-----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, FWWLDOIzIeY3uvR2OOlCJ18VWU8ZtUU5zAQ/RKIFHAoZagr97WuXofrytLuJvyeB q99ZGspTTovJrpq86HHwhw== 0000932471-02-000588.txt : 20020422 0000932471-02-000588.hdr.sgml : 20020422 ACCESSION NUMBER: 0000932471-02-000588 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020228 FILED AS OF DATE: 20020422 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD PRIMECAP FUND/ CENTRAL INDEX KEY: 0000752177 IRS NUMBER: 232311358 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-04098 FILM NUMBER: 02616755 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 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD/PRIMECAP FUND INC DATE OF NAME CHANGE: 19940608 N-30D 1 primecapfeb2002.txt PRIMECAP SEMI ANNUAL FEB 2002 VANGUARD(R)PRIMECAP FUND Semiannual Report * February 28, 2002 Stock [Picture of Ship on the Water] [LOGO] THE VANGUARD GROUP[R] WHAT YOU CAN CONTROL As an investor, you cannot control how the financial markets perform. But there are vital variables that you can control. You can decide how much to invest. You can limit the risk in your portfolio by diversifying your holdings. And you can control the investment costs you incur. Costs may seem the least dramatic of the three. But costs have a powerful impact on how your wealth accumulates; they reduce, dollar for dollar, the returns that you can derive from an investment. Every mutual fund has operating expenses--to pay for investment managers, telephone support, and so on. These costs appear in the fund's expense ratio, which reflects the percentage of average net assets (your money) consumed each year by operating costs. In 2001, the average mutual fund had an expense ratio of 1.32% (or $13.20 per $1,000 in assets), according to data from Lipper Inc. For Vanguard(R) funds, the average expense ratio was less than one-fourth that amount (0.27%, or $2.70 per $1,000 in assets). Our average expense ratio has been less than the industry average for 25 years, and it's an advantage we aim to maintain. Under our unique corporate structure, shareholders like you own the Vanguard funds, which in turn own The Vanguard Group. No middleman makes a profit from managing the operation. You bear all of the investment risk. It's only right that you reap as much of the potential reward as possible. - -------------------------------------------------------------------------------- CONTENTS Letter from the Chairman 1 Report from the Adviser 4 Fund Profile 7 Glossary of Investment Terms 8 Performance Summary 9 Financial Statements 10 Advantages of Vanguard.com 19 - -------------------------------------------------------------------------------- SUMMARY * Vanguard PRIMECAP Fund posted a return of -2.4% for the first half of its 2002 fiscal year, slightly outpacing its average peer mutual fund but lagging the S&P 500 Index. * The broad stock market plunged early in the period, but recovered some of its losses. * Negative returns, primarily in technology stocks, offset mostly positive returns in other sectors. LETTER FROM THE CHAIRMAN Fellow Shareholder, During the six months ended February 28, 2002, the U.S. stock market hit a three-year low, but rebounded to recover some of its losses. In this environment, vanguard(R) primecap fund posted a six-month return of -2.4%, which was marginally higher than that of its average competitor but lower than the return of its benchmark index. The table below compares your fund's total return (capital change plus reinvested dividends) with those of the average multi-capitalization core fund and the unmanaged Standard & Poor's 500 Index. The table includes the return for PRIMECAP Fund's Admiral(TM) Shares--a lower-cost share class for large or long-standing accounts--since their inception in November 2001. Information on your fund's distributions during the period and its starting and ending net asset values is in the table on page 3. - -------------------------------------------------------------------------------- TOTAL RETURNS Six Months Ended February 28, 2002 - -------------------------------------------------------------------------------- Vanguard PRIMECAP Fund Investor Shares -2.4% Admiral Shares* 5.0 Average Multi-Cap Core Fund** -3.0 S&P 500 Index -1.7 - -------------------------------------------------------------------------------- *Return since inception on November 12, 2001. **Derived from data provided by Lipper Inc. FINANCIAL MARKETS IN REVIEW During the six months ended February 28, 2002, the Wilshire 5000 Total Market Index--the broadest measure of the U.S. stock market--returned -1.1%. Stocks plunged after the September 11 terrorist attacks, but subsequently rallied from the three-year low mark. The stock market fell again near the end of the period, as corporate profits kept declining in the face of a global recession. In addition, the Enron accounting scandal raised concern about the integrity of corporate financial statements. Among the market's large stocks, as represented by the Russell 1000 Index, value-oriented shares--those trading at comparatively low prices relative to book value, earnings, and other financial measures--outpaced growth stocks, which trade at higher prices relative to such measures. Among smaller stocks, the pattern was the same. For the six months, small-cap value stocks, as represented by the Russell 2000 Value Index, returned 5.9%, making this category the best-performing market segment. International stocks showed general weakness, with more resilience in growth than in value. Overall, international stock returns trailed those of U.S. stocks, in part because a strong dollar reduced the value of foreign assets for investors based in the United States. 1 ================================================================================ MARKET BAROMETER Total Returns Periods Ended February 28, 2002 ------------------------------- Six One Five Months Year Years* - -------------------------------------------------------------------------------- STOCKS Russell 1000 Index (Large-caps) -1.6% -9.5% 8.4% Russell 2000 Index (Small-caps) 0.9 0.3 6.8 Wilshire 5000 Index (Entire market) -1.1 -8.4 7.8 MSCI EAFE Index (International) -8.3 -19.0 0.3 - -------------------------------------------------------------------------------- BONDS Lehman Aggregate Bond Index (Broad taxable market) 3.0% 7.7% 7.7% Lehman 10 Year Municipal Bond Index 2.0 6.6 6.4 Salomon Smith Barney 3-Month U.S. Treasury Bill Index 1.2 3.4 4.9 ================================================================================ CPI Consumer Price Index 0.2% 1.1% 2.2% - -------------------------------------------------------------------------------- *Annualized. Bonds provided some shelter from the stock market decline. The Lehman Brothers Aggregate Bond Index--a broad measure of the taxable bond market--returned 3.0% for the six months. Within that period, returns were volatile. In the weeks after September 11, bond yields fell as prices--and returns--soared. But the trend reversed toward the end of the six months, leaving yields more or less where they started. For the shortest-term securities, such as money market instruments, however, yields fell and stayed low because of aggressive rate-cutting by the Federal Reserve Board. The Fed reduced short-term interest rates by a total of 1.75 percentage points during the six months (part of an overall reduction of 4.75 percentage points during calendar 2001). Money market investors started the second half of our fiscal year with yields only a bit higher than the current rate of inflation. PERFORMANCE OVERVIEW With a return of -2.4%, Vanguard PRIMECAP Fund declined less than its average peer fund by 0.6 percentage point, but more than the S&P 500 Index by about the same margin. Some of the biggest losses among the fund's individual holdings were in airline stocks, which plunged after September 11. However, the transportation sector as a whole turned in a strong half-year performance and became the top contributor to the fund's performance relative to its benchmark index. This was due to some solid stock picks, both inside and outside the airline industry, and to the investment adviser's decision to overweight the sector in comparison with the S&P 500. PRIMECAP Fund's transportation-related stocks, which made up an average of 12% of its assets (versus about 2% for the broad market), returned 9%. The adviser's selection among health care stocks also helped our absolute and relative performance. The sector that hurt our returns most was technology. The fund's tech issues, which constituted nearly 30% of assets, fell almost -10%, despite a strong rally late in 2001. Other weak areas were utilities and the consumer discretionary sector. The negative impact of these three sectors offset the mostly positive returns in other areas. For details on individual securities, please see the Report from the Adviser starting on page 4. 2 IN SUMMARY The past two years have been a particularly volatile time in the financial markets and have illustrated the futility of trying to predict the market. As always, we advocate the sensible course of holding a diversified mix of stocks, bonds, and short-term investments in proportions appropriate for your goals, time horizon, and risk tolerance. Maintaining such a portfolio and tuning out the market "noise" can help you stay on track toward your long-term financial goals. We thank you for your loyalty and for your trust in our approach to investing. Sincerely, /S/ John J. Brennan JOHN J. BRENNAN Chairman and Chief Executive Officer March 13, 2002 ================================================================================ Your Fund's Performance at a Glance: August 31, 2001-February 28, 2002 Distributions Per Share ------------------- Starting Ending Income Capital Share Price Share Price Dividends Gains - -------------------------------------------------------------------------------- Vanguard PRIMECAP Fund Investor Shares $51.90 $50.24 $0.260 $0.135 Admiral Shares 50.00* 52.10 0.275 0.140 - -------------------------------------------------------------------------------- *Inception: November 12, 2001. 3 REPORT FROM THE ADVISER Vanguard PRIMECAP Fund recorded a -2.4% return during the six months ended February 28, 2002, the first half of our fiscal year. The fund declined a bit less than the average multi-cap core fund (-3.0%) but a bit more than the unmanaged S&P 500 Index (-1.7%). THE INVESTMENT ENVIRONMENT Before the events of September 11, speculative and business excesses in the markets and the economy were being corrected. We had survived the 18-month stock market correction and were beginning to glimpse light at the end of the tunnel. We continued to increase the fund's exposure to economically sensitive issues that we thought would recover in 2002. But the terrorist attacks changed the investment environment. Now it appeared that the recession would last longer than anticipated. Indeed, the events of September 11 may have accelerated the recessionary cycle by making the downturn more severe and sudden than it would have been. In the wake of the attacks, corporations made significant efforts to cut costs. The Federal Reserve Board continued to reduce interest rates aggressively. And the prospects for fiscal stimuli increased, as federal lawmakers worked on new spending and tax-cut proposals to build on the tax cut passed by Congress early in 2001. It is difficult to know what success terrorist groups may have in the future. In deciding on investment policies, investors must make some assumptions about the potential effects of such activity. For the most part, we are assuming that any future terrorist attacks will not have a meaningful impact on the overall economy. The economic outlook remains uncertain, but signs of improvement are emerging as the low interest rates fostered by the Federal Reserve Board continue to provide support to consumer spending. Inventory levels have also been significantly reduced. We assume that inflation will trend marginally higher in 2002 as fiscal and monetary stimuli take effect. We believe the economy will begin a gradual recovery this spring. Normally, such a recovery would be led by interest-rate-sensitive areas such as autos and housing; however, these businesses did not slump during the recession, so they may not improve much from current levels. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 4 OUR SUCCESSES Although airline stocks plummeted immediately after September 11, our overweighted position in the auto & transportation sector proved to be an area of strength for the fund. A number of our holdings in this group provided superior results, especially large positions in FedEx, Southwest Airlines, and Union Pacific. We were also overweighted, compared with the S&P 500 Index, in "other energy," the market's worst-performing sector during the half-year (it made up about 3% of fund assets on average but less than 2% of the index). Nonetheless, superior stock selection turned this into a plus for the fund, because our "other energy" stocks earned 1.5% compared with -23.0% for the index sector. We benefited from having avoided exposure to Enron and several companies--such as Williams Communications, Calpine, and Dynegy--hit by a "contagion effect" in the wake of Enron's collapse. The fund also was helped by superior stock selection in the health care sector (where Guidant, Pharmacia, and Novartis were among the standouts) and in the producer durables group (with help from Caterpillar, Tektronix, and Deere). OUR SHORTFALLS The technology sector was the market's fourth worst-performing group, and the PRIMECAP Fund suffered from an overweighting in the sector (nearly 30% of fund assets on average; about 17% of the index) as well as from poor stock selection. Among our tech holdings, Micron Technology and Citrix Systems were big losers. Given the damage done to airlines by the terrorist attacks, which raised costs and reduced passenger traffic, our significant exposure to this group was harmful. Two of our larger holdings--AMR and Delta Air Lines--were hurt badly. Although passenger traffic has been rebounding, the airline industry continues to face significant risks. In the consumer discretionary sector, our poor stock selection (notably General Motors Class H shares and Eastman Kodak) hurt the fund's performance in the latest six months. This sector had been one of our stronger performers in the previous six months. In the utilities group, the market's second-worst performer during the six months ended February 28, we also had subpar results. Our holdings in WorldCom and Sprint were hit hard by continued weakness in the telecommunications market (plagued by overcapacity and a general lack of demand) and increasing concerns over liquidity. In addition, the fallout from the Enron debacle hurt our position in UtiliCorp United. Finally, we were hurt by our decision to stay away from the consumer staples area, which was the market's third-best-performing group in the past half-year. 5 We avoided this sector in part because we have positioned the portfolio for an economic recovery, which should disproportionately benefit other sectors. THE FUND'S POSITIONING The fund's stance changed little during the six months, although we added to our technology positions as prices grew more attractive. We believe inflation will trend only modestly higher as the economy recovers and the U.S. dollar remains strong. Because we expect an economic recovery by mid-2002, we are overweighted in economically sensitive sectors, such as technology, producer durables, auto & transportation, and materials & processing. We also continue an overweighting in the "other energy" group. As noted, we are underweighted in consumer staples. Our holdings continue to be more diversified than usual, in part because we aren't sure which industry sectors will lead the market in the months ahead. Howard B. Schow Theo A. Kolokotrones Portfolio Manager Portfolio Manager Joel P. Fried Portfolio Manager PRIMECAP Management Company March 11, 2002 6 FUND PROFILE As of February 28, 2002 for PRIMECAP Fund This Profile provides a snapshot of the fund's characteristics, compared where appropriate to an unmanaged market index. Key terms are defined on page 8. ========================================================== PORTFOLIO CHARACTERISTICS S&P Fund 500 - ---------------------------------------------------------- Number of Stocks 119 500 Median Market Cap $15.1B $53.9B Price/Earnings Ratio 54.4x 29.7x Price/Book Ratio 2.6x 3.6x Yield 1.4% Investor Shares 0.4% Admiral Shares 0.5% Return on Equity 18.4% 23.8% Earnings Growth Rate 17.8% 13.7% Foreign Holdings 5.5% 1.4% Turnover Rate 15%* -- Expense Ratio -- Investor Shares 0.49%* Admiral Shares 0.42%* Cash Investments 8.2% -- - ------------------------------------------------------------ *Annualized. ============================================= TEN LARGEST HOLDINGS (% of total net assets) FedEx Corp. 4.9% (air transportation) Pharmacia Corp. 4.5 (pharmaceuticals) Adobe Systems, Inc. 3.7 (software) Micron Technology, Inc. 3.4 (electronics) Texas Instruments, Inc. 3.4 (electronics) Phillips Petroleum Co. 2.8 (oil) Guidant Corp. 2.7 (medical) Microsoft Corp. 2.7 (software) Novartis AG ADR 2.5 (pharmaceuticals) General Motors Corp. Class H 2.4 (telecommunications) - ----------------------------------------------- Top Ten 33.0% - ----------------------------------------------- ========================================= ====================== Volatility Measures Investment Focus S&P Market Cap Large Fund 500 Style Growth - ----------------------------------------- ====================== R-Squared 0.65 1.00 Beta 1.07 1.00 - ----------------------------------------- ========================================= =========================================================== Sector Diversification (% of common stocks) S&P Fund 500 - ---------------------------------------------------------- Auto & Transportation 14.7% 2.0% Consumer Discretionary 13.8 13.5 Consumer Staples 0.0 8.0 Financial Services 3.9 19.4 Health Care 12.6 14.6 Integrated Oils 4.6 5.5 Other Energy 2.8 1.5 Materials & Processing 3.8 3.2 Producer Durables 6.8 3.4 Technology 29.2 15.3 Utilities 2.6 7.8 Other 5.2 5.8 - ------------------------------------------------------------ [Picture of Computer] Visit our website www.vanguard.com for regularly updated fund information. 7 GLOSSARY OF INVESTMENT TERMS BETA. A measure of the magnitude of a fund'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 fund 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 INVESTMENTS. The percentage of a fund'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 fund. - -------------------------------------------------------------------------------- EXPENSE RATIO. The percentage of a fund'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 fund's equity assets represented by stocks or American Depositary Receipts of companies based outside the United States. - -------------------------------------------------------------------------------- MEDIAN MARKET CAP. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund's stocks, weighted by the proportion of the fund's assets invested in each stock. Stocks representing half of the fund's assets have market capitalizations above the median, and the rest are below it. - -------------------------------------------------------------------------------- PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book value, per share. For a fund, 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 fund, 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 fund's past returns can be explained by the returns from the overall market (or its benchmark index). If a fund's total returns were precisely synchronized with the overall market's returns, its R-squared would be 1.00. If a fund'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 fund, the weighted average return on equity for the companies whose stocks it holds. - -------------------------------------------------------------------------------- TURNOVER RATE. An indication of the fund's trading activity. Funds 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 fund's income from interest and dividends. The yield, expressed as a percentage of the fund'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. - -------------------------------------------------------------------------------- 8 PERFORMANCE SUMMARY As of February 28, 2002 for PRIMECAP FUND 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. An investor's shares, when redeemed, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. =================================================================== TOTAL INVESTMENT RETURNS (%) August 31, 1991-February 28, 2002 [Bar Chart] YEAR PRIMECAP FUND S&P 500 INDEX ---- ------------- ------------- 1992 -1.4 7.9 1993 30.9 15.2 1994 16.3 5.5 1995 32.3 21.4 1996 7.8 18.7 1997 50.5 40.6 1998 -5 8.1 1999 63.2 39.8 2000 44.1 16.3 2001 -26.4 -24.4 2002* -2.4 -1.7 - -------------------------------------------------------------------- *Six months ended February 28, 2002. Note: See Financial Highlights tables on pages 15 and 16 for dividend and capital gains information. ================================================================================ AVERAGE ANNUAL TOTAL RETURNS for periods ended December 31, 2001 This table presents average annual total returns through the latest calendar quarter--rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information.
Ten Years One Five ------------------------- Inception Date Year Years Capital Income Total - ------------------------------------------------------------------------------------------ PRIMECAP Fund Investor Shares 11/1/1984 -13.35% 17.03% 16.84% 0.72% 17.56% Fee-Adjusted Returns* -14.20 17.03 16.84 0.72 17.56 PRIMECAP Fund Admiral Shares 11/12/2001 7.69** Fee-Adjusted Returns* 6.62** - ------------------------------------------------------------------------------------------ *Reflective of the 1% fee assessed on redemptions of shares purchased on or after April 23, 2001, and held for less than five years. **Returns since inception.
9 FINANCIAL STATEMENTS February 28, 2002 (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, 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. 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, but may differ because certain investments or transactions may be treated differently for financial statement and tax purposes. 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 (91.8%) - -------------------------------------------------------------------------------- AUTO & TRANSPORTATION (13.5%) *(1) FedEx Corp. 15,896,000 $ 919,743 Union Pacific Corp. 6,506,500 394,749 (1) Delta Air Lines, Inc. 9,464,700 326,532 Southwest Airlines Co. 14,459,737 305,245 *(1) AMR Corp. 11,505,800 300,301 *(1) Alaska Air Group, Inc. 2,540,000 78,867 United Parcel Service, Inc. 1,200,000 70,728 (1) Airborne, Inc. 3,400,000 61,472 ArvinMeritor, Inc. 1,800,600 50,759 Fleetwood Enterprises, Inc. 1,238,100 12,356 -------------- 2,520,752 -------------- CONSUMER DISCRETIONARY (12.6%) * General Motors Corp. Class H 30,452,093 449,168 *(1) Robert Half International, Inc. 9,765,100 253,990 Eastman Kodak Co. 7,267,800 228,936 TJX Cos., Inc. 5,600,000 212,632 Lowe's Cos., Inc. 4,508,600 204,014 Target Corp. 4,019,000 168,396 * Best Buy Co., Inc. 2,475,000 166,815 The Walt Disney Co. 4,000,000 92,000 * Liberty Media Corp. 6,600,000 84,480 *(1) The Neiman Marcus Group, Inc. Class A 2,246,800 78,346 Manpower Inc. 1,829,400 61,340 Carnival Corp. 2,230,000 60,857 (1) The McClatchy Co. Class A 1,000,000 55,000 News Corp. Ltd. ADR 2,472,000 53,741 Washington Post Co. Class B 85,000 48,601 The Gap, Inc. 3,500,000 41,895 *(1) The Neiman Marcus Group, Inc. Class B 1,028,811 33,436 Tiffany & Co. 642,000 21,064 * Abercrombie & Fitch Co. 700,000 18,648 NIKE, Inc. Class B 300,000 17,658 RadioShack Corp. 300,000 8,232 Royal Caribbean Cruises, Ltd. 277,000 5,119 * GC Cos. 200,000 43 -------------- 2,364,411 -------------- FINANCIAL SERVICES (3.6%) The Chubb Corp. 2,050,000 154,037 Bank One Corp. 3,049,300 109,287 Wells Fargo Co. 2,000,000 93,800 Jefferson-Pilot Corp. 1,500,000 75,855 Transatlantic Holdings, Inc. 843,750 73,550 American International Group, Inc. 700,000 51,779 Lincoln National Corp. 1,000,000 51,210 Torchmark Corp. 1,200,000 48,228 St. Paul Cos., Inc. 250,000 12,225 -------------- 669,971 -------------- HEALTH CARE (11.5%) Pharmacia Corp. 20,656,981 847,969 * Guidant Corp. 12,071,264 500,957 Novartis AG ADR 12,156,600 461,465 10 - -------------------------------------------------------------------------------- Market Value* Shares (000) - -------------------------------------------------------------------------------- Medtronic, Inc. 3,465,000 $ 154,331 * Biogen, Inc. 2,282,000 121,288 Eli Lilly & Co. 340,000 25,748 * Celera Genomics Group-Applera Corp. 1,073,600 21,687 * Chiron Corp. 445,000 19,322 * Amgen, Inc. 42,000 2,435 -------------- 2,155,202 -------------- INTEGRATED OILS (4.2%) Phillips Petroleum Co. 8,800,000 520,168 Amerada Hess Corp. 3,860,000 267,382 -------------- 787,550 -------------- OTHER ENERGY (2.5%) Anadarko Petroleum Corp. 4,974,600 259,177 (1) Noble Affiliates, Inc. 3,600,000 130,320 (1) Pogo Producing Co. 3,260,000 88,020 -------------- 477,517 -------------- MATERIALS & Processing (3.5%) Potash Corp. of Saskatchewan, Inc. 2,600,000 160,784 Engelhard Corp. 4,757,600 136,876 Sigma-Aldrich Corp. 2,500,000 113,975 Temple-Inland Inc. 1,300,000 72,397 OM Group, Inc. 1,036,400 69,232 (1) Granite Construction Co. 3,150,000 67,819 (1) MacDermid, Inc. 1,701,000 35,296 MeadWestvaco Corp. 24,250 842 -------------- 657,221 -------------- PRODUCER DURABLES (6.3%) Caterpillar, Inc. 5,770,000 320,293 (1) Millipore Corp. 2,820,000 167,435 *(1) Tektronix, Inc. 6,629,600 158,514 Deere & Co. 2,848,500 136,529 * Lexmark International, Inc. 2,744,700 136,439 *(1) Plantronics, Inc. 4,701,500 94,030 Kennametal, Inc. 1,260,000 48,686 Donaldson Co., Inc. 1,080,000 39,042 * Agilent Technologies, Inc. 1,220,480 38,018 * Dionex Corp. 785,600 18,854 Pall Corp. 750,000 14,640 -------------- 1,172,480 -------------- TECHNOLOGY (26.8%) COMMUNICATIONS TECHNOLOGY (3.9%) Motorola, Inc. 21,425,550 278,532 LM Ericsson Telephone Co. ADR Class B 43,488,888 183,523 Nortel Networks Corp. 33,669,300 170,703 * Tellabs, Inc. 6,600,000 67,716 Symbol Technologies, Inc. 3,430,900 29,609 COMPUTER SERVICES SOFTWARE & Systems (10.4%) (1) Adobe Systems, Inc. 19,010,000 691,584 * Microsoft Corp. 8,525,000 497,348 *(1) Sabre Holdings Corp. 9,877,911 434,727 * Rational Software Corp. 9,300,000 172,608 *(1) Citrix Systems, Inc. 9,423,600 142,956 COMPUTER TECHNOLOGY (1.2%) Hewlett-Packard Co. 8,000,000 160,960 Compaq Computer Corp. 6,500,000 65,910 * Evans & Sutherland Computer Corp. 446,000 3,091 ELECTRONICS (1.4%) Sony Corp. ADR 5,500,000 254,100 ELECTRONICS--SEMICONDUCTORS/COMPONENTS (9.0%) * Micron Technology, Inc. 19,837,000 637,760 Texas Instruments, Inc. 21,514,000 631,436 Intel Corp. 12,750,000 364,013 * Xilinx, Inc. 914,900 32,863 * LSI Logic Corp. 1,400,000 20,986 ELECTRONICS TECHNOLOGY (0.3%) *(1) Coherent, Inc. 1,700,000 48,246 SCIENTIFIC EQUIPMENT & Supplies (0.6%) Applied Biosystems Group- Applera Corp. 5,258,600 118,844 -------------- 5,007,515 -------------- UTILITIES (2.4%) (1) UtiliCorp United, Inc. 8,016,820 176,691 * WorldCom Inc.- WorldCom Group 18,812,800 141,472 Sprint Corp. 8,848,800 124,680 WorldCom Inc.-MCI Group 433,912 2,990 -------------- 445,833 -------------- OTHER (4.9%) 914,024 -------------- - -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $13,624,735) 17,172,476 - -------------------------------------------------------------------------------- 11 Face Market Amount Value* PRIMECAP Fund (000) (000) - -------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENTS (8.5%) - -------------------------------------------------------------------------------- Repurchase Agreements Collateralized by U.S. Government Obligations in a Pooled Cash Account 1.89%, 3/1/2002--Note G $ 21,403 $ 21,403 1.89%, 3/1/2002 1,573,742 1,573,742 - -------------------------------------------------------------------------------- TOTAL TEMPORARY CASH INVESTMENTS (Cost $1,595,145) 1,595,145 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.3%) (Cost $15,219,880) 18,767,621 - -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (-0.3%) - -------------------------------------------------------------------------------- Other Assets--Note C 38,586 Liabilities--Note G (98,344) -------------- (59,758) -------------- - -------------------------------------------------------------------------------- NET ASSETS (100%) $18,707,863 ================================================================================ * See Note A in Notes 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. The total market value of investments in affiliated companies was $4,343,325,000. ADR--American Depositary Receipt. ================================================================================ Amount (000) - -------------------------------------------------------------------------------- AT FEBRUARY 28, 2002, NET ASSETS CONSISTED OF: - -------------------------------------------------------------------------------- Paid-in Capital--Note E $15,172,462 Overdistributed Net Investment Income--Note E (6,530) Accumulated Net Realized Losses (5,810) Unrealized Appreciation--Note F 3,547,741 - -------------------------------------------------------------------------------- NET ASSETS $18,707,863 ================================================================================ Investor Shares--Net Assets Applicable to 349,998,678 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $17,582,453 - -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- INVESTOR SHARES $50.24 ================================================================================ Admiral Shares--Net Assets Applicable to 21,599,501 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $1,125,410 - -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- ADMIRAL SHARES $52.10 ================================================================================ 12 STATEMENT OF OPERATIONS This Statement shows the types of income earned by the fund during the reporting period, and details the operating expenses charged to each class of its shares. These expenses directly reduce the amount of investment income available to pay to shareholders as income 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) of investments during the period. ================================================================================ PRIMECAP Fund Six Months Ended February 28, 2002 (000) - -------------------------------------------------------------------------------- INVESTMENT INCOME Income Dividends* $ 60,549 Interest 17,237 Security Lending 176 - -------------------------------------------------------------------------------- Total Income 77,962 - -------------------------------------------------------------------------------- EXPENSES Investment Advisory Fees--Note B 16,220 The Vanguard Group--Note C Management and Administrative Investor Shares 25,152 Admiral Shares 511 Marketing and Distribution Investor Shares 1,328 Admiral Shares 6 Custodian Fees 110 Auditing Fees 6 Shareholders' Reports Investor Shares 132 Admiral Shares 4 Trustees' Fees and Expenses 8 - -------------------------------------------------------------------------------- Total Expenses 43,477 Expenses Paid Indirectly--Note D (480) - -------------------------------------------------------------------------------- Net Expenses 42,997 - -------------------------------------------------------------------------------- NET INVESTMENT INCOME 34,965 - -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) ON INVESTMENT SECURITIES SOLD* (375,116) - -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES (166,076) - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(506,227) ================================================================================ * Dividend income and realized net gain (loss) from affiliated companies were $7,342,000 and $(100,928,000), respectively. 11 STATEMENT OF CHANGES IN NET ASSETS This Statement shows how the fund's total net assets changed during the three 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 net amount shareholders invested in or redeemed from the fund. Distributions and Capital Share Transactions are shown separately for each class of shares.
===================================================================================================== PRIMECAP Fund ------------------------------------------------------ Six Months Year Ended Jan. 1 to Ended Feb. 28, 2002 Aug. 31, 2001 Dec. 31, 2000 (000) (000) (000) - ----------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 34,965 $ 78,126 $ 176,463 Realized Net Gain (Loss) (375,116) 446,817 1,262,961 Change in Unrealized Appreciation (Depreciation) (166,076) (3,468,377) (817,005) - ----------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations (506,227) (2,943,434) 622,419 - ----------------------------------------------------------------------------------------------------- DISTRIBUTIONS Net Investment Income Investor Shares (90,882) (7,122) (166,715) Admiral Shares (3,771) -- -- Realized Capital Gain* Investor Shares (47,192) (138,858) (1,350,981) Admiral Shares (1,920) -- -- - ---------------------------------------------------------------------------------------------------- Total Distributions (143,765) (145,980) (1,517,696) - --------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS--Note H Investor Shares (672,182) 221,740 4,745,524 Admiral Shares 1,135,600 -- -- - --------------------------------------------------------------------------------------------------- Net Increase (Decrease) from Capital Share Transactions 463,418 221,740 4,745,524 - --------------------------------------------------------------------------------------------------- Total Increase (Decrease) (186,574) (2,867,674) 3,850,247 - --------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Period 18,894,437 21,762,111 17,911,864 - --------------------------------------------------------------------------------------------------- End of Period $18,707,863 $18,894,437 $21,762,111 =================================================================================================== *Includes fiscal 2002, 2001, and 2000 short-term gain distributions totaling $49,112,000, $7,121,000, and $129,665,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes.
14 FINANCIAL HIGHLIGHTS This table summarizes the fund's investment results and distributions to shareholders on a per-share basis for each class of shares. It also presents the 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 INVESTOR SHARES
=================================================================================================================== Six Months Ended Jan. 1 to Year Ended December 31, For a Share Outstanding Feb. 28, Aug. 31, --------------------------------------------- Throughout Rach Period 2002 2001 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $51.90 $60.38 $62.07 $47.66 $39.56 $30.08 $26.23 - -------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .094 .21 .52 .26 .34 .21 .19 Net Realized and Unrealized Gain (Loss) on Investments (1.359) (8.28) 2.33 19.07 9.63 10.77 4.59 - -------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.265) (8.07) 2.85 19.33 9.97 10.98 4.78 - -------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.260) (.02) (.49) (.27) (.35) (.20) (.20) Distributions from Realized Capital Gains (.135) (.39) (4.05) (4.65) (1.52) (1.30) (.73) - -------------------------------------------------------------------------------------------------------------------- Total Distributions (.395) (.41) (4.54) (4.92) (1.87) (1.50) (.93) - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $50.24 $51.90 $60.38 $62.07 $47.66 $39.56 $30.08 ==================================================================================================================== TOTAL RETURN* -2.44% -13.39% 4.47% 41.34% 25.44% 36.79% 18.31% ==================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $17,582 $18,894 $21,762 $17,912 $11,210 $8,186 $4,204 Ratio of Total Expenses to Average Net Assets 0.49%** 0.50%** 0.48% 0.51% 0.51% 0.51% 0.59% Ratio of Net Investment Income to Average Net Assets 0.39%** 0.58%** 0.80% 0.50% 0.78% 0.69% 0.69% Portfolio Turnover Rate 15%** 7% 11% 19% 13% 13% 10% =================================================================================================================== *Total returns do not reflect the 1% fee assessed on redemptions of shares purchased on or after April 23, 2001, and held for less than five years. **Annualized.
15 Financial Highlights (continued) PRIMECAP FUND ADMIRAL SHARES ================================================================================ Nov. 12, 2001* to For a Share Outstanding Throughout The Period Feb. 28, 2002 - -------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $50.00 - -------------------------------------------------------------------------------- Investment Operations Net Investment Income .066 Net Realized and Unrealized Gain (Loss) on Investments 2.449 - -------------------------------------------------------------------------------- Total from Investment Operations 2.515 - -------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.275) Distributions from Realized Capital Gains (.140) - -------------------------------------------------------------------------------- Total Distributions (.415) - -------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $52.10 ================================================================================ Total Return** 5.03% ================================================================================ Ratios/Supplemental Data Net Assets, End of Period (Millions) $1,125 Ratio of Total Expenses to Average Net Assets 0.42%Y Ratio of Net Investment Income to Average Net Assets 0.44%Y Portfolio Turnover Rate 15%Y ================================================================================ *Inception. **Total returns do not reflect the 1% fee assessed on redemptions of shares purchased on or after April 23, 2001, and held for less than five years. YAnnualized. 16 NOTES TO FINANCIAL STATEMENTS Vanguard PRIMECAP Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares, Investor Shares and Admiral Shares. Investor Shares are available to any investor who meets the fund's minimum purchase requirements. Admiral Shares were first issued on November 12, 2001, and are designed for investors who meet certain administrative, servicing, tenure, and account-size criteria. Effective in 2001, the fund's fiscal year-end changed from December 31 to August 31. A. The following significant accounting policies conform to generally accepted accounting principles for U.S. 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. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial statement purposes. 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. Fees assessed on redemptions of capital shares are credited to paid-in capital. Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets. B. PRIMECAP Management Company provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. For the period ended February 28, 2002, the investment advisory fee represented an effective annual rate of 0.18% 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. The fund has committed to provide up to 0.40% of its net assets in capital 17 NOTES TO FINANCIAL STATEMENTS (continued) contributions to Vanguard. At February 28, 2002, the fund had contributed capital of $3,476,000 to Vanguard (included in Other Assets), representing 0.02% of the fund's net assets and 3.47% of Vanguard's capitalization. The fund's trustees and officers are also directors and officers of Vanguard. D. The fund has asked its investment adviser to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund's management and administrative expenses. For the six months ended February 28, 2002, these arrangements reduced the fund's expenses by $480,000 (an annual rate of 0.01% of average net assets). E. During the period ended February 28, 2002, the fund purchased $1,651,241,000 of investment securities and sold $1,212,527,000 of investment securities, other than temporary cash investments. The fund used a tax accounting practice to treat a portion of the price of capital shares redeemed during the six months ended February 28, 2002, as distributions from net investment income. Accordingly, the fund has reclassified $4,640,000 from undistributed net investment income to paid-in capital. F. At February 28, 2002, net unrealized appreciation of investment securities for financial reporting and federal income tax purposes was $3,547,741,000, consisting of unrealized gains of $5,252,954,000 on securities that had risen in value since their purchase and $1,705,213,000 in unrealized losses on securities that had fallen in value since their purchase. G. The market value of securities on loan to broker/dealers at February 28, 2002, was $20,245,000, for which the fund held cash collateral of $21,403,000. The fund invests cash collateral received in repurchase agreements, and records a liability for the return of the collateral, during the period the securities are on loan. H. Capital share transactions for each class of shares were:
- ------------------------------------------------------------------------------------------------ Six Months Ended Jan. 1 to Year Ended Feb. 28, 2002 Aug. 31, 2001 Dec. 31, 2000 ------------------------- --------------------- -------------------- Amount Shares Amount Shares Amount Shares (000) (000) (000) (000) (000) (000) - ------------------------------------------------------------------------------------------------ Investor Shares Issued $1,544,417 31,381 $2,224,102 39,306 $6,063,577 89,135 Issued in Lieu of Cash Distributions 134,960 2,676 142,896 2,660 1,484,196 23,985 Redeemed* (2,351,559) (48,101) (2,145,258) (38,352) (2,802,249) (41,264) -------------------------------------------------------------------- Net Increase (Decrease)-- Investor Shares (672,182) (14,044) 221,740 3,614 4,745,524 71,856 -------------------------------------------------------------------- Admiral Shares Issued 1,149,303 21,861 -- -- -- -- Issued in Lieu of Cash Distributions 5,148 98 -- -- -- -- Redeemed* (18,851) (359) -- -- -- -- -------------------------------------------------------------------- Net Increase (Decrease)-- Admiral Shares 1,135,600 21,600 -- -- -- -- - ------------------------------------------------------------------------------------------------
*Net of redemption fees of $371,000 and $120,000 for 2002 and 2001, respectively (fund totals). The fund did not assess redemption fees in 2000. 18 ADVANTAGES OF VANGUARD.COM(TM) Why wait for the mail? You can get fund reports like this one sooner--and reduce the amount of mail you receive from us. Simply choose to view your fund reports online. Consider the benefits of using Vanguard.com. On our website, you can: * Choose to stop receiving fund reports and prospectuses via U.S. mail, and view them online instead. * Request a courtesy e-mail to notify you when a new fund report or prospectus is available. When you receive fund reports and prospectuses online, you lower Vanguard's printing and postage costs--and that helps to reduce the expense ratios of your funds. You will continue to receive confirmations of purchases, redemptions, and other account activity by mail. HOW TO NOTIFY US ABOUT YOUR MAILING PREFERENCES You can easily tell us to stop mailing your fund reports and prospectuses. Just log on to Vanguard.com (or follow the easy steps to register for secure, online access to your accounts) and update your Web Profile. Registered users can also view their account values; download records of recent transactions; research and track the performance of individual securities and funds; buy, exchange, and sell fund shares; and much more. If you invest directly with us, you can also elect to receive all of your account statements online or to have us mail out only your year-end statements, which detail every transaction you make during the year. However, if you invest with us through an employer-sponsored retirement plan or a financial intermediary, some of these options may not be available to you. All Vanguard shareholders can choose to receive our electronic newsletters: ECONOMIC WEEK IN REVIEW, a recap of each week's key economic reports and market activity; and WHAT'S NEW AT VANGUARD, an update on Vanguard investments, services, and online resources, delivered every month and whenever there's breaking news. YOUR ONLINE INFORMATION IS SECURE Vanguard.com uses some of the most secure forms of online communication available, including data encryption and Secure Sockets Layer (SSL) protocol. These technologies provide a high level of security and privacy when you access your account information, initiate online transactions, or send us messages. 19 THE VANGUARD(R) FAMILY OF FUNDS STOCK FUNDS 500 Index Fund Calvert Social Index Fund Capital Opportunity Fund Capital Value Fund Convertible Securities Fund Developed Markets Index Fund Emerging Markets Stock Index Fund Energy Fund Equity Income Fund European Stock Index Fund Explorer(TM) Fund Extended Market Index Fund Global Equity Fund Growth and Income Fund Growth Equity Fund Growth Index Fund Health Care Fund Institutional Developed Markets Index Fund Institutional Index Fund Institutional Total Stock Market Index Fund International Growth Fund International Value Fund Mid-Cap Index Fund Morgan(TM) Growth Fund Pacific Stock Index Fund Precious Metals Fund PRIMECAP Fund REIT Index Fund Selected Value Fund Small-Cap Growth Index Fund Small-Cap Index Fund Small-Cap Value Index Fund Strategic Equity Fund Tax-Managed Capital Appreciation Fund Tax-Managed Growth and Income Fund Tax-Managed International Fund Tax-Managed Small-Cap Fund Total International Stock Index Fund Total Stock Market Index Fund U.S. Growth Fund U.S. Value Fund Utilities Income Fund Value Index Fund Windsor(TM) Fund Windsor(TM) II Fund BALANCED FUNDS Asset Allocation Fund Balanced Index Fund LifeStrategy(R) Conservative Growth Fund LifeStrategy(R) Growth Fund LifeStrategy(R) Income Fund LifeStrategy(R) Moderate Growth Fund STAR(TM) Fund Tax-Managed Balanced Fund Wellesley(R) Income Fund Wellington(TM) Fund BOND FUNDS GNMA Fund High-Yield Corporate Fund High-Yield Tax-Exempt Fund Inflation-Protected Securities Fund Insured Long-Term Tax-Exempt Fund Intermediate-Term Bond Index Fund Intermediate-Term Corporate Fund Intermediate-Term Tax-Exempt Fund Intermediate-Term Treasury Fund Limited-Term Tax-Exempt Fund Long-Term Bond Index Fund Long-Term Corporate Fund Long-Term Tax-Exempt Fund Long-Term Treasury Fund Short-Term Bond Index Fund Short-Term Corporate Fund Short-Term Federal Fund Short-Term Tax-Exempt Fund Short-Term Treasury Fund State Tax-Exempt Bond Funds (California, Florida, Massachusetts, New Jersey, New York, Ohio, Pennsylvania) Total Bond Market Index Fund MONEY MARKET FUNDS Admiral(TM) Treasury Money Market Fund Federal Money Market Fund Prime Money Market Fund State Tax-Exempt Money Market Funds (California, New Jersey, New York, Ohio, Pennsylvania) Tax-Exempt Money Market Fund Treasury Money Market Fund VARIABLE ANNUITY Balanced Portfolio Diversified Value Portfolio Equity Income Portfolio Equity Index Portfolio Growth Portfolio High-Grade Bond Portfolio High Yield Bond Portfolio International Portfolio Mid-Cap Index Portfolio Money Market Portfolio REIT Index Portfolio Short-Term Corporate Portfolio Small Company Growth Portfolio For information about Vanguard funds and our variable annuity plan, including charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482-2600. Read it carefully before you invest or send money. Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500, and 500 are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the funds. Calvert Social Index is a trademark of Calvert Group, Ltd., and has been licensed for use by The Vanguard Group, Inc. Vanguard Calvert Social Index Fund is not sponsored, endorsed, sold, or promoted by Calvert Group, Ltd., and Calvert Group, Ltd., makes no representation regarding the advisability of investing in the fund. For information about Vanguard funds and our variable annuity plan, including charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482-2600. Read it carefully before you invest or send money. THE PEOPLE WHO GOVERN YOUR FUND The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis. A majority of Vanguard's board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. Our independent board members bring distinguished backgrounds in business, academia, and public service to their task of working with Vanguard officers to establish the policies and oversee the activities of the funds. Among board members' responsibilities are selecting investment advisers for the funds; monitoring fund operations, performance, and costs; reviewing contracts; nominating and selecting new trustees/directors; and electing Vanguard officers. ================================================================================ TRUSTEES (Year Elected) John J. Brennan Chairman of the Board, Chief Executive Officer, and (1987) Director/Trustee of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group. Charles D. Ellis The Partners of '63 (pro bono ventures in education); (2001) Senior Adviser to Greenwich Associates (international business-strategy consulting); Successor Trustee of Yale University; Overseer of the Stern School of Business at New York University; Trustee of the Whitehead Institute for Biomedical Research. Rajiv L. Gupta Chairman and Chief Executive Officer of Rohm and Haas Co. (2001) (chemicals); Director of Technitrol, Inc. (electronic components), and Agere Systems (communications components); Board Member of the American Chemistry Council; and Trustee of Drexel University. JoAnn Heffernan Heisen Vice President, Chief Information Officer, and Member of (1998) the Executive Committee of Johnson & Johnson (pharmaceuticals/consumer products); Director of the Medical Center at Princeton and Women's Research and Education Institute. Burton G. Malkiel Chemical Bank Chairman's Professor of Economics, (1977) Princeton University; Director of Vanguard Investment Series plc (Irish investment fund), Vanguard Group (Ireland) Limited (Irish investment management firm), Prudential Insurance Co. of America, BKF Capital (investment management firm), The Jeffrey Co. (holding company), and NeuVis, Inc. (software company). Alfred M. Rankin, Jr. Chairman, President, Chief Executive Officer, and (1993) Director of NACCO Industries,Inc. (forklift trucks/housewares/lignite); Director of Goodrich Corporation(industrial products/aircraft systems and services); Director of the Standard Products Company (a supplier for the automotive industry) until 1998. J. Lawrence Wilson Retired Chairman and Chief Executive Officer of Rohm and (1985) Haas Co. (chemicals); Director of Cummins Inc. (diesel engines), The Mead Corp. (paper products), and AmerisourceBergen Corp. (pharmaceutical distribution); Trustee of Vanderbilt University. ================================================================================ EXECUTIVE OFFICERS R. Gregory Barton Secretary; Managing Director and General Counsel of The Vanguard Group, Inc.; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group. Thomas J. Higgins Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group. More information about the trustees is in the Statement of Additional Information, available from The Vanguard Group. VANGUARD SENIOR MANAGEMENT TEAM
MORTIMER J. BUCKLEY, Information Technology. F. WILLIAM MCNABB, III, Institutional Investor Group. JAMES H. GATELY, Direct Investor Services. MICHAEL S. MILLER, Planning and Development. KATHLEEN C. GUBANICH, Human Resources. RALPH K. PACKARD, Finance. IAN A. MACKINNON, Fixed Income Group. GEORGE U. SAUTER, Quantitative Equity Group. - ------------------------------------------------------------------------------------------------------------ JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996.
[Picture of Ship] [Logo] The Vanguard Group Post Office Box 2600 Valley Forge, PA 19482-2600 ABOUT OUR COVER Our cover photographs were taken by Michael Kahn in September 2000 aboard HMS Rose in New York's Long Island Sound. Mr. Kahn is a renowned photographer--and accomplished sailor--whose work often focuses on seascapes and nautical images. The photographs are copyrighted by Mr. Kahn. All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc., unless otherwise noted. Vanguard, The Vanguard Group, Vanguard.com, Admiral, Explorer, Morgan, LifeStrategy, STAR, Wellesley, Wellington, Windsor, and the ship logo are trademarks of The Vanguard Group, Inc. All other marks are the property of their respective owners. FOR MORE INFORMATION This report is intended for the funds' shareholders. It may not be distributed to prospective investors unless it is preceded or accompanied by the current fund prospectus. To receive a free copy of the prospectus or the Statement of Additional Information, or to request additional information about the funds or other Vanguard funds, please contact us at one of the adjacent telephone numbers or by e-mail through Vanguard.com(TM). Prospectuses may also be viewed online. WORLD WIDE WEB www.vanguard.com FUND INFORMATION 1-800-662-7447 DIRECT INVESTOR ACCOUNT SERVICES 1-800-662-2739 INSTITUTIONAL INVESTOR SERVICES 1-800-523-1036 TEXT TELEPHONE 1-800-952-3335 (C)2002 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. Q592 042002 -----END PRIVACY-ENHANCED MESSAGE-----