<PAGE> 1
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
Building on the generous return we earned in 1995, Vanguard/PRIMECAP
Fund continued to provide a positive return as the bull market in stocks
marched on during the first half of 1996. The Fund turned in a solid half-year
return of +8.6%, albeit below the results of its two primary benchmarks.
The table that follows compares the total return (capital change plus
reinvested dividends) of PRIMECAP Fund during the semi-annual period with those
of the two benchmarks we use to gauge our performance: the unmanaged Standard &
Poor's 500 Composite Stock Price Index and the average growth mutual fund.
During this brief period, we lagged by a modest margin the results of these
tough competitive standards.
<TABLE>
<CAPTION>
- ------------------------------------------------------
TOTAL RETURN
-----------------
SIX MONTHS ENDED
JUNE 30, 1996
- ------------------------------------------------------
<S> <C>
PRIMECAP FUND + 8.6%
- ------------------------------------------------------
AVERAGE GROWTH MUTUAL FUND +10.1%
STANDARD & POOR'S 500 INDEX +10.1
- ------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $26.23 per share on
December 31, 1995, and $28.35 on June 30, 1996, adjusted to take into account
the reinvestment of a carry-over distribution of $.13 per share from net
capital gains realized during 1995 and paid in March 1996.
THE PERIOD IN REVIEW
The U.S. stock market continued to surge upward during the first half of 1996,
albeit below the near-record pace that prevailed in 1995. Even so, the advance
was impressive, occurring as it did in the face of a sharp rise in long-term
interest rates.
While the stock market, as measured by the Standard & Poor's 500
Composite Stock Price Index, chalked up a +10.1% return from January through
June, the bond market slumped. Short-term interest rates rose only modestly,
with the rate on 90-day Treasury bills rising from 5.0% to 5.2% during the
first half of the year. The rate increase was steeper for long-term bonds, with
the yield on the benchmark long-term U.S. Treasury bond rising from 6.0% at the
beginning of the year to 7.0% at the end of June. The price of the 30-year
Treasury bond fell -12% during the period. The Lehman Aggregate Bond Index, a
benchmark for the overall bond market, provided a negative total return of
- -1.2% in the half year, earning income of +3.3% combined with a price decline
of -4.5%.
The primary reason for the divergence in the returns of stocks and
bonds appears to be differing responses by equity and bond investors to the
surprising strength of the U.S. economy. Faster-than-expected economic growth
during the first half of 1996 led stock investors to anticipate accelerated
growth in corporate earnings, even as bond investors worried about higher
inflation. It remains to be seen whether the bull market in stocks can
continue in the face of higher interest rates, which may provide heightened
competition for investors' dollars at a time when common stocks offer
historically low dividend yields.
In this generous environment for common stocks, the +8.6% return of
PRIMECAP Fund fell one and one-half percentage points behind the +10.1% return
of the Standard & Poor's 500 Index. The Fund maintained a very substantial
overweighting in the market-leading technology sector (35% of net assets for
the Fund versus 11% for the Index), but that advantage was more than offset by
sub-par individual stock selections. Also contributing to our relative
shortfall was our 8% position in cash reserves, which represented a "drag" on
our performance in a rising stock market. That said, our avoidance of utility
stocks (0% of net assets for the Fund versus 12% for the Index)--the market's
worst- performing sector--provided an offsetting boost to our relative
performance.
We lagged the performance of the average growth mutual fund by the
same 1.5-percentage-point margin, but for slightly different reasons. First,
while many of our competitors maintained cash reserves during the six-month
period, few held as much cash as PRIMECAP. Second, our competitors
1
<PAGE> 2
held roughly 20% of their assets in two of the best-performing market
sectors--consumer staples and capital goods--compared to a 5% weighting for our
Fund.
IN SUMMARY
Six months ago in our Annual Report--following an extraordinarily bountiful
1995--we cautioned PRIMECAP Fund shareholders that "the financial markets are
never a 'one-way street.'" Despite the continued strength of the stock market
thus far in 1996, investors should be prepared for the inevitable rough patches
that surely lie ahead. Investors who understand that the long-term rewards of
investing in stocks go hand-in-hand with above-average interim volatility are
much more apt to "stay the course"-- come what may--with their long-term
investment program. We recommend that you do the same.
We look forward to reporting to you on the Fund's full year results in
our Annual Report six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- -------------------------------
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
- -------------------------------
John J. Brennan
President
July 25, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
2
<PAGE> 3
REPORT FROM THE INVESTMENT ADVISER
In the first half of 1996, PRIMECAP Fund produced a total return of +8.6%
compared to +10.1% for the unmanaged Standard & Poor's 500 Index. Once again,
equities provided an attractive return for the first six months. The
performance of our technology stocks and the Fund's minimal exposure to
consumer staples were the primary factors causing the Fund's results to trail
the S&P 500 Index.
As you may recall, the Fund performed poorly in the fourth quarter of
1995. Pervasive concerns of a slowing economy caused our substantial holdings
in economically sensitive stocks to post losses in the fourth quarter. Fears of
deceleration in the personal computer and cellular businesses and increasing
capacity in the semiconductor business resulted in particularly poor
performance among our technology holdings during the period. Market leadership
rapidly shifted to perceived safe stocks such as consumer staples and health
care.
Some of the concerns that emerged in last year's fourth quarter proved
to be well-founded. A number of our technology holdings reported earnings
shortfalls in the fourth quarter of 1995 and the first quarter of 1996.
Business remains softer than we would have expected nine months ago. Although
final demand for key technology products moderated somewhat from unsustainably
high rates last year, particularly in Western Europe, the primary culprit was a
70% collapse in the price of memory (a critical component in personal
computers), and a coincident inventory liquidation on a massive scale.
Industrywide, a campaign has been forged to reduce inventories. Believing that
components can be procured more inexpensively tomorrow than today, no company
wants to be caught holding any inventory. This has rippled through the entire
supply chain from manufacturers of components to distributors of computers. Few
companies with ties to the personal computer industry have gone unscathed. In
our evaluation, the industry is in the latter stages of this inventory
adjustment, and we expect to see improving fundamentals by year-end.
Ultimately, the decline in memory prices that has clouded current business
prospects will prove stimulative for electronic end-markets.
The market has punished many of the Fund's technology stocks for
short-term earnings disruptions. Valuations seem to reflect a significantly
diminished long-term growth outlook for these companies. We disagree with this
analysis. In our judgment, investors' preoccupation with consistent results
causes them to forsake businesses we regard as possessing greater long-term
opportunity if their quarterly pattern of earnings is deemed less predictable.
Technology companies serve particularly dynamic markets. This usually
translates into more volatile interim results regardless of the long-term
results.
As an illustration, led by technology stocks, the Fund's holdings have
grown earnings per share in excess of 19% annualized for the last five years.
This exceeds the 13% recorded by the S&P 500 by approximately 45%. However,
this growth premium was not achieved every quarter, or necessarily every year,
but only averaged over the entire period. Looking out three to five years, we
believe the Fund's holdings will continue to have superior relative earnings
growth, potentially double the 7% growth rate expected for the S&P 500. Yet,
from a valuation perspective, the price/earnings multiple of the our holdings
represent only a modest premium to the S&P 500.
During the first half of 1996, consumer staples continued to attract
investors. The sector led the market, increasing 15.5%. The Fund currently has
minimal representation in consumer staple stocks. Consequently, the
outperformance of this large sector hampered our results. We were surprised by
the strength in this sector. Unlike the latter part of 1995, when economic
concerns were prevalent, the economy exhibited reasonable strength in the first
half. Earnings disappointments were fairly widespread in the sector, yet the
stocks largely resisted bad news. For example, when the leading vendors of
cereal slashed prices by as much as 25%, the stocks barely declined. We do not
consider consumption of cereal as highly elastic, and are skeptical that these
price cuts will be offset by volume gains. In our opinion, the appeal of this
sector emanates from investors' obsession with consistent and predictable
results, and the perception that consumer staple stocks embody these qualities.
As we have communicated in prior
3
<PAGE> 4
reports, our assessment of long-term growth prospects within this sector are
modest, and valuations are rich. We intend to maintain our low exposure to
these stocks.
The Fund's transportation issues provided the greatest positive
influence on the first-half results. For some time, the Fund has committed
substantial assets to the sector (currently 16%). Year-to-date, the stocks have
appreciated 16%. Developments in the airline industry look especially
promising. Traffic and load factors are increasing concurrent with
flat-to-declining capacity and cost reductions at many of the major carriers.
The ValuJet tragedy will focus the FAA's attention on safety issues. This
encompasses pilot training in addition to aircraft maintenance. Increased
scrutiny by the FAA will hinder the start-up of new low-cost airlines, and
dampen the growth of existing low-cost carriers. This should benefit the
quality carriers via improved yields and better traffic.
After appreciating a remarkable 91% in 1995, the Fund's health-care
selections continued their ascent--up 11% to date. The Fund's pharmaceutical
and device companies are capitalizing on a confluence of favorable
developments. Their product pipelines are healthy. Their cost structures are
improving. Perhaps most important, the FDA appears more responsive to new drug
and device applications.
We concluded our comments in the 1995 Annual Report cautiously looking
to 1996. This perspective has not changed. This bull market has been one of
record duration. Signs of speculation are not difficult to find. Consequently,
we could see a meaningful correction, or at least a spotty market. Such an
environment portends a stockpicker's market. We believe this plays to our
strength. Our efforts are concentrated on discovering compelling long-term
opportunities and staying the course during turbulent times when we conclude
such circumstances are short term. This strategy has worked effectively for us
in the past, and we believe will continue to do so in the future.
Respectfully,
Howard B. Schow
Portfolio Manager
Theo A. Kolokotrones
Portfolio Manager
Joel P. Fried
Assistant Portfolio Manager
PRIMECAP Management Company July 10, 1996
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, 1996. 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 + 3.5 +18.7
- ------------------------------------------------------------------------------------------------------------------------------------
1987 10.06 .24 .10 10.74 - 3.2 +0.9 -23.3 + 5.3
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
1996 (6/30) 28.35 .13 -- 40.88 + 8.6 0.0 + 8.6 +10.1
- ------------------------------------------------------------------------------------------------------------------------------------
LIFETIME +554.1% +484.5%
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +17.5% +16.3%
- ------------------------------------------------------------------------------------------------------------------------------------
</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
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
June 30, 1996
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (92.1%)
- --------------------------------------------------------------------------------------
BASIC MATERIALS (3.9%)
- --------------------------------------------------------------------------------------
Engelhard Corp. 2,040,000 $ 46,920
(1)MacDermid, Inc. 189,000 13,136
Monsanto Co. 625,000 20,313
Quaker Chemical Corp. 140,000 1,715
Stepan Co. 300,000 5,438
Temple-Inland Inc. 1,300,000 60,775
----------
SECTOR TOTAL 148,297
----------
- -------------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (3.7%)
- -------------------------------------------------------------------------------------
Caterpillar, Inc. 755,000 51,151
Belden Inc. 349,000 10,470
Donaldson Co., Inc. 540,000 13,905
(1)Granite Construction Co. 1,260,000 28,980
Kennametal, Inc. 1,124,000 38,216
----------
SECTOR TOTAL 142,722
----------
- -------------------------------------------------------------------------------------
CONSUMER CYCLICALS (6.7%)
- -------------------------------------------------------------------------------------
Arvin Industries, Inc. 660,000 14,685
* BET Holdings Inc. Class A 380,000 10,023
* Coherent, Inc. 500,000 26,000
* Electronic Arts Inc. 1,000,000 26,500
Fleetwood Enterprises, Inc. 300,000 9,300
* Filene's Basement Corp. 995,000 4,851
* GC Cos. 200,000 7,450
Harcourt General, Inc. 540,000 27,000
Knight-Ridder, Inc. 100,000 7,250
McClatchy Newspapers, Inc. 390,000 10,774
Polaroid Corp. 720,000 32,850
* Price/Costco Inc. 3,400,000 72,675
Turner Broadcasting Class B 350,000 9,625
----------
SECTOR TOTAL 258,983
----------
- -------------------------------------------------------------------------------------
CONSUMER STAPLES (1.6%)
- -------------------------------------------------------------------------------------
Pioneer Hi Bred International 580,000 30,667
The Seagram Co. Ltd. 900,000 30,262
----------
SECTOR TOTAL 60,929
----------
- -------------------------------------------------------------------------------------
ENERGY (.2%)
- -------------------------------------------------------------------------------------
Schlumberger Ltd. 75,000 6,319
----------
- -------------------------------------------------------------------------------------
FINANCIAL (9.4%)
- -------------------------------------------------------------------------------------
American International
Group, Inc. 944,616 93,163
(1)Avemco Corp. 650,000 8,775
City National Corp. 621,485 9,788
General Re Corp. 570,000 86,783
Marsh & McLennan Cos., Inc. 220,000 21,230
National Re Holdings Corp. 350,000 13,213
NationsBank Corp. 100,000 8,263
State Street Boston Corp. 720,000 36,720
Torchmark Corp. 460,000 20,125
Transatlantic Holdings 375,000 26,297
Zurich Reinsurance Centre
Holdings, Inc. 1,089,000 34,303
----------
SECTOR TOTAL 358,660
----------
- -------------------------------------------------------------------------------------
HEALTH CARE (10.7%)
- -------------------------------------------------------------------------------------
American Home Products Corp. 180,000 10,823
Block Drug Co. Class A 150,704 6,179
* Boston Scientific Corp. 205,000 9,225
Guidant Corp. 2,605,316 128,312
Johnson & Johnson 1,515,420 75,013
Eli Lilly & Co. 822,340 53,452
* Lynx Therapeutic 72,900 364
Medtronic, Inc. 988,444 55,353
* Mycogen Corp. 800,000 11,900
Pharmacia & Upjohn, Inc. 1,260,000 55,913
*(1)Tripos Inc. 250,000 2,188
----------
SECTOR TOTAL 408,722
----------
- -------------------------------------------------------------------------------------
TECHNOLOGY (35.3%)
- -------------------------------------------------------------------------------------
COMPUTER & COMPUTER RELATED (8.8%)
Adobe Systems, Inc. 2,200,000 78,100
* Digital Equipment Corp. 1,148,000 51,660
Hewlett-Packard Co. 660,000 65,753
Reuters Holdings PLC ADR 740,000 53,557
* Stratus Computer, Inc. 377,000 10,933
*(1)Tandem Computers, Inc. 6,000,000 74,250
ELECTRONIC COMPONENTS & INSTRUMENTS (19.8%)
AMP, Inc. 1,180,000 47,347
* Dionex Corp. 510,000 16,447
*(1)Evans & Sutherland
Computer Corp. 840,000 17,640
Intel Corp. 2,002,000 146,897
* LSI Logic Corp. 818,700 21,286
Measurex Corp. 540,000 15,794
Molex, Inc. 125,000 3,969
Molex, Inc. Class A 125,000 3,672
Motorola, Inc. 1,305,000 82,052
* Octel Communications Corp. 2,250,000 43,874
Perkin-Elmer Corp. 940,000 45,354
Sony Corp. ADR 1,000,000 66,124
* Symbol Technologies, Inc. 1,111,000 49,440
Tektronix, Inc. 1,385,000 61,979
Texas Instruments, Inc. 2,740,000 136,658
OFFICE EQUIPMENT (.8%)
Xerox Corp. 600,000 32,100
TELECOMMUNICATIONS (5.9%)
L.M. Ericsson Telephone Co.
ADR Class B 4,600,000 98,325
L.M. Ericsson Telephone Co.
Cvt. Pfd. 4.25% 620,000 1,802
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------
<S> <C> <C>
*(1)Plantronics, Inc. 804,000 $ 29,547
* Tellabs, Inc. 1,000,000 66,750
Vodafone Group PLC ADR 832,500 30,698
-----------
SECTOR TOTAL 1,352,008
-----------
- -------------------------------------------------------------------------------------
TRANSPORT & SERVICES (15.7%)
- -------------------------------------------------------------------------------------
* AMR Corp. 1,775,000 161,525
* APL Ltd. 698,950 18,260
(1)Airborne Freight Corp. 1,190,000 30,940
*(1)Alaska Air Group, Inc. 700,000 19,163
Delta Air Lines, Inc. 1,905,000 158,115
* Federal Express Corp. 2,100,000 172,200
Southwest Airlines Co. 1,350,000 39,319
-----------
SECTOR TOTAL 599,522
-----------
- -------------------------------------------------------------------------------------
MISCELLANEOUS (4.9%)
- -------------------------------------------------------------------------------------
Manpower Inc. 1,140,000 44,745
Other (3.8%) 144,612
-----------
SECTOR TOTAL 189,357
-----------
- -------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $2,337,386) 3,525,519
- -------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (7.9%)
- -------------------------------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
--------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations
in a Pooled Cash
Account 5.35%, 7/1/96
(Cost $300,590) $300,590 300,590
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost $2,637,976) 3,826,109
- --------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------------
Other Assets--Notes C and E 41,621
Liabilities--Note E (41,135)
----------
486
- --------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------
Applicable to 134,999,219 outstanding
$.001 par value shares
(authorized 400,000,000 shares) $3,826,595
- --------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $28.35
======================================================================================
</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, 1996, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
---------- ------
<S> <C> <C>
PAID IN CAPITAL $2,591,264 $19.20
UNDISTRIBUTED NET INCOME 13,454 .10
ACCUMULATED NET
REALIZED GAINS 33,744 .25
UNREALIZED APPRECIATION OF
INVESTMENTS--NOTE D 1,188,133 8.80
- -------------------------------------------------------------------------------------
NET ASSETS $3,826,595 $28.35
- -------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
STATEMENT OF OEPRAITONS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
(000)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,238
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 10,426
- ---------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . 24,664
- ---------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B5,040
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . $5,144
Marketing and Distribution . . . . . . . . . . . . . . . 407 5,551
------
Taxes (other than income taxes) . . . . . . . . . . . . . 136
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . 6
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . 6
Shareholders' Reports . . . . . . . . . . . . . . . . . . 69
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . 28
Directors' Fees and Expenses . . . . . . . . . . . . . . . 6
- ---------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . 10,842
- ---------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . 13,822
- ---------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD . . . . . . . 34,586
- ---------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . 245,327
- ---------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $293,735
=========================================================================================================
</TABLE>
8
<PAGE> 9
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
JUNE 30, 1996 December 31, 1995
(000) (000)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . $ 13,822 $ 25,713
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . 34,586 78,807
Change in Unrealized Appreciation (Depreciation) . . . . . . 245,327 625,885
- -------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . 293,735 730,405
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . -- (26,218)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . (16,886) (68,839)
- --------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . (16,886) (95,057)
- --------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . 567,222 1,373,945
Issued in Lieu of Cash Distributions . . . . . . . . . . . . 16,706 93,789
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . (271,024) (419,953)
- --------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . 312,904 1,047,781
- -------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . 589,753 1,683,129
- -------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . 3,236,842 1,553,713
- -------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . $3,826,595 $3,236,842
=============================================================================================================
(1)Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . 21,004 58,906
Issued in Lieu of Cash Distributions . . . . . . . . . . 622 3,685
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . (10,023) (16,973)
- -------------------------------------------------------------------------------------------------------------
11,603 45,618
- -------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
SIX MONTHS ENDED ------------------------------------------------------
For a Share Outstanding Throughout Each Period JUNE 30, 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . $26.23 $19.98 $18.42 $16.19 $15.36 $12.21
------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . .10 .22 .12 .07 .12 .15
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . . 2.15 6.84 1.97 2.82 1.24 3.83
------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . 2.25 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 . . . . . . . (.13) (.59) (.41) (.59) (.41) (.68)
------- ------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . (.13) (.81) (.53) (.66) (.53) (.83)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . $28.35 $26.23 $19.98 $18.42 $16.19 $15.36
====================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . +8.61% +35.48% +11.41% +18.03% +8.99% +33.14%
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL data
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . $3,827 $3,237 $1,554 $791 $646 $486
Ratio of Total Expenses to Average Net Assets . . . . . . . .61%* .58% .64% .67% .68% .68%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . .77%* .99% .79% .44% .84%1 .09%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . 6%* 7% 8% 16% 7% 24%
Average Commission Rate Paid . . . . . . . . . . . . . . . $.0645+ N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions were charged.
This disclosure is required by the SEC beginning in 1996.
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, 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.
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, 1997, 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, 1996, the
advisory fee represented an effective annual rate of .28 of 1% of average net
assets.
C.The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Fund under methods approved by the Board of Directors. At June 30, 1996,
the Fund had contributed capital of $396,000 to Vanguard (included in Other
Assets), representing 2.0% 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, 1996, the Fund made purchases of
$437,550,000 and sales of $95,154,000 of investment securities other than U.S.
Government securities and temporary cash investments.
At June 30, 1996, net unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $1,188,133,000 of which $1,216,571,000
related to appreciated securities and $28,438,000 related to depreciated
securities.
E.The market value of securities on loan to broker/dealers at June 30, 1996,
was $23,949,000 for which the Fund had received cash collateral of $24,551,000.
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 Selected Value Portfolio
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
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 Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
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.
Q592-6/96
VANGUARD
PRIMCAP
FUND
SEMI-ANNUAL REPORT
JUNE 30, 1996
