and any realized gains must be distributed to shareholders each year, the bulk of net assets consists of Paid-in Capital (money invested by shareholders). The amounts shown for Undistributed Net Investment Income and Accumulated Net Realized Gains usually approximate the sums the fund had available to distribute to shareholders as income dividends or capital gains as of the statement date, but may differ because certain investments or transactions may be treated differently for financial statement and tax purposes. Any Accumulated Net Realized Losses, and any cumulative excess of distributions over net income or net realized gains, will appear as negative balances. Unrealized Appreciation (Depreciation) is the difference between the market value of the fund's investments and their cost, and reflects the gains (losses) that would be realized if the fund were to sell all of its investments at their statement-date values. - -------------------------------------------------------------------------------- MARKET VALUE^ EXPLORER FUND SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (90.6%)(1) - -------------------------------------------------------------------------------- AUTO & TRANSPORTATION (4.6%) Tidewater Inc. 1,006,600 $ 30,419 Polaris Industries, Inc. 435,300 19,571 * Swift Transportation Co., Inc. 1,096,490 18,629 C.H. Robinson Worldwide, Inc. 539,500 14,442 * Heartland Express, Inc. 592,466 13,923 * EGL, Inc. 1,068,200 12,915 * Easyjet Airline Co. PLC 2,119,966 11,592 Werner Enterprises, Inc. 460,500 9,970 BorgWarner, Inc. 208,200 8,894 * Frontier Airlines, Inc. 528,150 5,778 * Atlantic Coast Airlines Holdings Inc. 302,900 5,688 Navistar International Corp. 165,800 4,974 * Alaska Air Group, Inc. 193,500 4,721 SkyWest, Inc. 224,000 4,099 * Continental Airlines, Inc. Class B 200,000 3,498 * Landstar System 45,600 3,268 * Midwest Express Holdings, Inc. 241,900 2,685 Oshkosh Truck Corp. 35,500 1,360 * Gulfmark Offshore, Inc. 45,000 1,271 * AirTran Holdings, Inc. 333,400 1,260 * Mesa Air Group Inc. 190,600 1,020 Winnebago Industries, Inc. 35,500 864 * Monaco Coach Corp. 32,900 589 Arctic Cat, Inc. 29,600 480 * BE Avionics Inc. 58,800 477 * Sports Resorts International, Inc. 67,800 454 Wabtec Corp. 29,100 355 ------------ 183,196 ------------ CONSUMER DISCRETIONARY (21.0%) Callaway Golf Co. 2,008,600 28,703 Pier 1 Imports Inc. 2,400,350 26,428 * The Corporate Executive Board Co. 748,450 22,880 * Insight Communications Co., Inc. 950,000 19,475 * PETsMART, Inc. 2,431,000 18,986 Regis Corp. 822,700 17,491 Circuit City Stores, Inc. 1,181,600 16,212 * Borders Group, Inc. 1,036,500 16,159 * Edison Schools Inc. 853,000 16,079 * Playboy Enterprises, Inc. Class B 1,205,000 15,183 * Too Inc. 563,800 15,003 *(2) TETRA Technologies, Inc. 839,600 14,290 * Venator Group, Inc. 983,900 14,267 * Rare Hospitality International Inc. 776,900 14,163 *(2) LodgeNet Entertainment Corp. 914,100 13,812 * Career Education Corp. 522,500 13,622 Blockbuster Inc. Class A 526,200 13,197 * Radio One, Inc. Class D 1,120,000 12,936 * Pacific Sunwear of California 903,900 12,429 * Six Flags, Inc. 1,036,700 12,233 * Bally Total Fitness Holding Corp. 649,900 11,997 13 - -------------------------------------------------------------------------------- MARKET VALUE^ EXPLORER FUND SHARES (000) - -------------------------------------------------------------------------------- * Furniture Brands International Inc. 499,400 $ 11,991 E.W. Scripps Co. Class A 194,400 11,989 * AnnTaylor Stores Corp. 526,600 11,585 * Vans, Inc. 794,700 11,412 Ross Stores, Inc. 362,500 11,346 * Corinthian Colleges, Inc. 303,000 11,069 * Expedia Inc. 358,600 10,546 * Lamar Advertising Co. Class A 311,400 9,778 * Cox Radio, Inc. 450,500 9,776 * Fisher Scientific International Inc. 326,350 9,758 * Entercom Communications Corp. 280,200 9,443 Intrawest Corp. 657,000 9,185 Marcus Corp. 673,600 8,555 * Sinclair Broadcast Group, Inc. 1,139,800 8,412 * Pegasus Communications Corp. Class A 847,870 8,394 * Hot Topic, Inc. 317,300 8,021 * Universal Electronics, Inc. 531,000 7,827 * F.Y.I. Inc. 215,000 7,729 * Westwood One, Inc. 308,346 7,336 * Electronics Boutique Holdings Corp. 230,300 7,151 Tokyo Style Co., Ltd. 747,000 6,902 * Metro-Goldwyn-Mayer Inc. 426,000 6,842 * United Natural Foods, Inc. 327,700 6,783 * FreeMarkets, Inc. 500,000 6,685 Dover Downs Entertainment, Inc. 550,200 6,602 * Travelocity.com Inc. 445,000 6,493 * Insight Enterprises, Inc. 394,700 6,414 * ValueVision International, Inc. Class A 467,500 6,377 * Ticketmaster Class B 466,500 6,363 * Teletech Holdings Inc. 770,600 6,226 * AMC Entertainment, Inc. 506,300 6,076 * Copart, Inc. 196,000 5,753 * Direct Focus, Inc. 225,900 5,494 * Dollar Tree Stores, Inc. 240,500 5,404 * Education Management Corp. 146,000 5,037 * PLATO Learning, Inc. 350,667 4,979 * The Timberland Co. 150,000 4,872 Ruby Tuesday, Inc. 277,600 4,786 * Chico's FAS, Inc. 175,150 4,554 * Resources Connection, Inc. 195,600 4,360 * GTech Holdings Corp. 98,500 3,930 * Tuesday Morning Corp. 287,800 3,851 Phillips-Van Heusen Corp. 445,000 3,800 * MAXIMUS, Inc. 91,800 3,775 * Jack in the Box Inc. 152,900 3,761 * Overture Services, Inc. 142,200 3,747 * SCP Pool Corp. 152,100 3,535 * CEC Entertainment Inc. 89,300 3,459 * Watson Wyatt & Company Holdings 194,900 3,438 * ITT Educational Services, Inc. 84,100 3,201 * Tweeter Home Entertainment Group, Inc. 201,700 3,179 * SkillSoft Corp. 134,725 3,092 * DiamondCluster International, Inc. 300,000 3,090 * Genesco, Inc. 164,700 3,006 * THQ Inc. 60,300 3,003 * Sylvan Learning Systems, Inc. 132,800 2,975 * Waste Connections, Inc. 99,500 2,907 * Coinstar, Inc. 152,100 2,809 * The Cheesecake Factory 96,900 2,733 * The Topps Co., Inc. 262,400 2,690 Strayer Education, Inc. 55,600 2,669 * Barnes & Noble, Inc. 69,150 2,541 * Activision, Inc. 70,000 2,530 * Argosy Gaming Co. 87,000 2,526 * Take-Two Interactive Software, Inc. 178,500 2,487 * O'Reilly Automotive, Inc. 85,500 2,416 * Action Performance Cos., Inc. 89,900 2,356 * American Eagle Outfitters, Inc. 84,200 2,307 * The Children's Place Retail Stores, Inc. 97,000 2,305 * ProQuest Company 65,900 2,254 * Hollywood Entertainment Corp. 137,800 2,217 * Renaissance Learning, Inc. 66,700 2,182 * United Stationers, Inc. 76,300 2,140 Tupperware Corp. 104,800 2,137 * Rent-A-Center, Inc. 77,900 2,123 * Global Sports, Inc. 127,800 2,019 * WMS Industries, Inc. 107,800 1,935 * Lightbridge, Inc. 205,100 1,887 * Abercrombie & Fitch Co. 99,800 1,878 * Reebok International Ltd. 89,300 1,854 Matthews International Corp. 79,942 1,843 * Charlotte Russe Holding Inc. 128,400 1,823 * Men's Wearhouse, Inc. 91,600 1,820 Harman International Industries, Inc. 53,500 1,768 * iVillage Inc. 1,247,000 1,733 * Skechers U.S.A., Inc. 157,620 1,705 Oshkosh B' Gosh, Inc. Class A 48,200 1,674 Applebee's International, Inc. 54,200 1,631 * Wilsons The Leather Experts Inc. 127,150 1,541 Lee Enterprises, Inc. 44,300 1,526 * Anchor Gaming 29,800 1,515 * Polo Ralph Lauren Corp. 65,800 1,449 * ProBusiness Services, Inc. 79,100 1,383 * HotJobs.com Ltd. 231,400 1,358 * Cost Plus, Inc. 68,300 1,328 14 - -------------------------------------------------------------------------------- MARKET VALUE^ SHARES (000) - -------------------------------------------------------------------------------- * Sonic Corp. 38,500 $ 1,290 * Acclaim Entertainment Inc. 252,300 1,186 * Group 1 Automotive, Inc. 43,800 1,174 * Papa John's International, Inc. 41,400 1,153 * Metro One Telecommunications, Inc. 37,600 1,134 * Footstar Inc. 33,800 1,129 Pittston Brink's Group 57,800 1,113 * Midway Games Inc. 69,800 1,111 * 99 Cents Only Stores 30,950 1,100 * Buca, Inc. 80,000 1,086 * IHOP Corp. 41,600 1,063 * Right Management Consultants Inc. 30,200 1,050 * InterTan, Inc. 116,500 1,043 * WetSeal, Inc. Class A 51,100 1,040 * bebe stores, inc. 61,600 1,027 * Administaff, Inc. 44,100 992 * Dendrite International, Inc. 94,500 937 * ICT Group, Inc. 66,900 937 * Nautica Enterprises, Inc. 76,800 931 * Alliance Gaming Corp. 46,700 925 * R.H. Donnelley Corp. 34,200 903 * Quiksilver, Inc. 67,000 882 * Lands' End, Inc. 27,300 875 * Panera Bread Co. 21,200 872 * The Management Network Group Inc. 140,000 833 * Kenneth Cole Productions, Inc. 71,100 832 * Penn National Gaming, Inc. 39,000 799 * O'Charley's Inc. 49,800 796 * QRS Corp. 79,100 767 * P.F. Chang's China Bistro, Inc. 19,200 761 * Global Imaging Systems, Inc. 56,600 753 * Oakley, Inc. 70,200 750 * Fossil, Inc. 40,700 738 * Hotel Reservations Network, Inc. 23,200 718 * Shuffle Master, Inc. 56,600 709 Rollins, Inc. 43,400 705 * Christopher & Banks Corporation 20,900 689 * Factory 2-U Stores Inc. 47,800 676 * CoStar Group, Inc. 35,800 664 * Tropical Sportswear Int'l. Corp. 36,600 641 * PDI, Inc. 22,200 621 Brown Shoe Company, Inc. 55,300 608 * PriceSmart, Inc. 17,300 606 * Rent-Way, Inc. 86,400 600 IKON Office Solutions, Inc. 58,200 564 * 4Kids Entertainment Inc. 26,300 552 * Wink Communications, Inc. 482,500 545 * Elizabeth Arden, Inc. 41,300 545 * Columbia Sportswear Co. 18,650 533 American Woodmark Corp. 15,300 529 * Guitar Center, Inc. 34,900 481 * dELiA*s Corp. 74,300 460 * Green Mountain Coffee, Inc. 20,000 449 * Martha Stewart Living Omnimedia, Inc. 25,500 419 * Pre-Paid Legal Services, Inc. 26,900 410 * MemberWorks, Inc. 44,100 397 * Navigant Consulting, Inc. 99,300 358 * 1-800 CONTACTS, Inc. 23,900 338 * Salem Communications Corp. 17,300 334 * Steven Madden, Ltd. 35,000 315 * Stein Mart, Inc. 37,700 300 * School Specialty, Inc. 9,600 297 * Wackenhut Corp. 10,900 282 * Priceline.com Inc. 52,700 253 * Ameristar Casinos, Inc. 12,700 218 * Sirius Satellite Radio, Inc. 83,300 207 * Ultimate Electronics, Inc. 11,200 203 * Infogrames, Inc. 28,400 153 * Choice Hotel International, Inc. 6,700 117 Blyth, Inc. 5,500 107 * Trendwest Resorts, Inc. 1,400 39 ------------ 837,315 ------------ CONSUMER STAPLES (1.4%) Fleming Cos., Inc. 838,300 20,203 * Hain Celestial Group, Inc. 482,100 9,507 *(2) Wild Oats Markets Inc. 1,286,900 9,008 * Performance Food Group Co. 152,100 4,470 * American Italian Pasta Co. 88,800 3,617 Dial Corp. 122,900 2,050 Vector Group Ltd. 45,255 1,838 Church & Dwight, Inc. 57,900 1,505 * Triarc Cos., Inc. Class A 58,600 1,354 * NBTY, Inc. 132,200 1,128 Universal Corp. 34,200 1,106 * Del Monte Foods Co. 131,500 1,091 Nash-Finch Co. 23,600 544 * National Beverage Corp. 15,100 157 ------------ 57,578 ------------ FINANCIAL SERVICES (11.7%) * Investment Technology Group, Inc. 638,021 41,095 Sun Communities, Inc. REIT 753,900 28,271 Equity Residential Properties Trust REIT 930,000 24,134 Manufactured Home Communities, Inc. REIT 743,650 22,719 Jefferies Group, Inc. 672,200 22,297 Regency Centers Corp. REIT 680,000 16,830 * Van der Moolen Holding N.V. 694,513 16,733 Avalonbay Communities, Inc. REIT 364,000 16,526 Legg Mason Inc. 355,000 14,949 Arthur J. Gallagher & Co. 395,700 14,459 * E*TRADE Group, Inc. 2,024,700 13,221 15 - -------------------------------------------------------------------------------- MARKET VALUE^ EXPLORER FUND SHARES (000) - -------------------------------------------------------------------------------- GATX Corp. 479,000 $ 12,670 * Concord EFS, Inc. 430,350 11,779 Prentiss Properties Trust REIT 387,000 9,830 New York Community Bancorp, Inc. 384,824 9,648 Host Marriott Corp. REIT 1,342,000 9,059 * Labranche & Co. Inc. 291,000 8,407 Global Payments Inc. 260,020 7,788 * The InterCept Group, Inc. 211,200 7,540 Westcorp, Inc. 390,500 7,107 Odyssey Re Holdings Corp. 456,800 6,902 * BISYS Group, Inc. 129,500 6,737 Doral Financial Corp. 177,200 6,179 Brown & Brown, Inc. 99,200 5,694 Metris Cos., Inc. 346,000 5,609 Annuity and Life Re (Holdings), Ltd. 223,000 5,183 * Kronos, Inc. 75,800 4,350 Everest Re Group, Ltd. 60,900 4,071 Neuberger Berman Inc. 105,300 3,673 National Data Corp. 97,400 3,428 UCBH Holdings, Inc. 116,600 3,381 Astoria Financial Corp. 62,000 3,230 Fair Issac & Co. 66,550 3,164 Westamerica Bancorporation 78,500 2,868 * Indymac Bancorp, Inc. REIT 110,400 2,835 * Affiliated Managers Group, Inc. 44,900 2,770 First Midwest Bancorp 77,300 2,583 John H. Harland Co. 129,500 2,508 FactSet Research Systems Inc. 99,400 2,460 Hudson United Bancorp 94,600 2,459 * Barra, Inc. 51,950 2,403 Cousins Properties, Inc. REIT 89,400 2,164 W.R. Berkley Corp. 38,800 2,065 * BankUnited Financial Corp. 134,800 1,968 McGrath Rent Corp. 74,500 1,881 * AmeriCredit Corp. 120,700 1,871 AMB Property Corp. REIT 76,100 1,850 Fidelity National Financial, Inc. 80,010 1,841 Greater Bay Bancorp 80,600 1,837 Eaton Vance Corp. 64,000 1,798 Chittenden Corp. 66,125 1,636 * eFunds Corp. 104,700 1,623 * Homestore.com, Inc. 300,000 1,542 Hilb, Rogal and Hamilton Co. 26,400 1,529 Mills Corp. REIT 68,638 1,499 * Southwest Bancorporation of Texas, Inc. 51,000 1,463 Oriental Financial Group Inc. 72,700 1,413 First American Corp. 84,500 1,407 * National Processing, Inc. 51,400 1,344 Independent Bank Corp. 68,200 1,326 Charles E. Smith Residential Realty, Inc. REIT 27,900 1,324 Citizens Banking Corp. 42,100 1,276 Texas Regional Bancshares, Inc. 38,060 1,275 Dime Community Bancshares 52,350 1,269 * SoundView Technology Group, Inc. 622,900 1,252 Ventas, Inc. REIT 100,300 1,249 Seacoast Banking Corp. of Florida Class A 29,200 1,222 * S1 Corp. 115,700 1,203 CenterPoint Properties Corp. REIT 24,700 1,149 Midwest Banc Holdings, Inc. 55,400 1,143 Pennsylvania REIT 50,100 1,110 * First Federal Financial Corp. 49,400 1,099 Downey Financial Corp. 31,200 1,096 * Advent Software, Inc. 28,400 1,095 * Central Coast Bancorp 53,600 1,071 Provident Bankshares Corp. 48,600 1,070 Chelsea Property Group REIT 21,700 972 * BKF Capital Group, Inc. 37,000 964 LandAmerica Financial Group, Inc. 36,000 943 Wintrust Financial Corp. 32,300 920 * Digital Insight Corp. 51,100 851 S & T Bancorp, Inc. 35,100 817 Community First Bankshares, Inc. 33,600 807 * Triad Guaranty, Inc. 22,700 748 Investors Financial Services Corp. 13,700 725 United National Bancorp 29,600 723 * BlackRock, Inc. 16,700 722 Interactive Data Corp. 47,700 640 JP Realty Inc. REIT 29,000 609 TrustCo Bank NY 50,370 600 R & G Financial Corp. Class B 31,100 576 Sterling Bancshares, Inc. 46,500 554 Cathay Bancorp, Inc. 9,100 536 * The Profit Recovery Group International, Inc. 76,600 529 * Carreker Corp. 112,700 447 Alexandria Real Estate Equities, Inc. REIT 10,400 418 Washington REIT 14,800 357 United Bankshares, Inc. 13,000 354 Independent Bank Corp. 12,845 350 First Source Corp. 16,054 335 Sterling Bancorp 12,100 324 * Tradestation Group Inc. 127,700 248 * Corrections Corp. of America 12,600 222 * Net.B@nk, Inc. 26,700 220 National Golf Properties, Inc. REIT 12,400 187 CCBT Financial Cos. Inc. 6,000 141 Mississippi Valley Bancshares, Inc. 3,600 137 16 - -------------------------------------------------------------------------------- MARKET VALUE^ SHARES (000) - -------------------------------------------------------------------------------- * NextCard, Inc. 114,300 $ 99 * Harbor Global Company Ltd. 5,180 48 Troy Financial Corp. 1,200 26 Irwin Financial Corp. 1,000 16 Harleysville National Corp. 500 11 ------------ 465,685 ------------ HEALTH CARE (20.2%) DENTSPLY International Inc. 778,900 35,043 * Coventry Health Care Inc. 1,107,300 23,741 * Caremark Rx, Inc. 1,755,100 23,518 * Henry Schein, Inc. 653,800 22,066 * Mid Atlantic Medical Services, Inc. 1,144,700 21,234 * Triad Hospitals, Inc. 782,966 21,062 * Cubist Pharmaceuticals, Inc. 501,200 20,198 * Biogen, Inc. 350,000 19,250 * Chiron Corp. 350,500 18,864 * Regeneron Pharmaceuticals, Inc. 851,800 18,825 Mentor Corp. 638,000 17,813 * Transkaryotic Therapies, Inc. 448,500 17,070 * Beverly Enterprises, Inc. 2,234,400 16,736 *(2) Matria Healthcare, Inc. 690,400 16,735 * SangStat Medical Corp. 696,000 15,757 * Immunex Corp. 630,000 15,051 * Genzyme Corp. 273,100 14,734 * IDEXX Laboratories Corp. 580,900 14,639 Bausch & Lomb, Inc. 444,000 14,457 * Vertex Pharmaceuticals, Inc. 566,000 13,867 Arrow International, Inc. 317,900 12,096 * ImmunoGen, Inc. 769,400 11,149 * Isis Pharmaceuticals, Inc. 530,000 11,003 * Tularik, Inc. 464,000 10,672 * Cell Genesys, Inc. 573,000 10,257 * LifePoint Hospitals, Inc. 328,800 10,252 * Shire Pharmaceuticals Group PLC ADR 221,178 9,887 * Gilead Sciences, Inc. 150,000 9,435 * Syncor International Corp. 318,200 9,228 * Varian Medical Systems, Inc. 134,800 9,045 * Varian, Inc. 348,700 8,836 * Abgenix, Inc. 285,800 8,514 * Cephalon, Inc. 133,200 8,398 * AdvancePCS 137,500 8,356 * Sybron Dental Specialties, Inc. 406,933 8,342 * Medarex, Inc. 398,000 8,199 * Province Healthcare Co. 296,800 8,177 * Express Scripts Inc. 173,350 7,097 * CIMA Labs Inc. 130,675 7,063 * Thoratec Corp. 360,800 7,036 * Human Genome Sciences, Inc. 145,000 6,181 * Gene Logic Inc. 427,700 5,731 * Allscripts Healthcare Solutions, Inc. 1,756,500 5,673 * I-STAT Corp. 887,900 5,549 * Endocare, Inc. 247,900 5,503 Diagnostic Products Corp. 121,200 5,345 * AmSurg Corp. 204,400 4,993 * Humana, Inc. 426,300 4,924 * STERIS Corp. 219,500 4,917 * Perrigo Co. 329,800 4,878 * Sequenom, Inc. 644,900 4,824 * Apria Healthcare Group Inc. 204,600 4,706 * Accredo Health, Inc. 137,700 4,698 * NPS Pharmaceuticals Inc. 123,400 4,458 * Laboratory Corp. of America Holdings 49,940 4,305 * Covance, Inc. 230,500 4,230 * Charles River Laboratories, Inc. 123,400 4,146 * Respironics, Inc. 121,000 4,075 * Albany Molecular Research, Inc. 146,700 4,064 * Barr Laboratories Inc. 55,478 4,039 Cooper Cos., Inc. 82,300 3,950 * Bruker Daltonics, Inc. 167,900 3,862 * AmerisourceBergen Corp. 59,669 3,793 * Alkermes, Inc. 136,000 3,488 * AmeriPath, Inc. 123,800 3,480 * Telik, Inc. 442,468 3,473 * Taro Pharmaceutical Industries Ltd. 82,200 3,461 * Techne Corp. 109,600 3,303 * Applera Corp.-Celera Genomics Group 136,800 3,215 * Wright Medical Group, Inc. 204,200 3,063 * Rightchoice Managed Care, Inc. 44,300 2,964 * Eclipsys Corp. 232,700 2,906 * Neurocrine Biosciences, Inc. 66,300 2,789 * Scios, Inc. 120,000 2,772 * Cell Therapeutics, Inc. 89,700 2,694 * Integra LifeSciences Holdings 79,500 2,337 * Edwards Lifesciences Corp. 91,300 2,319 * Martek Biosciences Corp. 111,100 2,271 * Invitrogen Corp. 35,700 2,190 * Immunomedics Inc. 119,600 2,189 * Rehabcare Corp. 84,600 2,149 * InterMune Inc. 48,500 2,118 * Pharmaceutical Resources, Inc. 61,300 2,103 Alpharma, Inc. Class A 75,300 2,086 * DaVita, Inc. 112,900 2,055 * Trimeris, Inc. 51,000 2,025 * Ocular Sciences, Inc. 84,700 1,954 * CryoLife Inc. 57,450 1,884 * Sunrise Assisted Living, Inc. 62,100 1,856 * Arena Pharmaceuticals, Inc. 156,000 1,763 * Pharmaceutical Product Development, Inc. 64,100 1,710 * VidaMed, Inc. 337,400 1,690 * Genta Inc. 119,200 1,641 17 - -------------------------------------------------------------------------------- MARKET VALUE^ EXPLORER FUND SHARES (000) - -------------------------------------------------------------------------------- * PolyMedica Corp. 96,700 $ 1,596 * Gentiva Health Services, Inc. 91,200 1,550 * Theragenics Corp. 170,300 1,516 * CV Therapeutics, Inc. 37,800 1,491 * Neose Technologies, Inc. 50,500 1,483 * Cerus Corp. 32,200 1,479 * Pharmacopeia, Inc. 93,200 1,473 * ViroPharma Inc. 58,700 1,469 * Advanced Tissue Sciences Inc. 314,900 1,414 * ILEX Oncology, Inc. 53,700 1,402 * Nabi 175,300 1,367 * NaPro BioTherapeutics, Inc. 151,200 1,361 * Diversa Corp. 115,800 1,346 * Cerner Corp. 25,000 1,344 * Myriad Genetics, Inc. 29,000 1,334 * Select Medical Corp. 74,600 1,305 * Digene Corp. 36,500 1,294 * Bio-Technology General Corp. 176,900 1,265 Omnicare, Inc. 60,700 1,207 * Interneuron Pharmaceutical, Inc. 157,200 1,179 * Noven Pharmaceuticals, Inc. 54,600 1,171 * aaiPharma Inc. 55,200 1,103 * American Healthcorp Inc. 27,100 1,100 * Urocor, Inc. 60,900 1,086 * Per-Se Technologies, Inc. 124,900 1,079 * Transgenomic, Inc. 101,200 1,064 * Serologicals Corp. 57,500 1,015 * IGEN International, Inc. 33,700 991 * SurModics, Inc. 26,000 931 * ResMed Inc. 16,500 921 * Corixa Corp. 70,251 911 * Novoste Corp. 77,300 893 * Given Imaging Ltd. 95,200 852 * Sicor, Inc. 45,100 846 * Pharmacyclics, Inc. 38,700 841 * Atrix Laboratories, Inc. 32,300 811 * Impax Laboratories, Inc. 89,300 810 * Applied Molecular Evolution 82,800 792 * Genome Therapeutics Corp. 112,200 788 Vital Signs, Inc. 28,200 763 * Genelabs Technologies, Inc. 369,500 739 * BriteSmile, Inc. 153,000 728 * Alexion Pharmaceuticals, Inc. 42,000 723 * Keryx Biopharmaceuticals, Inc. 131,900 718 Invacare Corp. 20,900 700 * BioSphere Medical Inc. 76,900 681 * Magellan Health Services, Inc. 69,100 674 Datascope Corp. 20,000 670 * Kendle International Inc. 30,700 608 * AVI BioPharma, Inc. 78,400 604 * K-V Pharmaceutical Co. Class B 20,300 574 * Sonosite, Inc. 27,400 568 * Urologix, Inc. 37,000 558 * Tanox, Inc. 32,100 545 * ArQule, Inc. 56,100 516 * Titan Pharmaceuticals, Inc. 70,800 506 * Genzyme Transgenics Corp. 140,400 493 * Genencor International Inc. 35,600 445 * SRI/Surgical Express, Inc. 15,100 371 * Biosite Inc. 23,400 365 * Triangle Pharmaceuticals, Inc. 97,100 364 * Lincare Holdings, Inc. 14,000 360 * The Medicines Co. 50,300 354 * Possis Medical Inc. 24,800 321 * Closure Medical Corp. 18,600 315 * Avigen, Inc. 33,400 313 * SciClone Pharmaceuticals, Inc. 63,400 193 * Organogenesis, Inc. 44,300 172 * Enzo Biochem, Inc. 7,350 151 * Vical, Inc. 5,100 66 * American Medical Systems Holdings, Inc. 1,300 25 * Endo Pharmaceuticals Holdings, Inc. 2,500 25 * Endo Pharmaceuticals Warrants Exp. 3/31/2003 15,900 4 * Cyberonics, Inc. 200 3 ------------ 807,589 ------------ MATERIALS & PROCESSING (3.3%) Granite Construction Co. 508,150 12,653 Cambrex Corp. 315,400 11,670 Minerals Technologies, Inc. 261,600 10,699 * Cytec Industries, Inc. 417,200 9,984 Bowater Inc. 222,000 9,928 Wellman, Inc. 742,400 9,362 Valmont Industries, Inc. 544,500 8,560 IMC Global Inc. 697,100 7,494 Yamato Kogyo Co., Ltd. 1,550,000 6,521 Getty Realty Holding Corp. 338,600 5,804 Precision Castparts Corp. 217,900 4,955 * Dal-Tile International Inc. 246,100 3,989 * Intermagnetics General Corp. 82,324 2,373 Apogee Enterprises, Inc. 164,300 2,294 * Insituform Technologies Inc. Class A 111,500 2,136 Ferro Corp. 83,400 1,835 Olin Corp. 107,600 1,612 * Stillwater Mining Co. 100,000 1,559 * Freeport-McMoRan Copper & Gold Inc. Class B 131,800 1,463 * Shaw Group, Inc. 52,600 1,447 Spartech Corp. 68,400 1,402 * Simpson Manufacturing Co. 22,800 1,172 Georgia Gulf Corp. 65,400 1,162 * Ivex Packaging Corp. 63,200 1,153 Clarcor Inc. 44,400 1,092 * Lone Star Technologies, Inc. 62,500 1,028 Aptargroup Inc. 32,900 990 18 - -------------------------------------------------------------------------------- MARKET VALUE^ SHARES (000) - -------------------------------------------------------------------------------- * Valence Technology Inc. 257,100 $ 938 * Paxar Corp. 84,500 934 USEC Inc. 137,800 903 N L Industries, Inc. 68,200 877 WD-40 Co. 38,400 865 * Medis Technology Ltd. 88,900 718 Ball Corp. 10,200 628 * Airgas, Inc. 43,000 578 * Scotts Co. 13,400 540 * Mueller Industries Inc. 14,000 405 * Buckeye Technology, Inc. 42,000 372 * CoorsTek, Inc. 13,700 363 Interface, Inc. 73,100 293 Liqui-Box Corp. 500 21 ------------ 132,772 ------------ OTHER ENERGY (4.3%) * Hanover Compressor Co. 846,000 23,333 St. Mary Land & Exploration Co. 994,100 20,349 * Grey Wolf, Inc. 4,179,300 12,078 Helmerich & Payne, Inc. 357,400 10,840 CARBO Ceramics Inc. 287,900 10,474 * Core Laboratories N.V. 633,600 10,328 Sunoco, Inc. 267,400 10,009 * Unit Corp. 801,800 8,780 * Spinnaker Exploration Co. 151,400 6,643 Equitable Resources, Inc. 111,600 3,673 * Stone Energy Corp. 90,934 3,596 Vintage Petroleum, Inc. 184,900 3,234 * Plains Resources Inc. 113,200 3,090 XTO Energy, Inc. 169,850 3,057 Pogo Producing Co. 89,600 2,448 * Key Energy Services, Inc. 277,300 2,413 Cabot Oil & Gas Corp. Class A 99,800 2,405 * Swift Energy Co. 97,400 2,304 * Chesapeake Energy Corp. 297,000 2,153 * FuelCell Energy, Inc. 132,800 2,076 Arch Coal, Inc. 92,500 2,040 * Oceaneering International, Inc. 103,400 2,016 Frontier Oil Corp. 93,200 1,771 * Superior Energy Services, Inc. 223,900 1,769 * Patterson-UTI Energy, Inc. 98,100 1,768 Patina Oil & Gas Corp. 61,500 1,657 * Evergreen Resources, Inc. 36,100 1,442 * PetroQuest Energy, Inc. 204,700 1,376 CONSOL Energy, Inc. 46,100 1,272 * Louis Dreyfus Natural Gas Corp. 30,800 1,220 * Cal Dive International, Inc. 53,600 1,120 * Tom Brown, Inc. 39,400 920 * Houston Exploration Co. 27,900 872 * Key Production Company, Inc. 55,700 869 * Newpark Resources, Inc. 138,200 844 * ATP Oil & Gas Corp. 113,300 748 * Hydrill Co. 36,700 741 * The Meridian Resource Corp. 170,100 725 * Seitel, Inc. 52,800 718 * Emex Corp. 129,700 647 * Prima Energy Corp. 25,400 617 * Horizon Offshore, Inc. 66,400 570 * Comstock Resources, Inc. 71,400 541 * Veritas DGC Inc. 32,300 496 * Clayton Williams Energy, Inc. 35,900 446 RPC Inc. 29,600 426 * Westport Resources Corp. 4,950 85 ------------ 170,999 ------------ PRODUCER DURABLES (7.3%) * Mettler-Toledo International Inc. 841,000 38,610 Clayton Homes Inc. 2,053,500 28,749 * Polycom, Inc. 584,600 17,526 AGCO Corp. 1,375,400 15,900 * Palm Harbor Homes, Inc. 703,108 15,646 * Plantronics, Inc. 571,300 11,872 * Headwaters Inc. 799,500 9,802 Donaldson Co., Inc. 291,100 9,184 * Ultratech Stepper, Inc. 663,500 8,924 * Alliant Techsystems, Inc. 92,250 8,050 Lindsay Manufacturing Co. 433,050 7,985 * Garmin Ltd. 418,500 7,035 * NVR, Inc. 43,400 6,870 * Crown Castle International Corp. 537,700 6,291 * Brooks Automation, Inc. 185,400 5,985 * DuPont Photomasks, Inc. 152,375 5,492 * Veeco Instruments, Inc. 194,000 4,939 * Zygo Corp. 271,900 3,847 * Varian Semiconductor Equipment Associates, Inc. 126,000 3,785 * LAM Research Corp. 191,600 3,633 * SpectraLink Corp. 310,200 3,499 * Photronics Labs Inc. 135,000 3,351 Graco, Inc. 97,650 3,174 * Electro Scientific Industries, Inc. 126,300 2,977 * FEI Co. 105,100 2,836 Ametek Aerospace Products Inc. 101,700 2,746 * ATMI, Inc. 128,300 2,445 Helix Technology Corp. 117,700 2,281 Centex Corp. 54,400 2,081 C & D Technology Inc. 100,100 2,074 * Advanced Energy Industries, Inc. 102,000 2,049 Briggs & Stratton Corp. 54,000 2,028 * Cymer, Inc. 91,300 1,908 * MICROS Systems, Inc. 82,000 1,770 * Flowserve Corp. 75,700 1,770 Pulte Homes, Inc. 54,100 1,758 Ryland Group, Inc. 31,900 1,707 19 - -------------------------------------------------------------------------------- MARKET VALUE^ EXPLORER FUND SHARES (000) - -------------------------------------------------------------------------------- Technitrol, Inc. 64,700 $ 1,610 * TRC Cos., Inc. 37,700 1,586 * LTX Corp. 93,900 1,546 Cohu, Inc. 86,200 1,504 KB HOME 49,800 1,472 D. R. Horton, Inc. 65,148 1,456 Woodward Governor Co. 28,900 1,363 Engineered Support Systems, Inc. 26,100 1,300 * Therma-Wave Inc. 99,400 1,210 MDC Holdings, Inc. 45,000 1,200 * Tollgrade Communications, Inc. 46,300 1,180 * Powell Industries, Inc. 54,900 1,163 X-Rite Inc. 162,400 1,142 * Itron, Inc. 38,100 1,069 Newport News Shipbuilding Inc. 13,200 913 Belden, Inc. 44,600 892 * Arris Group Inc. 143,700 846 Standard Pacific Corp. 44,300 808 * Teledyne Technologies, Inc. 51,500 781 * Triumph Group, Inc. 30,300 778 * EMCORE Corp. 67,900 758 * ADE Corp. 76,700 729 * MKS Instruments, Inc. 33,600 725 General Cable Corp. 57,300 647 Stewart & Stevenson Services, Inc. 41,300 610 * Rudolph Technologies, Inc. 23,600 597 * Symmetricom Inc. 104,000 582 * SBA Communications Corp. 68,500 562 * American Superconductor Corp. 40,100 427 * Andrew Corp. 22,600 411 * Semitool, Inc. 38,500 383 HEICO Corp. 24,700 372 * FSI International, Inc. 41,000 337 * Somera Communications, Inc. 59,800 299 * Presstek, Inc. 43,100 280 Manitowac Co., Inc. 10,100 278 * Cable Design Technologies Corp. 17,100 219 Nordson Corp. 8,800 197 * Measurement Specialties, Inc. 12,100 108 * Nanometrics Inc. 4,800 95 * Wesco International, Inc. 9,200 45 HEICO Corp. Class A 2,470 29 Woodhead Industries, Inc. 1,200 19 ------------ 293,107 ------------ TECHNOLOGY (14.9%) * Maxtor Corp. 7,624,780 37,361 * Oak Technology, Inc. 2,239,857 22,376 * Western Digital Corp. 5,453,900 18,271 * Ingram Micro, Inc. Class A 1,340,300 17,156 * Aeroflex, Inc. 1,157,650 16,983 * Verity, Inc. 1,573,100 16,706 * Actel Corp. 676,300 12,545 * IDX Systems Corp. 1,255,200 12,364 * Vignette Corp. 2,489,900 11,653 * Peregrine Systems, Inc. 757,100 10,933 * Rational Software Corp. 827,000 10,850 * 3Com Corp. 2,583,600 10,696 * Trimble Navigation Ltd. 526,450 9,266 * Tekelec 456,900 8,772 * Monolithic System Technology, Inc. 800,000 8,752 * InterVoice-Brite, Inc. 701,000 8,734 * Anixter International Inc. 348,700 8,648 * The TriZetto Group, Inc. 876,700 8,504 * SonicWALL, Inc. 546,200 7,756 * FileNet Corp. 526,800 7,675 * Electronics for Imaging, Inc. 375,300 7,386 * Planar Systems, Inc. 506,800 7,369 * Hutchinson Technology, Inc. 403,700 7,339 * StorageNetworks, Inc. 1,416,000 7,094 * Advanced Fibre Communications, Inc. 353,625 6,588 * Concurrent Computer Corp. 541,500 6,357 * Microsemi Corp. 181,500 6,353 * Liberate Technologies, Inc. 638,300 6,306 * Emulex Corp. 262,300 6,211 * Borland Software Corp. 522,200 5,843 * SERENA Software, Inc. 353,700 5,716 * Register.com, Inc. 652,800 5,549 * SIPEX Corp. 631,000 5,427 * Semtech Corp. 142,200 5,368 * Optimal Robotics Corp. 180,000 5,306 * Documentum, Inc. 354,800 5,240 * Exar Corp. 228,200 5,144 * Enterasys Networks, Inc. 620,100 4,936 * Plexus Corp. 195,500 4,888 * Mercury Computer Systems, Inc. 102,400 4,829 * Agile Software Corp. 492,500 4,689 * Riverdeep Group PLC ADR 250,000 4,640 * REMEC, Inc. 500,250 4,477 * Caminus Corp. 244,400 4,299 * OpenTV Corp. 576,300 4,242 * MetaSolv, Inc. 592,200 4,145 * DRS Technologies, Inc. 100,000 4,035 * FLIR Systems, Inc. 86,800 4,021 * MatrixOne, Inc. 716,700 3,942 * CACI International, Inc. 62,900 3,913 * eSPEED, Inc. 725,200 3,880 * Microtune, Inc. 200,000 3,824 * Corvis Corp. 1,677,200 3,774 * DMC Stratex Networks, Inc. 690,000 3,761 * Secure Computing Corp. 227,300 3,716 * Sycamore Networks, Inc. 836,800 3,690 * Stratos Lightwave, Inc. 868,900 3,562 20 - -------------------------------------------------------------------------------- MARKET VALUE^ SHARES (000) - -------------------------------------------------------------------------------- * Adtran, Inc. 150,000 $ 3,480 * TTM Technologies, Inc. 373,100 3,451 * Genesis Microchip Inc. 73,000 3,373 * Zebra Technologies Corp. Class A 65,200 3,004 * Black Box Corp. 66,000 2,972 * SeaChange International, Inc. 120,800 2,972 * Coherent, Inc. 107,900 2,859 * Netro Corp. 714,000 2,749 * Micromuse Inc. 292,400 2,705 * General Semiconductor, Inc. 235,800 2,499 * Elantec Semiconductor, Inc. 76,300 2,494 * Manhattan Associates, Inc. 81,500 2,448 * Concord Communications, Inc. 160,000 2,344 * NetIQ Corp. 82,108 2,311 * Lantronix, Inc. 344,000 2,212 * Sapient Corp. 500,000 2,155 * Extreme Networks, Inc. 178,400 2,085 * Aspen Technologies, Inc. 156,150 2,069 * The Titan Corp. 78,700 2,056 * Advanced Digital Information Corp. 135,800 2,029 * Packeteer, Inc. 589,500 2,004 * InFocus Corp. 103,400 2,002 * Perot Systems Corp. 112,600 1,909 * DSP Group Inc. 90,700 1,905 * Read Rite Corp. 380,600 1,895 * Parlex Corp. 193,000 1,851 * Progress Software Corp. 124,900 1,847 * RF Micro Devices, Inc. 89,800 1,836 * Moldflow Corp. 177,500 1,821 * Cognizant Technology Solutions Corp. 62,200 1,755 * HNC Software, Inc. 101,100 1,749 * Intergraph Corp. 162,500 1,739 * Xicor, Inc. 176,700 1,730 * BSQUARE Corp. 548,000 1,693 * Ascential Software Corp. 422,300 1,596 * Systems & Computer Technology Corp. 129,700 1,589 * WebEx Communications, Inc. 51,000 1,571 * JDA Software Group, Inc. 99,500 1,562 * Netegrity, Inc. 129,350 1,519 * National Instruments Corp. 52,000 1,498 * Digitas Inc. 801,000 1,442 * Numerical Technologies, Inc. 57,900 1,429 * Avant! Corp. 139,300 1,408 * Retek Inc. 67,900 1,380 * Anaren Microwave, Inc. 88,400 1,352 * Computer Network Technology Corp. 86,300 1,260 * Pixelworks, Inc. 120,600 1,218 * SPSS, Inc. 68,900 1,188 * Integrated Circuit Systems, Inc. 68,500 1,165 * Diversinet Corp. 900,000 1,143 * McDATA Corp. Class A 77,100 1,134 * Mentor Graphics Corp. 59,600 1,130 * Stellent Inc. 54,900 1,125 * J.D. Edwards & Co. 158,300 1,122 Keithley Instruments Inc. 64,200 1,071 * Power Integrations, Inc. 46,500 1,070 * Alloy, Inc. 79,200 1,057 * DDi Corp. 116,900 1,056 * Legato Systems, Inc. 121,000 1,015 * TriQuint Semiconductor, Inc. 57,200 1,011 BEI Technologies, Inc. 62,700 1,009 * AXT, Inc. 91,900 1,003 * CommScope, Inc. 50,000 978 Newport Corp. 61,700 962 * Sage, Inc. 37,500 956 * ANSYS, Inc. 44,600 936 * LeCroy Corp. 57,700 915 * Radiant Systems, Inc. 132,500 876 * Sanchez Computer Associates, Inc. 95,900 863 * AsiaInfo Holdings, Inc. 64,300 858 * Harmonic, Inc. 102,500 827 * Iomega Corp. 118,040 825 * MSC.Software Corp. 65,700 825 * Interwoven, Inc. 111,400 814 * Mapinfo Corp. 89,400 811 EDO Corp. 29,500 795 Analogic Corp. 21,000 777 * Kroll Inc. 47,200 755 * Avid Technology, Inc. 77,800 699 * Informatica Corp. 75,200 697 * American Management Systems, Inc. 52,100 687 * Predictive Systems, Inc. 528,200 676 * Datastream Systems, Inc. 213,900 674 * Excel Technology, Inc. 41,600 646 * Virage Logic Corporation 62,900 626 * Zomax Inc. 120,500 610 * Echelon Corp. 44,800 609 * Digimarc Corp. 48,400 592 * SeeBeyond Technology Corp. 121,200 591 * Actuate Software Corp. 141,800 588 * Centillium Communications, Inc. 97,700 551 * FiberCore, Inc. 231,100 543 * Silicon Storage Technology, Inc. 58,700 525 * Forrester Research, Inc. 30,700 496 * SBS Technologies, Inc. 31,500 484 * Ulticom, Inc. 50,100 481 * MIPS Technologies, Inc. 50,500 472 * McAfee.com Corp. 19,800 436 * Centra Software, Inc. 69,200 365 * Pinnacle Systems, Inc. 80,300 346 * INT Media Group, Inc. 265,000 345 21 - -------------------------------------------------------------------------------- MARKET VALUE^ EXPLORER FUND SHARES (000) - -------------------------------------------------------------------------------- * Optical Communication Products, Inc. 119,300 $ 336 * Saba Software, Inc. 117,600 330 * Clarent Corp. 58,800 316 * Akamai Technologies, Inc. 84,200 266 * Satcon Technology Corp. 43,000 255 * Digital Lightwave, Inc. 30,700 185 * Visual Networks, Inc. 92,500 174 * Phoenix Technologies Ltd. 11,600 106 * Brio Technology, Inc. 54,800 75 * Checkpoint Systems, Inc. 1,400 15 * Micro General Corp. 600 6 ------------ 595,562 ------------ UTILITIES (1.6%) * Allegiance Telecom, Inc. 1,442,800 10,359 * General Communication, Inc. 815,400 9,475 * Mediacom Communications Corp. 477,450 6,407 * Orion Power Holdings, Inc. 225,000 5,807 * The Montana Power Co. 660,000 3,934 * Covanta Energy Corp. 260,100 3,387 * McLeodUSA, Inc. Class A 4,502,900 3,377 * Commonwealth Telephone Enterprises, Inc. 67,240 2,880 * Illuminet Holdings, Inc. 74,400 2,661 * Price Communications Corp. 115,300 2,093 Black Hills Corp. 75,600 2,076 Western Gas Resources, Inc. 53,200 1,714 Philadelphia Suburban Corp. 59,400 1,693 Energen Corp. 55,400 1,357 * UnitedGlobalCom Inc. Class A 892,500 1,160 * Intrado Inc. 36,600 994 * Alamosa Holdings, Inc. 68,600 966 * Boston Communications Group, Inc. 100,700 931 North Pittsburgh Systems, Inc. 48,900 733 Hickory Tech Corp. 46,300 706 * Rural Cellular Corp. Class A 30,500 693 * Dobson Communications Corp. 69,300 684 * NTELOS Inc. 58,400 471 Otter Tail Corp. 15,400 435 * Focal Communications Corp. 610,135 317 * Adelphia Business Solutions, Inc. 103,100 73 * ITC DeltaCom, Inc. 64,400 42 ------------ 65,425 ------------ OTHER (0.3%) Brunswick Corp. 425,500 7,612 Lancaster Colony Corp. 59,200 1,845 Quixote Corp. 52,800 1,170 Carlisle Co., Inc. 20,500 613 GenCorp, Inc. 24,800 295 ------------ 11,535 ------------ - -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $3,768,380) 3,620,763 - -------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENTS (11.1%)(1) - -------------------------------------------------------------------------------- FEDERAL HOME LOAN BANK (3) 2.30%, 1/9/2002 $ 22,000 21,913 U.S. TREASURY BILL (3) 3.50%, 12/6/2001 900 898 REPURCHASE AGREEMENTS Collateralized by U.S. Government Obligations in a Pooled Cash Account 2.60%, 11/1/2001 385,034 385,034 2.60%, 11/1/2001--Note G 37,177 37,177 - -------------------------------------------------------------------------------- TOTAL TEMPORARY CASH INVESTMENTS (COST $445,011) 445,022 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (101.7%) (COST $4,213,391) 4,065,785 - -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (-1.7%) - -------------------------------------------------------------------------------- Other Assets--Note C 58,574 Liabilities--Note G (128,298) ------------ (69,724) ------------ - -------------------------------------------------------------------------------- NET ASSETS (100%) - -------------------------------------------------------------------------------- Applicable to 76,983,864 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $3,996,061 ================================================================================ NET ASSET VALUE PER SHARE $51.91 ================================================================================ ^See Note A in Notes to Financial Statements. *Non-income-producing security. (1)The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures investments, the fund's effective common stock and temporary cash investment positions represents 95.7% and 6.0%, respectively, of net assets. See Note F in Notes to Financial Statements. (2)Considered an affiliated company as the fund owns more than 5% of the outstanding voting securities of such company. The total market value of investments in affiliated companies was $53,845,000. (3)Securities with a value of $22,811,000 have been segregated as initial margin for open futures contracts. REIT--Real Estate Investment Trust. ADR--American Depositary Receipt. - -------------------------------------------------------------------------------- AT OCTOBER 31, 2001, NET ASSETS CONSISTED OF: - -------------------------------------------------------------------------------- AMOUNT PER (000) SHARE - -------------------------------------------------------------------------------- Paid-in Capital $4,343,138 $56.42 Undistributed Net Investment Income 4,597 .06 Accumulated Net Realized Losses--Note E (197,559) (2.57) Unrealized Depreciation--Note F Investment Securities (147,606) (1.92) Futures Contracts (6,509) (.08) - -------------------------------------------------------------------------------- NET ASSETS $3,996,061 $51.91 ================================================================================ 22 STATEMENT OF OPERATIONS This Statement shows the types of income earned by the fund during the reporting period, and details the operating expenses charged to the fund. These expenses directly reduce the amount of investment income available to pay to shareholders as income dividends. This Statement also shows any Net Gain (Loss) realized on the sale of investments, and the increase or decrease in the Unrealized Appreciation (Depreciation) of investments during the period. - -------------------------------------------------------------------------------- EXPLORER FUND YEAR ENDED OCTOBER 31, 2001 (000) - -------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends $ 17,109 Interest 21,997 Security Lending 2,344 - -------------------------------------------------------------------------------- Total Income 41,450 - -------------------------------------------------------------------------------- EXPENSES Investment Advisory Fees--Note B Basic Fee 7,981 Performance Adjustment 2,628 The Vanguard Group--Note C Management and Administrative 19,842 Marketing and Distribution 582 Custodian Fees 168 Auditing Fees 12 Shareholders' Reports 149 Trustees' Fees and Expenses 8 - -------------------------------------------------------------------------------- Total Expenses 31,370 Expenses Paid Indirectly--Note D (175) - -------------------------------------------------------------------------------- Net Expenses 31,195 - -------------------------------------------------------------------------------- NET INVESTMENT INCOME 10,255 - -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) Investment Securities Sold* (142,155) Futures Contracts (65,932) Forward Currency Contracts 386 - -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) (207,701) - -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities (588,688) Futures Contracts 6,523 - -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (582,165) - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(779,611) ================================================================================ *Realized net gain from affiliated companies was $9,461,000. 23 STATEMENT OF CHANGES IN NET ASSETS This Statement shows how the fund's total net assets changed during the two most recent reporting periods. The Operations section summarizes information detailed in the Statement of Operations. The amounts shown as Distributions to shareholders from the fund's net income and capital gains may not match the amounts shown in the Operations section, because distributions are determined on a tax basis and may be made in a period different from the one in which the income was earned or the gains were realized on the financial statements. The Capital Share Transactions section shows the amount shareholders invested in the fund, either by purchasing shares or by reinvesting distributions, as well as the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed are shown at the end of the Statement. - -------------------------------------------------------------------------------- EXPLORER FUND YEAR ENDED OCTOBER 31, ---------------------------- 2001 2000 (000) (000) - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 10,255 $ 13,920 Realized Net Gain (Loss) (207,701) 1,010,358 Change in Unrealized Appreciation (Depreciation) (582,165) 21,315 - -------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations (779,611) 1,045,593 - -------------------------------------------------------------------------------- DISTRIBUTIONS Net Investment Income (15,049) (9,304) Realized Capital Gain (837,311) (324,836) - -------------------------------------------------------------------------------- Total Distributions (852,360) (334,140) - -------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS1 Issued 1,307,520 2,299,593 Issued in Lieu of Cash Distributions 839,334 329,593 Redeemed (1,084,664) (1,258,958) - -------------------------------------------------------------------------------- Net Increase (Decrease) from Capital Share Transactions 1,062,190 1,370,228 - -------------------------------------------------------------------------------- Total Increase (Decrease) (569,781) 2,081,681 - -------------------------------------------------------------------------------- NET ASSETS Beginning of Period 4,565,842 2,484,161 - -------------------------------------------------------------------------------- End of Period $3,996,061 $4,565,842 ================================================================================ 1Shares Issued (Redeemed) Issued 21,904 30,217 Issued in Lieu of Cash Distributions 14,653 5,360 Redeemed (18,659) (16,891) - -------------------------------------------------------------------------------- Net Increase (Decrease) in Shares Outstanding 17,898 18,686 ================================================================================ 24 FINANCIAL HIGHLIGHTS This table summarizes the fund's investment results and distributions to shareholders on a per-share basis. It also presents the Total Return and shows net investment income and expenses as percentages of average net assets. These data will help you assess: the variability of the fund's net income and total returns from year to year; the relative contributions of net income and capital gains to the fund's total return; how much it costs to operate the fund; and the extent to which the fund tends to distribute capital gains. The table also shows the Portfolio Turnover Rate, a measure of trading activity. A turnover rate of 100% means that the average security is held in the fund for one year.
- ----------------------------------------------------------------------------------------------- EXPLORER FUND YEAR ENDED OCTOBER 31, ------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $77.28 $61.49 $49.60 $62.31 $55.44 - ----------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .15 .25 .21 .21 .26 Net Realized and Unrealized Gain (Loss) on Investments (11.36) 23.80 12.18 (6.82) 9.71 - ----------------------------------------------------------------------------------------------- Total from Investment Operations (11.21) 24.05 12.39 (6.61) 9.97 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.25) (.23) (.20) (.25) (.27) Distributions from Realized Capital Gains (13.91) (8.03) (.30) (5.85) (2.83) - ----------------------------------------------------------------------------------------------- Total Distributions (14.16) (8.26) (.50) (6.10) (3.10) - ----------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $51.91 $77.28 $61.49 $49.60 $62.31 =============================================================================================== TOTAL RETURN -16.22% 42.56% 25.14% -11.22% 18.93% =============================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $3,996 $4,566 $2,484 $2,196 $2,550 Ratio of Total Expenses to Average Net Assets 0.72% 0.71% 0.74% 0.62% 0.62% Ratio of Net Investment Income to Average Net Assets 0.24% 0.36% 0.36% 0.37% 0.45% Portfolio Turnover Rate 77% 123% 79% 72% 84% ===============================================================================================
NOTES TO FINANCIAL STATEMENTS Vanguard Explorer Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements. 1. Security Valuation: Equity securities are valued at the latest quoted sales prices as of the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Prices are taken from the primary market in which each security trades. Security prices denominated in foreign currencies are translated into U.S. dollars at the exchange rates on the valuation date as employed by Morgan Stanley Capital International in the calculation of its indexes. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approxi- 25 mates market value. Securities for which market quotations are not readily available are valued by methods deemed by the board of trustees to represent fair value. 2. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements. 3. Repurchase Agreements: The fund, along with other members of The Vanguard Group, transfers uninvested cash balances to a pooled cash account, which is invested in repurchase agreements secured by U.S. government securities. Securities pledged as collateral for repurchase agreements are held by a custodian bank until the agreements mature. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. 4. Futures and Forward Currency Contracts: The fund uses S&P MidCap 400 and Russell 2000 Index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. The fund may also enter into forward currency contracts to protect the value of securities and related receivables and payables against changes in future foreign exchange rates. The fund's risks in using these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts. Futures and forward currency contracts are valued at their quoted daily settlement prices. The aggregate principal amounts of the contracts are not recorded in the financial statements. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized gains (losses) on futures or forward currency contracts. 5. Distributions: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. 6. Other: Dividend income is recorded on the ex-dividend date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. B. Granahan Investment Management, Inc., Wellington Management Company, LLP, Chartwell Investment Partners, and Grantham, Mayo, Van Otterloo & Co. LLC provide investment advisory services to the fund for fees calculated at an annual percentage rate of average net assets. The basic fees of Granahan, Wellington, and Chartwell are subject to quarterly adjustments based on performance for the preceding three years relative to the Russell 2000 Index and the Small Company Growth Fund Stock Index (an index of the stocks held by the largest small-capitalization stock mutual funds). The basic fee of Grantham, Mayo, Van Otterloo is subject to quarterly adjustments based on performance relative to the Russell 2000 Growth Index. The Vanguard Group provides investment advisory services to a portion of the fund on an at-cost basis; the fund paid Vanguard advisory fees of $175,000 for the year ended October 31, 2001. For the year ended October 31, 2001, the aggregate investment advisory fee represented an effective annual basic rate of 0.18% of the fund's average net assets before an increase of $2,628,000 (0.06%) based on performance. 26 C. The Vanguard Group furnishes at cost corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At October 31, 2001, the fund had contributed capital of $738,000 to Vanguard (included in Other Assets), representing 0.02% of the fund's net assets and 0.7% of Vanguard's capitalization. The fund's trustees and officers are also directors and officers of Vanguard. D. The fund has asked its investment advisers to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund's management and administrative expenses. The fund's custodian bank has also agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing custody account. For the year ended October 31, 2001, directed brokerage and custodian fee offset arrangements reduced expenses by $132,000 and $43,000, respectively. E. During the year ended October 31, 2001, the fund purchased $3,257,616,000 of investment securities and sold $3,031,025,000 of investment securities, other than temporary cash investments. At October 31, 2001, the fund had available a capital loss carryforward of $202,603,000 to offset future net capital gains through October 31, 2009. F. At October 31, 2001, net unrealized depreciation of investment securities for financial reporting and federal income tax purposes was $147,606,000, consisting of unrealized gains of $550,407,000 on securities that had risen in value since their purchase and $698,013,000 in unrealized losses on securities that had fallen in value since their purchase. At October 31, 2001, the aggregate settlement value of open futures contracts expiring in December 2001 and the related unrealized depreciation were: - -------------------------------------------------------------------------------- (000) ----------------------------- AGGREGATE NUMBER OF SETTLEMENT UNREALIZED FUTURES CONTRACTS LONG CONTRACTS VALUE DEPRECIATION - -------------------------------------------------------------------------------- S&P MidCap 400 Index 221 $ 49,874 $(3,391) Russell 2000 Index 716 153,457 (3,118) - -------------------------------------------------------------------------------- Unrealized depreciation on open futures contracts is required to be treated as realized loss for tax purposes. G. The market value of securities on loan to broker/dealers at October 31, 2001, was $32,062,000, for which the fund held cash collateral of $37,177,000. The fund invests cash collateral received in repurchase agreements, and records a liability for the return of the collateral, during the period the securities are on loan. 27 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Trustees of Vanguard Explorer Fund: In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Explorer Fund (the "Fund") at October 31, 2001, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2001 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania November 30, 2001 - -------------------------------------------------------------------------------- SPECIAL 2001 TAX INFORMATION (UNAUDITED) FOR VANGUARD EXPLORER FUND This information for the fiscal year ended October 31, 2001, is included pursuant to provisions of the Internal Revenue Code. The fund distributed $332,276,000 as capital gain dividends (from net long-term capital gains) to shareholders during the fiscal year, all of which is designated as a 20% rate gain distribution. For corporate shareholders, 71.0% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction. 28 - -------------------------------------------------------------------------------- THE PEOPLE WHO GOVERN YOUR FUND The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund trustees also serve on the board of directors of The Vanguard Group, which is owned by the funds and exists solely to provide services to them on an at-cost basis. A majority of Vanguard's board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. They bring distinguished backgrounds in business, academia, and public service to their task of working with Vanguard officers to establish the policies and oversee the activities of the funds. Among board members' responsibilities are selecting investment advisers for the funds; monitoring fund operations, performance, and costs; reviewing contracts; nominating and selecting new trustees/ directors; and electing Vanguard officers. The list below provides a brief description of each trustee's professional affiliations. The year in which the trustee joined the Vanguard board is noted in parentheses. - -------------------------------------------------------------------------------- TRUSTEES JOHN J. BRENNAN (1987) Chairman of the Board, Chief Executive Officer, and Director/Trustee of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. CHARLES D. ELLIS (2001) Senior Adviser to Greenwich Associates; Successor Trustee of Yale University; Overseer of the Stern School of Business at New York University; Trustee of the Whitehead Institute for Biomedical Research. JOANN HEFFERNAN HEISEN (1998) Vice President, Chief Information Officer, and a member of the Executive Committee of Johnson & Johnson; Director of The Medical Center at Princeton, and Women's Research and Education Institute. BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution; Director of American Express Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp. BURTON G. MALKIEL (1977) Chemical Bank Chairman's Professor of Economics, Princeton University; Director of Prudential Insurance Co. of America, BKF Capital, The Jeffrey Co., and NeuVis, Inc. ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and Director of NACCO Industries, Inc.; Director of Goodrich Corp. JAMES O. WELCH, JR. (1971) Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. J. LAWRENCE WILSON (1985) Retired Chairman and Chief Executive Officer of Rohm and Haas Co.; Director of AmerisourceBergen Corp., Cummins Inc., and The Mead Corp.; Trustee of Vanderbilt University. - -------------------------------------------------------------------------------- OTHER FUND OFFICERS R. GREGORY BARTON, Secretary; Managing Director- Legal and Secretary of The Vanguard Group, Inc.; Secretary of each of the investment companies in The Vanguard Group. THOMAS J. HIGGINS, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies in The Vanguard Group. - -------------------------------------------------------------------------------- VANGUARD MANAGING DIRECTORS JAMES H. GATELY, Direct Investor Services. KATHLEEN C. GUBANICH, Human Resources. IAN A. MACKINNON, Fixed Income Group. F. WILLIAM MCNABB, III, Institutional Investor Group. MICHAEL S. MILLER, Planning and Development. RALPH K. PACKARD, Chief Financial Officer. GEORGE U. SAUTER, Quantitative Equity Group. - -------------------------------------------------------------------------------- JOHN C. BOGLE Founder; Chairman and Chief Executive, 1974-1996. [SHIP] [THE VANGUARD GROUP(R) LOGO] Post Office Box 2600 Valley Forge, PA 19482-2600 ABOUT OUR COVER Our cover photograph was taken by Michael Kahn in September 2000 aboard HMS Rose in New York's Long Island Sound. Mr. Kahn is a renowned photographer--and accomplished sailor--whose work often focuses on seascapes and nautical images. The photograph is copyrighted by Mr. Kahn. All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc., unless otherwise noted. Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500, 500, S&P MidCap 400, and S&P SmallCap 600 are trademarks of The McGraw-Hill Companies, Inc. All other index names may contain trademarks and are the exclusive property of their respective owners. WORLD WIDE WEB www.vanguard.com FUND INFORMATION 1-800-662-7447 DIRECT INVESTOR ACCOUNT SERVICES 1-800-662-2739 INSTITUTIONAL INVESTOR SERVICES 1-800-523-1036 This report is intended for the fund's shareholders. It may not be distributed to prospective investors unless it is preceded or accompanied by the current fund prospectus. (C)2001 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. 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