<PAGE> 1
[VANGUARD PRIMECAP FUND LOGO]
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard/PRIMECAP Fund and the other Funds in The Vanguard
Group. Mr. Brennan will continue to serve as President of the Funds, and I will
continue to serve as Chairman of the Board.
As a shareholder of the Fund since its inception and as Chairman of
all the Vanguard Funds, I want to tell you that I am enthusiastic and confident
that Jack Brennan is exactly the right person to succeed me as Chief Executive
Officer. To use yet another Vanguard nautical metaphor, he will be the new
captain. He has the qualities of leadership, integrity, intelligence, and
vision that must continue to be Vanguard's hallmark as we move toward, and then
into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
[FIGURE 1]
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in
me in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
VANGUARD/PRIMECAP FUND SEEKS TO PROVIDE LONG-TERM GROWTH OF CAPITAL BY
INVESTING IN COMMON STOCKS SELECTED ON THE BASIS OF GREATER-THAN-AVERAGE
EARNINGS GROWTH POTENTIAL, CONSISTENCY OF EARNINGS GROWTH, AND QUALITY OF
MANAGEMENT.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Vanguard/PRIMECAP Fund began its second decade with an excellent return of
+35.5% for 1995. This gain was achieved in the most powerful stock market in
nearly four decades, making equities clearly the best asset class in which to
have been invested over the past year.
The table below reflects our fine absolute performance and also
compares our total return (capital change plus reinvested dividends) with that
of the unmanaged Standard & Poor's 500 Composite Stock Price Index and the
average growth mutual fund. In a year in which large-capitalization stocks led
the market, we gave the large-cap, blue-chip Index a run for its money. We also
outpaced our mutual fund peer group by a handsome margin.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Total Return
-----------------
YEAR ENDED
DECEMBER 31, 1995
- ------------------------------------------------------------------------------
<S> <C>
VANGUARD/PRIMECAP +35.5%
- ------------------------------------------------------------------------------
AVERAGE GROWTH MUTUAL FUND +30.8%
STANDARD & POOR'S 500 STOCK INDEX +37.6
- ------------------------------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $19.98 per share on
December 31, 1994, and $26.23 on December 31, 1995, with the latter figure
adjusted to take into account the reinvestment of our annual dividend of $.22
per share from net investment income and two distributions totaling $.59 per
share from net capital gains, nearly all of which were realized during the
calendar year.
THE STOCK MARKET IN 1995
The great bull market in stocks we enjoyed during the year was virtually
uninterrupted, as stock prices rose in eleven of the past twelve months. The
dimension of the increase was close to record breaking, delighting the bulls
even as it astonished the bears. By year's end, the Standard & Poor's 500 Index
had generated a total return of +37.6%--its best year since 1958.
There were, as always, many opinions as to the source of the
surprising strength in the stock market. In my view, it resulted from a
combination of: (1) record-breaking corporate profits; (2) a growing
speculative fever in the marketplace, especially during the final weeks of the
year; and (3) a sharp decline in long-term interest rates. The rise in
corporate profits was particularly striking. It's estimated that operating
earnings for the companies in the Standard & Poor's 500 Index increased about
+15% in 1995, after already rising +16% in 1994. (Since 1926, earnings growth
has averaged less than +7% per year.) If there is a cautionary signal in this
boom in profits, it is that the two-year cumulative earnings growth of +33% has
been accompanied by dividend growth of only +11%.
This subdued dividend growth in the face of sharply higher stock
prices resulted in a decline in the yield on the Index to 2.2%, the lowest
level on record. Nonetheless, the Wall Street chorus sings "this time it's
different." Dividend yield and earnings growth--the two fundamentals of stock
returns--are clearly taking a back seat to the market's high valuation of the
long-term fundamentals. This is called "speculation," and it is hardly an
inconsequential component of 1995's high returns on stocks. So, as 1996 begins,
we face an environment that is surely sobering.
A huge decline in interest rates during the year not only set bond
prices afire, but also provided a major stimulus to the stock market. The yield
of the Lehman Long-Term Corporate Bond Index declined from 8.9% to 6.9% during
our 1995 fiscal year, even below its level of 7.1% at the start of 1994. The
1995 decline drove long-term bond prices up by fully +19%, resulting in a total
return (including the interest coupon) of +28%--remarkably competitive with the
return on stocks. Short-term rates also declined as the Federal Reserve reduced
the Federal funds rate (the rate at which banks borrow from one another) in
July and again in December. On balance during the year, the yield on the U.S.
Treasury bill eased from 5.6% to 5.0%.
This improvement in the actual (and expected) interest rate environment was
caused
1
<PAGE> 4
[FIGURE 2]
largely by a measurable softening in the growth of the U.S. economy, perhaps
with further weakness to come. A sluggish economy, in turn, engendered
continued optimism about the benign outlook for inflation. Indeed, the Consumer
Price Index (CPI) was quite well-behaved in 1995, rising by but +2.6%, its
smallest increase since 1986. Investors should carefully ponder the extent to
which today's high growth rate of corporate earnings is likely to be sustained
in a slowing economy.
THE 1990S SO FAR
During the past year, growth stocks (return of +38.1%) and value stocks
(+37.0%) were relatively equal participants in the great bull market. So far
during the 1990s, as shown in the chart above, there was little overall
difference between the two investment styles, despite some considerable
year-to-year variations.
You will note that, during this six-year period, the average annual
rates of return of the two groups of stocks were virtually identical: +13.3%
for the Standard & Poor's Growth Index and +12.6% for the Standard & Poor's
Value Index. (Each Index represents about 50% of the total market
capitalization of the Standard & Poor's 500 Index.) Since this long-term
congruence conceals significant annual variations, we have also shown the
year-by-year total returns of the two Indexes. Please note especially the
enormous disparity of returns in 1993 (Growth Index +2%; Value Index +19%).
Note also that the Growth Index was the better performer in four of the
remaining five years.
What should you make of these numbers? I suggest that you consider my
comments in our 1994 Annual Report: "This outcome suggests the wisdom of
consistently sticking to your objectives, rather than endeavoring (fruitlessly,
I believe) to switch back and forth between these two market segments in the
search for higher returns. Put another way, most investors would benefit by
'staying the course' that best meets their needs, whether in growth stocks or
value stocks, or some steady mix of the two."
I should add that the extraordinary gains achieved by stocks in the
great bull market of 1995 have materially added to the total return of the
Standard & Poor's 500 Index so far during the 1990s. One year ago, the
five-year return on the Index averaged just +8.7% annually. When we tack on an
ebullient 1995, the six-year return rises sharply, to +13.1%. These two
returns, in substance, nicely bracket the +10.7% long-term (since 1926) annual
return on stocks. In any event, I would be very surprised if the decade of the
1990s, when it comes to its conclusion, will have matched the average return on
stocks of +17.5% per year during the Golden Eighties.
THE FUND IN 1995
In a very strong market for the large blue-chip stocks, we are pleased that the
total return of PRIMECAP Fund proved so competitive with that of the Standard &
Poor's 500 Index. Indeed, despite the fact that only about 60% of our assets
was invested in stocks represented in the Index, the return on the stock
portion of our portfolio substantially exceeded the Index return. But, our cash
reserves position, which averaged about 13% during the year (somewhat above
normal for the Fund) eroded our performance edge.
2
<PAGE> 5
Within the stock component, our solid margin over the Index was
achieved, not so much by our heavy commitment to the technology group (35% of
our assets versus 11% for the Index), but by our adviser's fine selection of
individual technology issues that outpaced the overall group. Technology
stocks, by the way, after strongly leading the market through mid-September,
fell back in the final months of the year, providing a total return roughly
equal to that of the 500 Index for the full year. Both our underweighting in
the lagging consumer stocks and good selections of airline stocks also gave us
a positive thrust, but one that was largely offset by our poor choices of
financial stocks.
We are especially proud of the drubbing (there is really no other word
for it) we gave the average growth mutual fund, exceeding its return of +30.8%
by nearly five full percentage points. Three notable factors were major
contributors to our edge: (1) our oversized technology position, peppered with
well-selected stocks; (2) our virtual non-participation in the lagging energy
group, compared to a position of about 5% for our peers; and (3) a modest
position in cyclical stocks (12% of our net assets versus 16% for our peers),
another lagging group in which our stock selections were notably good. In a
sense, it was a "stock picker's year," and our investment adviser, PRIMECAP
Management Company, picked them well.
No review of 1995 would be complete without mention of our decision to
close PRIMECAP Fund to new investors on March 7, 1995. Given the Fund's
excellent record during its first decade of operations, along with our
outstanding technology-driven returns during the early months of 1995, cash
inflows virtually exploded. We saw no end in sight for this avalanche and were
motivated solely by what we perceived as our fiduciary duty to existing
shareholders.
In our judgment, a premature announcement of the closing would have
made a tough situation even worse. We do regret our inability to accommodate
shareholders of other Vanguard Funds. Since our decision was made, PRIMECAP's
cash inflow has declined to a reasonable level. With investors still permitted
to add up to $25,000 per calendar year to their current holdings, the Fund has
continued to
[FIGURE 4]
Average Annual Total Returns--Periods Ended December 31, 1995
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------
<S> <C> <C> <C>
PRIMECAP FUND +35.48% +20.92% +15.51%
AVERAGE GROWTH FUND +30.79 +15.73 +12.36
STANDARD & POOR'S 500 INDEX +37.58 +16.59 +14.86
</TABLE>
Note: Past Performance is not predictive of future performance.
3
<PAGE> 6
grow at a healthy pace. The extraordinary 1995 return realized by the Fund, in
combination with steady cash inflows, resulted in an increase in net assets
from $1.6 billion to $3.2 billion during the year.
THE PERSPECTIVE OF A DECADE
PRIMECAP Fund's outstanding return in 1995 added a modest increment to our
superiority over the average growth fund. As shown in the chart on the previous
page, we have experienced our ups and downs during the past decade but, on
balance, have provided returns that were far superior to industry norms. What
is more, we were among a relatively small number of growth funds in operation
for the full decade that succeeded in outpacing the returns of the ever-tough
Standard & Poor's 500 Index. There were but 154 growth funds in operation ten
years ago (now there are 646 growth funds!), and only 32 of them--including
PRIMECAP--outpaced the Index. This table summarizes our ten-year record:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
TOTAL RETURN*
---------------------------
DECEMBER 31, 1985, TO
DECEMBER 31, 1995
---------------------------
FINAL VALUE
AVERAGE OF INITIAL
ANNUAL INVESTMENT
RATE OF $10,000
- ----------------------------------------------------------
<S> <C> <C>
PRIMECAP FUND +15.5% $42,300
- ----------------------------------------------------------
AVERAGE GROWTH FUND +12.4% $32,080
STANDARD & POOR'S 500 INDEX +14.9 39,950
- ----------------------------------------------------------
</TABLE>
*Assumes reinvestment of all income dividends and capital gains distributions.
It should go without saying that the returns reflected in the table are merely
history. Future returns of the Fund--both on an absolute basis and relative to
the average growth fund and the Index--are unpredictable, and may be better or
worse than those shown in the table.
Our competitive superiority over the decade resulted in a large
financial advantage for our shareholders. An initial investment of $10,000 in
PRIMECAP at the beginning of the decade was valued at $42,300 at its
conclusion. The average growth fund had a final value of $32,080. That is an
additional value for PRIMECAP shareholders of fully $10,220, an amount equal to
more than 100%(!) of the initial investment. Thus, the table offers a fair and
crystal-clear example of the miraculous power of compounding combined with the
special investment skills of our adviser.
Outpacing the Standard & Poor's 500 Index is, as noted above, no mean
achievement. The Index, as you know, is a theoretical construct, incurring none
of the advisory fees, operating expenses, and transaction costs that must be
borne--to one extent or another--in the real world in which mutual funds must
operate. For Vanguard, the trick, as it were, is to identify investment
advisers who have sufficient skills to more than compensate for these costs.
And that is precisely what PRIMECAP Management Company has accomplished for the
Fund.
IN SUMMARY
When I wrote to you in our 1994 Annual Report, after a tough and bumpy ride in
a lackluster year, I warned you that "the stock market is surely due for its
share of difficult bumps along the way during the next few years." As 1995 was
to turn out, I hardly could have been more wide of the mark. Whether 1996 or
even 1997 will confirm my caution remains to be seen.
To state the obvious, 1995 was an extraordinarily bountiful year for
the shareholders in PRIMECAP Fund. We should all take (only) a moment to bask
in the light of the generous rewards we earned. We should also recognize,
however, that the financial markets are never a "one-way street," and the risks
that exist today in the stock market may well come home to roost in 1996 and
erode our 1995 bounty. Put even more bluntly, our shareholders enjoyed an
enhancement of almost +36% in value during the year. With this gain now behind
us, even a significant market decline seems unlikely to take shareholders back
to where we were--presumably with satisfaction--just one year ago.
Under these circumstances, what course of action should shareholders
of PRIMECAP Fund follow? In our Annual Report a year ago, under very different
circumstances, I urged you to "stay the
4
<PAGE> 7
course" despite the lackluster returns provided by equities during the year.
Today, you should recognize that, despite the short-term risks of investing,
the biggest long-term risks are: (1) failing to invest in stocks at all; and
(2) following an erratic and ever-changing course. For our part, we intend to
maintain the Fund's goal of long-term capital growth that has been in place
since we began operations in 1984. "Stay the course" proved wise counsel a year
ago; I reiterate it today.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board
January 11, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
5
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED DECEMBER 31, 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 +35.48% +20.92% +15.51% +14.48% +1.03%
</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.
6
<PAGE> 9
REPORT FROM THE INVESTMENT ADVISER
During 1995, PRIMECAP Fund's total return of +35.5% lagged the +37.6% return
for the unmanaged S&P 500 Index, ending a string of five consecutive years in
which the Fund's performance exceeded this benchmark. In an absolute sense, the
returns enjoyed in the stock market throughout 1995 were spectacular. The
United States was the best performing stock market (in local currency terms) of
the 28 countries in the Dow Jones World Stock Index. The S&P 500's +37.6%
return was the greatest seen since 1958. For the first time in history, the Dow
Jones Industrial Average gained more than 1000 points in a single year, scaling
both the 4000 and 5000 levels.
Throughout 1995, economic growth slowed, and the threat of inflation
diminished. This triggered a huge rally in the bond market. At year end,
30-year U.S. Treasury bonds yielded 5.9%, a 26-month low, and down from 7.9% at
the year's inception. The Federal Reserve became comfortable with the notion
that inflation does not pose a problem in the near term. After more than a year
of tightening, the Fed reversed course and cut the Federal funds rate by 25
basis points on two occasions during 1995.
In our view, the three primary catalysts in this year's market advance
were lower interest rates, strong corporate earnings, and the change in
behavior at the Federal Reserve. Lower interest rates are generally reflected
in higher valuations for equities. This was certainly the case in 1995. Robust
gains in corporate earnings, driven by a combination of growth and cost
cutting, were also a critical factor. Finally, the change in posture by the
Federal Reserve was psychologically important to investors. It was an
indication that the Fed is receptive to playing a stimulative role should the
economy show further signs of faltering.
Although we are pleased with the absolute returns generated for
shareholders in 1995, we are disappointed with our relative results. All year,
we held 10% to 15% of the Fund's assets in cash. We believed this was prudent
and afforded us the flexibility to buy stocks should a significant correction
have occurred. However, holding cash carries a performance penalty when the
return on stocks exceeds that of cash. This was the case in 1995. The equity
portion of the Fund actually outperformed the S&P 500 by several percentage
points.
Despite the cash reserve, the Fund outperformed the S&P 500 in each of
the first three quarters. Through nine months, the Fund enjoyed an advantage of
more than +6% versus the Index. In the fourth quarter, however, the Fund lost
this entire margin and a little more. During the quarter, concern mounted that
economic growth was slowing. Consequently, economically sensitive stocks were
pummeled. The Fund's holdings in technology, transportation, basic materials,
and consumer cyclicals all posted losses versus a +6% gain in the S&P 500.
Stocks in these sectors represent more than two-thirds of the Fund's equity
holdings. Market leadership swiftly shifted to perceived "safe stocks."
Consumer staples, health care, utilities, and energy stocks outperformed the
S&P 500 during the quarter.
As in the fourth quarter, a flight to safety may be the correct course
of action in the near term. Going forward, however, we expect this strategy
will prove less successful. In our opinion, the valuations of defensive stocks
are rich, and the growth prospects are modest. Conversely, the valuations of
technology and industrial stocks seem reasonable, and the growth prospects are
attractive. Furthermore, we believe the economic slowdown will be a mild one.
This should benefit economically sensitive stocks in which the Fund is heavily
weighted.
Reviewing the year in its entirety, health care was the strongest
sector in the market, up +58.2%. Owing to outstanding stock selection of
pharmaceutical and medical device stocks, the Fund's health-care holdings
appreciated +90.8%. In response to a more difficult environment, the
pharmaceutical industry is undergoing a period of rapid consolidation. The
strong companies are getting stronger and demonstrating an ability to trim
costs from their operations. Eli Lilly & Company, Pharmacia & Upjohn, and
Johnson & Johnson are benefiting from this trend. Innovative products from
device companies like Guidant and Medtronic continue to offer new and
cost-effective solutions to medical problems. The Fund has maintained a market
weighting in health care.
(continued)
7
<PAGE> 10
Once again, technology stocks contributed meaningfully to our annual
results. The Fund's holdings increased +44.2%. In the final months of the year,
however, market momentum turned precipitously away from technology. Several
companies reported earnings shortfalls, fanning fears of deceleration in the
personal computer and cellular businesses and excess capacity in the
semiconductor industry.
We believe that growth has indeed moderated from unsustainably high
rates in some key industries. However, we believe the growth rate in the
intermediate term is attractive. Semiconductor capacity has begun to come on
stream, reflecting the extraordinary growth experienced during the last three
years, but at a rate well below historic peak levels. Global semiconductor
industry revenues grew +40% in 1995 to $154 billion. Considerable new capacity
is required to accommodate the $30 to $45 billion in incremental revenues
expected in 1996.
Shortages of several key components over the last couple of years have
constrained electronic products manufacturers' ability to meet all customer
demands and have kept product prices artificially high. This is neither normal
nor constructive for the business. Ideally, the capital additions will return
the industry to traditional "learning curve" pricing of 10% to 15% declines
each year versus the flattish pricing experienced for the last two years. This
should stimulate the end markets for electronic products.
Our weakest relative performance in 1995 was in financial stocks. The
sector gained +53% for the year, second only to health care. Our selections
were poor, increasing only +28%. We have maintained a market weighting in the
sector.
As we look toward 1996, we do so with caution. According to Ned Davis
Research, Inc., this is the longest run ever for the Dow Jones Industrial
Average without a -10% correction. The economy has undeniably slowed, and
earnings disappointments are forthcoming. This is rarely positive for stock
prices. Following a year of excellent equity returns, it is likely that we
could see a correction. However, we believe that if excesses existed in some of
the Fund's holdings, the fourth quarter deflated these to some degree. In our
judgment, expectations for technology stocks and other economically sensitive
stocks have been reduced beyond what long-term fundamentals and the economic
climate would dictate. Furthermore, we expect that the investment environment
in which "the rising tide lifts all boats" has expired. Investors will exercise
greater scrutiny in differentiating between winners and losers within an
industry. Stock selection will be of paramount importance. We think this plays
to our advantage. Consequently, we have reason to be optimistic regarding our
future relative performance.
Respectfully,
Howard B. Schow
Portfolio Manager
Theo A. Kolokotrones
Portfolio Manager
Joel P. Fried
Assistant Portfolio Manager
PRIMECAP Management Company
January 12, 1996
8
<PAGE> 11
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD/PRIMECAP FUND since inception through December 31, 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 S&P 500
VALUE WITH INCOME ------------------------------ -------
Year Ended NET ASSET CAPITAL GAINS INCOME DIVIDENDS & CAPITAL Capital Income Total Total
December 31 VALUE DISTRIBUTIONS DIVIDENDS GAINS REINVESTED Return Return Return 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 +31.8
- ----------------------------------------------------------------------------------------------------------------------------------
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 + 5.1
- ----------------------------------------------------------------------------------------------------------------------------------
1988 11.18 .25 .10 12.32 +13.7 +1.0 +14.7 +16.6
- ----------------------------------------------------------------------------------------------------------------------------------
1989 12.82 .61 .16 14.98 +20.2 +1.4 +21.6 +31.7
- ----------------------------------------------------------------------------------------------------------------------------------
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 +30.5
- ----------------------------------------------------------------------------------------------------------------------------------
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 26.23 .59 .22 37.64 +34.4 +1.1 +35.5 +37.6
- ----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +502.3% +430.8%
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +17.4% +16.1%
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
9
<PAGE> 12
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
December 31, 1995
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (89.7%)
- --------------------------------------------------------------------------------------
BASIC MATERIALS (3.8%)
- --------------------------------------------------------------------------------------
Engelhard Corp. 2,040,000 $ 44,370
(1) MacDermid, Inc. 189,000 11,056
Monsanto Co. 25,000 3,063
Quaker Chemical Corp. 140,000 1,785
Stepan Co. 300,000 4,988
Temple-Inland Inc. 1,300,000 57,362
------------
GROUP TOTAL 122,624
------------
- --------------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (3.5%)
- --------------------------------------------------------------------------------------
Caterpillar, Inc. 755,000 44,356
Donaldson Co., Inc. 540,000 13,568
(1) Granite Construction Co. 840,000 26,460
Kennametal, Inc. 900,000 28,575
------------
GROUP TOTAL 112,959
------------
- --------------------------------------------------------------------------------------
CONSUMER CYCLICALS (5.5%)
- --------------------------------------------------------------------------------------
Arvin Industries, Inc. 660,000 10,890
* Coherent, Inc. 500,000 20,250
* Electronic Arts 1,073,900 28,056
Harcourt General, Inc. 500,000 20,938
Knight-Ridder, Inc. 100,000 6,250
McClatchy Newspapers, Inc. 390,000 8,921
Polaroid Corp. 720,000 34,110
* Price/Costco Inc. 3,217,000 49,059
------------
GROUP TOTAL 178,474
------------
- --------------------------------------------------------------------------------------
ENERGY (.5%)
- --------------------------------------------------------------------------------------
Panhandle Eastern Corp. 200,000 5,575
Schlumberger Ltd. 145,000 10,041
------------
GROUP TOTAL 15,616
------------
- --------------------------------------------------------------------------------------
FINANCIAL (10.1%)
- --------------------------------------------------------------------------------------
American International
Group, Inc. 944,616 87,377
(1) Avemco Corp. 650,000 10,400
City National Corp. 621,485 8,701
General Re Corp. 536,765 83,199
Marsh & McLennan, Inc. 220,000 19,525
NationsBank, Inc. 100,000 6,962
State Street Boston Corp. 660,000 29,700
Torchmark Corp.` 460,000 20,815
Transatlantic Holdings 375,000 27,516
Zurich Reinsurance Centre
Holdings, Inc. 1,089,000 33,078
------------
GROUP TOTAL 327,273
------------
- --------------------------------------------------------------------------------------
HEALTH CARE (11.5%)
- --------------------------------------------------------------------------------------
Block Drug Co. Class A 150,704 5,199
* Cordis Corp. 525,000 52,631
Guidant Corp. 2,605,316 110,075
*(1) Heart Technology, Inc. 900,000 29,250
Johnson & Johnson 277,800 23,787
Eli Lilly & Co. 862,340 48,507
Medtronic, Inc. 988,444 55,229
* Pharmacia & Upjohn, Inc. 1,200,000 46,500
------------
GROUP TOTAL 371,178
------------
- --------------------------------------------------------------------------------------
TECHNOLOGY (35.6%)
- --------------------------------------------------------------------------------------
COMPUTER & COMPUTER RELATED (10.1%)
Adobe Systems, Inc. 1,538,000 95,356
* Digital Equipment Corp. 1,200,000 76,950
Hewlett-Packard Co. 630,000 52,763
Reuters Holdings PLC ADR 762,598 42,134
* Stratus Computer, Inc. 682,000 23,614
* Tandem Computers, Inc. 3,349,100 35,584
ELECTRONIC COMPONENTS & INSTRUMENTS (18.8%)
AMP, Inc. 1,060,000 40,677
* Dionex Corp. 255,000 14,471
*(1) Evans & Sutherland
Computer Corp. 840,000 18,690
Intel Corp. 1,737,000 98,575
* LSI Logic Corp. 818,700 26,812
Measurex Corp. 540,000 15,255
Molex, Inc. 125,000 3,969
Molex, Inc. Class A 125,000 3,813
Motorola, Inc. 1,055,000 60,135
* Octel Communications Corp. 1,100,000 35,475
Perkin-Elmer Corp. 820,000 30,955
Sony Corp. ADR 830,000 50,941
* Symbol Technologies, Inc. 920,000 36,340
Tektronix, Inc. 1,335,000 65,582
Texas Instruments, Inc. 2,076,000 107,433
OFFICE EQUIPMENT (.8%)
Xerox Corp. 200,000 27,400
TELECOMMUNICATIONS (5.9%)
L.M. Ericsson
Telephone Co. ADR 4,257,500 82,489
L.M. Ericsson
Telephone Co. Cvt. Pfd. 4.25% 620,000 1,666
*(1) Plantronics, Inc. 804,000 29,044
* Tellabs, Inc. 1,180,000 43,660
Vodafone Group PLC ADR 952,500 33,576
------------
GROUP TOTAL 1,153,359
------------
- --------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORT & SERVICES (14.6%)
- --------------------------------------------------------------------------------------
* AMR Corp. 1,775,000 $ 131,794
Airborne Freight Corp. 700,000 18,638
* Alaska Air Group, Inc. 400,000 6,500
American President Cos., Ltd. 640,000 14,720
Delta Air Lines, Inc. 1,750,000 129,281
* Federal Express Corp. 1,980,000 146,273
Southwest Airlines Co. 1,150,000 26,737
------------
GROUP TOTAL 473,943
------------
- --------------------------------------------------------------------------------------
MISCELLANEOUS (4.6%)
- --------------------------------------------------------------------------------------
Manpower Inc. 1,000,000 28,125
Other (3.7%) 119,658
------------
GROUP TOTAL 147,783
------------
- --------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $1,960,403) 2,903,209
- --------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (11.1%)
- --------------------------------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
----------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations
in a Pooled Cash
Account 5.89%, 1/2/96
(Cost $358,292) $358,292 358,292
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.8%)
(Cost $2,318,695) 3,261,501
- --------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.8%)
- --------------------------------------------------------------------------------------
Other Assets--Notes C and E 17,433
Liabilities--Note E (42,092)
------------
(24,659)
- --------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------
Applicable to 123,396,508 outstanding
$.001 par value shares
(authorized 150,000,000 shares) $3,236,842
- --------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $26.23
======================================================================================
</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 DECEMBER 31, 1995,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------
Amount Per
(000) Share
---------- ----------
<S> <C> <C>
Paid in Capital $2,278,360 $18.46
Overdistributed Net
Investment Income (368) --
Accumulated Net Realized Gains 16,044 .13
Unrealized Appreciation of
Investments--Note D 942,806 7.64
- --------------------------------------------------------------------------------------
NET ASSETS $3,236,842 $26.23
- --------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
(000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,509
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 21,206
- --------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . 40,715
- --------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B . . . . . . . . . . . . . . . . 7,700
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . $6,383
Marketing and Distribution . . . . . . . . . . . . . . . . . 473 6,856
------
Taxes (other than income taxes) . . . . . . . . . . . . . . . . 200
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . 20
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . 12
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . 150
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . 54
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . 10
- --------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . 15,002
- --------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . 25,713
- --------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . . . . . . 78,807
- --------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . 625,885
- --------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $730,405
==============================================================================================================
</TABLE>
SPECIAL 1995 TAX INFORMATION (UNAUDITED)
FOR VANGUARD/PRIMECAP FUND
Corporate shareholders should note that for the fiscal year ended December 31,
1995, 34.4% of the Fund's investment income (i.e., dividend income plus
short-term capital gains, if any) qualifies for the intercorporate dividends
received deduction.
12
<PAGE> 15
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
DECEMBER 31, 1995 December 31, 1994
(000) (000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . $ 25,713 $ 8,960
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . 78,807 31,811
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . 625,885 77,964
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . 730,405 118,735
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . (26,218) (8,890)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . (68,839) (28,580)
- --------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . (95,057) (37,470)
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . . . . 790,104 388,913
--In Lieu of Cash Distributions . . . . . . . . . . . . . 93,789 36,964
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . 583,841 455,358
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . . . . (242,498) (93,175)
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . (177,455) (106,509)
- --------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . 1,047,781 681,551
- --------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . 1,683,129 762,816
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . 1,553,713 790,897
- --------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . . . . $3,236,842 $1,553,713
====================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . $.22 $.12
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . $.59 $.41
- --------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,906 43,291
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . 3,685 1,885
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,973) (10,327)
- --------------------------------------------------------------------------------------------------------------------
45,618 34,849
- --------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed) Net Investment Income . . . . $ (368) $ 137
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . $19.98 $18.42 $16.19 $15.36 $12.21
INVESTMENT OPERATIONS ------ ------ ------ ------ ------
Net Investment Income . . . . . . . . . . . . . . . . .22 .12 .07 .12 .15
Net Realized and Unrealized Gain (Loss) on Investments 6.84 1.97 2.82 1.24 3.83
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . 7.06 2.09 2.89 1.36 3.98
- ---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.22) (.12) (.07) (.12) (.15)
Distributions from Realized Capital Gains . . . . . . (.59) (.41) (.59) (.41) (.68)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . (.81) (.53) (.66) (.53) (.83)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . $26.23 $19.98 $18.42 $16.19 $15.36
===============================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . +35.48% +11.41% +18.03% +8.99% +33.14%
- ---------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . . $3,237 $1,554 $791 $646 $486
Ratio of Expenses to Average Net Assets . . . . . . . . . .58% .64% .67% .68% .68%
Ratio of Net Investment Income to Average Net Assets . . .99% .79% .44% .84% 1.09%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . 7% 8% 16% 7% 24%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
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 a 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.
14
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS (continued)
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 year ended December 31, 1995,
the advisory fee represented an effective annual rate of .30 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 December 31, 1995, the Fund had contributed capital of $381,000
to Vanguard (included in Other Assets), representing 1.9% of Vanguard's
capitalization. The Fund's officers and directors are also officers and
directors of Vanguard.
D. During the year ended December 31, 1995, the Fund made purchases of
$1,016,748,000 and sales of $158,974,000 of investment securities other than
U.S. Government securities and temporary cash investments.
At December 31, 1995, net unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $942,806,000 of which $975,736,000
related to appreciated securities and $32,930,000 related to depreciated
securities.
E. The market value of securities on loan to broker/dealers at December
31, 1995, was $946,000 for which the Fund had received cash collateral of
$989,000.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard/PRIMECAP Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Vanguard/PRIMECAP Fund (the "Fund") at December 31, 1995, and the results of
its operations, the changes in its net assets and the financial highlights for
each of the respective periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities by correspondence with the custodian and brokers and
the application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP Thirty South Seventeenth Street
January 31, 1996 Philadelphia, Pennsylvania 19103
15
<PAGE> 18
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd. and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and
The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co. and
NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
KAREN E. WEST, CONTROLLER; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
16
<PAGE> 19
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
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 Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
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.
[THE VANGUARD GROUP LOGO]
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q590-12/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 20
VANGUARD PRIMECAP FUND
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile".
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through five.
Line charts illustrating annual total returns between Standard & Poor's Growth
Index and Standard & Poor's Value Index for the fiscal years 1990 through 1995.
Line charts illustrating cumulative performance between Vanguard/PRIMECAP Fund
Standard & Poor's 500 Index and Average Growth Fund, average Annual Total
Returns for the period December 31, 1985, to December 31, 1995 appears at the
bottom of page three.
A running head featuring an hour glass, compass and telescope, and battleships
in the background appears at the top of page six.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of pages seven & eight.
A running head featuring a cannon and battleships in the background appears at
the top of page nine.
A running head featuring an open log book, pen and battleships in the
background appears at the top of pages ten through fifteen.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page sixteen.
A running head featuring birds flying and ships in the background appears at
the top of the inside back cover.
