<PAGE> 1
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Vanguard/PRIMECAP Fund continued its stunning performance record of recent
years with a return of +25.3% during the six months ended June 30, the first
half of our 1995 fiscal year. We not only participated in the strong bull
market for common stocks in recent months, but in fact were again among the
industry's performance leaders.
Just as in 1993 and 1994, the Fund succeeded in garnering a total
return (capital change plus income) that surpassed by a wide margin both of our
measurement standards: the Standard & Poor's 500 Composite Stock Price Index
and the average growth mutual fund. The table below reflects the powerful
absolute returns achieved by stocks generally during the half year, as well as
our imposing relative return:
<TABLE>
<CAPTION>
--------------------------------------------------------
Total Return
-----------------
Six Months Ended
June 30, 1995
--------------------------------------------------------
<S> <C>
PRIMECAP FUND +25.3%
--------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +20.2%
AVERAGE GROWTH MUTUAL FUND +17.5
--------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $19.98 per share on
December 31, 1994, and $24.95 on June 30, 1995, 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 1994 and paid in March 1995.
THE PERIOD IN REVIEW
After a moderately disappointing 1994, the stock market sprung to life as 1995
began. During the past six months, the market has moved upward, week after
week, in virtually straight-line fashion, delighting the bulls and astonishing
the bears. On balance, the Dow Jones Industrial Average rose from 3834 as the
year began to 4556 on June 30.
As usual, there were many opinions as to the source of the market's
surprising strength. In my view, it resulted from a combination of: (1) the
sharp decline in interest rates (the yield on the long-term U.S. Treasury bond
fell from 7.8% to 6.6% during the period, a dip of 120 basis points); (2) the
diminishing threat of additional increases in short-term interest rates by the
Federal Reserve Board; (3) a slight softening in U.S. economic growth,
resulting in continued optimism about the outlook for inflation; (4)
record-breaking corporate profits; and (5) a hint of speculative fever in the
marketplace. Whatever the cause, the total stock market (Wilshire 5000 Index)
provided a return of +19.2% for the six months.
The largest contributor to the Fund's relative performance success
during the half year was our major concentration in the technology sector,
which provided a return of +38% during the period. Our overweighting in this
splendidly performing group (37% of the Fund's net assets versus 10% for the
Index), along with our success in selecting individual technology issues,
provided a premium of 7.2 percentage points over the performance of the
Standard & Poor's 500 Index--more than enough to account for our total premium
of 5.1 percentage points. Most of the resultant gap was accounted for by
several selections in the financial group that lagged the market.
Our even larger 7.8 percentage point return premium over the average
growth fund also resulted largely from our overweighting in the technology
area. Our underweighting in three sectors (utilities, energy, and consumer
staples) that lagged the market was another plus for the Fund.
Some of these differences in sector concentration reflect the fact
that many growth funds, rather than focusing on stocks with above-average
prospects for long-term earnings growth, have broadened their focus to include
"value" stocks, defined as those with above-average yields and below-average
price-to-earnings ratios. While we, too, seek to capture value, we do so with
our prime focus on stocks with long-term growth potential.
SUMMING UP
This Semi-Annual Report marks the first time I have written to you since my
letter of March 7, 1995, announcing the closing of the Fund to new shareholder
accounts. We took this step--so atypical
1
<PAGE> 2
of the way most mutual funds, ever-seeking to gather more assets,
behave--primarily in the interests of the existing shareholders of the Fund, to
wit, you.
Our objective was simply to staunch the accelerating cash flow into
the Fund, which was becoming increasingly difficult to invest on a timely
basis. (Cash flow was coming into PRIMECAP at the rate of $164 million per
month in 1995, compared with $53 million in 1994, and $1.5 million in 1993.) We
also had the impression that much of the cash flow was the product of the
increasingly prevalent "hot money" of short-term mutual fund investors, who
jump from one fund to another based on recent performance. Such investors
increase a fund's transaction costs twice; first, when they jump on the
bandwagon after good performance; and second, when they jump off at the first
sign of negative, or even lagging, returns (events which occur, sooner or
later, to all equity mutual funds).
I should note that we attempted to minimize the disruption of the
investment programs of existing PRIMECAP investors in two ways: (1) allowing
present shareholders to add up to $25,000 each year to their accounts; and (2)
allowing those investing regularly through IRAs and 401(k) thrift plans to
continue their programs. As a result, the Fund continues to enjoy a nicely
positive cash inflow, albeit at a much moderated level.
Finally, let me express two cautions: (1) PRIMECAP, by reason of its
heavy commitment to technology stocks, is less diversified than the typical
equity fund. This concentration has provided substantial rewards, but it also
entails significant risks. (2) This year's bull market in stocks has been
extraordinarily strong and swift, but "trees do not grow to the sky." The
second half of the year seems most unlikely to witness a repeat of the bounties
of the first half. So, long-term investors should continue to balance their
holdings in PRIMECAP and other stock funds with holdings of bonds and reserves.
Usually, the best policy is to resist the temptation to attempt to outguess the
market by making major, precipitate reallocations among these three basic
classes of financial assets. In our 1994 Annual Report six months ago, we urged
you to "stay the course." That proved fine advice then; we reiterate it now.
Sincerely,
/s/ John C. Bogle
-----------------
John C. Bogle
Chairman of the Board
July 11, 1995
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, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
-----------------------------------------
INCEPTION TOTAL CAPITAL INCOME
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
VANGUARD/PRIMECAP FUND 11/1/84 +38.93% +16.45% +16.35% +15.40% +0.95%
</TABLE>
ALL OF THESE 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
In the first half of 1995, PRIMECAP Fund produced a total return of +25.3%
compared to +20.2% for the unmanaged Standard & Poor's 500 Index. It was an
outstanding first half for the Fund from both an absolute and a relative
perspective. Certainly, we are delighted to report a +25.3% absolute return,
however, we are especially pleased with the Fund's relative performance. It was
one of the more difficult periods in recent times to outperform the S&P 500
Index. Only approximately 20% of equity mutual funds exceeded this benchmark.
The performance of stocks during the first two quarters has surprised
most market observers. As 1995 began, bearish sentiment was pervasive. The
dollar was heading toward a post-World War II low versus the Japanese yen. The
Latin American financial markets were in turmoil. Even the confidence of
municipal bond investors was briefly challenged when Orange County, California,
filed for bankruptcy. Despite these rather ominous developments, U.S. equities
recorded impressive gains in the first half that represent the best semi-annual
performance in eight years.
Once again, the Fund's substantial overweighting in the technology
sector and excellent selection within the sector were the most significant
factors in our results. The technology sector was the best sector in the
market, increasing +38.1% in the first half. Our technology issues did
moderately better, up +41.9%. As we have communicated to you in the last three
Annual Reports, we have made a major commitment to semiconductor stocks.
Although semiconductor stocks were among our best performing stocks in 1994,
they are leading the pack again. The Fund's semiconductor holdings: Texas
Instruments, LSI Logic, Burr-Brown, and Intel posted gains ranging from +78.8%
to +98.8%.
Although technology stocks have been excellent performers, and many
mutual funds have increased their exposure to the sector, we still believe the
fundamentals are favorable, and the valuations are attractive. It is
intuitively obvious to every consumer that electronics are becoming
increasingly ubiquitous. It is not just personal computers. Toys, appliances,
automobiles, consumer electronics, and industrial machinery contain increased
electronic content with each new product generation. In fact, LSI Logic, the
Fund's best performing semiconductor stock over the last few years, derives
only 20% of its revenues from the personal computer and related businesses.
By definition, as electronic technology continues to grow faster than
the Gross National Product, it becomes a more significant component of the
overall economy. In time this should be reflected in the market capitalization
of the technology sector relative to the broad market. Since 1972, technology
stocks have traded in a range that represents 6% to 17% of the market
capitalization of the S&P 500 Index. Currently, the sector trades at 11.1% of
the S&P 500, despite the fact that technology has never been more critical to
the economy than it is today. We believe this is an anomaly that will correct
over time. It is an important consideration in our continuing optimism for
technology stocks.
Transportation stocks also contributed significantly to our first half
results. Led by gains of at least +40% in Delta Air Lines, Southwest Airlines,
and AMR Corporation, the Fund's transportation holdings were up +26.7% for the
period. In last year's Annual Report, we discussed our disappointment with the
1994 performance of our airline holdings. However, we noted that our confidence
in the sector had never been greater. This viewpoint is unchanged, the industry
continues to look healthier to us. The airlines are exercising commendable
restraint in adding capacity. Capacity growth is comfortably lagging the growth
in passenger miles flown. Fare discounting entering the important summer period
appears less severe than in recent years. All of the companies continue to
aggressively attack costs. Recently, Delta has been the most notable in this
regard. Earlier in the year, Delta led an industry-wide compaign to
substantially reduce travel agents' commissions. The company is on track to
slash more than $2 billion in operating costs by 1997. We expect the course of
actions that Delta and the other major airlines are pursuing will lead to huge
cash flow generation and earnings gains in the near future.
(continued)
3
<PAGE> 4
Most market indexes are near record levels following many years of
truly outstanding equity returns. Certainly some caution is warranted. However,
we view the economic environment as favorable for stocks. Interest rates have
declined, inflation is low, and monetary growth is adequate. Most important, we
continue to find stocks with exciting fundamentals that sell at reasonable
valuations.
Respectfully,
Howard B. Schow
Portfolio Manager
Theo A. Kolokotrones
Portfolio Manager
PRIMECAP Management Company
July 7, 1995
4
<PAGE> 5
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD/PRIMECAP Fund since inception through June 30, 1995. During the period
illustrated, stock prices fluctuated widely; these results should not be
considered a representation of the dividend income or capital gain or loss that
may be realized from an investment made in the Fund today.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA* TOTAL INVESTMENT RETURN**
-----------------------------------------------------------------------------------------------------------------------------------
PRIMECAP Fund
Value with Income ----------------------------
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total S&P 500 Index
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Total Return
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (11/84) $ 6.25 -- -- $ 6.25 -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
1984 6.56 -- -- 6.56 + 4.9% 0.0% + 4.9% + 0.6%
-----------------------------------------------------------------------------------------------------------------------------------
1985 8.89 -- $.01 8.90 +35.6 +0.2 +35.8 +31.6
-----------------------------------------------------------------------------------------------------------------------------------
1986 10.64 $.18 .14 10.99 +21.8 +1.7 +23.5 +18.6
-----------------------------------------------------------------------------------------------------------------------------------
1987 10.06 .24 .10 10.74 - 3.2 +0.9 - 2.3 + 5.2
-----------------------------------------------------------------------------------------------------------------------------------
1988 11.18 .25 .10 12.32 +13.7 +1.0 +14.7 +16.5
-----------------------------------------------------------------------------------------------------------------------------------
1989 12.82 .61 .16 14.98 +20.2 +1.4 +21.6 +31.6
-----------------------------------------------------------------------------------------------------------------------------------
1990 12.21 .12 .13 14.56 - 3.8 +1.0 - 2.8 - 3.1
-----------------------------------------------------------------------------------------------------------------------------------
1991 15.36 .68 .15 19.39 +31.8 +1.3 +33.1 +30.4
-----------------------------------------------------------------------------------------------------------------------------------
1992 16.19 .41 .12 21.13 + 8.2 +0.8 + 9.0 + 7.6
-----------------------------------------------------------------------------------------------------------------------------------
1993 18.42 .59 .07 24.94 +17.6 +0.4 +18.0 +10.1
-----------------------------------------------------------------------------------------------------------------------------------
1994 19.98 .41 .12 27.79 +10.7 +0.7 +11.4 + 1.3
-----------------------------------------------------------------------------------------------------------------------------------
1995 (6/30) 24.95 .07 -- 34.81 +25.3 0.0 +25.3 +20.2
-----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +457.0% +361.5%
-----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +17.5% +15.4%
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted for the 4-for-1 stock split, February 23, 1990.
** Includes reinvestment of income dividends and any capital gains distributions
for both the Fund and the Index.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
5
<PAGE> 6
FINANCIAL STATEMENTS
(unaudited)
June 30, 1995
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (86.6%)
----------------------------------------------------------------------
BASIC MATERIALS (4.4%)
----------------------------------------------------------------------
Engelhard Corp. 1,340,000 $ 57,452
(1) MacDermid, Inc. 189,000 8,411
Quaker Chemical Corp. 140,000 2,205
Stepan Co. 300,000 5,137
Temple-Inland Inc. 1,000,000 47,625
----------
GROUP TOTAL 120,830
----------
----------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (4.2%)
----------------------------------------------------------------------
Belden Inc. 200,000 5,400
Caterpillar, Inc. 725,000 46,581
Donaldson Co., Inc. 540,000 14,108
(1) Granite Construction Co. 840,000 18,585
Kennametal, Inc. 700,000 24,675
* Sanifill, Inc. 150,000 4,706
----------
GROUP TOTAL 114,055
----------
----------------------------------------------------------------------
CONSUMER CYCLICALS (7.2%)
----------------------------------------------------------------------
Arvin Industries, Inc. 660,000 14,767
* BET Holdings Inc. Class A 380,000 6,935
Capital Cities/ABC, Inc. 150,000 16,200
* Coherent, Inc. 500,000 14,625
* Electronic Arts 1,015,000 27,532
* Filene's Basement Corp. 995,000 3,234
* GC Cos. 200,000 6,550
Harcourt General, Inc. 500,000 21,250
Knight-Ridder, Inc. 100,000 5,687
McClatchy Newspapers, Inc. 390,000 8,629
Polaroid Corp. 720,000 29,340
* Price/Costco Inc. 2,450,000 39,813
----------
GROUP TOTAL 194,562
----------
----------------------------------------------------------------------
ENERGY (.5%)
----------------------------------------------------------------------
Panhandle Eastern Corp. 200,000 4,875
Schlumberger Ltd. 145,000 9,008
----------
GROUP TOTAL 13,883
----------
----------------------------------------------------------------------
FINANCIAL (8.7%)
----------------------------------------------------------------------
American International
Group, Inc. 555,000 63,270
(1) Avemco Corp. 650,000 11,294
City National Corp. 621,485 7,069
General Re Corp. 430,000 57,566
Marsh & McLennan, Inc. 220,000 17,847
NationsBank, Inc. 100,000 5,363
Torchmark Corp.` 460,000 17,365
Transatlantic Holdings 375,000 24,375
* Zurich Reinsurance Centre
Holdings, Inc. 1,089,000 31,173
----------
GROUP TOTAL 235,322
----------
----------------------------------------------------------------------
HEALTH CARE (6.5%)
----------------------------------------------------------------------
Block Drug Co. Class A 146,315 4,938
Caremark International, Inc. 200,000 4,000
* Cordis Corp. 525,000 35,044
*(1) Heart Technology, Inc. 900,000 17,213
Johnson & Johnson 277,800 18,786
Eli Lilly & Co. 440,000 34,540
*(1) Lynx Therapeutic 729,000 73
Medtronic, Inc. 480,000 37,020
* Mycogen Corp. 735,000 6,064
Puritan-Bennett Corp. 260,000 9,978
Upjohn Co. 188,000 7,120
----------
GROUP TOTAL 174,776
----------
----------------------------------------------------------------------
TECHNOLOGY (37.3%)
----------------------------------------------------------------------
COMPUTER & COMPUTER RELATED (8.0%)
Adobe Systems, Inc. 1,335,000 77,430
* Digital Equipment Corp. 1,000,000 40,750
* Stratus Computer, Inc. 682,000 21,142
Reuters Holdings PLC ADR 640,000 32,000
* Tandem Computers, Inc. 2,830,000 45,634
ELECTRONIC COMPONENTS & INSTRUMENTS (19.6%)
AMP, Inc. 500,000 21,125
* Burr-Brown Corp. 360,000 9,540
* Dionex Corp. 255,000 11,539
*(1) Evans & Sutherland
Computer Corp. 840,000 12,810
Intel Corp. 1,710,000 108,157
* LSI Logic Corp. 818,700 32,032
Molex, Inc. 100,000 3,850
Molex, Inc. Class A 100,000 3,625
Motorola, Inc. 930,000 62,426
* Octel Communications Corp. 1,075,000 31,444
Perkin-Elmer Corp. 520,000 18,460
Sony Corp. ADR 664,000 32,204
* Symbol Technologies, Inc. 880,000 33,770
Tektronix, Inc. 1,160,000 57,130
Texas Instruments, Inc. 700,000 93,712
OFFICE EQUIPMENT (2.4%)
Hewlett-Packard Co. 630,000 46,935
Xerox Corp. 150,000 17,588
TELECOMMUNICATIONS (7.3%)
L.M. Ericsson
Telephone Co. ADR 3,480,000 69,600
L.M. Ericsson
Telephone Co. Cvt. 4.25% 620,000 1,628
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
----------------------------------------------------------------------
<S> <C> <C>
*(1) Plantronics, Inc. 804,000 $ 21,507
* Tellabs, Inc. 1,520,000 72,960
Vodafone Group PLC ADR 820,000 31,057
----------
GROUP TOTAL 1,010,055
----------
----------------------------------------------------------------------
TRANSPORT & SERVICES (13.1%)
----------------------------------------------------------------------
* AMR Corp. 1,455,000 108,579
Airborne Freight Corp. 460,000 9,315
* Alaska Air Group, Inc. 400,000 7,350
American President Cos., Ltd. 440,000 10,450
Delta Air Lines, Inc. 1,465,000 108,044
* Federal Express Corp. 1,365,000 82,924
Southwest Airlines Co. 1,150,000 27,456
----------
GROUP TOTAL 354,118
----------
----------------------------------------------------------------------
UTILITIES (.4%)
----------------------------------------------------------------------
Telephone & Data Systems, Inc. 295,000 10,731
----------
----------------------------------------------------------------------
MISCELLANEOUS (4.3%)
----------------------------------------------------------------------
Manpower Inc. 875,000 22,313
Other (3.4%) 92,953
----------
GROUP TOTAL 115,266
----------
----------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $1,549,552) 2,343,598
----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEMPORARY CASH INVESTMENT (10.1%)
----------------------------------------------------------------------
Face
Amount
(000)
---------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations
in a Pooled Cash
Account 6.13%, 7/3/95
(Cost $274,362) $274,362 274,362
----------------------------------------------------------------------
TOTAL INVESTMENTS (96.7%)
(Cost $1,823,914) 2,617,960
----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
(000)+
----------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (3.3%)
----------------------------------------------------------------------
Other Assets--Notes C and E $ 154,536
Liabilities--Note E (64,751)
----------
89,785
----------------------------------------------------------------------
NET ASSETS (100%)
----------------------------------------------------------------------
Applicable to 108,531,606 outstanding
$.001 par value shares
(authorized 150,000,000 shares) $2,707,745
----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $24.95
======================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
(1) Considered an affiliated company as the Fund owns more than 5% of the
outstanding voting securities of such company.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
AT JUNE 30, 1995, NET ASSETS CONSISTED OF:
----------------------------------------------------------------------
Amount Per
(000) Share
----------- ---------
<S> <C> <C>
Paid in Capital $1,888,159 $17.40
Undistributed Net
Investment Income 11,716 .11
Accumulated Net Realized Gains 13,824 .13
Unrealized Appreciation of
Investments--Note D 794,046 7.31
----------------------------------------------------------------------
NET ASSETS $2,707,745 $24.95
----------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1995
(000)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,595
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,388
-----------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . 17,983
-----------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B . . . . . . . . . . . . . . . . . 3,300
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . $2,766
Marketing and Distribution . . . . . . . . . . . . . . . . . . . 173 2,939
------
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . 81
Custodians' Fees . . . . . . . . . . . . . . . . . . . . . . . . . 9
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . 50
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . 16
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . 4
-----------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . 6,404
-----------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . 11,579
-----------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . . . . . . . 14,625
-----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . 477,125
-----------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . $503,329
=====================================================================================================
</TABLE>
8
<PAGE> 9
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
JUNE 30, 1995 December 31, 1994
(000) (000)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . $ 11,579 $ 8,960
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . 14,625 31,811
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . 477,125 77,964
---------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations . . . . . . . . . . . . . . . . . . . . . 503,329 118,735
---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . -- (8,890)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . (6,877) (28,580)
---------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . (6,877) (37,470)
---------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . . . . 480,992 388,913
--In Lieu of Cash Distributions . . . . . . . . . . . . . 6,785 36,964
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . 367,550 455,358
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . . . . (125,101) (93,175)
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . (72,646) (106,509)
---------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . 657,580 681,551
---------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . 1,154,032 762,816
---------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . 1,553,713 790,897
---------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . . . . . . . . . . $2,707,745 $1,553,713
===============================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . . -- $.12
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . $.07 $.41
---------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,039 43,291
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . 318 1,885
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,604) (10,327)
---------------------------------------------------------------------------------------------------------------
30,753 34,849
---------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . . . . $ 11,716 $ 137
---------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
SIX MONTHS ENDED ------------------------------------------------
For a Share Outstanding Throughout Each Period(1) JUNE 30, 1995 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . $19.98 $18.42 $16.19 $15.36 $12.21 $12.82
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . .11 .12 .07 .12 .15 .12
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . 4.93 1.97 2.82 1.24 3.83 (.48)
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . 5.04 2.09 2.89 1.36 3.98 (.36)
--------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . -- (.12) (.07) (.12) (.15) (.13)
Distributions from Realized Capital Gains . . . . . . (.07) (.41) (.59) (.41) (.68) (.12)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (.07) (.53) (.66) (.53) (.83) (.25)
--------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . $24.95 $19.98 $18.42 $16.19 $15.36 $12.21
====================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . +25.28% +11.41% +18.03% +8.99% +33.14% -2.79%
--------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
------------------------
Net Assets, End of Period (Millions) . . . . . . . . . $2,708 $1,554 $791 $646 $486 $305
Ratio of Expenses to Average Net Assets . . . . . . . . .60%* .64% .67% .68% .68% .75%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . 1.08%* .79% .44% .84% 1.09% 1.06%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 4%* 8% 16% 7% 24% 11%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
(1) Adjusted to reflect a 4-for-1 stock split as of February 23, 1990.
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 the close of the New York Stock Exchange
(generally 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
require 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, 1996, 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, 1995, the
advisory fee represented an effective annual rate of .31 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, 1995, the Fund had contributed capital of $333,000 to
Vanguard (included at cost in Other Assets), representing 1.7% 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, 1995, the Fund made purchases of
$548,083,000 and sales of $36,978,000 of investment securities other than U.S.
Government securities and temporary cash investments.
At June 30, 1995, unrealized appreciation for financial reporting and Federal
income tax purposes aggregated $794,046,000 of which $815,168,000 related to
appreciated securities and $21,122,000 related to depreciated securities.
E. The market value of securities on loan to broker/dealers at June 30, 1995,
was $48,498,000 for which the Fund had received cash collateral of $52,195,000.
11
<PAGE> 12
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income
Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Portfolio
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
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
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[THE VANGUARD GROUP LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1-(800) 662-7447 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.
Q592-6/95
VANGUARD
PRIMECAP
FUND
[FIGURE]
SEMI-ANNUAL REPORT
JUNE 30, 1995
