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THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATIONS SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P R O S P E C T U S
MARCH 31, 1994
<PAGE>
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A Member of The Vanguard Group
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PROSPECTUS -- MARCH 31, 1994
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT OBJECTIVE AND POLICIES
Vanguard/PRIMECAP Fund, Inc. (the "Fund") is an open-end
diversified investment company that seeks to provide long-
term growth of capital by investing principally in common
stocks. Dividend income is incidental to this objective. The
Fund selects stocks primarily on the basis of above-average
earnings growth potential and quality of management. There is
no assurance that the Fund will achieve its stated objective.
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OPENING AN ACCOUNT
To open a regular (non-retirement) account, please complete
and return the Account Registration Form. If you need
assistance in completing this Form, please call the Investor
Information Department. To open an Individual Retirement
Account (IRA), please use a Vanguard IRA Adoption Agreement.
To obtain a copy of this form, call 1-800-662-7447, Monday
through Friday, from 8:00 a.m. to 8:00 p.m. (Eastern time).
The minimum initial investment is $10,000 ($500 for
Individual Retirement Accounts and Uniform Gifts/Transfers to
Minors Act accounts). The Fund is offered on a no-load basis
(i.e. there are no sales commissions or 12b-1 fees). However,
the Fund incurs expenses for investment advisory, management,
administrative and distribution services.
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ABOUT THIS PROSPECTUS
This Prospectus is designed to set forth concisely the
information you should know about the Fund before you invest.
It should be retained for future reference. A "Statement of
Additional Information" containing additional information
about the Fund has been filed with the Securities and
Exchange Commission. This Statement is dated March 31, 1994
and has been incorporated by reference into this Prospectus.
It may be obtained, without charge, by writing to the Fund or
by calling the Investor Information Department.
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<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page Page Page
<S> <C> <C>
Fund Expenses....................... 2 Investment Limitations.............. 7 SHAREHOLDER GUIDE
Financial Highlights................ 2 Management of the Fund.............. 8 Opening an Account and
Yield and Total Return.............. 3 Investment Adviser.................. 8 Purchasing Shares................. 14
FUND INFORMATION Performance Record.................. 9 When Your Account Will Be
Investment Objective................ 4 Dividends, Capital Gains and Taxes.. 10 Credited.......................... 17
Investment Policies................. 4 The Share Price of the Fund......... 11 Selling Your Shares................. 17
Investment Risks.................... 5 General Information................. 12 Exchanging Your Shares.............. 19
Who Should Invest................... 6 Directors and Officers.............. 13 Important Information
Implementation of Policies.......... 6 About Telephone Transactions...... 20
Transferring Registration........... 21
Other Vanguard Services............. 21
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</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE>
FUND EXPENSES
The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Fund. The expenses
set forth below are for the 1993 fiscal year.
SHAREHOLDER TRANSACTION EXPENSES
------------------------------------------------------
Sales Load Imposed on Purchases................ None
Sales Load Imposed on Reinvested Dividends..... None
Redemption Fees................................ None
Exchange Fees.................................. None
ANNUAL FUND OPERATING EXPENSES
------------------------------------------------------
Management & Administrative Expenses........... 0.24%
Investment Advisory Fees....................... 0.39
12b-1 Fees..................................... None
Other Expenses
Distribution Costs.................... 0.02%
Miscellaneous Expenses................ 0.02
----
Total Other Expenses........................... 0.04
----
TOTAL OPERATING EXPENSES............... 0.67%
====
The purpose of this table is to assist you in understanding
the various costs and expenses that you would bear directly
or indirectly as an investor in the Fund.
The following example illustrates the expenses that you would
incur on a $1,000 investment over various periods, assuming
(1) a 5% annual rate of return and (2) redemption at the end
of each period. As noted in the table above, the Fund charges
no redemption fees of any kind.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$7 $21 $37 $83
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY
BE HIGHER OR LOWER THAN THOSE SHOWN.
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FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding
throughout each period, insofar as they relate to each of the
five years in the period ended December 31, 1993, have been
audited by Price Waterhouse, independent accountants, whose
report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes
thereto, which are incorporated by reference in the Statement
of Additional Information and in this Prospectus, and which
appear, along with the report of Price Waterhouse, in the
Fund's 1993 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see the
Fund's 1993 Annual Report to Shareholders which may be
obtained without charge by writing to the Fund or by calling
our Investor Information Department at 1-800-662-7447.
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, Nov. 1, 1984+
--------------------------------------------------------------------------------- to
1993 1992 1991 1990 1989 1988 1987 1986 1985 Dec. 31, 1984
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD....... $16.19 $15.36 $12.21 $12.82 $11.18 $10.06 $10.64 $ 8.89 $6.56 $6.25
------ ------ ------ ------ ------ ------ ------ ------ ----- -----
INVESTMENT OPERATIONS
Net Investment Income..... .07 .12 .15 .12 .17 .09 .11 .08 .06 .02
Net Realized and
Unrealized Gain (Loss)
on Investments.......... 2.82 1.24 3.83 (.48) 2.24 1.37 (.36) 1.99 2.28 .29
---- ---- ---- ---- ---- ---- ---- ---- ---- -----
TOTAL FROM
INVESTMENT
OPERATIONS.......... 2.89 1.36 3.98 (.36) 2.41 1.46 (.25) 2.07 2.34 .31
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DISTRIBUTIONS
Dividends from Net
Investment Income....... (.07) (.12) (.15) (.13) (.16) (.09) (.10) (.14) (.01) --
Distributions from
Realized Capital Gains.. (.59) (.41) (.68) (.12) (.61) (.25) (.23) (.18) -- --
---- ---- ---- ---- ---- ---- ---- ---- ---- -----
TOTAL DISTRIBUTIONS... (.66) (.53) (.83) (.25) (.77) (.34) (.33) (.32) (.01) --
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NET ASSET VALUE,
END OF PERIOD............. $18.42 $16.19 $15.36 $12.21 $12.82 $11.18 $10.06 $10.64 $8.89 $6.56
=================================================================================================================================
TOTAL RETURN................ 18.03% 8.99% 33.14% (2.79)% 21.61% 14.66% (2.29)% 23.54% 35.76% 4.88%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)................ $791 $646 $486 $305 $279 $186 $165 $133 $54 $2
Ratio of Expenses to Average
Net Assets................ .67% .68% .68% .75% .74% .83% .83% .82% .98% --
Ratio of Net Investment
Income to Average Net
Assets.................... .44% .84% 1.09% 1.06% 1.35% .83% .91% 1.00% 1.44% 2.12%+
Portfolio Turnover Rate..... 16% 7% 24% 11% 15% 26% 21% 15% 14% 51%
<FN>
* Annualized.
Note: Adjusted to reflect a 4-for-1 stock split as of February 23, 1990.
+Commencement of operations.
</TABLE>
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YIELD AND TOTAL RETURN
From time to time the Fund may advertise its yield and
total return. Both yield and total return figures are based
on historical earnings and are not intended to indicate
future performance. The "total return" of the Fund refers to
the average annual compounded rates of return over one-,
five- and ten-year periods or the life of the Fund (as stated
in the advertisement) that would equate an initial amount
invested at the beginning of a stated period to the ending
redeemable value of the investment, assuming the reinvestment
of all dividend and capital gains distributions.
The "30-day yield" of the Fund is calculated by dividing the
net investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and dividend
income earned on the Fund's securities; it is net of all
expenses and all recurring and nonrecurring charges that have
been applied to all shareholder accounts. The yield
calculation assumes that the net investment income earned
over 30 days is compounded monthly for six months and then
<PAGE>
annualized. Methods used to calculate advertised yields are
standardized for all stock and bond mutual funds. However,
these methods differ from the accounting methods used by the
Fund to maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to your own
account or the yiel reported in the Fund's Annual Report
to Shareholders.
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INVESTMENT OBJECTIVE
THE FUND SEEKS TO PROVIDE LONG-TERM CAPITAL GROWTH
The Fund is an open-end diversified investment company. The
objective of the Fund is to provide long-term growth of
capital for its shareholders. Dividend income is incidental
to this objective. There is no assurance that the Fund will
achieve its stated objective.
The investment objective of the Fund is fundamental and so
cannot be changed without the approval of a majority of the
Fund's shareholders.
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INVESTMENT POLICIES
THE FUND INVESTS IN COMMON STOCKS
The Fund will invest primarily in common stocks which offer
favorable prospects for capital growth but little current
income. The Fund is managed without regard to tax
ramifications. Under normal circumstances, common stocks will
represent at least 80% of the Fund's assets.
Common stocks are selected for the Fund on the basis of
several fundamental factors, including above-average growth
in corporate earnings, an above-average level of current
earnings, consistency of earnings growth, and earnings
quality. These factors for a particular security are
evaluated in relationship to stocks in general (as measured,
for example, by the Standard & Poor's 500 Composite Stock
Price Index) and to the individual stock's current market
price. Companies with cyclically depressed earnings may also
be considered as investments for the Fund if, in the opinion
of the Fund's Adviser, such securities are likely to provide
above-average growth in earnings in the future.
Investments of the Fund will generally be listed on a
national securities exchange. The Fund may also invest in
unlisted securities, but generally such securities will trade
in an established over-the-counter market.
Although the Fund seeks to invest principally in common
stocks, the Fund is also authorized to invest in securities
convertible into common stocks (including corporate notes,
bonds and preferred stocks) when, in the opinion of the
Adviser, such convertible securities may be purchased at
favorable prices relative to the common stock itself. The
Fund may also invest in stock index futures and options to a
limited extent and in certain short-term fixed income
securities. See "Implementation of Policies" for a
description of these and other investment practices of the
Fund.
These policies are not fundamental and so may be changed by
the Board of Directors without shareholder approval.
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<PAGE>
INVESTMENT RISKS
INVESTORS ARE EXPOSED TO THE MARKET RISK OF COMMON STOCKS
As a mutual fund investing primarily in common stocks, the
Fund is subject to market risk -- i.e., the possibility that
stock prices in general will decline over short or even
extended periods. The stock market tends to be cyclical, with
periods when stock prices generally rise and periods when
stock prices generally decline.
To illustrate the volatility of stock prices, the following
table sets forth the extremes for U.S. stock market returns
as well as the average return for the period from 1926 to
1993, as measured by the Standard & Poor's 500 Composite
Stock Price Index:
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1993)
OVER VARIOUS TIME PERIODS
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----- ----- ------ ------
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.3 +10.3 +10.6 +10.6
As shown, in the period from 1926 to 1993, the Index has
provided an annual total return (capital appreciation plus
dividend income), on average, of +12.3%. The return in
individual years has varied from a low of -43.3% to a high of
+53.9%, reflecting the short-term volatility of stock prices.
While the average return can be used as a guide for setting
expectations for future stock market returns, it may not be
useful for forecasting future returns in any particular
period, as stock returns are quite volatile from year to
year.
GROWTH STOCKS MAY EXHIBIT GREATER VOLATILITY
Growth stocks, which are the Fund's primary investments, are
likely to be even more volatile in price than the stock
market as a whole. Among the reasons for the greater price
volatility of growth stocks are the small or negligible
dividends paid by such companies and the greater business
uncertainty associated with rapidly growing firms. Besides
exhibiting greater volatility, growth stocks may, to a
degree, fluctuate independently of the broad stock market. As
a result, investors should expect that the Fund may exhibit
potentially greater volatility than stocks in general and may
vary in price independently of the broad stock market.
The chart above should not be viewed as a representation of
future investment performance of the stock market or the
Fund. The illustrated returns represent historical investment
performance, which may be a poor guide to future returns.
Also, stock market indexes such as the S&P 500 are based on
unmanaged portfolios of securities before transaction costs
and other expenses. Such costs will reduce the relative
investment performance of the Fund and other "real world"
portfolios. Finally, the Fund is likely to differ in
portfolio composition from broad stock market averages, and
so the Fund's performance should not be expected to mirror
the returns provided by a specific index.
<PAGE>
THE FUND IS SUBJECT TO MANAGER RISK
The investment adviser manages the Fund according to the
traditional methods of "active" investment management, which
involves the buying and selling of securities based upon
economic, financial and market analysis and investment
judgement. MANAGER RISK refers to the possibility that the
Fund's investment adviser may fail to execute the Fund's
investment strategy effectively. As a result, the Fund may
fail to achieve its stated objective.
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WHO SHOULD INVEST
INVESTORS SEEKING LONG-TERM CAPITAL GROWTH
The Fund is intended for investors who have the
perspective, patience and financial ability to assume short-
term, often substantial investment risk in pursuit of long-
term capital growth. The Fund is intended to be a long-term
investment vehicle and is not designed to provide investors
with a means of speculating on short-term market movements.
Investors who engage in excessive account activity generate
additional costs which are borne by all of the Fund's
shareholders. In order to minimize such costs the Fund has
adopted the following policies. The Fund reserves the right
to reject any purchase request (including exchange purchases
from other Vanguard portfolios) that is reasonably deemed to
be disruptive to efficient portfolio management, either
because of the timing of the investment or previous excessive
trading by the investor. Additionally, the Fund has adopted
exchange privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Fund reserves
the right to suspend the offering of its shares. The Fund's
share price is expected to be volatile. Investors may wish to
reduce the potential risk of investing in the Fund by
purchasing shares on a regular, periodic basis (dollar-cost
averaging), rather than investing in one lump sum.
No assurance can be given that shareholders will be protected
from the risk of loss that is inherent in equity investing.
Investors should not consider the Fund a complete investment
program. Most investors should maintain diversified holdings
of securities with different risk characteristics --
including common stocks, bonds and money market instruments.
Investors may also wish to complement an investment in the
Fund with other types of common stock investments.
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IMPLEMENTATION OF POLICIES
In addition to investing primarily in common stocks, the Fund
follows a number of other investment practices to achieve its
objective.
THE FUND MAY INVEST IN SHORT-TERM FIXED INCOME SECURITIES
Although it normally seeks to remain fully invested in equity
securities, the Fund may invest in certain short-term fixed
income securities. Such securities may be used to invest
uncommitted cash balances, to maintain liquidity to meet
shareholder redemptions, or to take a temporarily defensive
position against potential stock market declines. These
securities include: obligations of the United States
Government and its agencies or instrumentalities; commercial
paper, bank certificates of deposit, and bankers'
acceptances; and repurchase agreements collateralized by
these securities.
THE FUND MAY USE FUTURES CONTRACTS AND OPTIONS
The Fund may utilize equity futures contracts and options to
a limited extent. Specifically, the Fund may enter into
futures contracts provided that not more than 5% of its
assets are required as a futures contract deposit; in
addition, the Fund may enter into futures contracts and
options transactions only to the extent that obligations
<PAGE>
under such contracts or transactions represent not more than
20% of the Fund's assets.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage
involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate
and substantial loss (or gain) to the investor. When
investing in futures contracts, the Fund will segregate cash
or cash equivalents in the amount of the underlying
obligation.
THE FUND MAY LEND ITS SECURITIES
The Fund may lend its investment securities to qualified
institutional investors for either short-term or long-term
purposes of realizing additional income. Loans of securities
by the Fund will be collateralized by cash, letters of
credit, or securities issued or guaranteed by the U.S.
Government or its agencies. The collateral will equal at
least 100% of the current market value of the loaned
securities.
PORTFOLIO TURNOVER IS NOT EXPECTED TO EXCEED 75%
Although it seeks to invest for the long term, the Fund
retains the right to sell securities irrespective of how long
they have been held. It is anticipated that the
annual portfolio turnover rate of the Fund will not exceed
75%. A turnover rate of 75% would occur, for example, if
three-quarters of the Fund's securities were replaced within
one year.
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INVESTMENT LIMITATIONS
THE FUND HAS ADOPTED CERTAIN FUNDAMENTAL
LIMITATIONS
The Fund has adopted certain limitations in an attempt to
reduce its exposure to specific situations. Some of these
limitations are that the Fund will not:
(a) invest more than 25% of its assets in any one industry;
(b) with respect to 75% of the value of its total assets,
purchase the securities of any issuer (except obligations
of the United States Government and its
instrumentalities) if as a result the Fund would hold
more than 10% of the outstanding voting securities of the
issuer, or more than 5% of the value of the Fund's total
assets would be invested in the securities of such
issuer;
(c) borrow money, except that the Fund may borrow from banks
(or through reverse repurchase agreements), for temporary
or emergency (not leveraging) purposes, including the
meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an
amount not exceeding 10% of the value of the Fund's net
assets (including the amount borrowed and the value of
any outstanding reverse repurchase agreements) at the
time the borrowing is made. Whenever borrowings exceed 5%
of the value of the Fund's net assets, the Fund will not
make any additional investments;
(d) pledge, mortgage or hypothecate any of its assets to an
extent greater than 5% of its total assets.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional Information
may be changed only with the approval of a majority of the
Fund's shareholders.
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<PAGE>
MANAGEMENT OF THE FUND
VANGUARD ADMINISTERS AND DISTRIBUTES THE FUND
The Fund is a member of The Vanguard Group of Investment
Companies, a family of 32 investment companies with 78
distinct investment portfolios and total assets in excess of
$120 billion. Through their jointly owned subsidiary, The
Vanguard Group, Inc. ("Vanguard"), the Fund and the other
funds in the Group obtain at cost virtually all of their
corporate management, administrative, shareholder accounting
and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain Vanguard
funds. As a result of Vanguard's unique corporate structure,
the Vanguard funds have costs substantially lower than those
of most competing mutual funds. In 1993, the average expense
ratio (annual costs including advisory fees divided by total
net assets) for the Vanguard funds amounted to approximately
.30% compared to an average of 1.02% for the mutual fund
industry (data provided by Lipper Analytical Services).
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each fund
pays its share of Vanguard's net expenses, which are
allocated among the funds under methods approved by the Board
of Directors (Trustees) of each fund. In addition, each fund
bears its own direct expenses, such as legal, auditing and
custodian fees.
Vanguard also provides distribution and marketing services
to the Vanguard funds. However, each fund bears its share of
the Group's distribution costs. The funds are available on a
no-load basis (i.e., there are no sales commissions or 12b-1
fees).
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INVESTMENT ADVISER
PRIMECAP MANAGES THE FUND'S INVESTMENTS
The Fund employs PRIMECAP Management Company (the "Adviser"),
225 South Lake Street, Pasadena, CA 91101, under an
investment advisory agreement dated September 1, 1984, to
manage the investment and reinvestment of the assets of the
Fund and to review, supervise and administer continuously the
Fund's investment program. The Adviser discharges its
responsibilities subject to the control of the Officers and
Directors of the Fund.
The Adviser is a professional investment advisory firm
which provides services to employee benefit plans, endowment
funds, foundations and other institutions, as well as the
Fund. As of December 31, 1993, the Adviser held discretionary
management authority with respect to over $2.05 billion of
assets. Howard B. Schow, Chairman of the Adviser, serves as
portfolio manager of the Fund, a position he has held since
the Fund's inception in 1984. In managing the Fund's
investments, Mr. Schow is assisted by Theo A. Kolokotrones,
Executive Vice President of the Adviser and assistant
portfolio manager of the Fund.
The Fund pays the Adviser an advisory fee at the end of each
fiscal quarter, calculated by applying a quarterly rate,
based on the following annual percentage rates, to the Fund's
average month-end net assets for the quarter:
<PAGE>
NET ASSETS RATE
----------- ------
First $25 million .750%
Next $225 million .500%
Next $250 million .375%
Over $500 million .250%
The advisory fee rate on the first $25 million of the
Fund's net assets is in excess of the fee paid by many other
mutual funds. For the year ended December 31, 1993, the
investment advisory fee paid by the Fund represented an
effective annual rate of .39% of 1% of average net assets.
The investment advisory agreement with PRIMECAP Management
Company authorizes the Adviser to select brokers or dealers
to execute purchases and sales of the Fund's portfolio
securities, and directs the Adviser to use its best efforts
to obtain the best available price and the most favorable
execution with respect to all transactions. The full range
and quality of brokerage services available are considered in
making these determinations.
The Fund has authorized the Adviser to pay higher commissions
in recognition of brokerage services felt necessary for the
achievement of better execution, provided the Adviser
believes this to be in the best interest of the Fund.
Although the Fund does not market its shares through
intermediary brokers or dealers, the Fund may place orders
with qualified broker-dealers who recommend the Fund to
clients if the Officers of the Fund believe that the quality
of the transaction and the commission are comparable to what
they would be with other qualified brokerage firms.
The Fund's Board of Directors may, without the approval of
shareholders, provide for: (a) the employment of a new
investment adviser pursuant to the terms of a new advisory
agreement either as a replacement for an existing adviser or
as an additional adviser; (b) a change in the terms of an
advisory agreement; and (c) the continued employment of an
existing adviser on the same advisory contract terms where a
contract has been assigned because of a change in control of
the adviser. Any such change will only be made upon not less
than 30 days prior written notice to shareholders of the Fund
which shall include substantially the information concerning
the adviser that would have normally been included in a proxy
statement.
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PERFORMANCE RECORD
The table on page 10 provides investment results for the
Fund for several periods throughout the Fund's lifetime. The
results shown represent "total return" investment
performance, which assumes the reinvestment of all capital
gains and income dividends for the indicated periods. Also
included is comparative information with respect to the
unmanaged Standard & Poor's 500 Composite Stock Price Index,
a widely-used barometer of stock market activity, and the
Consumer Price Index, a statistical measure of changes in the
prices of goods and services. The table does not make any
allowance for federal, state or local income taxes, which
shareholders must pay on a current basis.
<PAGE>
The results shown should not be considered a representation
of the total return from an investment made in the Fund
today. The period shown was a generally favorable one for
common stock investments. This information is provided to
help investors better understand the Fund and may not provide
a basis for comparison with other investments or mutual funds
which use a different method to calculate performance.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN FOR VANGUARD/PRIMECAP FUND
-------------------------------------------------------------------------
FISCAL PERIODS VANGUARD/PRIMECAP S&P 500 CONSUMER
ENDED 12/31/93 FUND INDEX PRICE INDEX
----------- ----------------------------- ------------ ---------------
<S> <C> <C> <C>
1 Year +18.0% +10.1% +2.7%
5 Years +15.2 +14.5 +3.9
Lifetime* +16.3 +15.6 +3.6
<FN>
*November 1, 1984 to December 31, 1993.
</TABLE>
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DIVIDENDS, CAPITAL GAINS AND TAXES
THE FUND WILL PAY DIVIDENDS AND ANY CAPITAL GAINS ANNUALLY
The Fund expects to pay annual dividends from ordinary
income. Capital gains distributions, if any, will also be
made annually. The Fund is managed without regard to tax
ramifications.
In addition, in order to satisfy certain distribution
requirements of the Tax Reform Act of 1986, the Fund may
declare special year-end dividend and capital gains
distributions during December. Such distributions, if
received by shareholders by January 31, are deemed to have
been paid by the Fund and received by shareholders on
December 31 of the prior year.
Dividend and capital gains distributions may be automatically
reinvested or received in cash. See "Choosing a Distribution
Option" for a description of these distribution methods.
The Fund intends to continue to qualify for taxation as a
"regulated investment company" under the Internal Revenue
Code so that it will not be subject to federal income tax to
the extent its income is distributed to shareholders.
Dividends paid by the Fund from net investment income,
whether received in cash or reinvested in additional shares,
will be taxable to shareholders as ordinary income. For
corporate investors, dividends from net investment income
will generally qualify in part for the intercorporate
dividends-received deduction. However, the portion of the
dividends so qualified depends on the aggregate taxable
qualifying dividend income received by the Fund from domestic
(U.S.) sources.
Distributions paid by the Fund from long-term capital
gains, whether received in cash or reinvested in additional
shares, are taxable as long-term capital gains, regardless of
the length of time you have owned shares in the Fund. Capital
gains distributions are made when the Fund realizes net
capital gains on sales of portfolio securities during the
year. The Fund does not seek to realize any particular amount
of capital gains during a year; rather, realized gains are a
byproduct of portfolio management activities. Consequently,
capital gains distributions may be expected to vary
considerably from year to year; there will be no capital
<PAGE>
gains distributions in years when the Fund realizes net
capital losses or in future years to which such losses may be
carried forward.
Note that if you accept capital gains distributions in cash,
instead of reinvesting them in additional shares, you are in
effect reducing the capital at work for you in the Fund.
Also, keep in mind that if you purchase shares in the Fund
shortly before the record date for a dividend or capital
gains distribution, a portion of your investment will be
returned to you as a taxable distribution, regardless of
whether you are reinvesting your distributions or receiving
them in cash.
The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by the Fund.
A CAPITAL GAIN OR LOSS MAY BE REALIZED UPON EXCHANGE OR REDEMPTION
A sale of shares of the Fund is a taxable event and may
result in a capital gain or loss. A capital gain or loss may
be realized from an ordinary redemption of shares or an
exchange of shares between two mutual funds (or two
portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may be
subject to state and local taxes.
The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer
identification regulations. You may avoid this withholding
requirement by certifying on your Account Registration Form
your proper Social Security or Taxpayer Identification Number
and by certifying that you are not subject to backup
withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Fund are exempt from
Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult their
own tax advisers concerning the tax consequences of an
investment in the Fund.
- ------------------------------------------------------------------------------
THE SHARE PRICE OF THE FUND
The Fund's share price or "net asset value" per share is
determined by dividing the total assets of the Fund, less all
liabilities, by the total number of shares outstanding. The
net asset value is calculated as of the close of regular
trading on the New York Stock Exchange (generally 4:00 p.m.
Eastern time) on each day that the Exchange is open for
business.
Market values for securities listed on an exchange are based
upon the latest quoted sales prices for such securities.
Securities which are listed on an exchange but which are not
traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Unlisted securities are
valued at the latest quoted bid price. All prices of listed
securities are taken from the exchange where the security is
primarily traded. Securities may be valued on the basis of
prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
<PAGE>
Short-term instruments (with remaining maturities of 60 days
or less) are valued at cost, which approximates market value.
Securities for which market quotations are not readily
available or which are restricted as to sale (or resale) and
other assets are valued by such methods as the Board of
Directors deems in good faith to reflect fair value.
The Fund's share price can be found daily in the mutual fund
section of most major newspapers under the heading of The
Vanguard Group.
- ------------------------------------------------------------------------------
GENERAL INFORMATION
The Fund is a Maryland corporation. The Fund's Articles of
Incorporation permit the Directors to issue 100,000,000
shares of common stock, with a $.001 par value. The Board of
Directors has the power to designate one or more classes
("Portfolios") of shares of common stock and to classify or
reclassify any unissued shares with respect to such
Portfolios. Currently the Fund is offering one class of
shares.
The shares of the Fund are fully paid and nonassessable; have
no preference as to conversion, exchange, dividends,
retirement or other features; and have no pre-emptive rights.
Such shares have non-cumulative voting rights, meaning that
the holders of more than 50% of the shares voting for the
election of Directors can elect 100% of the Directors if they
so choose. A shareholder is entitled to one vote for each
full share held (and a fractional vote for each fractional
share held).
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on the
removal of a Director or Directors of the Fund if requested
in writing by the holders of not less than 10% of the
outstanding shares of the Fund.
All securities and cash are held by State Street Bank and
Trust Company, Boston, MA. The Vanguard Group, Inc., Valley
Forge, PA, serves as the Fund's Transfer and Dividend
Disbursing Agent. Price Waterhouse serves as independent
accountants for the Fund and will audit its financial
statements annually. The Fund is not involved in any
litigation.
- ------------------------------------------------------------------------------
<PAGE>
DIRECTORS AND OFFICERS
The Officers of the Fund manage its day to day operations and
are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. The following is a list of Directors and Officers
of the Fund and a statement of their present positions and
principal occupations during the past five years. The mailing
address of the Fund's Directors and Officers is Post Office
Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman, Chief
Executive Officer and Director *
Chairman, Chief Executive
Officer, and Director of The
Vanguard Group, Inc., and of each
of the investment companies in
The Vanguard Group; Director of
The Mead Corporation and General
Accident Insurance.
JOHN J. BRENNAN, President &
Director *
President and Director of The
Vanguard Group, Inc., and of each
of the investment companies in
The Vanguard Group.
ROBERT E. CAWTHORN, Director
Chairman and Chief Executive
Officer,
Rhone-Poulenc Rorer, Inc.;
Director of Immune Response Corp.
and Sun Company, Inc.; Trustee,
Universal Health Realty Income
Trust.
BARBARA BARNES HAUPTFUHRER,
Director
Director of The Great Atlantic
and Pacific Tea Company, ALCO
Standard Corp., Raytheon Company,
Knight-Ridder, Inc., and
Massachusetts Mutual Life
Insurance Co.
BRUCE K. MACLAURY, Director
President, The Brookings
Institution; Director of Dayton
Hudson Corporation, American
Express Bank, Ltd. and The St.
Paul Companies, Inc.
BURTON G. MALKIEL, Director
Chemical Bank Chairmen's
Professor of Economics, Princeton
University; Director of
Prudential Insurance Co. of
America, Amdahl Corporation,
Baker Fentress & Co., Jeffrey Co.
and The Southern New England
Telephone Company.
ALFRED M. RANKIN, JR., Director
President, Chief Executive
Officer and Director of NACCO
Industries, Inc.; Director of
BFGoodrich Company, The Standard
Products Company and The Reliance
Electric Company.
JOHN C. SAWHILL, Director
President and Chief Executive
Officer of The Nature
Conservancy; formerly, Director
and Senior Partner, McKinsey &
Co.; and President, New York
University; Director of Pacific
Gas and Electric Company and
NACCO Industries.
JAMES O. WELCH, JR., Director
Retired Chairman of Nabisco
Brands, Inc., retired Vice
Chairman and Director of RJR
Nabisco; Director of TECO Energy,
Inc.
J. LAWRENCE WILSON, Director
Chairman and Director of Rohm &
Haas Company; Director of Cummins
Engine Company, Vanderbilt
University, and Trustee of the
Culver Educational Foundation.
RAYMOND J. KLAPINSKY, Secretary *
Senior Vice President and
Secretary of The Vanguard Group,
Inc.; Secretary of each of the
investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer *
Treasurer of The Vanguard Group,
Inc. and of each of the
investment companies in The
Vanguard Group.
KAREN E. WEST, Controller *
Vice President of The Vanguard
Group, Inc.; Controller of each
of the investment companies in
The Vanguard Group.
---------
*Officers of the Fund are
"interested persons" as defined in
the Investment Company Act of 1940.
- ------------------------------------------------------------------------------
<PAGE>
SHAREHOLDER GUIDE
OPENING AN ACCOUNT AND PURCHASING SHARES
You may open a regular (non-retirement) account, either by
mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the amount you wish to invest. Your purchase must
be equal to or greater than the $3,000 minimum initial
investment ($500 for Uniform Gifts/Transfers to Minors Act
accounts). You must open a new Individual Retirement Account
by mail (IRAs may not be opened by wire) using a Vanguard IRA
Adoption Agreement. Your purchase must be equal to or greater
than the $500 minimum initial investment requirement, but no
more than $2,000 if you are making a regular IRA
contribution. Rollover contributions are generally limited to
the amount withdrawn within the past 60 days from an IRA or
other qualified Retirement Plan. If you need assistance with
the forms or have any questions about this Fund, please call
our Investor Information Department (1-800-662-7447). NOTE:
For other types of account registrations (e.g., corporations,
associations, other organizations, trusts or powers of
attorney), please call us to determine which additional forms
you may need.
Because of the risks associated with common stock
investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide investors
with a means of speculating on short-term market movements.
Consequently, the Fund reserves the right to reject any
specific purchase (and exchange purchase) request. The Fund
also reserves the right to suspend the offering of shares for
a period of time.
The Fund's shares are purchased at the next-determined net
asset value after your investment has been received. The Fund
is offered on a no-load basis (i.e., there are no sales
commissions or 12b-1 fees).
ADDITIONAL INVESTMENTS
Subsequent investments to regular accounts may be made by
mail ($100 minimum), wire ($1,000 minimum), exchange from
another Vanguard Fund account ($100 minimum), or Vanguard
Fund Express. Subsequent investments to Individual Retirement
Accounts may be made by mail ($100 minimum) or exchange
from another Vanguard Fund account. In some instances,
contributions may be made by wire or Vanguard Fund Express.
Please call us for more information on these options.
-------------------------------------------------------------
<PAGE>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount Additional investments
Complete and sign of your should include the Invest-
the enclosed initial investment on the by-Mail remittance form
Account registration form, make attached to your Fund
Registration Form your check payable to The confirmation statements.
Vanguard Group--59, and Please make your check
mail to: payable to The Vanguard
VANGUARD FINANCIAL CENTER Group--59, write your
P.O. BOX 2600 account number on your
VALLEY FORGE, PA 19482 check and, using the
return envelope provided,
mail to the address
indicated on the Invest-
by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests
registered mail, 455 DEVON PARK DRIVE should be mailed to one of
send to: WAYNE, PA 19087 the addresses indicated
for new accounts. Do not
send registered or express
mail to the post office
box address.
-----------------------------------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
Money should be ABA 031000011
wired to: CORESTATES NO 0101 9897
ATTN VANGUARD
BEFORE WIRING VANGUARD/PRIMECAP FUND
Please contact ACCOUNT NUMBER
Client Services ACCOUNT REGISTRATION
(1-800-662-2739)
To assure proper receipt, please be sure your bank includes
the name of the Fund selected, the account number Vanguard
has assigned to you and the eight digit CoreStates number. If
you are opening a new account, please complete the Account
Registration Form and mail it to the "New Account" address
after completing your wire arrangement. NOTE: Federal Funds
wire purchase orders will be accepted only when the Fund and
Custodian Bank are open for business.
-------------------------------------------------------------
PURCHASING BY EXCHANGE (from a Vanguard account)
You may open a new account or purchase additional shares
by making an exchange from an existing Vanguard account.
However, the Fund reserves the right to refuse any exchange
purchase request. Call our Client Services Department (1-800-
662-2739) for assistance. The new account will have the same
registration as the existing account.
-------------------------------------------------------------
PURCHASING BY FUND EXPRESS
Special Purchase and Automatic Investment
The Fund Express Special Purchase option lets you move
money from your bank account to your Vanguard account at your
request. Or if you choose the Automatic Investment option,
money will be moved from your bank account to your Vanguard
account on the schedule (monthly, bimonthly (every other
<PAGE>
month), quarterly or yearly) you select. To establish this
Fund Express option, please provide the appropriate
information on the Account Registration Form. We will send
you a confirmation of your Fund Express enrollment; please
wait three weeks before using the service.
- ------------------------------------------------------------------------------
CHOOSING A DISTRIBUTION OPTION
You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION--Both dividends and capital
gains distributions will be reinvested in additional Fund
shares. This option will be selected for you automatically
unless you specify one of the other options.
2. CASH DIVIDEND OPTION--Your dividends will be paid in cash
and your capital gains will be reinvested in additional
Fund shares.
3. ALL CASH OPTION--Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends and/or
capital gains distributions in another Vanguard Fund account
is available. Please call our Client Services Department (1-
800-662-2739) for information. You may also elect Vanguard
Dividend Express which allows you to transfer your cash
dividends and/or capital gains distributions automatically to
your bank account. Please see "Other Vanguard Services" for
more information.
- ------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK ABOUT THE TIMING OF CAPITAL GAINS AND DIVIDEND
DISTRIBUTIONS BEFORE INVESTING
Under Federal Tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund shareholders.
These distributions are made to all shareholders who own Fund
shares as of the distribution's record date, regardless of
how long the shares have been owned. Purchasing shares just
prior to the record date could have a significant impact on
your tax liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable
capital gain or income dividend distribution, you will be
assessed taxes on the amount of the capital gain and/or
dividend distribution later paid even though you owned the
Fund shares for just a short period of time. (Taxes are due
on the distributions even if the dividend or gain is
reinvested in additional Fund shares.) While the total value
of your investment will be the same after the
distribution--the amount of the distribution will offset the
drop in the NAV of the shares--you should be aware of the tax
implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Fund's annual
capital gains distribution normally occurs in December, while
income dividends are generally paid annually in December. For
additional information on distributions and taxes, see the
section titled "Dividends, Capital Gains and Taxes."
- ------------------------------------------------------------------------------
<PAGE>
IMPORTANT INFORMATION
ESTABLISHING OPTIONAL SERVICES
The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO ADD
SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD
WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR
FURTHER ASSISTANCE.
SIGNATURE GUARANTEES
For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature, and may be obtained from banks, brokers, and any
other guarantor that Vanguard deems acceptable. A SIGNATURE
GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES
Share certificates will be issued upon request. If a
certificate is lost, you may incur an expense to replace it.
BROKER-DEALER PURCHASES
If you purchase shares in Vanguard Funds through a registered
broker-dealer or investment adviser the broker-dealer or
adviser may charge a service fee.
CANCELLING TRADES
The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic, received in
writing or by telephone, once the trade has been received.
- ------------------------------------------------------------------------------
WHEN YOUR ACCOUNT WILL BE CREDITED
Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal Funds
wire or exchange and is received by the close of regular
trading on the New York Stock Exchange (generally 4:00 p.m.
Eastern time) your trade date is the day of receipt. If your
purchase is received after the close of the Exchange, your
trade date is the next business day. Your shares are
purchased at the net asset value determined on your trade
date.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a
foreign check which has been drawn in U.S. dollars and has
been issued by a foreign bank with a U.S. correspondent bank.
- ------------------------------------------------------------------------------
SELLING YOUR SHARES
You may withdraw any portion of the funds in your account by
redeeming shares at any time. You may initiate a request by
writing or by telephoning. Your redemption proceeds are
normally mailed within two business days after the receipt of
the request in Good Order.
SELLING BY MAIL
Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD/PRIMECAP FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request to
Vanguard Financial Center, Vanguard/PRIMECAP Fund, 455 Devon
Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Fund's net asset
value next determined after Vanguard has received all
required documents in Good Order.
-------------------------------------------------------------
<PAGE>
DEFINITION OF GOOD ORDER
GOOD ORDER means that the request includes the following:
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required, in the case of estates, corporations, trusts,
and certain other accounts.
If you have any questions about this definition as it
pertains to your request, please call our Client Services
Department at 1-800-662-2739.
-------------------------------------------------------------
SELLING BY TELEPHONE
To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at 1-
800-662-2739. The proceeds will be sent to you by mail.
Please see "Important Information About Telephone
Transactions."
-------------------------------------------------------------
SELLING BY FUND EXPRESS
Automatic Withdrawal & Special Redemption
If you select the Fund Express Automatic Withdrawal option,
money will be automatically moved from your Vanguard Fund
account to your bank account according to the schedule you
have selected. The Special Redemption option lets you move
money from your Vanguard account to your bank account on your
request. You may elect Fund Express on the Account
Registration Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
-------------------------------------------------------------
SELLING BY EXCHANGE
You may sell shares of the Fund by making an exchange into
another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
-------------------------------------------------------------
IMPORTANT REDEMPTION INFORMATION
Shares purchased by check or Fund Express may not be redeemed
until payment for the purchase is collected, which may take
up to ten calendar days. Your money is invested during the
holding period.
-------------------------------------------------------------
DELIVERY OF REDEMPTION PROCEEDS
Redemption requests received by telephone prior to the close
of regular trading on the New York Stock Exchange (generally
4:00 p.m. Eastern time) are processed on the day of receipt
and the redemption proceeds are normally sent on the
following business day.
Redemption requests received by telephone after the close of
the Exchange are processed on the business day following
receipt and the proceeds are normally sent on the second
business day following receipt.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order.
If you experience difficulty in making a telephone redemption
during periods of drastic economic or market changes, your
redemption request may be made by regular or express mail. It
will be implemented at the net asset value next determined
after your request has been received by Vanguard in Good
Order. The Fund reserves the right to revise or terminate the
telephone redemption privilege at any time.
<PAGE>
The Fund may suspend the redemption right or postpone payment
at times when the New York Stock Exchange is closed or under
any emergency circumstances as determined by the United
States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may at
redemption proceeds in whole or in part by a distribution in
kind of readily marketable securities.
-------------------------------------------------------------
VANGUARD'S AVERAGE COST STATEMENT
If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you redeemed.
Please see "Other Vanguard Services" for additional
information.
-------------------------------------------------------------
MINIMUM ACCOUNT BALANCE REQUIREMENT
Due to the relatively high cost of maintaining smaller
accounts, the Fund reserves the right to redeem shares in any
account that is below the minimum initial investment amount
of $3,000. In addition, if at any time the total investment
does not have a value of at least $1,000, you may be notified
that the value of your account is below the Fund's minimum
account balance requirement. You would then be allowed 60
days to make an additional investment before the account is
liquidated. Proceeds would be promptly paid to the
shareholder. This minimum does not apply to IRAs, other
retirement accounts, and Uniform Gifts/Transfers to Minors
Act accounts.
- ------------------------------------------------------------------------------
EXCHANGING YOUR SHARES
Should your investment goals change, you may exchange your
shares of Vanguard/PRIMECAP Fund for those of other available
Vanguard Funds.
EXCHANGING BY TELEPHONE:
Call Client Services (1-800-662-2739)
When exchanging shares by telephone, please have ready the
Fund name, account number, Social Security Number or Taxpayer
Identification Number listed on the account, and account
address. Requests for telephone exchanges received prior to
the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) are processed at the close
of business that same day. Requests received after the close
of the Exchange are processed the next business day.
TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR FROM VANGUARD
BALANCED INDEX FUND, VANGUARD EXPLORER FUND, VANGUARD INDEX
TRUST, VANGUARD INTERNATIONAL EQUITY INDEX FUND--EUROPEAN AND
PACIFIC PORTFOLIOS, AND VANGUARD QUANTITATIVE PORTFOLIOS. If
you experience difficulty in making a telephone exchange,
your exchange request may be made by regular or express mail,
and it will be implemented at the closing net asset value on
the date received by Vanguard provided the request is
received in Good Order.
-------------------------------------------------------------
EXCHANGING BY MAIL
Please be sure to include on your exchange request the
name and account number of your current Fund, the name of the
Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD/PRIMECAP FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request to
Vanguard Financial Center, Vanguard/PRIMECAP Fund, 455 Devon
Park Drive, Wayne, PA 19087.)
-------------------------------------------------------------
<PAGE>
IMPORTANT EXCHANGE INFORMATION
Before you make an exchange, you should consider the
following:
* Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions you
may have, call our Investor Information Department (1-800-
662-7447).
* An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
* Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
* The shares to be exchanged must be on deposit and not held
in certificate form.
* New accounts are not currently accepted in Vanguard/Windsor
Fund.
* The redemption price of shares redeemed by exchange is
the net asset value next determined after Vanguard has
received the required documentation in Good Order.
* When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange privilege.
However, the Fund reserves the right to revise or terminate
its provisions, limit the amount of or reject any exchange,
as deemed necessary, at any time.
- ------------------------------------------------------------------------------
EXCHANGE PRIVILEGE LIMITATIONS
The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use of
the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive exchange
activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST
30 DAYS APART) from the Fund during any twelve month period.
Notwithstanding these limitations, the Fund reserves the
right to reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management.
- ------------------------------------------------------------------------------
IMPORTANT INFORMATION ABOUT TELEPHONE TRANSACTIONS
The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in writing
that telephone transactions on your account not be
permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions, Vanguard
adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio;
(ii) the 10-digit account number; (iii) the exact name
in which the account is registered; and (iv) the Social
Security or Taxpayer Identification number listed on
the account.
<PAGE>
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record, only.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures have
been followed. Vanguard believes that the security procedures
described above are reasonable and that if such procedures
are followed, you will bear the risk of any losses resulting
from unauthorized or fraudulent telephone transactions on
your account. If Vanguard fails to follow reasonable security
procedures, it may be liable for any losses resulting from
unauthorized or fraudulent telephone transactions on your
account.
- ------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You may transfer the registration of any of your Fund
shares to another person by completing a transfer form and
sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110,
VALLEY FORGE, PA 19482, ATTENTION: TRANSFER DEPARTMENT. The
request must be in Good Order. Before mailing your request,
please call our Client Services Department (1-800-662-2739)
for full instructions.
- ------------------------------------------------------------------------------
OTHER VANGUARD SERVICES
For more information about any of these services, please call
our Investor Information Department at 1-800-662-7447.
STATEMENTS AND REPORTS
Vanguard will send you a confirmation statement each time
you initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market accounts.
You will also receive a comprehensive account statement at
the end of each calendar quarter. The fourth-quarter
statement will be a year-end statement, listing all
transaction activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using the
average cost single category method. This service is
available for most taxable accounts opened since January 1,
1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement in February of the following year.
Please call our Client Services Department (1-800-662-2739)
for information.
Financial reports on the Fund will be mailed to you semi-
annually, according to the Fund's fiscal year-end.
VANGUARD DIRECT DEPOSIT SERVICE
With Vanguard's Direct Deposit Service, most U.S. Government
checks (including Social Security and military pension
checks) and private payroll checks may be automatically
deposited into your Vanguard Fund account. Separate brochures
and forms are available for direct deposit of U.S. Government
and private payroll checks.
VANGUARD AUTOMATIC EXCHANGE SERVICE
Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or to
contribute to an IRA or other retirement plan.
VANGUARD FUND EXPRESS
Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank, savings
and loan association, or a credit union that is a member of
the Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Fund Express
application.
<PAGE>
The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the automatic
options, the minimum amount is $50. The maximum amount that
can be transferred using any of the options is $100,000.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD DIVIDEND EXPRESS
Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) network. You may elect this
service on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Vanguard
Dividend Express application.
VANGUARD TELE-ACCOUNT
Vanguard's Tele-Account is a convenient, automated service
that provides share price, price change and yield quotations
on Vanguard Funds through any TouchTone(TM) telephone. This
free service also lets you obtain information about your
account balance, your last transaction, and your most recent
dividend or capital gains payment. To contact Vanguard's
Tele-Account service, dial 1-800-ON-BOARD (1-800-662-6273). A
free brochure offering detailed operating instructions is
available from our Investor Information Department
(1-800-662-7447).
- ------------------------------------------------------------------------------
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<PAGE>
PART B
VANGUARD/PRIMECAP FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 31, 1994
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated March 31, 1994). To obtain the Prospectus
please call:
Investor Information Department
1-800-662-7447
TABLE OF CONTENTS PAGE
Investment Limitations............................................ 1
Purchase of Shares................................................ 2
Redemption of Shares.............................................. 2
Shareholder Services.............................................. 3
Management of the Fund............................................ 3
Yield and Total Return............................................ 5
Performance Measures.............................................. 5
Investment Advisory Services...................................... 6
Portfolio Transactions............................................ 7
Investment Policies............................................... 8
Financial Statements.............................................. 10
INVESTMENT LIMITATIONS
The following restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority of the outstanding shares of the
Fund (as defined in the Investment Company Act of 1940). The Fund may not
under any circumstances:
1) Invest for the purpose of exercising control of management of any
company;
2) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Fund would hold
more than 10% of the outstanding voting securities of the issuer, or
more than 5% of the value of the Fund's total assets would be invested
in the securities of such issuer;
3) Invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of assets
approved by the Fund's shareholders or otherwise to the extent permitted
by Section 12 of the Investment Company Act of 1940. The Fund will
invest only in investment companies which have investment objectives and
investment policies consistent with those of the Fund;
4) Engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be deemed to
be an underwriter under the Securities Act of 1933, as amended, in
disposing of investment securities;
5) Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(including the Fund's investment in The Vanguard Group, Inc.);
6) Borrow money, except that the Fund may borrow from banks (or through
reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests which
might otherwise require the untimely disposition of securities, in an
amount not exceeding 10% of the value of the Fund's net assets
(including the amount borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of the Fund's net assets, the Fund
will not make any additional investments;
7) Invest in commodities (except that the Fund may invest in futures
contracts and options to the extent that not more than 5% of the Fund's
assets are required as deposit to secure obligations under futures
<PAGE>
contracts and not more than 20% of the Fund's assets are invested in
futures contracts and options at any time) or real estate although the
Fund may purchase and sell securities of companies which deal in real
estate, or interests therein;
8) Purchase securities on margin or sell any securities short except as
specified above in investment limitation No. 7;
9) Purchase or retain any security if (i) one or more Officers, Directors
or partners of the Fund or its investment adviser individually own or
would own, directly or beneficially, more than 1/2 of 1 per cent of the
securities of such issuer, and (ii) in the aggregate such persons own or
would own more than 5% of such securities;
10) Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (6) above) which are either publicly distributed or
customarily purchased by institutional investors, and (ii) by lending
its securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the
Investment Company Act or the Rules and Regulations or interpretations
of the Securities and Exchange Commission thereunder;
11) Pledge, mortgage, or hypothecate any of its assets to an extent greater
than 5% of its total assets; and
12) Invest more than 25% of the value of its total assets in any one
industry.
Notwithstanding these limitations, the Fund may own all or any portion of
the securities of, or make loans to, or contribute to the costs or other
financial requirements of any company which will be wholly owned by the Fund
and one or more other investment companies and is primarily engaged in the
business of providing, at-cost, management, administrative, distribution or
related services to the Fund and other investment companies. See "Management
of the Fund." As a non-fundamental policy, the Fund will not invest more than
5% of its assets in the securities of companies that, together with
predecessors, have been in continuous operation for less than three years.
The above-mentioned limitations are considered at the time investment
securities are purchased.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase and exchange purchase orders
when in the judgment of management such rejection is in the best interest of
the Fund, and (iii) to reduce or waive the minimum for initial and subsequent
investments for certain fiduciary accounts or under circumstances where
certain economies can be achieved in sales of the Fund's shares.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading
on the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods
as the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or l% of the net assets of the
Fund at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Commission. Redemptions in excess of the above
limits may be paid in whole or in part, in investment securities or in cash,
as the Directors may deem advisable; however, payment will be made wholly in
cash unless the Directors believe that economic or market conditions exist
which would make such a practice detrimental to the best interests of the
Fund. If redemptions are paid in investment securities, such securities will
be valued as set forth in the Prospectus under "The Fund's Share Price" and a
redeeming shareholder would normally incur brokerage expenses if he converted
these securities to cash.
No charge is made by the Fund for redemptions. Any redemption may be more or
less than the shareholder's cost depending on the market value of the
securities held by the Fund.
<PAGE>
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged without cost for shares of any open-end
Fund in The Vanguard Group, except any Fund currently not offering shares to
new investors. A shareholder of any open-end Fund in The Vanguard Group may
likewise exchange his(her) shares for shares of the Fund. Exchange requests
may be made either by mail, telephone or telegraph.
Telephone and telegraph exchanges (referred to as "expedited exchanges")
will be accepted only if the account of the shareholder and the registration
of the two accounts are identical. Requests for expedited exchanges received
prior to 4:00 p.m. (Eastern time) will be processed as of the close of
business on the same day. Requests received after 4:00 p.m. will be processed
on the next business day. No expedited exchanges will be accepted into, or
from, Vanguard Explorer Fund, Vanguard Balanced Index Fund, Vanguard Index
Trust, Vanguard International Equity Index Fund--European and Pacific
Portfolios, and Vanguard Quantitative Portfolios. Neither the Fund nor The
Vanguard Group, Inc. ("Vanguard") will be responsible for the authenticity of
exchange instructions received by telephone or telegraph. Expedited exchanges
may also be subject to limitations as to amounts and frequency, and to other
restrictions established by the Board of Directors to assure that such
exchanges do not disadvantage the Fund and its shareholders. Shareholders may
obtain the terms of these limitations, which may be revised at any time, from
Vanguard.
Any such exchange will be based on the respective net asset values of the
shares involved. There are no sales commissions or charges of any kind. Before
making an exchange, a shareholder should consider the investment objectives
and policies of the Fund to be purchased, and other relevant information
(including the minimum initial investment), which can be found in that Fund's
prospectus. A prospectus for any of the Vanguard Funds may be obtained from
Vanguard.
For Federal income tax purposes, an exchange between Funds is a taxable
event and, accordingly, a capital gain or loss may be realized. The exchange
privilege may be modified or terminated at any time, and any of the Vanguard
Funds may limit or discontinue the offering of its shares without notice to
shareholders.
INFORMATION FOR SHAREHOLDERS
Following any purchase or redemption, a shareholder will receive a statement
which reflects all activity during the current calendar year. Each shareholder
will also receive a monthly statement, which includes a valuation as of the
day the statement is prepared.
Semi-annual reports and annual audited reports, which include the list of
investments held by the Fund, will be sent to shareholders.
MANAGEMENT OF THE FUND
OFFICERS AND DIRECTORS
The Fund's officers, under the supervision of the Board of Directors, manage
the day to day operations of the Fund. The Directors, who are elected annually
by shareholders, set broad policies for the Fund and choose its officers. A
list of the Directors and officers of the Fund and a brief statement of their
present positions and principal occupations during the past 5 years is set
forth in the Prospectus. As of April 1, 1992, the Directors and officers of
the Fund owned less than 1% of the Fund's outstanding shares.
Vanguard/PRIMECAP Fund is a member of The Vanguard Group of Investment
Companies. Through their jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other Funds in the Group obtain at cost
virtually all of their corporate management, administrative and distribution
services. Vanguard also provides investment advisory services on an at-cost
basis to certain of the Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment.
Each Fund pays its share of Vanguard's net expenses which are allocated among
the Funds under methods approved by the Board of Directors (Trustees) of each
Fund. In addition, each Fund bears its own direct expenses such as legal,
auditing and custodian fees.
The Fund's officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external
adviser for the Funds.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts of which each of the Funds have invested are adjusted
<PAGE>
from time to time in order to maintain the proportionate relationship between
each Fund's relative net assets and its contribution to Vanguard's capital. At
December 31, 1993, the Fund had contributed capital of $129,000 to Vanguard,
representing 0.6% of Vanguard's capitalization. The Fund's Service Agreement
was amended on May 10, 1993 to provide as follows: (a) each Vanguard Fund may
invest up to .40% of its current assets in Vanguard, and (b) there is no other
limitation on the amount that each Vanguard Fund may contribute to Vanguard's
capitalization.
MANAGEMENT
Corporate management and administrative services include: (1) executive
staff; (2) accounting and financial; (3) legal and regulatory; (4) shareholder
account maintenance; (5) monitoring and control of custodian relationships;
(6) shareholder reporting; and (7) review and evaluation of advisory and other
services provided to the Funds by third parties. During the fiscal year ended
December 31, 1993, the Fund's share of Vanguard's actual net costs of
operation relating to management and administrative services (including
transfer agency) totaled approximately $1,758,000.
DISTRIBUTION
Vanguard provides all distribution and marketing activities for the Funds in
the Group. Vanguard Marketing Corporation, a wholly-owned subsidiary of
Vanguard, acts as Sales Agent for the shares of the Funds in connection with
any sales made directly to investors in the states of Florida, Missouri, New
York, Ohio, Texas and such other states as it may be required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining one
half of those expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as
a Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of average distribution expense rate for the Group, and that
no Fund shall incur annual distribution expenses in excess of 20/100 of 1% of
its average month-end net assets. During the fiscal year ended December 31,
1993, the Fund paid approximately $165,000 of the Group's distribution and
marketing expenses.
INVESTMENT ADVISORY SERVICES
Vanguard also provides Vanguard Money Market Reserves, Vanguard
Institutional Portfolios, Vanguard Admiral Funds, Vanguard Municipal Bond
Fund, the several Portfolios of Vanguard Fixed Income Securities Fund,
Vanguard Institutional Index Fund; Vanguard Bond Index Fund, several
Portfolios of Vanguard Variable Insurance Fund, the Vanguard State Tax-Free
Funds, and Vanguard Balanced Index Fund, Vanguard Index Trust and Vanguard
International Equity Index Fund with investment advisory services. These
services are provided on an at-cost basis from a money management staff
employed directly by Vanguard. The compensation and other expenses of this
staff are paid by the Funds utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS
The Fund pays each Director, who is not also an officer, an annual fee plus
a proportionate share of travel and other expenses incurred in attending Board
meetings. During the year ended December 31, 1993 the Fund paid approximately
$2,000 in fees to its non-interested Directors. Directors who are also
officers receive no remuneration for their services as Directors. The Fund's
officers and employees are paid by Vanguard which, in turn, is reimbursed by
the Fund (and each other Fund in the Group), for its proportionate share of
officers' and employees' salaries and retirement benefits. The Fund's
proportionate share of remuneration paid by Vanguard (and reimbursed by the
Fund) during the fiscal year to all officers of the Fund, as a group, was
approximately $32,421.
Directors who are not Officers are paid an annual fee based on the number of
years of service on the Board upon retirement. The fee is equal to $1,000 for
each year of service (up to fifteen years) and each investment
<PAGE>
company member of the Vanguard Group contributes a proportionate amount to
this fee based on its relative net assets. Under its retirement plan, Vanguard
contributes annually an amount equal to 10% of each eligible officer's annual
compensation plus 5.7% of that part of an eligible officer's compensation
during the year, if any, that exceeds the Social Security Taxable Wage Base
then in effect. Under its thrift plan, all eligible officers are permitted to
make pre-tax contributions in an amount up to 4% of total compensation,
subject to federal tax limitations, which are matched by Vanguard on a 100%
basis. The Fund's proportionate share of retirement contributions made by
Vanguard under its retirement and thrift plans on behalf of all Officers of
the Fund, as a group, during the 1993 fiscal year was approximately $3,682.
YIELD AND TOTAL RETURN
The yield of the Fund for the 30 day period ended December 31, 1993 was
0.33%.
The average annual total return of the Fund for the one and five year
periods ended December 31, 1993 and the period since the Fund's inception (11/
1/84) was +18.03%, +15.15% and +16.30%, respectively. Total return is computed
by finding the average compounded rate of return over the periods set forth
above that would equate an initial amount invested at the beginning of the
period to the ending redeemable value of the investment.
PERFORMANCE MEASURES
Each of the investment company members of the Vanguard Group, including
Vanguard/PRIMECAP Fund, may, from time to time, use one or more of the
following unmanaged indices for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES -- consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government
National Mortgage Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-
weighted, total return index, including approximately 800 issues with
maturities of 12 years or greater.
SHEARSON LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by
the Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND --
SHEARSON LEHMAN CORPORATE (BAA) BOND INDEX --
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND --
STANDARD & POOR'S PREFERRED INDEX --
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
<PAGE>
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers
High Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index, 35% Salomon Brothers High
Grade Bond Index.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that
contains individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated BBB- or better. The Index has a market
value of over $4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX --
is a market weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB- or better with maturities between
5 and 10 years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities greater than 10
years. The index has a market value of over $900 billion.
Advertisements which refer to the use of the fund as a potential investment
for Individual Retirement Accounts may quote a total return based upon
compounding of dividends on which it is presumed no Federal income tax
applies.
In assessing such comparisons of yields, an investor should keep in mind
that the composition of the investments in the reported averages is not
identical to the Fund's Portfolio and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its yield. In addition there can be no assurance that the
Fund will continue its performance as compared to such other averages.
INVESTMENT ADVISORY SERVICES
The Fund employs PRIMECAP Management Company (the "Adviser") under an
investment advisory agreement dated as of May 4, 1989 to manage the investment
and reinvestment of the assets of the Fund and to continuously review,
supervise and administer the Fund's investment program. The Adviser discharges
its responsibilities subject to the control of the officers and Directors of
the Fund.
The Fund pays the Adviser an advisory fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the Fund's average month-end net assets for the quarter:
Net Assets Rate
------ ---
First $25 million.............................................. .750%
Next $225 million.............................................. .500%
Next $250 million.............................................. .375%
Over $500 million.............................................. .250%
During the fiscal years ended December 31, 1991, 1992 and 1993, the Fund
paid investment advisory fees of approximately $1,929,000, $2,407,000 and
$2,854,000, respectively.
The agreement will continue until April 30, 1995 and will be renewable
thereafter for successive one year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including
the affirmative votes of a majority of the Directors who are not parties to
the contract or "interested persons" (as defined in the Investment Company Act
of 1940) of any such party, cast in person at a meeting called for the purpose
of considering such approval. In addition, the question of continuance of the
Agreement may be presented to the shareholders of the Fund; in such event,
such continuance shall be effected only if approved by the affirmative vote of
a majority of the outstanding voting securities of the Fund. The agreement is
automatically terminated if assigned, and may be terminated without penalty at
any time (1) either by vote of
<PAGE>
the Board of Directors of the Fund or by vote of its outstanding voting
securities on 60 days' written notice to the Adviser, or (2) by the Adviser
upon 90 days' written notice to the Fund.
The Fund's Board of Directors may, without the approval of shareholders,
provide for:
A. The employment of a new investment adviser pursuant to the terms of a
new advisory agreement, either as a replacement for an existing adviser or
as an additional adviser.
B. A change in the terms of an advisory agreement.
C. The continued employment of an existing adviser on the same advisory
contract terms where a contract has been assigned because of a change in
control of the adviser.
Any such change will only be made upon not less than 30 days' prior
written notice to shareholders, which shall include the information
concerning the adviser that would have normally been included in a proxy
statement.
Because the Adviser provides only investment advisory services to the Fund
and has no control over the Fund's expenses, the Adviser has not undertaken to
guarantee expenses of the Fund. The officers of the Fund have worked out
alternative arrangements with state authorities which do not require an
expense guarantee.
The Adviser is a California corporation whose outstanding shares are owned
by its directors and officers. The directors of the corporation and the
offices they currently hold are: Howard Bernard Schow, Chairman, Mitchell John
Milias, President and Treasurer, David Kimball Richards, Vice Chairman, and
Theofanis Anastasios Kolokotrones, Senior Vice President and Secretary.
PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes the Adviser (with the approval
of the Fund's Board of Directors) to select the brokers or dealers that will
execute the purchases and sales of portfolio securities for the Fund and
directs the Adviser to use its best efforts to obtain the best available price
and most favorable execution as to all transactions for the Fund. The Adviser
has undertaken to execute each investment transaction at a price and
commission which provides the most favorable total cost or proceeds reasonably
obtainable under the circumstances.
In placing portfolio transactions, the Adviser will use its best judgment to
choose the broker most capable of providing the brokerage services necessary
to obtain best available price and most favorable execution. The full range
and quality of brokerage services available will be considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research and statistical information and
provide other services in addition to execution services to the Fund and/or
the Adviser. The Adviser considers such information useful in the performance
of its obligations under the agreement, but is unable to determine the amount
by which such services may reduce its expenses.
The investment advisory agreement also incorporates the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Directors, the Adviser may cause the Fund to
pay a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the Adviser to the Fund.
Currently, it is the Fund's policy that the Adviser may at times pay higher
commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. The Adviser will only pay such higher
commissions if it believes this to be in the best interest of the Fund. Some
brokers or dealers who may receive such higher commissions in recognition of
brokerage services related to execution of securities transactions are also
providers of research information to the Adviser and/or the Fund. However, the
Adviser has informed the Fund that it will not pay higher commission rates
specifically for the purpose of obtaining research services.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be through such firms.
However, the Fund may place portfolio orders with qualified broker-dealers who
recommend the Fund to other clients, or who act as agent in the purchase of
the Fund's shares for their clients, and may,
<PAGE>
when a number of brokers and dealers can provide comparable best price and
execution on a particular transaction, consider the sale of Fund shares by a
broker or dealer in selecting among qualified broker-dealers.
During the fiscal years ended December 31, 1991, 1992 and 1993, the Fund
paid approximately $231,930, $332,976 and $315,112 in brokerage commissions,
respectively.
Some securities considered for investment by the Fund may also be
appropriate for other clients served by the Adviser. If purchase or sale of
securities consistent with the investment policies of the Fund and one or more
of these other clients serviced by the Adviser are considered at or about the
same time, transactions in such securities will be allocated among the Fund
and such other clients in a manner deemed equitable by the Adviser.
INVESTMENT POLICIES
FUTURES CONTRACTS AND OPTIONS
The Fund may enter into futures contracts, options, and options on futures
contracts for several reasons: to maintain cash reserves while simulating full
investment, to facilitate trading, to reduce transaction costs, or to seek
higher investment returns when a futures contract is priced more attractively
than the underlying equity security or index. Futures contracts provide for
the future sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and at a specified
price. Futures contracts which are standardized as to maturity date and
underlying financial instrument are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act
by the Commodity Futures Trading Commission ("CFTC"), a U.S. Government
Agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are
closed out before the settlement date without the making or taking of
delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold," or "selling" a
contract previously purchased) in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be
changed. Brokers may establish deposit requirements which are higher than the
exchange minimums. Futures contracts are customarily purchased and sold which
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to
and from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations
in the prices of underlying securities. The Fund intends to use futures
contracts only for bonafide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bonafide hedging transactions. The Fund will
only sell futures contracts to protect securities it owns against price
declines or purchase contracts to protect against an increase in the price of
securities it intends to purchase. As evidence of this hedging interest, the
Fund expects that approximately 75% of its futures contract purchases will be
"completed," that is, equivalent amounts of related securities will have been
purchased or are being purchased by the Fund upon sale of open futures
contracts.
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Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While the Fund will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
The Fund will not enter into futures contract transactions to the extent
that, immediately thereafter, the sum of its initial margin deposits on open
contracts exceeds 5% of the market value of the Fund's total assets. In
addition, the Fund will not enter into futures contracts to the extent that
its outstanding obligations to purchase securities under these contracts would
exceed 20% of the Fund's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures contracts may be closed out only on an Exchange which
provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, the Fund would continue to
be required to make daily cash payments to maintain its required margin. In
such situations, if the Fund has insufficient cash, it may have to sell
portfolio securities to meet daily margin requirements at a time when it may
be disadvantageous to do so. In addition, the Fund may be required to make
delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the ability to effectively hedge it.
The Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The principal futures exchanges in the United States are the Board of Trade of
the City of Chicago and the Chicago Mercantile Exchange.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the contract. The Fund also bears
the risk that the Adviser will incorrectly predict market trends. However,
because the futures strategies of the Fund are engaged in only for hedging
purposes, the Adviser does not believe that the Fund is subject to the risks
of loss frequently associated with futures transactions. The Fund would
presumably have sustained comparable losses if, instead of the futures
contract, it had invested in the underlying financial instrument and sold it
after the decline.
Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is
also possible that the Fund could both lose money on futures contracts and
also experience a decline in value of its portfolio securities. There is also
the risk of loss by the fund of margin deposits in the event of bankruptcy of
a broker with whom the Fund has an open position in a futures contract or
related option. Additionally, investments in futures contracts and options
involve the risk that the investment adviser will incorrectly predict stock
market trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades
may be made on that day at a price beyond that limit. The daily limit governs
only price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract
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prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation
of future positions and subjecting some futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS
Except for transactions the Fund has identified as hedging transactions, the
Fund is required for Federal income tax purposes to recognize as income for
each taxable year its net unrealized gains and losses on certain futures
contracts held as of the end of the year as well as those actually realized
during the year. In most cases, any gain or loss recognized with respect to a
futures contract is considered to be 60% long-term capital gain or loss and
40% short-term capital gain or loss, without regard to the holding period of
the contract. Furthermore, sales of futures contracts which are intended to
hedge against a change in the value of securities held by the Fund may affect
the holding period of such securities and, consequently, the nature of the
gain or loss on such securities upon disposition.
In order for the Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income derived with respect to the
Fund's business of investing in securities. In addition, gains realized on the
sale or other disposition of securities held for less than three months must
be limited to less than 30% of the Fund's annual gross income. It is
anticipated that any net gain realized from the closing out of futures
contracts will be considered gain from the sale of securities and therefore be
qualifying income for purposes of the 90% requirement. In order to avoid
realizing excessive gains on securities held less than three months, the Fund
may be required to defer the closing out of futures contracts beyond the time
when it would otherwise be advantageous to do so. It is anticipated that
unrealized gains on futures contracts, which have been open for less than
three months as of the end of the Fund's fiscal year and which are recognized
for tax purposes, will not be considered gains on sales of securities held
less than three months for the purpose of the 30% test.
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Fund's fiscal year) on futures transaction.
Such distributions will be combined with distributions of capital gains
realized on the Fund's other investments and shareholders will be advised on
the nature of the payment.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the year ended December 31, 1993,
including the financial highlights for each of the five years in the period
ended December 31, 1993, appearing in the Vanguard/PRIMECAP Fund's 1993 Annual
Report to Shareholders, and the report thereon of Price Waterhouse,
independent accountants, also appearing therein, are incorporated by reference
in this Statement of Additional Information. The Fund's 1993 Annual Report to
Shareholders is enclosed with this Statement of Additional Information.
