<PAGE> 1
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Common stock prices experienced two significant downdrafts--one in late March,
the other in late June--during the six months ended June 30, the first half of
Vanguard/PRIMECAP Fund's 1994 fiscal year. Nonetheless, reasonable strength
during the remainder of the period held the net decline in the total value of
all U.S. stocks to -4.5%. In this environment, PRIMECAP Fund performed well,
earning a positive total return of +0.5%.
Relative to the return of -3.4% on the unmanaged Standard & Poor's 500
Composite Stock Price Index, dominated by the performance of both growth and
value stocks with large market capitalizations, the Fund's positive total
return (capital change plus income) was gratifying enough. But our return was
even more gratifying relative to the -6.0% return achieved by the average
growth mutual fund, with investment objectives and policies similar to ours.
This table presents the comparisons:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------
Total Return
----------------
Six Months Ended
June 30, 1994
- - ----------------------------------------------------------------------
<S> <C>
VANGUARD/PRIMECAP FUND +0.5%
- - ----------------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX -3.4%
AVERAGE GROWTH MUTUAL FUND -6.0
- - ----------------------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $18.42 per share on
December 31, 1993, and $18.44 on June 30, 1994, with the latter figure adjusted
to take into account the reinvestment of a carry-over distribution of $.07 per
share from net capital gains realized during 1993 and paid in March.
* THE STOCK MARKET IN REVIEW
Following two years of relative tranquility, substantial volatility returned to
the stock market during the past six months, and stocks in the aggregate showed
a net decline. While the decline in stock prices from the February high to the
June low (-8%) was fairly significant, it was a far cry from the market's sharp
dips in 1990 (-20%), 1987 (-34%), 1981 (-18%), and 1973-1974 (-48%). (Price
change from high to low, excluding income.)
Although the recent price decline could be described as "moderate" in an
historical sense, it seemed to reflect investor concerns beyond the actual
dimensions of the problems confronting the market, most notably possible future
inflation. Surely, investor concerns were increased by the sharp six-month
decline in the prices of long-term U.S. Treasury bonds (-15%), as interest
rates leaped upward--from 6.4% at the start of our fiscal period to 7.6% at its
close. By way of perspective, this yield was 7.4% when 1993 began.
While these inflationary concerns have yet to be reflected in the Consumer
Price Index, the Federal Reserve has acted to "tighten" the money supply and
slow economic growth and potential future inflation, raising the Federal funds
rate (at which banks borrow from one another) four times--in February, March,
April, and again in May--from 3.00% to 4.25%. Theory suggests that increases in
short-term rates should be regarded by market participants as a restraint on
potential inflation, and thus cause long-term rates to fall. However, this
theory seldom holds true in practice, and 1994 has proved to be no exception.
In the stock market, the six-month period was the reverse of 1993 in at
least two respects: (1) stocks with large market capitalizations outpaced those
with medium and small market capitalizations; and (2) traditional actively
managed mutual funds generally fell short of the unmanaged market indexes. But
one equity market factor that persisted was the continued ascendancy of value
stocks--those with above-average dividend yields and below-average price-book
value ratios--over growth stocks--those that provide lower yields but
presumably richer prospects for earnings growth. The disparity in returns thus
far in 1994, however, has been far short of last year's, when the Standard
1
<PAGE> 2
& Poor's/BARRA Growth and Value Indexes provided returns of +1.7% and +18.6%,
respectively. During the past six months, the comparable figures were -4.4% for
the Growth Index and -2.4% for the Value Index. As we have often noted, the
relationship of the two groups is quite cyclical; there is every reason to
expect that growth stocks will, sooner, I think, rather than later, give a
relatively better account of themselves.
Interestingly enough, the "story" for PRIMECAP Fund over the past six
months had little to do with the general trends in the returns of growth stocks
or value stocks. Rather, the Fund's superior performance relative to both the
Standard & Poor's 500 Index and the average growth mutual fund was virtually
entirely accounted for by our substantial overweighting in the technology
sector--one of the sectors that best resisted the market decline--combined with
outstanding individual stock selections by our investment adviser, PRIMECAP
Management Company. For the full period, the Fund held about 46% of total net
assets in technology issues, compared with but 10% for the Index and 17% for
the average growth fund. While this high degree of portfolio concentration
exposes the Fund to greater risk, it also provides opportunity for greater
return. And that was just what we achieved during the past six months. On
balance, as shown in the table at the start of this letter, we outperformed the
Standard & Poor's 500 Index by 3.9 percentage points and the average growth
fund by a remarkable 6.5 percentage points.
* IN SUMMARY
When I wrote to you six months ago in our Annual Report for 1993, I noted that,
as we look ahead, "it would be imprudent not to offer a word of caution about
the stock market, which is surely due for its share of difficult bumps along
the way during the next few years." Such bumps obviously transpired during the
first half of 1994, and there may well be more to come. That said, PRIMECAP
Fund, with its concentrated portfolio and emphasis on medium and smaller
capitalization stocks, is designed for the long-term investor, and we would
urge you, once again, to "stay the course."
Sincerely,
/s/ JOHN C. BOGLE
- - ---------------------
John C. Bogle
Chairman of the Board
July 18, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED JUNE 30, 1994) ARE AS FOLLOWS:
1 YEAR: +9.94% 5 YEARS: +12.56% SINCE INCEPTION (11/1/84): +15.46%
THE FUND'S AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION INCLUDES A CAPITAL
RETURN OF +14.54% AND AN INCOME RETURN OF +0.92%. ALL OF THE DATA REPRESENT
PAST PERFORMANCE. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST.
2
<PAGE> 3
REPORT FROM THE INVESTMENT ADVISER
During the six months ended June 30, 1994, PRIMECAP Fund produced a total
return of +0.5%, compared to -3.4% for the unmanaged S&P 500 Index (see
Chairman's letter for details). It was a particularly difficult period for
small growth stocks, as reflected by declines of -6.4% and -8.7% in the broader
Russell 2000 and NASDAQ Composite Indexes, respectively. Considering that
PRIMECAP Fund holds many small capitalization growth issues, we are pleased
with the interim results.
The year began on a positive note, with PRIMECAP Fund's share value
increasing +5.0% during January. This gain was completely erased by the end of
the first quarter, as a spike in interest rates and trade concerns caused the
market to weaken. The S&P 500 Index concluded the first half at roughly the
same level it stood at the end of March. A "soft" U.S. dollar, persistent
concerns of increasing inflation, and the negative publicity surrounding losses
in derivative securities have heightened investor caution.
The dominant trend experienced in 1993 continued during the first half of
1994. Stocks in the economically sensitive sectors--technology, capital goods,
and basic industry--continue to outperform stocks in the consumer sector. The
primary factor underlying our strong relative performance has been our stock
selection within the technology sector. PRIMECAP's technology stocks generated
a +7.4% return, well ahead of the modest decline of -0.8% for the S&P 500
technology stocks. These results were leveraged by PRIMECAP Fund's substantial
overweighting in this sector. Throughout the first half, however, we allowed
our technology exposure to gradually decline. PRIMECAP Fund ended the first
half with a 35.0% weighting in technology, still several times the Index
weighting of 7.5%, but below the Fund's average weighting of 48.7% during 1993.
Our heavy commitment to transportation stocks (16.2% weighting versus 2.0%
for the S&P 500) hurt results during the past six months. Following a
rewarding 1993 in which the Fund's transportation stocks appreciated +28.6%,
they retraced -9.1% during the first half of the year. We foresee improving
fundamentals for these companies driven by leaner cost structures, shrinking
capacity, and improving economies abroad.
In consumer staples, our stock selection has been above average. Despite
our conscious underweighting of this sector, we continue to hold a
market-weighted position (i.e., similar to that of the S&P Index) in drug and
medical device companies. These stocks have rebounded nicely in the first half,
as some of the worst fears regarding health care legislation have diminished.
We believe that innovative pharmaceutical and medical device companies are part
of the solution to escalating health care costs. Drugs and medical devices play
an important role in eliminating surgical procedures, shortening hospital
stays, and lengthening and improving the quality of life. At the margin, we are
increasing our exposure to this area as exciting products and depressed
valuations present opportunities.
The past two years have been encouraging for PRIMECAP Fund as we believe
the market has validated our thesis. Relative returns for economically
sensitive stocks vis-a-vis consumer stocks have improved. However, there are
several reasons for near-term caution. Rising interest rates, trade concerns, a
weak dollar, and the market's preoccupation with the specter of inflation have
caused us to adopt a more cautious posture. We have allowed cash to build from
4.3% of net assets at the end of 1993 to 17% at June 30. When adding equities,
downside risk has been given greater consideration. We have devoted more time
looking for depressed stocks and out-of-favor industries. For example, during
the first half of the year we increased exposure in the reinsurance area, with
purchases of American International Group, General Re, and Marsh & McLennan.
An increasingly proactive Federal government, uncertainty regarding the
future direction of interest rates, inflation, and the dollar may presage a
volatile stock market in the second half. However, we believe that PRIMECAP
Fund is
3
<PAGE> 4
well positioned to capitalize on opportunities as they occur. In the long term,
we remain committed to the view that economically sensitive stocks will
outperform consumer stocks. In particular, we have positioned PRIMECAP Fund to
benefit from the growing importance of information technology in the global
economy.
Respectfully,
Howard B. Schow
Portfolio Manager
Theo A. Kolokotrones
Assistant Portfolio Manager
PRIMECAP Management Company
July 6, 1994
4
<PAGE> 5
TOTAL INVESTMENT RETURN
The table below illustrates the returns for VANGUARD/PRIMECAP FUND from
November 1, 1984, to June 30, 1994, the lifetime of the Fund. During this
period, stock prices fluctuated and were higher at the end than at the
beginning. These results should not be considered a representation of the
dividend income or capital gain or loss which may be realized from an
investment made in the Fund today.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT
PERIOD PER SHARE DATA* YEAR-END VALUE RETURN
- - -------------------------------------------------------------------------------------------------------------------------
Annual Percentage Change**
Value with Income Vanguard/ ---------------------------------
Year Ended Net Asset Income Capital Gains Dividends & Capital PRIMECAP S&P 500 Vanguard/ S&P 500
December 31 Value Dividends Distributions Gains Reinvested Fund Index PRIMECAP Fund Index
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (11/84) $ 6.25 -- -- $ 6.25 $10,000 $10,000 -- --
- - -------------------------------------------------------------------------------------------------------------------------
1984 6.56 -- -- 6.56 10,488 10,061 + 4.9% + 0.6%
- - -------------------------------------------------------------------------------------------------------------------------
1985 8.89 $.01 -- 8.90 14,239 13,244 +35.8 +31.6
- - -------------------------------------------------------------------------------------------------------------------------
1986 10.64 .14 $ .18 10.99 17,591 15,710 +23.5 +18.6
- - -------------------------------------------------------------------------------------------------------------------------
1987 10.06 .10 .23 10.74 17,188 16,524 - 2.3 + 5.2
- - -------------------------------------------------------------------------------------------------------------------------
1988 11.18 .09 .25 12.32 19,707 19,251 +14.7 +16.5
- - -------------------------------------------------------------------------------------------------------------------------
1989 12.82 .16 .61 14.98 23,966 25,332 +21.6 +31.6
- - -------------------------------------------------------------------------------------------------------------------------
1990 12.21 .13 .12 14.56 23,297 24,542 - 2.8 - 3.1
- - -------------------------------------------------------------------------------------------------------------------------
1991 15.36 .15 .68 19.39 31,018 31,988 +33.1 +30.4
- - -------------------------------------------------------------------------------------------------------------------------
1992 16.19 .12 .41 21.13 33,808 34,436 + 9.0 + 7.6
- - -------------------------------------------------------------------------------------------------------------------------
1993 18.42 .07 .59 24.94 39,902 37,901 +18.0 +10.1
- - -------------------------------------------------------------------------------------------------------------------------
1994 (6/30) 18.44 -- .07 25.06 40,090 36,618 + 0.5 - 3.4
- - -------------------------------------------------------------------------------------------------------------------------
LIFETIME $.97 $3.14 +300.9% +266.2% +15.5% +14.4%
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* All per share data have been adjusted for the 4-for-1 stock split in
February 1990.
** Adjusted to include reinvestment of income dividends and
any capital gains distributions both for the Fund and the Index. No
adjustment has made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
5
<PAGE> 6
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
June 30, 1994
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- - -----------------------------------------------------
<S> <C> <C>
COMMON STOCKS (84.2%)
- - -----------------------------------------------------
BASIC MATERIALS (2.5%)
Englehard Corp. 570,000 $ 14,393
(1)MacDermid, Inc. 189,000 5,481
Quaker Chemical Corp. 140,000 2,485
Stepan Co. 150,000 3,975
---------
GROUP TOTAL 26,334
---------
- - -----------------------------------------------------
CAPITAL GOODS & CONSTRUCTION
(4.7%)
Donaldson Co., Inc. 540,000 12,083
Granite Construction Co. 490,000 9,677
Molex, Inc. 75,000 2,813
Molex, Inc. Class A 75,000 2,700
* Symbol Technologies, Inc. 880,000 22,000
---------
GROUP TOTAL 49,273
---------
- - -----------------------------------------------------
CONSUMER CYCLICAL (6.1%)
Arvin Industries, Inc. 340,000 8,160
Capital Cities/ABC, Inc. 200,000 14,225
(1)McClatchy Newspapers, Inc. 390,000 9,311
Polaroid Corp. 460,000 14,662
Price/Costco Inc. 1,160,000 17,255
---------
GROUP TOTAL 63,613
---------
- - -----------------------------------------------------
CONSUMER STAPLES (.4%)
Johnson & Johnson 102,800 4,407
---------
- - -----------------------------------------------------
ENERGY (1.3%)
Associated Natural Gas Corp. 250,000 8,000
Schlumberger Ltd. 100,000 5,913
---------
GROUP TOTAL 13,913
---------
- - -----------------------------------------------------
FINANCIAL (7.4%)
American International
Group, Inc. 240,000 20,790
(1)Avemco Corp. 650,000 9,019
* City National Corp. 621,485 6,215
General Re Corp. 260,000 28,340
Marsh & McLennan, Inc. 160,000 13,340
---------
GROUP TOTAL 77,704
---------
- - -----------------------------------------------------
HEALTH CARE (6.5%)
Block Drug Co. Class A 142,054 4,510
* Cordis Corp. 400,000 15,500
Eli Lilly & Co. 120,500 6,854
* Heart Technology, Inc. 700,000 11,375
Medtronic, Inc. 223,700 17,924
Puritan-Bennett Corp. 340,000 6,715
Upjohn Co. 163,000 4,747
---------
GROUP TOTAL 67,625
---------
- - -----------------------------------------------------
PROFESSIONAL SERVICES (3.6%)
Harcourt General, Inc. 520,000 18,265
Manpower Inc. 940,000 19,740
---------
GROUP TOTAL 38,005
---------
- - -----------------------------------------------------
TECHNOLOGY (35.0%)
AMP, Inc. 225,000 15,581
Adobe Systems, Inc. 1,040,000 28,340
* Burr-Brown Corp. 240,000 1,860
* Coherent, Inc. 500,000 6,125
* Digital Equipment Corp. 313,000 6,064
* Dionex Corp. 255,000 8,479
L.M. Ericsson Telephone Co.
Cvt. 4.25% 620,000 1,046
L.M. Ericsson Telephone
Co. ADR 760,000 37,620
(1)Evans & Sutherland
Computer Corp. 420,000 5,670
Hewlett-Packard Co. 170,000 12,814
Intel Corp. 583,100 34,111
* LSI Logic Corp. 660,000 16,500
Linear Technology Corp. 320,000 14,000
Motorola, Inc. 497,900 22,157
* Octel Communications Corp. 430,000 7,095
Perkin-Elmer Corp. 485,000 14,186
Reuters Holdings PLC ADR 240,000 9,360
Sony Corp. ADR 104,000 6,318
* Stratus Computer, Inc. 410,000 11,582
* Tandem Computers, Inc. 1,060,000 11,925
Tektronix, Inc. 140,000 3,955
Telephone & Data Systems,
Inc. 295,000 10,915
* Tellabs, Inc. 920,000 28,290
Texas Instruments, Inc. 312,300 24,828
Vodafone Group PLC ADR 195,000 14,771
Xerox Corp. 143,400 14,017
---------
GROUP TOTAL 367,609
---------
- - -----------------------------------------------------
TRANSPORT & SERVICES (12.7%)
* AMR Corp. 470,000 27,906
Airborne Freight Corp. 220,000 7,645
* Alaska Air Group, Inc. 250,000 3,719
American President Cos., Ltd. 348,000 7,787
Delta Air Lines, Inc. 500,000 22,625
* Federal Express Corp. 645,500 48,170
Southwest Airlines Co. 600,000 15,675
---------
GROUP TOTAL 133,527
---------
- - -----------------------------------------------------
MISCELLANEOUS (4.0%) 41,676
---------
- - -----------------------------------------------------
TOTAL COMMON STOCKS
(Cost $668,076) 883,686
- - -----------------------------------------------------
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- - -----------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (17.4%)
- - -----------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
4.26%, 7/1/94
(Cost $181,807) $181,807 $ 181,807
- - -----------------------------------------------------
TOTAL INVESTMENTS (101.6%)
(Cost $849,883) 1,065,493
- - -----------------------------------------------------
OTHER ASSETS AND LIABILITIES
(-1.6%)
- - -----------------------------------------------------
Other Assets--Notes C and E 24,328
Liabilities--Note E (40,856)
---------
(16,528)
- - -----------------------------------------------------
NET ASSETS (100%)
- - -----------------------------------------------------
Applicable to 56,891,833
outstanding $.001 par
value shares (authorized
100,000,000 shares) $1,048,965
- - -----------------------------------------------------
NET ASSET VALUE PER SHARE $18.44
=====================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
(1) Considered affiliated companies as the Fund owns more than 5% of the
outstanding voting securities of such companies.
<TABLE>
<CAPTION>
- - ------------------------------------------------------
AT JUNE 30, 1994, NET ASSETS CONSISTED OF:
- - ------------------------------------------------------
Amount Per
(000) Share
---------- ------
<S> <C> <C>
Paid in Capital $ 812,154 $14.28
Undistributed Net
Investment Income 3,062 .05
Accumulated Net Realized Gains 18,139 .32
Unrealized Appreciation
of Investments--Note D 215,610 3.79
- - ------------------------------------------------------
NET ASSETS $1,048,965 $18.44
- - ------------------------------------------------------
</TABLE>
7
<PAGE> 8
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1994
(000)
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,562
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,585
- - -------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . 6,147
- - -------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . . . . . . . 1,683
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . $1,309
Marketing and Distribution . . . . . . . . . . . . . . . . 82 1,391
------
Taxes (other than income taxes)--Note A . . . . . . . . . . . 36
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . 7
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . 5
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . 20
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . 8
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . 2
- - -------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . 3,152
- - -------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . 2,995
- - -------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . . . . . 18,686
- - -------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . (23,347)
- - -------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations . . $ (1,666)
=============================================================================================================
</TABLE>
8
<PAGE> 9
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
JUNE 30, 1994 December 31, 1993
(000) (000)
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . $ 2,995 $ 3,225
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . 18,686 25,536
Change in Unrealized Appreciation (Depreciation) . . . . . . (23,347) 93,538
- - ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations . . . . . . . . . . . . . . . . . . (1,666) 122,299
- - ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . (3,028)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . (3,392) (25,364)
- - ------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . (3,392) (28,392)
- - ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . . . 194,169 154,453
-- In Lieu of Cash Distributions . . . . . . . . 3,334 27,861
-- Exchange . . . . . . . . . . . . . . . . . . . 167,791 103,697
Redeemed -- Regular . . . . . . . . . . . . . . . . . . . (52,479) (95,669)
-- Exchange . . . . . . . . . . . . . . . . . . . (49,689) (139,445)
- - ------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . 263,126 50,897
- - ------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . 258,068 144,804
- - ------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . 790,897 646,093
- - ------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . . . . . . $1,048,965 $ 790,897
==================================================================================================================
(1) Distributions Per Share . . . . . . . . . . . . . . . .
Net Investment Income . . . . . . . . . . . . . . . . . $ -- $ .07
Realized Net Gain . . . . . . . . . . . . . . . . . . . $ .07 $ .59
- - ------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . 19,228 14,702
Issued in Lieu of Cash Distributions . . . . . . . . . 172 1,571
Redeemed . . . . . . . . . . . . . . . . . . . . . . . (5,438) (13,251)
- - ------------------------------------------------------------------------------------------------------------------
13,962 3,022
- - ------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . $ 3,062 $ 67
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
For a Share Outstanding SIX MONTHS ENDED -------------------------------------------------
Throughout Each Period(1) JUNE 30, 1994 1993 1992 1991 1990 1989
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . $18.42 $16.19 $15.36 $12.21 $12.82 $11.18
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .05 .07 .12 .15 .12 .17
Net Realized and Unrealized Gain . . . . . .
(Loss) on Investments . . . . . . . . . . .04 2.82 1.24 3.83 (.48) 2.24
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . .09 2.89 1.36 3.98 (.36) 2.41
- - ---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . -- (.07) (.12) (.15) (.13) (.16)
Distributions from Realized Capital Gains . . (.07) (.59) (.41) (.68) (.12) (.61)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.07) (.66) (.53) (.83) (.25) (.77)
- - ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . $18.44 $18.42 $16.19 $15.36 $12.21 $12.82
===============================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . +0.47% +18.03% +8.99% +33.14% -2.79% +21.61%
- - ---------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- - ------------------------
Net Assets, End of Period (Millions) . . . . . $1,049 $791 $646 $486 $305 $279
Ratio of Expenses to Average Net Assets . . . . .68%* .67% .68% .68% .75% .74%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . .65%* .44% .84% 1.09% 1.06% 1.35%
Portfolio Turnover Rate . . . . . . . . . . . . 8%* 16% 7% 24% 11% 15%
- - ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Adjusted to reflect a 4-for-1 stock split as of February 23, 1990.
* Annualized.
10
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS
Vanguard/PRIMECAP Fund is registered under the Investment Company Act of 1940
as a diversified open-end investment company.
* A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of 4:00 PM on the valuation date; securities
not traded are valued at the mean of the latest quoted bid and asked prices.
Securities not listed are valued at the latest quoted bid prices. Temporary
cash investments are valued at cost which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group of Investment Companies, transfers uninvested cash
balances into a Pooled Cash Account, the daily aggregate of which is
invested in repurchase agreements secured by U.S. Government obligations.
Securities pledged as collateral for repurchase agreements are held by the
Fund's custodian bank until maturity of each repurchase agreement.
Provisions of the agreement ensure that the market value of this collateral
is sufficient in the event of default; however, in the event of default or
bankruptcy by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal proceedings.
4. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized gains
and losses on the sale of investment securities are those of specific
securities sold. Dividend income and distributions to shareholders are
recorded on the ex-dividend date.
* B. Under the terms of a contract which expires April 30, 1995, the Fund pays
PRIMECAP Management Company an advisory fee calculated at an annual percentage
rate of average net assets. For the six months ended June 30, 1994, the
advisory fee represented an effective annual rate of .36 of 1% of average net
assets.
* C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing and distribution services. The costs of such services
are allocated to the Fund under methods approved by the Board of Directors. At
June 30, 1994, the Fund had contributed capital of $164,000 to Vanguard
(included in Other Assets), representing .8% of Vanguard's capitalization. The
Fund's officers and directors are also officers and directors of Vanguard.
* D. During the six months ended June 30, 1994, the Fund made purchases of
$165,316,000 and sales of $33,988,000 of investment securities other than U.S.
Government securities and temporary cash investments.
At June 30, 1994, unrealized appreciation for financial reporting and Federal
income tax purposes aggregated $215,610,000 of which $259,249,000 related to
appreciated securities and $43,639,000 related to depreciated securities.
* E. The market value of securities on loan to broker/dealers at June 30, 1994,
was $20,351,000 for which the Fund had received cash collateral of $22,044,000.
11
<PAGE> 12
THE VANGUARD FAMILY OF FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund-Money Market Portfolio
Vanguard State Tax-Free Funds (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds (CA, FL, NJ, NY, OH, PA)
FIXED INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
EQUITY FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund-U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund-International Portfolio
The Vanguard Group * Vanguard Financial Center
Valley Forge, PA 19482
New Account Information: 1-(800) 662-7447
Shareholder Account Services: 1-(800) 662-2739
This Report has been prepared for shareholders and
may be distributed to others only if preceded or
accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q592-06/94
VANGUARD
PRIME CAP FUND
[FLAG PHOTO - SEE EDGAR APPENDIX]
SEMI-ANNUAL REPORT
JUNE 30, 1994
<PAGE> 13
EDGAR APPENDIX
The back cover of the printed version of this report features the flags of
the United States of America and Vanguard flying from a halyard.
