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[LOGO OF VANGUARD PRIMECAP FUND APPEARS HERE]
A Member of The Vanguard Group
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PROSPECTUS--APRIL 28, 1995
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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 Vanguard/PRIMECAP Fund, Inc. (the "Fund") is an open-end di-
OBJECTIVE AND versified investment company that seeks to provide long-term
POLICIES growth of capital by investing principally in common stocks.
Dividend income is incidental to this objective. The Fund se-
lects stocks primarily on the basis of above-average earnings
growth potential and quality of management. There is no as-
surance that the Fund will achieve its stated objective.
Shares of the Fund are neither insured nor guaranteed by any
agency of the U.S. Government, including the FDIC.
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OPENING AN Currently, shares of the Fund are not being offered or sold
ACCOUNT to new investors. Current shareholders of the Fund may make
additional investments of up to $25,000 during calendar year
1995. See "Opening an Account and Purchasing Shares" for ad-
ditional information.
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 This Prospectus is designed to set forth concisely the
PROSPECTUS 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 April 28, 1995
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 OF
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Fund Expenses......................................................... 2
Financial Highlights.................................................. 2
Yield and Total Return................................................ 3
FUND INFORMATION
Investment Objective.................................................. 4
Investment Policies................................................... 4
Investment Risks...................................................... 5
Who Should Invest..................................................... 6
Implementation of
Policies............................................................. 6
Investment Limitations................................................ 7
<CAPTION>
Page
<S> <C>
Management of the
Fund................................................................. 8
Investment Adviser.................................................... 8
Performance Record.................................................... 10
Dividends, Capital
Gains and Taxes...................................................... 10
The Share Price of the
Fund................................................................. 12
General Information................................................... 12
SHAREHOLDER GUIDE
Opening an Account and
Purchasing Shares.................................................... 13
<CAPTION>
Page
<S> <C>
When Your Account Will Be Credited.................................... 16
Selling Your Shares................................................... 16
Exchanging Your Shares................................................ 18
Important Information About Telephone Transactions.................... 19
Transferring Registration............................................. 20
Other Vanguard Services............................................... 20
</TABLE>
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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 AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
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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 1994 fiscal year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
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<S> <C>
Sales Load Imposed on Purchases......................... None
Sales Load Imposed on Reinvested Dividends.............. None
Redemption Fees......................................... None
Exchange Fees........................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
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<S> <C> <C>
Management & Administrative Expenses.................... 0.26%
Investment Advisory Fees................................ 0.34
12b-1 Fees.............................................. None
Other Expenses
Distribution Costs................................ 0.02%
Miscellaneous Expenses............................ 0.02
----
Total Other Expenses.................................... 0.04
----
TOTAL OPERATING EXPENSES.............................. 0.64%
====
</TABLE>
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.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$7 $20 $36 $80
</TABLE>
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 The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period, insofar as they relate to each of the
five years in the period ended December 31, 1994, have been
audited by Price Waterhouse LLP, independent accountants,
whose report thereon was unqualified. This information should
be read in conjunction with the Fund's 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
LLP, in the Fund's 1994 Annual Report to Shareholders. For a
more complete discussion of the Fund's performance, please
see the Fund's 1994 Annual Report to Shareholders, which may
be obtained without charge by writing to the Fund or by call-
ing our Investor Information Department at 1-800-662-7447.
2
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $18.42 $16.19 $15.36 $12.21 $12.82 $11.18 $10.06 $10.64 $ 8.89 $6.56
------ ------ ------ ------ ------ ------ ------ ------ ------ -----
INVESTMENT OPERATIONS
Net Investment Income.. .12 .07 .12 .15 .12 .17 .09 .11 .08 .06
Net Realized and
Unrealized Gain (Loss)
on Investments........ 1.97 2.82 1.24 3.83 (.48) 2.24 1.37 (.36) 1.99 2.28
------ ------ ------ ------ ------ ------ ------ ------ ------ -----
TOTAL FROM INVESTMENT
OPERATIONS........... 2.09 2.89 1.36 3.98 (.36) 2.41 1.46 (.25) 2.07 2.34
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DISTRIBUTIONS
Dividends from Net
Investment Income..... (.12) (.07) (.12) (.15) (.13) (.16) (.09) (.10) (.14) (.01)
Distributions from
Realized Capital
Gains................. (.41) (.59) (.41) (.68) (.12) (.61) (.25) (.23) (.18) --
------ ------ ------ ------ ------ ------ ------ ------ ------ -----
TOTAL DISTRIBUTIONS... (.53) (.66) (.53) (.83) (.25) (.77) (.34) (.33) (.32) (.01)
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NET ASSET VALUE, END OF
YEAR................... $19.98 $18.42 $16.19 $15.36 $12.21 $12.82 $11.18 $10.06 $10.64 $8.89
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TOTAL RETURN............ 11.41% 18.03% 8.99% 33.14% (2.79)% 21.61% 14.66% (2.29)% 23.54% 35.76%
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RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)............. $1,554 $ 791 $ 646 $ 486 $ 305 $ 279 $ 186 $ 165 $ 133 $ 54
Ratio of Expenses to
Average Net Assets..... .64% .67% .68% .68% .75% .74% .83% .83% .82% .98%
Ratio of Net Investment
Income to Average Net
Assets................. .79% .44% .84% 1.09% 1.06% 1.35% .83% .91% 1.00% 1.44%
Portfolio Turnover Rate. 8% 16% 7% 24% 11% 15% 26% 21% 15% 14%
</TABLE>
Note: Adjusted to reflect a 4-for-1 stock split as of February 23, 1990.
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YIELD AND From time to time the Fund may advertise its yield and total
TOTAL RETURN return. Both yield and total return figures are based on his-
torical earnings and are not intended to indicate future per-
formance. The "total return" of the Fund refers to the aver-
age 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.
In accordance with industry guidelines set forth by the U.S.
Securities and Exchange Commission, 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 in-
come includes interest and dividend income earned on the
Fund's securities; it is net of all expenses and all recur-
ring 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
3
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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.
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INVESTMENT The Fund is an open-end diversified investment company. The
OBJECTIVE objective of the Fund is to provide long-term growth of capi-
tal for its shareholders. Dividend income is incidental to
THE FUND SEEKS this objective. There is no assurance that the Fund will
TO PROVIDE achieve its stated objective.
LONG-TERM
CAPITAL GROWTH 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 The Fund will invest primarily in common stocks which offer
POLICIES favorable prospects for capital growth but little current in-
come. The Fund is managed without regard to tax ramifica-
THE FUND tions. Under normal circumstances, common stocks will repre-
INVESTS IN sent at least 80% of the Fund's assets.
COMMON STOCKS
Common stocks are selected for the Fund on the basis of sev-
eral fundamental factors, including above-average growth in
corporate earnings, an above-average level of current earn-
ings, consistency of earnings growth, and earnings quality.
These factors for a particular security are evaluated in re-
lationship 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 in-
vestments for the Fund if, in the opinion of the Fund's Ad-
viser, such securities are likely to provide above-average
growth in earnings in the future.
Investments of the Fund will generally be listed on a na-
tional securities exchange. The Fund may also invest in un-
listed 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 Ad-
viser, such convertible securities may be purchased at favor-
able 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. However,
shareholders would be notified before any material change is
made in the Fund's policies.
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4
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INVESTMENT As a mutual fund investing primarily in common stocks, the
RISKS Fund is subject to market risk--i.e., the possibility that
stock prices in general will decline over short or even ex-
INVESTORS ARE tended periods. The stock market tends to be cyclical, with
EXPOSED TO THE periods when stock prices generally rise and periods when
MARKET RISK OF stock prices generally decline.
COMMON STOCKS
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
1994, as measured by the Standard & Poor's 500 Composite
Stock Price Index:
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1994)
OVER VARIOUS TIME PERIODS
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.2 +10.2 +10.7 +10.7
</TABLE>
As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging 10.7%
for all 10-year periods from 1926 to 1994. The return in in-
dividual 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 peri-
od, as stock returns are quite volatile from year to year.
GROWTH STOCKS Growth stocks, which are the Fund's primary investments, are
MAY EXHIBIT likely to be even more volatile in price than the stock mar-
GREATER ket as a whole. Among the reasons for the greater price vola-
VOLATILITY tility 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, invest-
ors 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. Al-
so, stock market indexes such as the S&P 500 are based on un-
managed portfolios of securities before transaction costs and
other expenses. Such costs will reduce the relative invest-
ment performance of the Fund and other "real world" portfo-
lios. Finally, the Fund is likely to differ in portfolio com-
position from broad stock market averages, and so the Fund's
performance should not be expected to mirror the returns pro-
vided by a specific index.
5
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THE FUND IS The investment adviser manages the Fund according to the tra-
SUBJECT TO ditional methods of "active" investment management, which in-
MANAGER RISK volve the buying and selling of securities based upon econom-
ic, financial and market analysis and investment judgement.
MANAGER RISK refers to the possibility that the Fund's in-
vestment 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 The Fund is intended for investors who have the perspective,
INVEST patience and financial ability to assume short-term, often
substantial investment risk in pursuit of long-term capital
INVESTORS growth. The Fund is intended to be a long-term investment ve-
SEEKING LONG- hicle and is not designed to provide investors with a means
TERM CAPITAL of speculating on short-term market movements. Investors who
GROWTH 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 fol-
lowing policies. The Fund reserves the right to reject any
purchase request (including exchange purchases from other
Vanguard portfolios) that is reasonably deemed to be disrup-
tive 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 privi-
lege limitations as described in the section "Exchange Privi-
lege 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 po-
tential 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 In addition to investing primarily in common stocks, the Fund
OF POLICIES follows a number of other investment practices to achieve its
objective.
THE FUND MAY Although it normally seeks to remain fully invested in equity
INVEST IN securities, the Fund may invest in certain short-term fixed
SHORT-TERM income securities. Such securities may be used to invest un-
FIXED INCOME committed cash balances, to maintain liquidity to meet share-
SECURITIES holder redemptions, or to take a temporarily defensive posi-
tion against potential stock market declines. These securi-
ties include: obligations of the United States Government and
its agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and repur-
chase agreements collateralized by these securities.
THE FUND MAY The Fund may utilize equity futures contracts and options to
USE FUTURES a limited extent. Specifically, the Fund may enter into
CONTRACTS AND futures contracts provided that not more than 5% of its as-
OPTIONS sets are required as a futures contract deposit; in addition,
the
6
<PAGE>
Fund may enter into futures contracts and options transac-
tions only to the extent that obligations under such con-
tracts or transactions represent not more than 20% of the
Fund's assets.
The risk of loss in trading futures contracts in some strate-
gies 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 The Fund may lend its investment securities to qualified in-
LEND ITS stitutional investors for either short-term or long-term pur-
SECURITIES poses 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 Although it seeks to invest for the long term, the Fund re-
TURNOVER IS tains the right to sell securities irrespective of how long
NOT EXPECTED they have been held. It is anticipated that the annual port-
TO EXCEED 75% folio turnover rate of the Fund will not exceed 75%. A turn-
over 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 The Fund has adopted certain limitations in an attempt to re-
LIMITATIONS duce its exposure to specific situations. Some of these limi-
tations are that the Fund will not:
THE FUND HAS (a) invest more than 25% of its assets in any one industry;
ADOPTED
CERTAIN (b) with respect to 75% of the value of its total assets,
FUNDAMENTAL purchase the securities of any issuer (except obligations
LIMITATIONS 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 in-
vestment securities are purchased. The limitations described
here and in the Statement of Addi-
7
<PAGE>
tional Information may be changed only with the approval of a
majority of the Fund's shareholders.
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MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Com-
THE FUND panies, a family of more than 30 investment companies with
more than 80 distinct investment portfolios and total assets
VANGUARD in excess of $130 billion. Through their jointly-owned sub-
ADMINISTERS sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and
AND the other funds in the Group obtain at cost virtually all of
DISTRIBUTES their corporate management, administrative, shareholder ac-
THE FUND counting 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 1994, the aver-
age expense ratio (annual costs including advisory fees di-
vided by total net assets) for the Vanguard funds amounted to
approximately .30% compared to an average of 1.05% for the
mutual fund industry (data provided by Lipper Analytical
Services).
The Officers of the Fund manage its day-to-day operations and
are responsible to the Fund's Board of Directors. The Direc-
tors set broad policies for the Fund and choose its Officers.
A list of the Directors and Officers of the Fund and a state-
ment of their present positions and principal occupations
during the past five years can be found in the Statement of
Additional Information.
Vanguard employs a supporting staff of management and admin-
istrative personnel needed to provide the requisite services
to the funds and also furnishes the funds with necessary of-
fice 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 The Fund employs PRIMECAP Management Company (the "Adviser"),
ADVISER 225 South Lake Street, Pasadena, CA 91101, under an invest-
ment advisory agreement dated September 1, 1984, to manage
PRIMECAP the investment and reinvestment of the assets of the Fund and
MANAGES THE to review, supervise and administer continuously the Fund's
FUND'S investment program. The Adviser discharges its responsibili-
INVESTMENTS ties 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, 1994, the Adviser held discretionary
8
<PAGE>
management authority with respect to over $3.1 billion of as-
sets. 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 invest-
ments, Mr. Schow is assisted by Theo A. Kolokotrones, Execu-
tive 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:
<TABLE>
<CAPTION>
NET ASSETS RATE
----------------- -----
<S> <C>
First $25 million .750%
Next $225 million .500%
Next $250 million .375%
Over $500 million .250%
</TABLE>
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, 1994, the investment
advisory fee paid by the Fund represented an effective annual
rate of .34% 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 secu-
rities, and directs the Adviser to use its best efforts to
obtain the best available price and the most favorable execu-
tion 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 be-
lieves this to be in the best interest of the Fund. Although
the Fund does not market its shares through intermediary bro-
kers or dealers, the Fund may place orders with qualified
broker-dealers who recommend the Fund to clients if the Offi-
cers 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 in-
vestment 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 ad-
visory agreement; and (c) the continued employment of an ex-
isting 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 con-
cerning the adviser that would have normally been included in
a proxy statement.
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9
<PAGE>
PERFORMANCE The table below provides investment results for the Fund for
RECORD 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 div-
idends for the indicated periods. Also included is compara-
tive information with respect to the unmanaged Standard &
Poor's 500 Composite Stock Price Index, a widely-used barome-
ter 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.
The results shown should not be considered a representation
of the total return from an investment made in the Fund to-
day. The period shown was a generally favorable one for com-
mon 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.
AVERAGE ANNUAL RETURN FOR VANGUARD/PRIMECAP FUND
<TABLE>
<CAPTION>
FISCAL PERIODS VANGUARD/PRIMECAP S&P 500 CONSUMER
ENDED 12/31/94 FUND INDEX PRICE INDEX
-------------- ----------------- ------- -----------
<S> <C> <C> <C>
1 Year +11.4% + 1.3% +2.7%
5 Years +13.2 + 8.7 +3.5
10 Years +15.5 +14.3 +3.6
Lifetime* +15.8 +14.2 +3.5
</TABLE>
*November 1, 1984 to December 31, 1994.
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DIVIDENDS, The Fund expects to pay annual dividends from ordinary in-
CAPITAL GAINS come. Capital gains distributions, if any, will also be made
AND TAXES annually. The Fund is managed without regard to tax ramifica-
tions.
THE FUND WILL In addition, in order to satisfy certain distribution re-
PAY DIVIDENDS quirements of the Tax Reform Act of 1986, the Fund may de-
AND ANY clare special year-end dividend and capital gains distribu-
CAPITAL GAINS tions during December. Such distributions, if received by
ANNUALLY 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. Divi-
dends paid by the Fund from net investment income and net
short-term capital gains, whether received in cash or rein-
vested 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 divi-
10
<PAGE>
dends-received deduction. However, the portion of the divi-
dends so qualified depends on the aggregate taxable qualify-
ing 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 capi-
tal 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 by-
product of portfolio management activities. Consequently,
capital gains distributions may be expected to vary consider-
ably from year to year; there will be no capital gains dis-
tributions in years when the Fund realizes net capital loss-
es.
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. Al-
so, 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 re-
turned 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 A sale of shares of the Fund is a taxable event and may re-
OR LOSS MAY BE sult in a capital gain or loss. A capital gain or loss may be
REALIZED UPON realized from an ordinary redemption of shares or an exchange
EXCHANGE OR of shares between two mutual funds (or two portfolios of a
REDEMPTION mutual fund).
Dividend distributions, capital gains distributions, and cap-
ital 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 share-
holders who have not complied with IRS taxpayer identifica-
tion regulations. You may avoid this withholding requirement
by certifying on your Account Registration Form your proper
Social Security or Employer Identification number and by cer-
tifying that you are not subject to backup withholding.
The Fund has obtained a Certificate of Authority to do busi-
ness as a foreign corporation in Pennsylvania and does busi-
ness 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 in-
vestment in the Fund.
- --------------------------------------------------------------------------------
11
<PAGE>
THE SHARE The Fund's share price or "net asset value" per share is de-
PRICE OF THE termined by dividing the total assets of the Fund, less all
FUND 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 busi-
ness.
Market values for securities listed on an exchange are based
upon the latest quoted sales prices for such securities. Se-
curities 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 be-
lieved to reflect the fair market value of such securities.
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 avail-
able 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 The Fund is a Maryland corporation. The Fund's Articles of
INFORMATION Incorporation permit the Directors to issue 150,000,000
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 Portfo-
lios. 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, retire-
ment 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 elec-
tion 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 ap-
plicable 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 out-
standing 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 Dis-
bursing Agent. Price Waterhouse LLP serves as independent ac-
countants for the Fund and will audit its financial state-
ments annually. The Fund is not involved in any litigation.
- --------------------------------------------------------------------------------
12
<PAGE>
SHAREHOLDER GUIDE
OPENING AN Currently, shares of the Fund are not being offered or sold
ACCOUNT AND to new investors. Current shareholders of the Fund may make
PURCHASING additional investments, but the aggregate amount of such in-
SHARES vestments made during the calendar year may not exceed
$25,000 (not counting investments prior to March 7, 1995).
Because of the risks associated with common stock invest-
ments, the Fund is intended to be a long-term investment ve-
hicle 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 com-
missions or 12b-1 fees).
ADDITIONAL Subsequent investments to regular accounts may be made by
INVESTMENTS mail ($100 minimum), wire ($1,000 minimum), exchange from an-
other Vanguard Fund account ($100 minimum), or Vanguard Fund
Express. Subsequent investments to Individual Retirement Ac-
counts may be made by mail ($100 minimum) or exchange from
another Vanguard Fund account. In some instances, contribu-
tions to IRAs may be made by wire or Vanguard Fund Express.
Please call us for more information on these options.
- --------------------------------------------------------------------------------
ADDITIONAL Additional investments should include the Invest-by-Mail re-
INVESTMENTS TO mittance form attached to your Fund confirmation statements.
EXISTING Please make your check payable to The Vanguard Group--59,
ACCOUNTS write your account number on your check and, using the return
envelope provided, mail to the address indicated on the In-
PURCHASING BY vest-by-Mail Form.
MAIL
If you do not have a return envelope, mail your request to
Vanguard Financial Center, P.O. Box 2600, Valley Forge, PA
19482. Do not send registered or express mail to this post
office box address. Instead, send it to Vanguard Financial
Center, 455 Devon Park Drive, Wayne, PA 19087.
--------------------------------------------------------------
13
<PAGE>
PURCHASING BY CORESTATES BANK, N.A.
WIRE Money ABA 031000011
should be CORESTATES NO 0101 9897
wired to: ATTN VANGUARD
VANGUARD/PRIMECAP FUND
BEFORE WIRING ACCOUNT NUMBER
Please contact ACCOUNT REGISTRATION
Client
Services (1-
800-662-2739)
To assure proper receipt, please be sure your bank includes
the Fund name, the account number Vanguard has assigned to
you and the eight-digit CoreStates number. NOTE: Federal
Funds wire purchase orders will be accepted only when the
Fund and Custodian Bank are open for business.
--------------------------------------------------------------
PURCHASING BY Current shareholders may purchase additional shares of the
EXCHANGE (from Fund by making an exchange from an existing Vanguard account.
a Vanguard However, the Fund reserves the right to refuse any exchange
account) purchase request. Call our Client Services Department (1-800-
662-2739) for assistance.
--------------------------------------------------------------
PURCHASING BY The Fund Express Special Purchase option lets you move money
FUND EXPRESS from your bank account to your Vanguard account on an "as
needed" basis. Or if you choose the Automatic Investment op-
Special tion, money will be moved automatically from your bank ac-
Purchase and count to your Vanguard account on the schedule (monthly, bi-
Automatic monthly [every other month], quarterly or yearly) you select.
Investment To establish these Fund Express options, please call 1-800-
662-7447 for a Fund Express application. We will send you a
confirmation of your Fund Express enrollment after you com-
plete and return this form; please wait three weeks before
using the service.
- --------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 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 distribu-
tions will be paid in cash.
You may change your option by calling our Client Services De-
partment (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
14
<PAGE>
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 distribu-
tions automatically to your bank account. Please see "Other
Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION Under federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund shareholders.
INVESTORS These distributions are made to all shareholders who own Fund
SHOULD ASK shares as of the distribution's record date, regardless of
ABOUT THE how long the shares have been owned. Purchasing shares just
TIMING OF prior to the record date could have a significant impact on
CAPITAL GAINS your tax liability for the year. For example, if you purchase
AND DIVIDEND shares immediately prior to the record date of a sizable cap-
DISTRIBUTIONS ital gain or income dividend distribution, you will be as-
BEFORE sessed taxes on the amount of the capital gain and/or divi-
INVESTING dend 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 in-
vestment will be the same after the distribution--the amount
of the distribution will offset the drop in the net asset
value of the shares--you should be aware of the tax implica-
tions the timing of your purchase may have.
Prospective investors should, therefore, inquire about poten-
tial distributions before investing. The Fund's annual divi-
dend and capital gains distributions normally occur in Decem-
ber. For additional information on distributions and taxes,
see the section titled "Dividends, Capital Gains and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
INFORMATION your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO ADD
ESTABLISHING SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD
OPTIONAL WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
SERVICES CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FUR-
THER ASSISTANCE.
SIGNATURE For our mutual protection, we may require a signature guaran-
GUARANTEES tee 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 certifi-
cate is lost, you may incur an expense to replace it.
BROKER-DEALER If you purchase shares in Vanguard Funds through a registered
PURCHASES broker-dealer or investment adviser the broker-dealer or ad-
viser may charge a service fee.
CANCELLING The Fund will not cancel any trade (e.g., a purchase, ex-
TRADES change or redemption) believed to be authentic, received in
writing or by telephone, once the trade request has been re-
ceived.
15
<PAGE>
ELECTRONIC If you would prefer to receive a prospectus for the Fund or
PROSPECTUS any of the Vanguard Funds in an electronic format, please
DELIVERY call 1-800-231-7870 for additional information. If you elect
to do so, you may also receive a paper copy of the prospec-
tus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR Your trade date is the date on which your account is credit-
ACCOUNT WILL ed. If your purchase is made by check, Federal Funds wire or
BE CREDITED 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. Vanguard will
not accept third party checks to open an account. Please be
sure your purchase check is made payable to the Vanguard
Group.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a for-
eign check which has been drawn in U.S. dollars and has been
issued by a foreign bank with a U.S. correspondent bank. The
name of the U.S. correspondent bank must be printed on the
face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account by
SHARES redeeming shares at any time. You may initiate a request by
writing or by telephoning. Your redemption proceeds are nor-
mally mailed within two business days after the receipt of
the request in Good Order.
SELLING BY Requests should be mailed to VANGUARD FINANCIAL CENTER, VAN-
MAIL GUARD/ PRIMECAP FUND, P.O. BOX 1120, VALLEY FORGE, PA 19482.
(For express or registered mail, send your request to Van-
guard 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 re-
quired documents in Good Order.
--------------------------------------------------------------
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER
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 regis-
tered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be re-
quired, in the case of estates, corporations, trusts, and
certain other accounts.
6. Any certificates you are holding for the account.
IF YOU HAVE ANY QUESTIONS ABOUT THIS DEFINITION AS IT PER-
TAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DE-
PARTMENT AT 1-800-662-2739.
--------------------------------------------------------------
16
<PAGE>
SELLING BY To sell shares by telephone, you or your pre-authorized rep-
TELEPHONE resentative 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 If you select the Fund Express Automatic Withdrawal option,
FUND EXPRESS money will be automatically moved from your Vanguard Fund ac-
count to your bank account according to the schedule you have
Automatic selected. The Special Redemption option lets you move money
Withdrawal & from your Vanguard account to your bank account on an "as
Special needed" basis. To establish these Fund Express options,
Redemption please call 1-800-662-7447 for a Fund Express application. We
will send you a confirmation of your Fund Express enrollment
after you complete and return this form; please wait three
weeks before using the service.
--------------------------------------------------------------
SELLING BY You may sell shares of the Fund by making an exchange into
EXCHANGE another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
--------------------------------------------------------------
IMPORTANT Shares purchased by check or Fund Express may be redeemed at
REDEMPTION any time. However, your redemption proceeds will not be paid
INFORMATION until payment for the purchase is collected, which may take
up to ten calendar days.
--------------------------------------------------------------
DELIVERY OF Redemption requests received by telephone prior to the close
REDEMPTION of regular trading on the New York Stock Exchange (generally
PROCEEDS 4:00 p.m. Eastern time) are processed on the day of receipt
and the redemption proceeds are normally sent on the follow-
ing business day.
Redemption requests received by telephone after the close of
the Exchange are processed on the business day following re-
ceipt and the proceeds are normally sent on the second busi-
ness 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 Or-
der. The Fund reserves the right to revise or terminate the
telephone redemption privilege at any time.
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 detri-
mental to the best interests of the Fund's remaining share-
holders 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.
--------------------------------------------------------------
17
<PAGE>
VANGUARD'S If you make a redemption from a qualifying account, Vanguard
AVERAGE COST will send you an Average Cost Statement which provides you
STATEMENT with the tax basis of the shares you redeemed. Please see
"Other Vanguard Services" for additional information.
--------------------------------------------------------------
MINIMUM Due to the relatively high cost of maintaining smaller ac-
ACCOUNT counts, the Fund reserves the right to redeem shares in any
BALANCE account that is below the minimum initial investment amount
REQUIREMENT of $3,000. If at any time your total investment does not have
a value of at least $3,000, you may be notified that your ac-
count is below the Fund's minimum account balance require-
ment. You would then be allowed 60 days to make an additional
investment before the account is liquidated. Proceeds would
be promptly paid to the registered shareholder. (This minimum
does not apply to IRAs, other retirement accounts, and Uni-
form Gifts/Transfers to Minors Act accounts.)
The Fund's minimum account balance requirement will not apply
if your account falls below $3,000 solely as a result of de-
clining markets (i.e., a decline in a Fund's net asset val-
ue).
- --------------------------------------------------------------------------------
EXCHANGING Should your investment goals change, you may exchange your
YOUR SHARES shares of Vanguard/PRIMECAP Fund for those of other available
Vanguard Funds.
EXCHANGING BY When exchanging shares by telephone, please have ready the
TELEPHONE Fund name, account number, Social Security Number or Employer
Identification number listed on the account and exact name
Call Client and address in which the account is registered. Only the reg-
Services (1- istered shareholder, or his or her pre-authorized representa-
800-662-2739) tive, may complete such an exchange. 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 INDEX TRUST,
VANGUARD INTERNATIONAL EQUITY INDEX FUND AND VANGUARD QUANTI-
TATIVE PORTFOLIOS. If you experience difficulty in making a
telephone exchange, your exchange request may be made by reg-
ular or express mail, and it will be implemented at the clos-
ing net asset value on the date received by Vanguard provided
the request is received in Good Order.
--------------------------------------------------------------
EXCHANGING BY Please be sure to include on your exchange request the name
MAIL 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 Cen-
ter, Vanguard/PRIMECAP Fund, 455 Devon Park Drive, Wayne, PA
19087.)
--------------------------------------------------------------
18
<PAGE>
IMPORTANT Before you make an exchange, you should consider the follow-
EXCHANGE ing:
INFORMATION
. Please read the Fund's prospectus before making an ex-
change. 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 the Fund or
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.
The exchange privilege is only available in states in which
the shares of the Fund are registered for sale. The Fund's
shares are currently registered for sale in all 50 states and
the Fund intends to maintain such registration.
- --------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to prevent excessive use of
the exchange privilege that may potentially disrupt the man-
agement of the Fund and increase transaction costs, the Fund
has established a policy of limiting excessive exchange ac-
tivity.
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 pur-
chases from other Vanguard portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire redemptions)
INFORMATION and exchanges by telephone is automatically established on
ABOUT your account unless you request in writing that telephone
TELEPHONE transactions on your account not be permitted.
TRANSACTIONS
To protect your account from losses resulting from unautho-
rized or fraudulent telephone instructions, Vanguard adheres
to the following security procedures:
19
<PAGE>
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 and address used
in the registration; and (iv) the Social Security or Employer
Identification number listed on the account.
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 au-
thenticity of transaction instructions received by telephone,
provided that reasonable security procedures have been fol-
lowed. Vanguard believes that the security procedures de-
scribed 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 ac-
count.
- --------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund shares
REGISTRATION 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.
- --------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each time you
REPORTS 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 state-
ment will be a year-end statement, listing all transaction
activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the aver-
age cost of shares redeemed from your account, using the av-
erage 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 Van-
guard account may expect to receive their Average Cost State-
ment in February of the following year. Please call our Cli-
ent Services Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you semi-an-
nually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please call
SERVICES our Investor Information Department at 1-800-662-7447.
VANGUARD With Vanguard's Direct Deposit Service, most U.S. Government
DIRECT DEPOSIT checks (including Social Security and military pension
SERVICE checks) and private payroll checks may be automatically de-
posited into your Vanguard Fund account. Separate brochures
and forms are available for direct deposit of U.S. Government
and private payroll checks.
20
<PAGE>
VANGUARD Vanguard's Automatic Exchange Service allows you to move
AUTOMATIC money automatically among your Vanguard Fund accounts. For
EXCHANGE instance, the service can be used to "dollar cost average"
SERVICE from a money market portfolio into a stock or bond fund or to
contribute to an IRA or other retirement plan. Please contact
our Client Services Department at 1-800-662-2739 for addi-
tional information.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money between
EXPRESS 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.
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 re-
demptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific Van-
guard Funds. For more information, please refer to the Van-
guard Fund Express brochure.
VANGUARD Vanguard's Dividend Express allows you to transfer your divi-
DIVIDEND dends and/or capital gains distributions automatically from
EXPRESS your Fund account, one business day after the Fund's payable
date, to your account at a bank, savings and loan associa-
tion, 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 Informa-
tion Department (1-800-662-7447) for a Vanguard Dividend Ex-
press application.
VANGUARD Vanguard's Tele-Account is a convenient, automated service
TELE-ACCOUNT that provides share price, price change and yield quotations
on Vanguard Funds through any TouchToneTM telephone. This
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 brochure of-
fering detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
21
<PAGE>
[LOGO OF VANGUARD PRIMECAP FUND APPEARS HERE]
- ---------------
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
[LOGO OF VANGUARD PRIMECAP FUND APPEARS HERE]
P R O S P E C T U S
APRIL 28, 1995
[LOGO OF VANGUARD GROUP OF INVESTMENT COMPANIES APPEARS HERE]
PO59
<PAGE>
PART B
VANGUARD/PRIMECAP FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 28, 1995
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated April 28, 1995). To obtain the Prospectus
please call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Limitations..................................................... B-1
Purchase of Shares......................................................... B-2
Redemption of Shares....................................................... B-2
Management of the Fund..................................................... B-4
Yield and Total Return..................................................... B-7
Performance Measures....................................................... B-7
Investment Advisory Services............................................... B-9
Portfolio Transactions..................................................... B-10
Investment Policies........................................................ B-11
Financial Statements....................................................... B-14
</TABLE>
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 "1940 Act")). The
Fund may not under any circumstances:
1) Invest for the purpose of exercising control of management of any com-
pany;
2) With respect to 75% of the value of its total assets, purchase the se-
curities 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 ap-
proved by the Fund's shareholders or otherwise to the extent permitted by
Section 12 of the 1940 Act. The Fund will invest only in investment compa-
nies which have investment objectives and investment policies consistent
with those of the Fund;
4) Engage in the business of underwriting securities issued by other per-
sons, 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.);
B-1
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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 other-
wise require the untimely disposition of securities, in an amount not ex-
ceeding 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 invest-
ments;
7) Invest in commodities (except that the Fund may invest in futures con-
tracts and options to the extent that not more than 5% of the Fund's assets
are required as deposit to secure obligations under futures 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 there-
in;
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 securi-
ties 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 ob-
ligations (including repurchase agreements, subject to the limitation de-
scribed 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 in-
dustry.
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 fi-
nancial 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 busi-
ness of providing, at-cost, management, administrative, distribution or re-
lated 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 secu-
rities are purchased.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the offer-
ings 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 in-
vestments 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
B-2
<PAGE>
determined by the Securities and Exchange Commission (the "Commission"), (ii)
during any period when an emergency exists as defined by the rules of the Com-
mission 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 as-
sets, 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 redemp-
tions 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 Direc-
tors 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 redemp-
tions are paid in investment securities, such securities will be valued as set
forth in the Prospectus under "The Share Price of the Fund" and a redeeming
shareholder would normally incur brokerage expenses if he converted these se-
curities 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 securi-
ties held by the Fund.
B-3
<PAGE>
MANAGEMENT OF THE FUND
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 Of-
ficers is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman, Chief JOHN C. SAWHILL, Director
Executive Officer and Director* President and Chief Executive
Chairman, Chief Executive Officer, Officer of The Nature Conservancy;
and Director of The Vanguard Group, formerly, Director and Senior
Inc., and of each of the investment Partner, McKinsey & Co.; and
companies in The Vanguard Group; President, New York University;
Director of The Mead Corporation Director of Pacific Gas and
and General Accident Insurance. Electric Company and NACCO
Industries.
JOHN J. BRENNAN, President & JAMES O. WELCH, JR., Director
Director* Retired Chairman of Nabisco Brands,
President and Director of The Inc., retired Vice Chairman and
Vanguard Group, Inc., and of each Director of RJR Nabisco; Director
of the investment companies in The of TECO Energy, Inc.
Vanguard Group.
J. LAWRENCE WILSON, Director
ROBERT E. CAWTHORN, Director Chairman and Chief Executive
Chairman of Rhone-Poulenc Rorer, Officer of Rohm & Haas Company;
Inc.; Director of Sun Company, Inc. Director of Cummins Engine Company,
Trustee of Vanderbilt University
and the Culver Educational
BARBARA BARNES HAUPTFUHRER, Director Foundation.
Director of The Great Atlantic and
Pacific Tea Company, ALCO Standard RAYMOND J. KLAPINSKY, Secretary*
Corp., Raytheon Company, Knight- Senior Vice President and Secretary
Ridder, Inc., and Massachusetts of The Vanguard Group, Inc.;
Mutual Life Insurance Co. and Secretary of each of the investment
Trustee Emerita of Wellesley companies in The Vanguard Group.
College.
BRUCE K. MACLAURY, Director RICHARD F. HYLAND, Treasurer*
President, The Brookings Treasurer of The Vanguard Group,
Institution; Director of American Inc. and of each of the investment
Express Bank, Ltd., The St. Paul companies in The Vanguard Group.
Companies, Inc. and Scott Paper
Company.
BURTON G. MALKIEL, Director KAREN E. WEST, Controller
Chemical Bank Chairman's Professor Vice President of The Vanguard
of Economics, Princeton University; Group, Inc.; Controller of each of
Director of Prudential Insurance the investment companies in The
Co. of America, Amdahl Corporation, Vanguard Group.
Baker Fentress & Co., The Jeffrey --------
Co. and Southern New England
Communications Company. *Officers of the Fund are "inter-
ested persons" as defined in the
Investment Company Act of 1940.
ALFRED M. RANKIN, JR., Director
Chairman, President, and Chief
Executive Officer of NACCO
Industries, Inc.; Director of The
BFGoodrich Company, The Standard
Products Company and The Reliance
Electric Company.
B-4
<PAGE>
Vanguard/PRIMECAP Fund is a member of The Vanguard Group of Investment Com-
panies. Through their jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other Funds in the Group obtain at cost virtu-
ally all of their corporate management, administrative and distribution serv-
ices. 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 person-
nel 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 ad-
viser for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to pre-
vent unlawful practices in connection with the purchase or sale of securities
by persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are per-
mitted to engage in personal securities transactions. However, such transac-
tions are subject to procedures and guidelines substantially similar to those
recommended by the mutual fund industry and approved by the U.S. Securities
and Exchange Commission.
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 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, 1994, the Fund had contributed capital of $229,000 to Vanguard, represent-
ing 1.1% of Vanguard's capitalization. The Fund's Service Agreement provides
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 Van-
guard 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, 1994, the Fund's share of Vanguard's actual net costs of opera-
tion relating to management and administrative services (including transfer
agency) totaled approximately $2,965,000.
DISTRIBUTION
Vanguard provides all distribution and marketing activities for the Funds in
the Group. Vanguard Marketing Corporation, a wholly-owned subsidiary of Van-
guard, 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 materi-
als and marketing personnel. Distribution services may also include organizing
and offering to the public, from time to
B-5
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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 contri-
bution 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, 1994,
the Fund paid approximately $184,000 of the Group's distribution and marketing
expenses.
INVESTMENT ADVISORY SERVICES
Vanguard provides Vanguard Money Market Reserves, Vanguard Institutional
Money Market Portfolio, Vanguard Admiral Funds, Vanguard Municipal Bond Fund,
the several Portfolios of Vanguard Fixed Income Securities Fund, Vanguard In-
stitutional Index Fund, Vanguard Bond Index Fund, several Portfolios of Van-
guard Variable Insurance Fund, Vanguard California Tax-Free Fund, Vanguard
Florida Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund, Vanguard New
York Insured Tax Fund, Vanguard Ohio Tax-Free Fund, Vanguard Pennsylvania Tax-
Free Fund, Vanguard Balanced Index Fund, Vanguard Tax-Managed Fund, Vanguard
Index Trust, Vanguard International Equity Index Fund a portion of
Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund as well as sev-
eral indexed separate accounts with investment advisory services. These serv-
ices 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, 1994 the Fund paid approximately
$5,000 in fees to its non-interested Directors. Directors who are also Offi-
cers receive no remuneration for their services as Directors. The Fund's Offi-
cers 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 Offi-
cers' and employees' salaries and retirement benefits. The Fund's proportion-
ate 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
$44,362.
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 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 annu-
ally 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. Un-
der its Thrift Plan, all eligible officers are permitted to make pre-tax con-
tributions 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 propor-
tionate share of retirement contributions made by Vanguard under its retire-
ment and thrift plans on behalf of all Officers of the Fund, as a group, dur-
ing the 1994 fiscal year was approximately $6,600.
B-6
<PAGE>
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors for the fiscal year ended December
31, 1994.
VANGUARD/PRIMECAP FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT ESTIMATED FROM ALL
BENEFITS ANNUAL VANGUARD
AGGREGATE ACCRUED AS BENEFITS FUNDS PAID
COMPENSATION PART OF FUND UPON TO
NAMES OF DIRECTORS FROM FUND EXPENSES RETIREMENT DIRECTORS(2)
- ------------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
John C. Bogle(1).............. -- -- -- --
John J. Brennan(1)............ -- -- -- --
Barbara Barnes Hauptfuhrer.... $391 $107 $15,000 $50,000
Robert E. Cawthorn............ $391 $ 76 $13,000 $50,000
Bruce K. MacLaury............. $435 $110 $12,000 $45,000
Burton G. Malkiel............. $391 $ 45 $15,000 $50,000
Alfred M. Rankin, Jr.......... $391 $ 20 $15,000 $50,000
John C. Sawhill............... $391 $ 38 $15,000 $50,000
James O. Welch, Jr............ $375 $ 67 $15,000 $48,000
J. Lawrence Wilson............ $383 $ 27 $15,000 $49,000
</TABLE>
- --------
(1) As "Interested Directors," Messrs. Bogle and Brennan receive no
compensation for their service as Directors.
(2) The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 33 Vanguard
Funds (26 in the case of Mr. MacLaury).
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended December 31, 1994 was
1.10%.
The average annual total return of the Fund for the one- and five-year peri-
ods ended December 31, 1994 and the period since the Fund's inception
(11/1/84) was +11.41%, +13.15% and +15.54%, respectively. Total return is com-
puted 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 Van-
guard/ 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 more than 6,000 common equity se-
curities, covering all stocks in the U.S. for which daily pricing is avail-
able.
WILSHIRE 4500 EQUITY INDEX--consists of all stocks in the Wilshire 5000 ex-
cept for the 500 stocks in the Standard and Poor's 500 Index.
B-7
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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 convert-
ible issues of 100 million or greater in market capitalization. The index is
priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by pri-
vate lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly is-
sued, 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.
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--consists of over 4,500 U.S. trea-
sury, agency and investment grade corporate bonds.
LEHMAN CORPORATE (Baa) BOND INDEX--all publicly offered fixed-rate, noncon-
vertible domestic corporate bonds rated Baa by Moody's, with a maturity longer
than 1 year and with more than $25 million outstanding. This index includes
over 1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND--is a yield index on current-cou-
pon high grade general-obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average
yield for four high grade, non-callable preferred stock issues.
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 in-
clude income.
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 con-
tains 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 be-
tween 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.
B-8
<PAGE>
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX--is a mar-
ket 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 com-
pounding 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 iden-
tical 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 cal-
culate 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 in-
vestment advisory agreement dated as of May 1, 1993 to manage the investment
and reinvestment of the assets of the Fund and to continuously review, super-
vise 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 per-
centage rates, to the Fund's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- -----
<S> <C>
First $25 million...................................................... .750%
Next $225 million...................................................... .500%
Next $250 million...................................................... .375%
Over $500 million...................................................... .250%
</TABLE>
During the fiscal years ended December 31, 1992, 1993 and 1994, the Fund
paid investment advisory fees of approximately $2,407,000, $2,854,000 and
$3,882,000, respectively.
The agreement will continue until April 30, 1995 and will be renewable
thereafter for successive one-year periods, only if each renewal is specifi-
cally approved by a vote of the Fund's Board of Directors, including the af-
firmative votes of a majority of the Directors who are not parties to the con-
tract or "interested persons" (as defined in the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of considering such approv-
al. 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 ef-
fected only if approved by the affirmative vote of a majority of the outstand-
ing 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 the Board of Directors of the Fund or by vote of its outstanding vot-
ing securities on 60 days' written notice to the Adviser, or (2) by the Ad-
viser upon 90 days' written notice to the Fund.
The Fund's Board of Directors may, without the approval of shareholders,
provide for:
(i) 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;
(ii) A change in the terms of an advisory agreement; and
(iii) The continued employment of an existing adviser on the same advi-
sory contract terms where a contract has been assigned because of a change
in control of the adviser.
B-9
<PAGE>
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, 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 di-
rects 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 commis-
sion which provides the most favorable total cost or proceeds reasonably ob-
tainable 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 ef-
fecting the same transaction; provided that such commission is deemed reason-
able in terms of either that particular transaction or the overall responsi-
bilities 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 other-
wise 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
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for their clients, and may, 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, 1992, 1993 and 1994, the Fund
paid approximately $332,976, $315,112 and $815,001 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 under-
lying 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 ac-
ceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Clos-
ing out an open futures position is done by taking an opposite position ("buy-
ing" a contract which has previously been "sold," or "selling" a contract pre-
viously purchased) in an identical contract to terminate the position. Broker-
age 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 comple-
tion 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. Bro-
kers 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 con-
tract 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 unfavor-
able changes in the value of securities otherwise held for investment purposes
or expected to be acquired by them. Speculators are less inclined
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to own the securities underlying the futures contracts which they trade, and
use futures contracts with the expectation of realizing profits from fluctua-
tions 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 bona fide hedging transactions. The Fund will
only sell futures contracts to protect securities it owns against price de-
clines 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 con-
tracts.
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 addi-
tion, the Fund will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts would ex-
ceed 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 assur-
ance that a liquid secondary market will exist for any particular futures con-
tract 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 port-
folio 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 deliv-
ery 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 sub-
stantial, 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 sub-
stantial 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
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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 im-
perfect 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 re-
lated option. Additionally, investments in futures contracts and options in-
volve the risk that the investment adviser will incorrectly predict stock mar-
ket 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 unfa-
vorable positions. Futures contract 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
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. A Fund may be required to
defer the recognition of losses on futures contracts to the extent of any un-
recognized gains on related positions held by the Fund.
In order for the Fund to continue to qualify for Federal income tax treat-
ment 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, inter-
est, income derived from loans of securities, gains from the sale of securi-
ties 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 oth-
erwise 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 transac-
tions. 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 distributions.
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FINANCIAL STATEMENTS
The Fund's Financial Statements for the year ended December 31, 1994, in-
cluding the financial highlights for each of the five years in the period
ended December 31, 1994, appearing in the Vanguard/PRIMECAP Fund's 1994 Annual
Report to Shareholders, and the report thereon of Price Waterhouse LLP, inde-
pendent accountants, also appearing therein, are incorporated by reference in
this Statement of Additional Information. The Fund's 1994 Annual Report to
Shareholders is enclosed with this Statement of Additional Information.
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