-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ueejpg3r62hVNOSGyVh6ACK9QbeX67Oqv2yjeYYz8vjunv0chiDj+WmBSr8yyrRT XhF8aeQwiSUhBIq+UxXisA== 0000893220-98-001377.txt : 19980817 0000893220-98-001377.hdr.sgml : 19980817 ACCESSION NUMBER: 0000893220-98-001377 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD/PRIMECAP FUND INC CENTRAL INDEX KEY: 0000752177 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 232311358 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-04098 FILM NUMBER: 98690923 BUSINESS ADDRESS: STREET 1: PO BOX 2600 VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 FORMER COMPANY: FORMER CONFORMED NAME: PRIMECAP FUND INC DATE OF NAME CHANGE: 19920703 N-30D 1 VANGUARD PRIMECAP FUND SEMI ANNUAL 1998 1 VANGUARD/ PRIMECAP FUND Semiannual Report - June 30, 1998 [PHOTO] [THE VANGUARD GROUP LOGO] 2 OUR CREW MAKES THE DIFFERENCE Throughout our history, The Vanguard Group has received considerable attention as the low-cost provider of mutual funds. While such accolades are gratifying, we are most proud, not of our low operating expenses or the billions of dollars we manage, but of our sterling reputation created by the Vanguard crew. We recognize that it is our crew members--more than 7,000 highly motivated men and women--who form the cornerstone of our operations. We could not survive long--let alone prosper--without them. That's why we chose this fiscal year's fund reports to celebrate the spirit, enthusiasm, and achievements of our crew. (We call those who work at Vanguard crew members, not employees, because they operate as a team to accomplish our mission of serving you, our clients.) But while we prize the collective contributions of our crew, we also take time to recognize the importance of the individual. Each calendar quarter, we present our Award For Excellence to a handful of crew members who have demonstrated particular excellence in the performance of their jobs and who embody "The Vanguard Spirit." Our report cover shows only a few of the more than 300 crew members who have received this distinction since 1984. They, along with the rest of our valiant crew, look forward to serving you in the years ahead. [PHOTO] [PHOTO] John C. Bogle John J. Brennan Senior Chairman Chairman & CEO CONTENTS A MESSAGE TO OUR SHAREHOLDERS .................... 1 THE MARKETS IN PERSPECTIVE ....................... 4 REPORT FROM THE ADVISER .......................... 6 PORTFOLIO PROFILE ................................ 8 PERFORMANCE SUMMARY .............................. 10 FINANCIAL STATEMENTS ............................. 11
All comparative mutual fund data are from Lipper Analytical Services, Inc., or Morningstar unless otherwise noted. 3 FELLOW SHAREHOLDER, The stock market--led by big blue-chip issues--continued its unprecedented climb during the first half of 1998. Vanguard/PRIMECAP Fund earned +11.9% during the period, a return that was excellent in an absolute sense but subpar in relation to its comparative standards--the average growth mutual fund and the Standard & Poor's 500 Composite Stock Price Index. PRIMECAP Fund's return is based on an increase in net asset value from $39.56 per share on December 31, 1997, to $43.99 per share on June 30, 1998, with the latter figure adjusted for a dividend of $0.01 per share paid from net investment income and a distribution of $0.28 per share paid from net realized capital gains.
- ---------------------------------------------------------- TOTAL RETURNS SIX MONTHS ENDED JUNE 30, 1998 - ---------------------------------------------------------- Vanguard/PRIMECAP Fund +11.9% - ---------------------------------------------------------- Average Growth Fund +15.1% - ---------------------------------------------------------- S&P 500 Index +17.7% - ----------------------------------------------------------
THE PERIOD IN REVIEW The U.S. economy grew vigorously, inflation was subdued, and interest rates declined during the first half of 1998. Strong consumer spending, triggered by high employment and rising wages, was the economy's propellant and was more than enough to offset the negative effects of Asia's severe economic slump. Asia's troubles, which cut the prices of many products imported to the United States, were partly responsible for the nation's benign inflation--consumer prices rose only 1.1% for the six months and 1.7% for the twelve months ended June 30. And low inflation soothed the bond market, where bond prices rose and interest rates declined: the yield on the 30-year U.S. Treasury bond was 5.63% on June 30, down 29 basis points (0.29 percentage point) from its yield at the start of the year. The Lehman Brothers Aggregate Bond Index, a proxy for the taxable bond market, earned +3.9% during the half-year. Stock prices wobbled at times--the S&P 500 Index dropped -1.9% on April 27 alone--but rose in every month except May. The market's advance was led by a relatively narrow segment of blue-chip growth stocks. Indeed, more than half of the S&P 500 Index's remarkable +17.7% return during the period was accounted for by fewer than 20 very large-capitalization stocks. The growth component of the S&P 500 Index returned +23.1%, nearly double the +12.1% earned by its value stocks. The Wilshire 4500 Index, comprising stocks outside the S&P 500, earned +9.4%, a return that was excellent except in comparison with the large-cap segment. As usual, we now turn to the fund's performance during the past six months. Whether it is favorable or unfavorable, we report on it as a matter of full disclosure. But, as we have often reminded you, short-term returns represent little more--or less--than one lap in a very long race. In any event, PRIMECAP Fund's +11.9% return was 3.2 percentage points behind that earned by the average growth fund and 5.8 percentage points behind the +17.7% return on the S&P 500 Index. The unusual dominance of the very largest growth stocks was the chief reason for our underperformance. PRIMECAP Fund's median market cap of about $11 billion is less than one-quarter the $50 billion median market 1 4 cap of the S&P 500 Index, a disparity that worked to our disadvantage in a period when bigger was definitely better on Wall Street. In general, the fund benefited from the industry sectors emphasized by our adviser, PRIMECAP Management Company. While our largest sectors--technology (27.5% of assets on average during the period), auto & transportation (18.2% of assets), and health care (12.7% of assets)--were above-average performers, the fund's holdings within those sectors did not gain as much as the S&P 500's holdings. For example, we lagged the S&P auto & transportation group because the performance of airline stocks, which had served the fund so well during 1997, took a backseat to automakers' stocks during the first half of 1998. Our performance versus the Index also was hurt somewhat by the defensive nature of the fund's cash reserve, which amounted to more than 12% of assets at the end of the period. The Index, of course, exists only on paper and is always "fully invested." Real-world portfolios, on the other hand, often hold some cash while awaiting investment opportunities or to meet shareholder redemptions. In a rapidly rising stock market such as we experienced during the half-year, cash serves as a drag on performance. As you know, PRIMECAP Fund's Board closed the fund to new investors as of April 21, 1998, a step taken to control the growth of the fund's assets so as not to hinder the implementation of its investment strategy. IN SUMMARY We confess to having been surprised--though quite gratified--by the strength of the stock market's continuing advance during the first half of 1998. We note that the return over the past twelve months for the S&P 500 Index (+30.2%) was nearly three times the long-term average annual return from stocks. Though we claim no predictive powers, we feel safe in saying that such outsized returns can't continue indefinitely. And we reiterate our long-standing recommendation that investors hold balanced portfolios--consisting of bond and money market funds in addition to stock funds--appropriate to their unique financial situations, goals, and temperament. Such portfolios are time-tested vehicles for reaping the rewards of financial markets as well as for "staying the course" toward your long-term objectives. /s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN John C. Bogle John J. Brennan Senior Chairman Chairman and Chief Executive Officer July 10, 1998 2 5 Notice to Shareholders At a special meeting on June 30, 1998, shareholders of Vanguard/PRIMECAP Fund overwhelmingly approved four proposals. The proposals and voting results were: 1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. This change will reduce the amount of state taxes the fund pays annually by approximately $736,000 at current asset levels. Approved by 97.07% of the shares voted, as follows:
---------------------------------------------------- FOR AGAINST ABSTAIN ---------------------------------------------------- 132,168,882 2,323,232 1,659,458 ----------------------------------------------------
2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This change permits PRIMECAP Fund to participate in Vanguard's interfund lending program, which allows funds to loan money to each other if--and only if--it makes good financial sense to do so on both sides of the transaction. The interfund lending program won't be an integral part of your fund's investment program; it is a contingency arrangement for managing unusual cash flows. Approved by 96.55% of the shares voted, as follows:
---------------------------------------------------- FOR AGAINST ABSTAIN ---------------------------------------------------- 131,452,576 2,519,834 2,179,163 ----------------------------------------------------
2b. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. This change sets standard limits of 15% of net assets on the amount of money Vanguard funds can borrow from all sources and on the amount of assets that can be pledged to secure any loans. Approved by 95.64% of the shares voted, as follows:
---------------------------------------------------- FOR AGAINST ABSTAIN ---------------------------------------------------- 130,219,043 3,355,844 2,576,685 ----------------------------------------------------
2c. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN SECURITIES OWNED BY AFFILIATES. This change eliminates the fund's policy of avoiding investments in securities that are owned in certain amounts by Directors, officers, and key advisory personnel. This policy was well-intentioned but wrongly focused and unnecessary in light of the fund's Code of Ethics and other regulatory protections against conflicts of interest on the part of fund management. Approved by 94.51% of the shares voted, as follows:
---------------------------------------------------- FOR AGAINST ABSTAIN ---------------------------------------------------- 128,671,579 4,800,844 2,679,149 ----------------------------------------------------
3 6 THE MARKETS IN PERSPECTIVE Six Months Ended June 30, 1998 Blue skies predominated for U.S. financial markets during the first six months of 1998, and even the occasional clouds had silver linings. The bond market provided solid returns during the half-year, while the stock market's performance was extraordinarily strong. After expanding at a 5.4% annual pace during the first quarter, the U.S. economy kept steaming along through June, fueled by powerful increases in household spending. Consumers had reason to be upbeat: plentiful jobs (unemployment fell to 4.3% of the workforce in May); rising wages (personal income in May was 5.9% higher than in May 1997); and tame inflation (consumer prices in June were up only 1.7% from a year before). The economic push provided by consumers more than compensated for the drag caused by Asia's severe economic problems. Weakening currencies and business slowdowns in Asia cut into U.S. exports and lowered the cost of Asian imports, causing the U.S. trade deficit to hit record levels. Ominously, Asia's problems appear to be more serious and enduring than many economists expected. Yet for Americans this "Asian contagion" has a bright side: It serves as an escape valve for the inflationary pressures that ordinarily would be expected to build up with the U.S. economy humming along at high speed.
- -------------------------------------------------------------------------------- TOTAL RETURNS PERIODS ENDED JUNE 30, 1998 ------------------------------------ 6 MONTHS 1 YEAR 5 YEARS* - -------------------------------------------------------------------------------- EQUITY S&P 500 Index 17.7% 30.2% 23.1% Russell 2000 Index 4.9 16.5 16.0 MSCI EAFE Index 16.1 6.4 10.3 - -------------------------------------------------------------------------------- FIXED-INCOME Lehman Aggregate Bond Index 3.9% 10.5% 6.9% Lehman 10-Year Municipal Bond Index 2.6 8.5 6.6 Salomon Brothers Three-Month U.S. Treasury Bill Index 2.6 5.3 4.9 - -------------------------------------------------------------------------------- OTHER Consumer Price Index 1.1% 1.7% 2.5% - --------------------------------------------------------------------------------
*Annualized. U.S. EQUITY MARKETS The mixture of robust economic growth and anemic inflation was a tonic for the U.S. stock market. Although prices generally rose, there were striking disparities in returns between large-capitalization and small-cap stocks and between growth and value stocks. The large-cap-dominated S&P 500 earned 17.7% during the six months, nearly double the 9.4% return on the rest of the market (as measured by the Wilshire 4500 Index) and more than triple the 4.9% return on the small-cap Russell 2000 Index. Within the S&P 500 Index, growth stocks were up 23.1%, while value stocks rose 12.1%. A decline in interest rates contributed to the stock market's rise, as falling rates on bonds tend to make equities more attractive and to boost the price investors will pay for each dollar of a stock's earnings or dividends. Yet growth in earnings and dividends--the long-term underpinning of stock prices--was unimpressive during the first half of 1998. Corporate earnings estimates were reduced in June, the tenth consecutive month in which securities analysts have cut their earnings estimates, according to I/B/E/S International, a financial research group. Earnings by the S&P 500 companies were expected to 4 7 rise by only about 2% for the first half of 1998, I/B/E/S reported. With gains in prices outstripping increases in earnings and dividends, stock valuations are at or near all-time highs, an indication that investors expect ideal conditions to continue. Technology stocks were the best-performing sector during the first half of 1998, generating a 32.7% return. Three other sectors of the stock market--health care, consumer discretionary stocks such as retailers, and auto & transportation--each provided returns of about 25% for the six months. Companies involved in energy, chemicals, or other commodity-based businesses were generally laggards. Prices of many commodities have declined as Asia's economic funk cuts demand for energy and other industrial materials in the face of plentiful supplies. U.S. FIXED-INCOME MARKETS Investors in fixed-income securities enjoyed a moderate rise in the market value of their holdings because of declining interest rates. This price appreciation, added to coupon interest income, resulted in solid total returns. The 3.9% total return of the Lehman Aggregate Bond Index during the half-year brought its return for the 12 months ended June 30 to 10.5%, or a very generous 8.8% after adjustment for inflation. Yields on 10-year and 30-year U.S. Treasury bonds declined by 29 basis points (0.29 percentage point) to 5.45% and 5.63%, respectively, during the first half of 1998, with most of the drop occurring during the second quarter. The yield on 3-month Treasury bills declined 36 basis points to 4.99%. Mild inflation--consumer prices were up 1.1% for the half-year--enabled rates to decline despite the economy's strong growth. Yields on corporate and municipal bonds did not decline as far as those on Treasury securities because of a large increase in the supply of new bonds issued by companies and municipalities taking advantage of lower rates to refinance old debt. Similarly, mortgage-backed securities did not match Treasuries' performance because of expectations that large numbers of homeowners would pay off old, higher-coupon mortgage loans and refinance with new, lower-rate loans. INTERNATIONAL EQUITY MARKETS Stock markets in Europe soared while those in Asia and most emerging economies suffered steep declines in U.S.-dollar terms. The 16.1% overall return from international markets, as measured by the Morgan Stanley Capital International Europe, Australasia, Far East Index, masked the divergence between Europe and other regions. Europe's markets were up 27.1% when measured in local currencies and 26.5% in U.S. dollars, after adjusting for a slight overall rise in the dollar's value. Stocks benefited from an upswing in most European economies, from signs that corporate managers are increasingly focused on shareholder value, and from optimism concerning next year's planned adoption of the euro as a single European currency. In the Pacific, which is dominated by Japan's stock market, stocks were buffeted by several problems: slowing growth in economic activity; continued instability in currencies; political upheavals; and widespread worries about corporate and banking insolvencies. On balance, the region's stocks fell 6.0% in U.S.-dollar terms. Japanese stocks were down 2.5%, but losses were more severe in the region's smaller markets. Emerging markets were, on balance, down sharply. Asian stock markets were hurt by continued weakness in the currency values of several countries, by Japan's recession, and by a growing conviction that the region's economic troubles are far from transitory. Venezuela and Mexico, both key oil-producing nations, were hard hit by falling oil prices. 5 8 REPORT FROM THE ADVISER During the first half of 1998, Vanguard/PRIMECAP Fund's total return of 11.9% trailed both the 17.7% recorded by the unmanaged S&P 500 Index and the 15.1% achieved by the average growth mutual fund. It was an exceptionally difficult period for the fund, as we were out of step with most market trends. In the wake of crashing currencies and stock markets in Southeast Asia, investors focused on large-capitalization stocks that they perceived as consistent growers, and they were virtually insensitive to price in their pursuit of these issues. Consequently, performance was concentrated in the very largest stocks. According to Merrill Lynch data, the largest 100 stocks in the S&P 500 Index increased an average of 21.3% during the six months, while the 400 remaining stocks appreciated only 7.4%. As the performances of the largest stocks and the broader market diverged, valuations followed suit. PRIMECAP Fund, which emphasizes growth at a reasonable price, has about 21% of its assets in the S&P's 100 largest stocks, versus a weighting of about 68% for these stocks in the Index itself. We see much greater value in smaller stocks. However, this strategy clearly hampered our performance in the first half of the year. The economic landscape during the period evolved about as we had expected. Business in Southeast Asia essentially disappeared, but even before this year, the region represented only a small percentage of revenues for the fund's companies. The European economy improved, and business in Japan deteriorated somewhat. The major deviation from the scenario we had expected was that many of our technology companies reported unanticipated shortfalls in their domestic business, despite a robust economy. We believe the primary cause of the weak domestic business is a radical change in technology companies' approach toward holding inventory. The sensational success of Dell Computer's "build to order" business model has generated momentum throughout the technology industry to replicate that model. This drive to reduce inventories has accelerated due to events in Southeast Asia. Over the past few years, South Korea and Taiwan, in particular, had built substantial semiconductor production capacity, believing that this capability was critical to attaining technological competitiveness on a global scale. The capacity-building peaked around the end of 1997, just as technology companies began embracing the new "no inventory" approach. This caused prices of semiconductors to collapse, thus expediting manufacturers' efforts to reduce inventory. We believe that the earnings disappointments among technology companies have largely been an inventory-liquidation phenomenon and that it has nearly run its course. Slowing sales to end users have also played a role, but the absolute level of sales remains healthy and should begin to be reflected in earnings during the second half. Some areas within technology--most notably Internet stocks--have been immune to the inventory bubble. With momentum investors--those who strive to profit by buying the "hot" stocks--clamoring to buy Internet stocks, these companies propelled technology indexes 6 9 and grabbed the media spotlight. Despite the stocks' potential for extraordinary growth, the valuations afforded them seem unjustifiably high. Like Internet stocks, many communications stocks were unaffected by the inventory liquidation. The fund's holdings in Ericsson, Bay Networks, Tellabs, Nokia, and Lucent posted gains that significantly outpaced the S&P 500. As with Internet stocks, communications companies enjoy excellent prospects for growth. Unlike the Internet group, however, communications stocks' valuations seem reasonable, and the fund has maintained significant exposure to this group. After technology, our largest sector commitments continue to be auto & transportation and health care. Although these two sectors accounted for most of our favorable performance in 1997, they have depressed our results so far this year. Unlike our technology stocks, our transportation companies have not experienced earnings disappointments. On the contrary, business, especially among the airlines, continues to be exceptionally strong despite weak traffic in Asia. Load factors and yields remain at record levels, leading to record profits. Plunging fuel prices are only enhancing what is already the most prosperous period the airlines have experienced since deregulation. Despite this scenario, valuations of the group relative to historical norms have not improved at all. Investors refuse to concede that the airline industry's cyclical nature has diminished. We believe that the next economic downturn will demonstrate the change in the airline business--earnings will be preserved at higher levels than analysts expect. When this occurs, we think the group's relative valuation will improve. As we look at the fund, we are encouraged by its relatively attractive valuation. The 50 largest stocks in the S&P 500, which account for more than half the market value of the Index, carry a collective price/earnings ratio that is fully one-third higher than the P/E of the fund's top ten holdings (based on calendar 1997 earnings). To us, PRIMECAP Fund represents relative value, especially given our expectation that the earnings growth of our holdings will exceed that of the S&P 500 over the next several years. Howard B. Schow, Portfolio Manager Theo A. Kolokotrones, Portfolio Manager Joel P. Fried, Assistant Portfolio Manager F. Jack Liebau Jr., Assistant Portfolio Manager PRIMECAP Management Company
July 10, 1998 INVESTMENT PHILOSOPHY The fund reflects a belief that superior long-term investment results can be achieved by selecting stocks with prices lower than the fundamental value of the underlying companies, based on the investment adviser's assessment of such factors as their industry positions, growth potential, and expected profitability. 7 10 PORTFOLIO PROFILE PRIMECAP Fund This Profile provides a snapshot of the fund's characteristics as of June 30, 1998, compared where appropriate to an unmanaged index. Key elements of this Profile are defined on page 9.
PORTFOLIO CHARACTERISTICS - ------------------------------------------------------------- PRIMECAP S&P 500 - ------------------------------------------------------------- Number of Stocks 96 500 Median Market Cap $10.8B $50.0B Price/Earnings Ratio 20.2x 24.8x Price/Book Ratio 3.5x 4.5x Yield 0.8% 1.4% Return on Equity 18.1% 21.6% Earnings Growth Rate 19.6% 16.4% Foreign Holdings 8.4% 1.7% Turnover Rate 11%* -- Expense Ratio 0.50%* -- Cash Reserves 12.8% --
*Annualized. INVESTMENT FOCUS - ---------------------------------------------------------- [GRAPH]
VOLATILITY MEASURES - ---------------------------------------------------------- PRIMECAP S&P 500 - ---------------------------------------------------------- R-Squared 0.66 1.00 Beta 0.96 1.00
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) - ---------------------------------------------------------- AMR Corp. 4.0% Texas Instruments, Inc. 3.9 Delta Air Lines, Inc. 3.7 Guidant Corp. 3.5 Pharmacia & Upjohn, Inc. 3.4 Intel Corp. 2.9 FDX Corp. 2.8 Bay Networks, Inc. 2.7 LM Ericsson Telephone Co. 2.5 Micron Technology, Inc. 2.1 - ---------------------------------------------------------- Top Ten 31.5%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS) - ---------------------------------------------------------------------------------------------------------- JUNE 30, 1997 JUNE 30, 1998 ----------------------------------------------------------- PRIMECAP PRIMECAP S&P 500 ----------------------------------------------------------- Auto & Transportation 15.6% 16.0% 3.3% Consumer Discretionary 10.0 10.2 10.2 Consumer Staples 1.6 2.0 10.7 Financial Services 8.6 6.7 18.5 Health Care 12.9 11.9 12.1 Integrated Oils 0.0 0.0 6.5 Other Energy 0.6 2.1 1.0 Materials & Processing 5.9 6.9 5.2 Producer Durables 15.0 8.9 3.5 Technology 28.5 31.2 13.0 Utilities 0.3 0.0 10.3 Other 1.0 4.1 5.7 - ----------------------------------------------------------------------------------------------------------
8 11 BETA. A measure of the magnitude of a portfolio's past share-price fluctuations in relation to the ups and downs of the overall market (or appropriate market index). The market (or index) is assigned a beta of 1.00, so a portfolio with a beta of 1.20 would have seen its share price rise or fall by 12% when the overall market rose or fell by 10%. CASH RESERVES. The percentage of a portfolio's net assets invested in "cash equivalents"--highly liquid, short-term, interest-bearing securities. This figure does not include cash invested in futures contracts to simulate stock investment. EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the past five years for the stocks now in a portfolio. EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors. FOREIGN HOLDINGS. The percentage of a portfolio's net assets represented by stocks or American Depositary Receipts of companies based outside the United States. INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two attributes: market capitalization (large, medium, or small) and relative valuation (growth, value, or a blend). MEDIAN MARKET CAP. An indicator of the size of companies in which a portfolio invests; the midpoint of market capitalization (market price x shares outstanding) of a portfolio's stocks, weighted by the proportion of the portfolio's assets invested in each stock. Stocks representing half of the portfolio's assets have market capitalizations above the median, and the rest are below it. NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio holds, the more diversified it is and the more likely to perform in line with the overall stock market. PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book value, per share. For a portfolio, the weighted average price/book ratio of the stocks it holds. PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share earnings over the past year. For a portfolio, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company's future growth. R-SQUARED. A measure of how much of a portfolio's past returns can be explained by the returns from the overall market (or its benchmark index). If a portfolio's total return were precisely synchronized with the overall market's return, its R-squared would be 1.00. If a portfolio's returns bore no relationship to the market's returns, its R-squared would be 0. RETURN ON EQUITY. The annual average rate of return generated by a company during the past five years for each dollar of shareholder's equity (net income divided by shareholder's equity). For a portfolio, the weighted average return on equity for the companies whose stocks it holds. SECTOR DIVERSIFICATION. The percentages of a portfolio's common stocks that come from each of the major industry groups that compose the stock market. TEN LARGEST HOLDINGS. The percentage of net assets that a portfolio has invested in its ten largest holdings. (The average for stock mutual funds is about 30%.) As this percentage rises, a portfolio's returns are likely to be more volatile because they are more dependent on the fortunes of a few companies. TURNOVER RATE. An indication of trading activity during the period. Portfolios with high turnover rates incur higher transaction costs and are more likely to distribute capital gains (which are taxable to investors). YIELD. A snapshot of a portfolio's income from interest and dividends. The yield, expressed as a percentage of the portfolio's net asset value, is based on income earned over the past 30 days and is annualized, or projected forward for the coming year. The index yield is based on the current annualized rate of dividends paid on stocks in the index. 9 12 PERFORMANCE SUMMARY All of the data on this page represent past performance, which cannot be used to predict future returns that may be achieved by the fund. Note, too, that both share price and return can fluctuate widely, so an investment in the fund could lose money.
PRIMECAP FUND TOTAL INVESTMENT RETURNS: NOVEMBER 1, 1984-JUNE 30, 1998 - --------------------------------------------------------- PRIMECAP FUND S&P 500 FISCAL CAPITAL INCOME TOTAL TOTAL YEAR RETURN RETURN RETURN RETURN - --------------------------------------------------------- 1984 4.9% 0.0% 4.9% 0.6% 1985 35.6 0.2 35.8 31.8 1986 21.8 1.7 23.5 18.7 1987 -3.2 0.9 -2.3 5.3 1988 13.7 1.0 14.7 16.6 1989 20.2 1.4 21.6 31.7 1990 -3.8 1.0 -2.8 -3.1 1991 31.8 1.3 33.1 30.5 1992 8.2 0.8 9.0 7.6 1993 17.6 0.4 18.0 10.1 1994 10.7 0.7 11.4 1.3 1995 34.4 1.1 35.5 37.6 1996 17.5 0.8 18.3 23.0 1997 36.1 0.7 36.8 33.4 1998* 11.9 0.0 11.9 17.7 - ---------------------------------------------------------
*Six months ended June 30, 1998. See Financial Highlights table on page 15 for dividend and capital gains information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998 - ------------------------------------------------------------------------------------------------------ 10 YEARS INCEPTION -------------------------------- DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL - ------------------------------------------------------------------------------------------------------ PRIMECAP Fund 11/1/1984 26.47% 24.51% 17.29% 0.91% 18.20% - ------------------------------------------------------------------------------------------------------
10 13 FINANCIAL STATEMENTS June 30, 1998 (unaudited) STATEMENT OF NET ASSETS This Statement provides a detailed list of the fund's holdings, including each security's market value on the last day of the reporting period. Securities are grouped and subtotaled by asset type (common stocks, preferred stocks, bonds, etc.) and by industry sector. Other assets are added to, and liabilities are subtracted from, the value of Total Investments to calculate the fund's Net Assets. Finally, Net Assets are divided by the outstanding shares of the fund to arrive at its share price, or Net Asset Value (NAV) Per Share. At the end of the Statement of Net Assets, you will find a table displaying the composition of the fund's net assets on both a dollar and per-share basis. Because all income and any realized gains must be distributed to shareholders each year, the bulk of net assets consists of Paid in Capital (money invested by shareholders). The amounts shown for Undistributed Net Investment Income and Accumulated Net Realized Gains usually approximate the sums the fund had available to distribute to shareholders as income dividends or capital gains as of the statement date. Any Accumulated Net Realized Losses, and any cumulative excess of distributions over net income or net realized gains, will appear as negative balances. Unrealized Appreciation (Depreciation) is the difference between the market value of the fund's investments and their cost, and reflects the gains (losses) that would be realized if the fund were to sell all of its investments at their statement- date values.
- ---------------------------------------------------------- MARKET VALUE* PRIMECAP FUND SHARES (000) - ---------------------------------------------------------- COMMON STOCKS (87.2%) - ---------------------------------------------------------- AUTO & TRANSPORTATION (14.0%) - - AMR Corp. 5,100,000 $ 424,575 (1)Airborne Freight Corp. 3,160,000 110,402 Arvin Industries, Inc. 740,000 26,871 Delta Air Lines, Inc. 3,050,000 394,212 - - FDX Corp. 4,690,000 294,297 Fleetwood Enterprises, Inc. 1,200,000 48,000 Southwest Airlines Co. 5,775,000 171,084 ---------- 1,469,441 ---------- CONSUMER DISCRETIONARY (8.8%) Block Drug Co. Class A 270,000 10,260 - - Consolidated Stores, Inc. 582,500 21,116 - - Costco Cos., Inc. 3,500,000 220,719 Dillard's Inc. 1,200,000 49,725 - - Filene's Basement Corp. 995,000 5,426 - - GC Cos. 200,000 10,375 The Gap, Inc. 255,000 15,714 (1)Harcourt General, Inc. 2,600,000 154,700 Manpower Inc. 2,470,000 70,858 (1)The McClatchy Co. Class A 800,000 27,700 - -(1)Neiman Marcus Group Inc. 3,000,000 130,312 NIKE, Inc. Class B 176,000 8,569 Nordstrom, Inc. 949,000 73,310 - -(1)Plantronics, Inc. 1,608,000 82,812 Time Warner, Inc. 600,000 51,262 ---------- 932,858 ---------- CONSUMER STAPLES (1.7%) Brown-Forman Corp. Class B 700,000 44,975 The Seagram Co. Ltd. 3,300,000 135,094 ---------- 180,069 ---------- ENERGY (1.8%) Noble Affiliates, Inc. 1,600,000 60,800 (1)Pogo Producing Co. 2,600,000 65,325 Union Pacific Resources Group, Inc. 3,700,000 64,981 ---------- 191,106 ---------- FINANCIAL SERVICES (5.8%) American International Group, Inc. 836,924 122,191 City National Corp. 621,485 22,956 General Re Corp. 720,000 182,520 HSB Group Inc. 300,000 16,050 Marsh & McLennan Cos., Inc. 450,000 27,197 St. Paul Cos., Inc. 1,000,000 42,063 State Street Corp. 1,000,000 69,500 Torchmark Corp. 1,880,000 86,010 Transatlantic Holdings, Inc. 562,500 43,488 ---------- 611,975 ---------- HEALTH CARE (10.4%) - - Boston Scientific Corp. 500,000 35,813 Guidant Corp. 5,210,632 371,583 Johnson & Johnson 1,100,000 81,125 Eli Lilly & Co. 1,826,640 120,672 - - Lynx Therapeutics Inc. 72,900 683 Medtronic, Inc. 1,996,888 127,302 Pharmacia & Upjohn, Inc. 7,676,900 354,097 ---------- 1,091,275 ---------- MATERIALS & PROCESSING (6.0%) Belden, Inc. 383,000 11,729 Engelhard Corp. 4,800,000 97,200 (1)Granite Construction Co. 1,400,000 42,875
11 14
- ----------------------------------------------------------- MARKET VALUE* PRIMECAP FUND SHARES (000) - ----------------------------------------------------------- (1)MacDermid, Inc. 1,701,000 $ 48,053 Monsanto Co. 1,800,000 100,575 - - Mycogen Corp. 1,641,000 39,435 OM Group, Inc. 828,100 34,159 Pioneer Hi-Bred International, Inc. 1,350,000 55,856 Potash Corp. of Saskatchewan, Inc. 1,600,000 120,900 Stepan Co. 292,600 8,723 Temple-Inland Inc. 1,300,000 70,038 --------- 629,543 --------- PRODUCER DURABLES (7.8%) Caterpillar, Inc. 1,810,000 95,704 Deere & Co. 1,450,000 76,669 - - Dionex Corp. 1,020,000 26,903 Donaldson Co., Inc. 1,080,000 25,515 Flowserve Corp. 732,552 18,039 Kennametal, Inc. 1,140,000 47,595 - - Lexmark International Group, Inc. Class A 700,000 42,700 (1)Millipore Corp. 2,820,000 76,845 Molex, Inc. 195,312 4,883 Molex, Inc. Class A 195,312 4,565 Nokia Corp. A ADR 960,000 69,660 Pall Corp. 750,000 15,375 Perkin-Elmer Corp. 1,300,000 80,844 Pitney Bowes, Inc. 2,400,000 115,500 (1)Tektronix, Inc. 3,300,000 116,738 ---------- 817,535 ---------- TECHNOLOGY (27.2%) COMMUNICATIONS TECHNOLOGY (5.3%) LM Ericsson Telephone Co. ADR Class B 9,200,000 263,350 LM Ericsson Telephone Co. 4.25% Cvt. Pfd. 620 4,728 Lucent Technologies, Inc. 300,000 24,956 Motorola, Inc. 2,880,000 151,380 - - Tellabs, Inc. 1,600,000 114,600 COMPUTER SERVICES, SOFTWARE & SYSTEM (3.0%) (1)Adobe Systems, Inc. 5,190,000 220,251 - -(1)The SABRE Group Holdings, Inc. 2,309,200 87,750 - - Tripos Inc. 95,000 1,330 COMPUTER TECHNOLOGY (6.5%) - - Bay Networks, Inc. 8,770,000 282,833 Compaq Computer Corp. 6,228,925 176,746 - -(1)Evans & Sutherland Computer Corp. 840,000 21,158 Hewlett-Packard Co. 3,180,000 190,403 - - Stratus Computer, Inc. 377,000 9,543 ELECTRONICS (1.7%) Sony Corp. ADR 2,119,000 182,366 ELECTRONICS--SEMICONDUCTORS/ COMPONENTS (9.5%) Intel Corp. 4,075,000 302,059 - - LSI Logic Corp. 1,488,700 34,333 - - Micron Technology, Inc. 8,900,000 220,831 Texas Instruments, Inc. 7,030,000 409,937 - - Xilinx, Inc. 1,100,000 37,400 ELECTRONICS--TECHNOLOGY (1.2%) - -(1)Coherent, Inc. 1,800,000 30,881 Symbol Technologies, Inc. 2,499,750 94,366 ---------- 2,861,201 ---------- OTHER (3.7%) Novartis AG ADR 1,200,000 99,300 Miscellaneous (2.7%) 288,042 ---------- 387,342 ---------- - ----------------------------------------------------------- TOTAL COMMON STOCKS (COST $5,538,154) 9,172,345 - ----------------------------------------------------------- FACE AMOUNT (000) - ----------------------------------------------------------- TEMPORARY CASH INVESTMENTS (12.6%) - ----------------------------------------------------------- REPURCHASE AGREEMENTS Collateralized by U.S. Government Obligations in a Pooled Cash Account 5.67%, 7/1/1998 $1,324,785 1,324,785 5.76%, 7/1/1998--Note F 616 616 - ----------------------------------------------------------- TOTAL TEMPORARY CASH INVESTMENTS (COST $1,325,401) 1,325,401 - ----------------------------------------------------------- TOTAL INVESTMENTS (99.8%) (COST $6,863,555) 10,497,746 - ----------------------------------------------------------- OTHER ASSETS AND LIABILITIES (0.2%) - ----------------------------------------------------------- Other Assets--Note C 50,462 Liabilities--Note F (28,032) ---------- 22,430 - ----------------------------------------------------------- NET ASSETS (100%) - ----------------------------------------------------------- Applicable to 239,127,078 outstanding $.001 par value shares of beneficial interest (unlimited a uthorization) $10,520,176 =========================================================== NET ASSET VALUE PER SHARE $43.99 ===========================================================
*See Note A in Notes to Financial Statements. - -Non-Income-Producing Security. ADR--American Depositary Receipt. (1)Considered an affiliated company as the Fund owns more than 5% of the outstanding voting securities of such company. The total market value of investments in affiliated companies was $1,215,802,000.
- ----------------------------------------------------------- AT JUNE 30, 1998, NET ASSETS CONSISTED OF: - ----------------------------------------------------------- AMOUNT PER (000) SHARE - ----------------------------------------------------------- Paid in Capital $ 6,704,223 $28.03 Undistributed Net Investment Income 41,703 .17 Accumulated Net Realized Gains 140,059 .59 Unrealized Appreciation-- Note E 3,634,191 15.20 - ----------------------------------------------------------- NET ASSETS $10,520,176 $43.99 ===========================================================
12 15 STATEMENT OF OPERATIONS This Statement shows dividend and interest income earned by the fund during the reporting period, and details the operating expenses charged to the fund. These expenses directly reduce the amount of investment income available to pay to shareholders as dividends. This Statement also shows any Net Gain (Loss) realized on the sale of investments, and the increase or decrease in the Unrealized Appreciation (Depreciation) on investments during the period.
- --------------------------------------------------------------------------------------------------------------------------- PRIMECAP FUND SIX MONTHS ENDED JUNE 30, 1998 (000) - --------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends* $ 28,573 Interest 39,573 --------------- Total Income 68,146 --------------- EXPENSES Investment Advisory Fees--Note B 10,452 The Vanguard Group--Note C Management and Administrative 12,434 Marketing and Distribution 1,152 Taxes (other than income taxes) 362 Custodian Fees 21 Auditing Fees 8 Shareholders' Reports 84 Annual Meeting and Proxy Costs 36 Trustees' Fees and Expenses 10 --------------- Total Expenses 24,559 - --------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME 43,587 - --------------------------------------------------------------------------------------------------------------------------- REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 140,941 - --------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 857,874 - --------------------------------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,042,402 ===========================================================================================================================
*Dividend income from affiliated companies was $3,353,000. 13 16 STATEMENT OF CHANGES IN NET ASSETS This Statement shows how the fund's total net assets changed during the two most recent reporting periods. The Operations section summarizes information detailed in the Statement of Operations. The amounts shown as Distributions to shareholders from the fund's net income and capital gains may not match the amounts shown in the Operations section, because distributions are determined on a tax basis and may be made in a period different from the one in which the income was earned or the gains were realized on the financial statements. The Capital Share Transactions section shows the amount shareholders invested in the fund, either by purchasing shares or by reinvesting distributions, as well as the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed are shown at the end of the Statement.
- --------------------------------------------------------------------------------------------------------------------------- PRIMECAP FUND ------------------------------------- SIX MONTHS YEAR ENDED ENDED JUN. 30, 1998 DEC. 31, 1997 (000) (000) - --------------------------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net Investment Income $ 43,587 $ 42,005 Realized Net Gain 140,941 289,401 Change in Unrealized Appreciation (Depreciation) 857,874 1,327,647 ----------------------------------- Net Increase in Net Assets Resulting from Operations 1,042,402 1,659,053 ----------------------------------- DISTRIBUTIONS Net Investment Income (2,328) (39,529) Realized Capital Gain (65,221) (248,608) ----------------------------------- Total Distributions (67,549) (288,137) ----------------------------------- CAPITAL SHARE TRANSACTIONS1 Issued 2,215,095 3,307,320 Issued in Lieu of Cash Distributions 65,922 282,274 Redeemed (921,857) (978,333) ----------------------------------- Net Increase from Capital Share Transactions 1,359,160 2,611,261 - --------------------------------------------------------------------------------------------------------------------------- Total Increase 2,334,013 3,982,177 - --------------------------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Period 8,186,163 4,203,986 ----------------------------------- End of Period $10,520,176 $8,186,163 =========================================================================================================================== (1)Shares Issued (Redeemed) Issued 52,253 85,932 Issued in Lieu of Cash Distributions 1,528 7,480 Redeemed (21,562) (26,285) ----------------------------------- Net Increase in Shares Outstanding 32,219 67,127 ===========================================================================================================================
14 17 FINANCIAL HIGHLIGHTS This table summarizes the fund's investment results and distributions to shareholders on a per-share basis. It also presents the fund's Total Return and shows net investment income and expenses as percentages of average net assets. These data will help you assess: the variability of the fund's net income and total returns from year to year; the relative contributions of net income and capital gains to the fund's total return; how much it costs to operate the fund; and the extent to which the fund tends to distribute capital gains. The table also shows the Portfolio Turnover Rate, a measure of trading activity. A turnover rate of 100% means that the average security is held in the fund for one year.
- ------------------------------------------------------------------------------------------------------------------------- PRIMECAP FUND YEAR ENDED DECEMBER 31, FOR A SHARE OUTSTANDING SIX MONTHS ENDED ----------------------------------------------------------- THROUGHOUT EACH PERIOD JUNE 30, 1998 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $39.56 $30.08 $26.23 $19.98 $18.42 $16.19 - ------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .18 .21 .19 .22 .12 .07 Net Realized and Unrealized Gain (Loss) on Investments 4.54 10.77 4.59 6.84 1.97 2.82 ------------------------------------------------------------------------- Total from Investment Operations 4.72 10.98 4.78 7.06 2.09 2.89 ------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.01) (.20) (.20) (.22) (.12) (.07) Distributions from Realized Capital Gains (.28) (1.30) (.73) (.59) (.41) (.59) ------------------------------------------------------------------------- Total Distributions (.29) (1.50) (.93) (.81) (.53) (.66) - ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $43.99 $39.56 $30.08 $26.23 $19.98 $18.42 ========================================================================================================================= TOTAL RETURN 11.95% 36.79% 18.31% 35.48% 11.41% 18.03% ========================================================================================================================= RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $10,520 $8,186 $4,204 $3,237 $1,554 $791 Ratio of Total Expenses to Average Net Assets 0.50%* 0.51% 0.59% 0.58% 0.64% 0.67% Ratio of Net Investment Income to Average Net Assets 0.89%* 0.69% 0.69% 0.99% 0.79% 0.44% Portfolio Turnover Rate 11%* 13% 10% 7% 8% 16% - -------------------------------------------------------------------------------------------------------------------------
*Annualized. 15 18 NOTES TO FINANCIAL STATEMENTS Vanguard/PRIMECAP Fund is registered under the Investment Company Act of 1940 as a diversified open-end investment company, or mutual fund. A. The following significant accounting policies conform to generally accepted accounting principles for mutual funds. The fund consistently follows such policies in preparing its financial statements. 1. SECURITY VALUATION: Equity securities are valued at the latest quoted sales prices as of the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Prices are taken from the primary market in which each security trades. Temporary cash investments are valued at cost, which approximates market value. Securities for which market quotations are not readily available are valued by methods deemed by the Board of Trustees to represent fair value. 2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements. 3. REPURCHASE AGREEMENTS: The fund, along with other members of The Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account, which is invested in repurchase agreements secured by U.S. government securities. Securities pledged as collateral for repurchase agreements are held by a custodian bank until the agreements mature. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. 4. DISTRIBUTIONS: Distributions to shareholders are recorded on the ex-dividend date. 5. OTHER: Dividend income is recorded on the ex-dividend date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. B. PRIMECAP Management provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. For the six months ended June 30, 1998, the advisory fee represented an effective annual rate of 0.21% of the fund's 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 Trustees. At June 30, 1998, the fund had contributed capital of $2,016,000 to Vanguard (included in Other Assets), representing 2.9% of Vanguard's capitalization. The fund's Trustees and officers are also Directors and officers of Vanguard. D. During the six months ended June 30, 1998, the fund purchased $1,530,470,000 of investment securities and sold $480,914,000 of investment securities, other than temporary cash investments. E. At June 30, 1998, net unrealized appreciation of investment securities for financial report- ing and federal income tax purposes was $3,634,191,000, consisting of unrealized gains of $3,812,839,000 on securities that had risen in value since their purchase and $178,648,000 in unrealized losses on securities that had fallen in value since their purchase. F. The market value of securities on loan to brokers/dealers at June 30, 1998, was $597,000, for which the fund held cash collateral of $616,000. Cash collateral received is invested in repurchase agreements. 16 19 TRUSTEES AND OFFICERS JOHN C. BOGLE Senior Chairman of the Board and Director of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. JOHN J. BRENNAN Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. BARBARA BARNES HAUPTFUHRER Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc., Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and Ladies Professional Golf Association; Trustee Emerita of Wellesley College. BRUCE K. MACLAURY President Emeritus of The Brookings Institution; Director of American Express Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp. 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 Telecommunications 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., Procter & Gamble 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. and The Mead Corp.; Trustee of Vanderbilt University. OTHER FUND OFFICERS RAYMOND J. KLAPINSKY Secretary; Managing Director and Secretary of The Vanguard Group, Inc.; Secretary of each of the investment companies in The Vanguard Group. RICHARD F. HYLAND Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies in The Vanguard Group. KAREN E. WEST Controller; Principal of The Vanguard Group, Inc.; Controller of each of the investment companies in The Vanguard Group. OTHER VANGUARD OFFICERS R. GREGORY BARTON Managing Director, Legal Department. ROBERT A. DISTEFANO Managing Director, Information Technology. JAMES H. GATELY Managing Director, Individual Investor Group. KATHLEEN C. GUBANICH Managing Director, Human Resources. IAN A. MACKINNON Managing Director, Fixed Income Group. F. WILLIAM MCNABB, III Managing Director, Institutional Investor Group. MICHAEL S. MILLER Managing Director, Planning and Development. RALPH K. PACKARD Managing Director and Chief Financial Officer. GEORGE U. 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"Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates. 17 20 VANGUARD FAMILY OF FUNDS STOCK FUNDS Convertible Securities Fund Equity Income Fund Explorer Fund Growth and Income Portfolio Horizon Fund Aggressive Growth Portfolio Capital Opportunity Portfolio Global Equity Portfolio Index Trust 500 Portfolio Extended Market Portfolio Growth Portfolio Mid Capitalization Stock Portfolio Small Capitalization Growth Stock Portfolio Small Capitalization Stock Portfolio Small Capitalization Value Stock Portfolio Total Stock Market Portfolio Value Portfolio Institutional Index Fund International Equity Index Fund Emerging Markets Portfolio European Portfolio Pacific Portfolio International Growth Portfolio International Value Portfolio Morgan Growth Fund PRIMECAP Fund Selected Value Portfolio Specialized Portfolios Energy Portfolio Gold & Precious Metals Portfolio Health Care Portfolio REIT Index Portfolio Utilities Income Portfolio Tax-Managed Fund Capital Appreciation Portfolio Growth and Income Portfolio Total International Portfolio Trustees' Equity Fund U.S. Portfolio U.S. Growth Portfolio Windsor Fund Windsor II MONEY MARKET FUNDS Admiral Funds U.S. Treasury Money Market Portfolio Money Market Reserves Federal Portfolio Prime Portfolio Municipal Bond Fund Money Market Portfolio State Tax-Free Funds (CA, NJ, NY, OH, PA) Treasury Money Market Portfolio BOND FUNDS Admiral Funds Intermediate-Term U.S. Treasury Portfolio Long-Term U.S. Treasury Portfolio Short-Term U.S. Treasury Portfolio Bond Index Fund Intermediate-Term Bond Portfolio Long-Term Bond Portfolio Short-Term Bond Portfolio Total Bond Market Portfolio Fixed Income Securities Fund GNMA Portfolio High Yield Corporate Portfolio Intermediate-Term Corporate Portfolio Intermediate-Term U.S. Treasury Portfolio Long-Term Corporate Portfolio Long-Term U.S. Treasury Portfolio Short-Term Corporate Portfolio Short-Term Federal Portfolio Short-Term U.S. Treasury Portfolio Municipal Bond Fund High-Yield Portfolio Insured Long-Term Portfolio Intermediate-Term Portfolio Limited-Term Portfolio Long-Term Portfolio Short-Term Portfolio Preferred Stock Fund State Tax-Free Funds (CA, FL, NJ, NY, OH, PA) BALANCED FUNDS Asset Allocation Fund Balanced Index Fund Horizon Fund Global Asset Allocation Portfolio LifeStrategy Portfolios Conservative Growth Portfolio Growth Portfolio Income Portfolio Moderate Growth Portfolio STAR Portfolio Tax-Managed Fund Balanced Portfolio Wellesley Income Fund Wellington Fund Q592-6/1998 (C) 1998 Vanguard Marketing Corporation, Distributor. All rights reserved. [THE VANGUARD GROUP LOGO] Post Office Box 2600 Valley Forge, Pennsylvania 19482 FUND INFORMATION 1-800-662-7447 INDIVIDUAL ACCOUNT SERVICES 1-800-662-2739 INSTITUTIONAL INVESTOR SERVICES 1-800-523-1036 www.vanguard.com online@vanguard.com All Vanguard funds are offered by prospectus only. Prospectuses contain more complete information on advisory fees, distribution charges, and other expenses and should be read carefully before you invest or send money. Prospectuses can be obtained directly from The Vanguard Group. -----END PRIVACY-ENHANCED MESSAGE-----