<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-92948) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 15
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 17
VANGUARD/PRIMECAP FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600,
VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
It is proposed that this amendment become effective on April 9, 1998,
pursuant to paragraph (b) of Rule 485 of the Securities Act of 1933.
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
We have elected to register an indefinite number of shares pursuant to
Regulation 24f-2 under the Investment Company Act of 1940. We filed our Rule
24f-2 Notice for the year ended December 31, 1997 on March 30, 1998.
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<PAGE>
VANGUARD/PRIMECAP FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <C> <S>
Item 1. Cover Page............................ Cover Page
Item 2. Synopsis.............................. Not Applicable
Item 3. Condensed Financial Information....... Financial Highlights
Item 4. General Description of Registrant..... Investment Objective;
Investment Limitations;
Investment Policies;
General Information
Item 5. Management of the Fund................ Directors and Officers;
Management of the Fund;
Investment Adviser
Item 5A. Management's Discussion of Fund
Performance........................... Herein incorporated by
reference to Registrant's
Annual Report to
Shareholders dated
December 31, 1997 filed
with the Securities &
Exchange Commission's
EDGAR system on February
20, 1998.
Item 6. Capital Stock and Other Securities.... Opening an Account and
Purchasing Shares; Selling
Your Shares; The Share
Price of the Fund;
Dividends, Capital Gains,
and Taxes; General
Information
Item 7. Purchase of Securities Being Offered.. Cover Page; Opening an
Account and Purchasing
Shares
Item 8. Redemption or Repurchase.............. Selling Your Shares
Item 9. Pending Legal Proceedings............. Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <C> <S>
Item 10. Cover Page............................ Cover Page
Item 11. Table of Contents..................... Cover Page
Item 12. General Information and History....... Investment Policies
Item 13. Investment Objective and Policies..... Investment Policies;
Investment Limitations
Item 14. Management of the Registrant.......... Management of the Fund;
Investment Advisory
Services
Item 15. Control Persons and Principal Holders
of Securities......................... Management of the Fund
Item 16. Investment Advisory and Other Management of the Fund;
Services.............................. Investment Advisory
Services
Item 17. Brokerage Allocation.................. Not Applicable
Item 18. Capital Stock and Other Securities.... Financial Statements
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered.............. Purchase of Shares;
Redemption of Shares
Item 20. Tax Status............................ Appendix
Item 21. Underwriters.......................... Not Applicable
Item 22. Calculations of Performance Data...... Not Applicable
Item 23. Financial Statements.................. Financial Statements
</TABLE>
<PAGE>
================================================================================
[LOGO OF VANGUARD PRIMECAP
FUND APPEARS HERE] A Member of The Vanguard Group
================================================================================
PROSPECTUS--APRIL 9, 1998
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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
OBJECTIVE AND diversified investment company that seeks to provide long-
POLICIES term growth of capital by investing principally in common
stocks. Dividend income is incidental to this objective.
The Fund selects stocks primarily on the basis of above-
average earnings growth potential and quality of manage-
ment. There is no assurance 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, in-
cluding the FDIC.
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OPENING AN To open a regular (non-retirement) account, please com-
ACCOUNT plete and return the Account Registration Form. If you
need assistance in completing this Form, please call the
Investor Information Department. To open an Individual Re-
tirement Account (IRA), please use a Vanguard IRA Adoption
Agreement. To obtain a copy of this form, call 1-800-662-
7447, Monday through Friday, from 8:00 a.m. to 8:00 p.m.
(Eastern time). The minimum initial investment is $3,000
($1,000 for Individual Retirement Accounts and Uniform
Gifts/Transfers to Minors Act accounts). The Fund is of-
fered on a no-load basis (i.e., there are no sales commis-
sions 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 9, 1998 and has been incorporated by reference
into this Prospectus. It may be obtained without charge by
writing to the Fund, calling the Investor Information
Department at 1-800-662-7447 or visiting the Securities
and Exchange Commission's Website (www.sec.gov).
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page Page
<S> <C> <C> <C> <C> <C>
Fund Expenses................ 2 Management of the Fund...... 8 When Your Account Will Be Credited...... 17
Financial Highlights......... 2 Investment Adviser.......... 9 Selling Your Shares..................... 17
Yield and Total Return....... 3 Performance Record.......... 10 Exchanging Your Shares.................. 20
FUND INFORMATION Dividends, Capital Gains and Important Information About Telephone
Investment Objective......... 4 Taxes...................... 11 Transactions........................... 21
Investment Policies.......... 4 The Share Price of the Fund. 12 Transferring Registration............... 22
Investment Risks............. 5 General Information......... 13 Other Vanguard Services................. 23
Who Should Invest............ 6 SHAREHOLDER GUIDE
Implementation of Policies... 6 Opening an Account and
Investment Limitations....... 8 Purchasing Shares.......... 14
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<PAGE>
FUND EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Fund. The expenses
set forth below are for the 1997 fiscal year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
---------------------------------------------------------------
<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
---------------------------------------------------------------
<S> <C>
Management & Administrative Expenses.................... 0.24%
Investment Advisory Fees................................ 0.24
12b-1 Fees.............................................. None
Other Expenses
Distribution Costs................................ 0.02%
Miscellaneous Expenses............................ 0.01
----
Total Other Expenses.................................... 0.03
----
TOTAL OPERATING EXPENSES.............................. 0.51%
====
</TABLE>
The purpose of this table is to assist you in understand-
ing the various costs and expenses that you would bear di-
rectly or indirectly as an investor in the Fund.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. As noted in the table above,
the Fund charges no redemption fees of any kind.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$5 $16 $29 $64
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, 1997, have
been derived from Financial Statements which were 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, together with the remaining por-
tions of the Fund's 1997 Annual Report to Shareholders,
are incorporated by reference in the Statement of Addi-
tional Information and in this Prospectus, and which ap-
pear, along with the report of Price Waterhouse LLP, in
the Fund's 1997 Annual Report to Shareholders. The Fund's
1997 Annual Report to Shareholders may be obtained without
charge by writing to the Fund or by calling our Investor
Information Department at 1-800-662-7447.
2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $30.08 $26.23 $19.98 $18.42 $16.19 $15.36 $12.21 $12.82 $11.18 $10.06
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.. .21 .19 .22 .12 .07 .12 .15 .12 .17 .09
Net Realized and
Unrealized Gain (Loss)
on Investments........ 10.77 4.59 6.84 1.97 2.82 1.24 3.83 (.48) 2.24 1.37
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... 10.98 4.78 7.06 2.09 2.89 1.36 3.98 (.36) 2.41 1.46
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income..... (.20) (.20) (.22) (.12) (.07) (.12) (.15) (.13) (.16) (.09)
Distributions from
Realized Capital
Gains................. (1.30) (.73) (.59) (.41) (.59) (.41) (.68) (.12) (.61) (.25)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS... (1.50) (.93) (.81) (.53) (.66) (.53) (.83) (.25) (.77) (.34)
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR................... $39.56 $30.08 $26.23 $19.98 $18.42 $16.19 $15.36 $12.21 $12.82 $11.18
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN............ 36.79% 18.31% 35.48% 11.41% 18.03% 8.99% 33.14% (2.79)% 21.61% 14.66%
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)............. $8,186 $4,204 $3,237 $1,554 $ 791 $ 646 $ 486 $ 305 $ 279 $ 186
Ratio of Total Expenses
to Average Net Assets.. 0.51% 0.59% 0.58% 0.64% 0.67% 0.68% 0.68% 0.75% 0.74% 0.83%
Ratio of Net Investment
Income to Average Net
Assets................. 0.69% 0.69% 0.99% 0.79% 0.44% 0.84% 1.09% 1.06% 1.35% 0.83%
Portfolio Turnover Rate. 13% 10% 7% 8% 16% 7% 24% 11% 15% 26%
Average Commission Rate
Paid................... $.0599 $.0637 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
Note: Adjusted to reflect a 4-for-1 stock split as of February 23, 1990.
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From time to time the Fund may advertise its yield and to-
YIELD AND TOTAL tal return. Both yield and total return figures are based
RETURN on historical earnings and are not intended to indicate
future performance. The "total return" of the Fund refers
to the average annual compounded rates of return over one-
, five- and ten-year periods or the life of the Fund (as
stated in the advertisement) that would equate an initial
amount invested at the beginning of a stated period to the
ending redeemable value of the investment, assuming the
reinvestment of all dividend and capital gains distribu-
tions.
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 in-
vestment income per share earned during a 30-day period by
the net asset value per share on the last day of the peri-
od. Net investment income includes interest and dividend
income earned on the Fund's securities; it is net of all
expenses and all recurring and nonrecurring charges that
have been applied to all shareholder accounts. The yield
calculation assumes that the net investment income earned
over 30 days is compounded monthly for six months and then
annualized. Methods used to calculate advertised yields
are standardized for all stock and bond mutual funds. How-
ever, 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 in-
come paid to an investor's account.
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3
<PAGE>
INVESTMENT The Fund is an open-end diversified investment company.
OBJECTIVE The objective of the Fund is to provide long-term growth
of capital for its shareholders. Dividend income is inci-
THE FUND SEEKS dental to this objective. There is no assurance that the
TO PROVIDE LONG- Fund will achieve its stated objective.
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 of-
POLICIES fer favorable prospects for capital growth but little cur-
rent income. The Fund is managed without regard to tax
THE FUND INVESTS ramifications. Under normal circumstances, common stocks
IN COMMON STOCKS will represent at least 80% of the Fund's assets.
The Fund primarily holds common stocks considered to offer
above average corporate earnings growth potential that is
not reflected in the current valuation. The Adviser makes
judgments about portfolio securities in the context of a
3-5 year investment horizon. When evaluating earnings
growth, the Fund considers changing industry dynamics, new
markets, product cycles, management changes and other fun-
damental factors. Individual securities are assessed rela-
tive to the stock market averages as defined by the S&P
500 Composite Stock Index.
Securities in which the Fund invests generally will be
listed on a national securities exchange. The Fund may
also invest in unlisted securities, but such securities
generally 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 securi-
ties convertible into common stocks (including corporate
notes, bonds and preferred stocks) when, in the opinion of
the Adviser, such convertible securities may be purchased
at favorable prices relative to the common stock itself.
The Fund may also invest in stock index futures and op-
tions 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.
The Fund is responsible for voting the shares of all secu-
rities it holds.
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 mate-
rial change is made in the Fund's policies.
- -------------------------------------------------------------------------------
4
<PAGE>
INVESTMENT RISKS As a mutual fund investing primarily in common stocks, the
Fund is subject to MARKET RISK--i.e., the possibility that
INVESTORS ARE stock prices in general will decline over short or even
EXPOSED TO THE extended periods. The stock market tends to be cyclical,
MARKET RISK OF with periods when stock prices generally rise and periods
COMMON STOCKS when stock prices generally decline.
To illustrate the volatility of stock prices, the follow-
ing table sets forth the extremes for U.S. stock market
returns as well as the average return for the period from
1926 to 1997, as measured by the Standard & Poor's 500
Composite Stock Price Index:
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1997)
OVER VARIOUS TIME PERIODS
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +13.0 +10.5 +10.9 +10.9
As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging
10.9% for all 10-year periods from 1926 to 1997. The re-
turn in individual years has varied from a low of -43.3%
to a high of +53.9%, reflecting the short-term volatility
of stock prices. Average annual return may not be useful
for forecasting future returns in any particular period,
as stock returns are quite volatile from year to year.
GROWTH STOCKS Growth stocks, which are the Fund's primary investments,
MAY EXHIBIT are likely to be even more volatile in price than the
GREATER stock market as a whole. Among the reasons for the greater
VOLATILITY price volatility of growth stocks are the small or negli-
gible dividends paid by such companies. Besides exhibiting
greater volatility, growth stocks may, to a degree, fluc-
tuate independently of the broad stock market. As a re-
sult, investors should expect that the Fund may exhibit
potentially greater volatility than stocks in general and
may vary in price independently of the broad stock market.
The chart above should not be viewed as a representation
of future investment performance of the stock market or
the Fund. The illustrated returns represent historical in-
vestment performance, which may be a poor guide to future
returns. Also, stock market indexes such as the S&P 500
are based on unmanaged portfolios of securities before
transaction costs and other expenses. Such costs will re-
duce the relative investment performance of the Fund and
other "real world" portfolios. Finally, the Fund is likely
to differ in portfolio composition from broad stock market
averages, and so the Fund's performance should not be ex-
pected to mirror the returns provided by a specific index.
5
<PAGE>
THE FUND IS The investment adviser manages the Fund according to the
SUBJECT TO traditional methods of "active" investment management, which
MANAGER RISK involve the buying and selling of securities based upon eco-
nomic, financial and market analysis and investment judge-
ment. MANAGER RISK refers to the possibility that the Fund's
investment adviser may fail to execute the Fund's investment
strategy effectively. As a result, the Fund may fail to
achieve its stated objective.
- -------------------------------------------------------------------------------
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
SEEKING LONG- vehicle and is not designed to provide investors with a
TERM CAPITAL means of speculating on short-term market movements. Invest-
GROWTH ors who engage in excessive account activity generate addi-
tional costs which are borne by all of the Fund's sharehold-
ers. In order to minimize such costs, the Fund has adopted
the following policies. The Fund reserves the right to re-
ject any purchase request (including exchange purchases from
other Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management, either because
of the timing of the investment or previous excessive trad-
ing by the investor. Additionally, the Fund has adopted ex-
change privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Fund reserves
the right to suspend the offering of its shares. The Fund's
share price is expected to be volatile. Investors may wish
to reduce the potential risk of investing in the Fund by
purchasing shares on a regular, periodic basis (dollar-cost
averaging), rather than investing in one lump sum.
No assurance can be given that shareholders will be pro-
tected from the risk of loss that is inherent in equity in-
vesting. Investors should not consider the Fund a complete
investment program. Most investors should maintain diversi-
fied holdings of securities with different risk characteris-
tics--including common stocks, bonds and money market in-
struments. Investors may also wish to complement an invest-
ment in the Fund with other types of common stock invest-
ments.
- -------------------------------------------------------------------------------
IMPLEMENTATION In addition to investing primarily in common stocks, the
OF POLICIES Fund follows a number of other investment practices to
achieve its objective.
THE FUND MAY
INVEST IN Although it normally seeks to remain fully invested in eq-
SHORT-TERM uity securities, the Fund may invest in certain short-term
FIXED INCOME fixed income securities. Such securities may be used to in-
SECURITIES vest uncommitted cash balances, to maintain liquidity to
meet shareholder redemptions, or to take a temporary defen-
sive position against potential stock market declines. These
securities include: obligations of the United States Govern-
ment and its agencies or instrumentalities; commercial pa-
per, bank certificates of deposit, and bankers' acceptances;
and repurchase agreements collateralized by these securi-
ties.
6
<PAGE>
THE FUND MAY The Fund may lend its investment securities to qualified in-
LEND ITS stitutional investors for either short-term or long-term
SECURITIES purposes of realizing additional income. Loans of securities
by the Fund will be collateralized by cash, letters of cred-
it, or securities issued or guaranteed by the U.S. Govern-
ment 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 NOT tains the right to sell securities irrespective of how long
EXPECTED TO they have been held. It is anticipated that the annual port-
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.
DERIVATIVE Derivatives are instruments whose values are linked to or
INVESTING derived from an underlying security or index. The most com-
mon and conventional types of derivative securities are
futures and options.
THE FUND MAY The Fund may invest in futures contracts and options, but
INVEST IN only to a limited extent. Specifically, the Fund may enter
DERIVATIVE into futures contracts provided that not more than 5% of its
SECURITIES assets are required as a futures contract deposit; in addi-
tion, the Fund may enter into futures contracts and options
transactions only to the extent that obligations under such
contracts or transactions represent not more than 20% of the
Fund's assets.
Futures contracts and options may be used for several common
fund management strategies: to maintain cash reserves while
simulating full investment, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when
a specific futures contract is priced more attractively than
other futures contracts or the underlying security or index.
The Fund may use futures contracts for bona fide "hedging"
purposes. In executing a hedge, a manager sells, for exam-
ple, stock index futures to protect against a decline in the
stock market. As such, if the market drops, the value of the
futures position will rise, thereby offsetting the decline
in value of the Fund's stock holdings.
FUTURES The primary risks associated with the use of futures con-
CONTRACTS AND tracts and options are: (i) imperfect correlation between
OPTIONS POSE the change in market value of the stocks held by the Fund
CERTAIN RISKS and the prices of futures contracts and options; and (ii)
possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures po-
sition prior to its maturity date. The risk of imperfect
correlation will be minimized by investing in those con-
tracts whose price fluctuations are expected to resemble
those of the Fund's underlying securities. The risk that the
Fund will be unable to close out a futures position will be
minimized by entering into such transactions on a national
exchange with an active and liquid secondary market.
The risk of loss in trading futures contracts in some strat-
egies can be substantial, due both to the low margin depos-
its required and the extremely high degree of leverage in-
volved in futures pricing. As a result, a relatively small
price
7
<PAGE>
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 other
liquid portfolio securities in the amount of the underlying
obligation.
- -------------------------------------------------------------------------------
INVESTMENT The Fund has adopted limitations on some of its investment
LIMITATIONS policies. Some of these limitations are that the Fund will
not:
THE FUND HAS
ADOPTED CERTAIN (a) invest more than 25% of its assets in any one industry;
FUNDAMENTAL
LIMITATIONS (b) with respect to 75% of the value of its total assets,
purchase the securities of any issuer (except obligations
of the United States Government and its
instrumentalities) if as a result the Fund would hold
more than 10% of the outstanding voting securities of the
issuer, or more than 5% of the value of the Fund's total
assets would be invested in the securities of such
issuer;
(c) borrow money, except that the Fund may borrow from banks
(or through reverse repurchase agreements), for temporary
or emergency (not leveraging) purposes, including the
meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an
amount not exceeding 10% of the value of the Fund's net
assets (including the amount borrowed and the value of
any outstanding reverse repurchase agreements) at the
time the borrowing is made. Whenever borrowings exceed 5%
of the value of the Fund's net assets, the Fund will not
make any additional investments; and
(d) pledge, mortgage or hypothecate any of its assets to an
extent greater than 5% of its total assets.
A complete list of the Fund's investment limitations can be
found in the Statement of Additional Information. These lim-
itations are fundamental and may be changed only by approval
of a majority of the Fund's shareholders.
- -------------------------------------------------------------------------------
MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment
THE FUND Companies, a family of more than 30 investment companies
with more than 95 distinct investment portfolios and total
VANGUARD assets in excess of $360 billion. Through their jointly-
ADMINISTERS AND owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
DISTRIBUTES THE Fund and the other funds in the Group obtain at cost virtu-
FUND ally all of their corporate management, administrative,
shareholder accounting and distribution services. Vanguard
also provides investment advisory services on an at-cost ba-
sis 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 1997, the average expense ratio (annual costs in-
cluding advisory fees divided by total net assets) for the
Vanguard funds amounted to approximately .28% compared to an
average of 1.24% for the mutual fund industry (data provided
by Lipper Analytical Services Inc.).
8
<PAGE>
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 Of-
ficers. A list of the Directors and Officers of the Fund and
a statement of their present positions and principal occupa-
tions during the past five years can be found in the State-
ment 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).
- -------------------------------------------------------------------------------
INVESTMENT The Fund employs PRIMECAP Management Company (the "Advis-
ADVISER er"), 225 South Lake Avenue, Pasadena, CA 91101, under an
investment advisory agreement dated October 1, 1997, to man-
PRIMECAP age the investment and reinvestment of the assets of the
MANAGES THE Fund and to review, supervise and administer continuously
FUND'S the Fund's investment program. The Adviser discharges its
INVESTMENTS responsibilities subject to the control of the Officers and
Directors of the Fund.
The Adviser is a professional investment advisory firm which
provides services to employee benefit plans, endowment
funds, foundations and other institutions, as well as the
Fund. As of December 31, 1997, the Adviser held discretion-
ary management authority with respect to over $11.3 billion
of assets. Howard B. Schow, Chairman of the Adviser, and
Theo A. Kolokotrones, President, serve as portfolio managers
of the Fund. Mr. Schow has held this position since the
Fund's inception in 1984, while Mr. Kolokotrones has been a
portfolio manager of the Fund since 1985. They are assisted
by Joel P. Fried, Senior Vice President, and other members
of the staff.
The Fund pays the Adviser an advisory fee at the end of each
fiscal quarter, calculated by applying a quarterly rate,
based on the following annual percentage rates, to the
Fund's average month-end net assets for the quarter:
NET ASSETS RATE
-------------------- -----
First $50 million .500%
Next $200 million .450%
Next $250 million .375%
Next $1,750 million .250%
Next $2,750 million .200%
Next $5,000 million .175%
Over $10,000 million .150%
9
<PAGE>
For the year ended December 31, 1997, the investment advi-
sory fee paid by the Fund represented an effective annual
rate of 0.24% of average net assets. This fee was paid pur-
suant to a previous agreement that called for a higher rate
of fees.
The Fund has authorized the adviser to choose brokers or
dealers to handle the purchase and sale of the Fund's secu-
rities, and is directed to get the best available price and
most favorable execution from these brokers with respect to
all transactions. At times, the adviser may choose brokers
who charge higher commissions in the interests of obtaining
better execution of a transaction. If more than one broker
can obtain the best available price and favorable execution
of a transaction, then the adviser is authorized to choose a
broker who, in addition to executing the transaction, will
provide research services to the adviser or the Fund. Howev-
er, the adviser will not pay higher commissions specifically
for the purpose of obtaining research services. The Fund may
direct the adviser to use a particular broker for certain
transactions in exchange for commission rebates or research
services provided to the Fund.
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
advisory agreement; or (c) the continued employment of an
existing adviser on the same advisory contract terms where a
contract has been assigned because of a change in control of
the adviser. Any such change will only be made upon not less
than 30 days' prior written notice to shareholders of the
Fund, which shall include substantially the information con-
cerning the adviser that would have normally been included
in a proxy statement.
- -------------------------------------------------------------------------------
PERFORMANCE The table on page 11 provides investment results for the
RECORD Fund for several periods throughout the Fund's lifetime. The
results shown represent "total return" investment perfor-
mance, which assumes the reinvestment of all capital gains
and income dividends for the indicated periods. Also in-
cluded is comparative information with respect to the unman-
aged Standard & Poor's 500 Composite Stock Price Index, a
widely-used barometer of stock market activity, and the Con-
sumer 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.
10
<PAGE>
The results shown should not be considered a representa-
tion of the total return from an investment made in the
Fund today. The period shown was a generally favorable one
for common stock investments. This information is provided
to help investors better understand the Fund and may not
provide a basis for comparison with other investments or
mutual funds which use a different method to calculate
performance.
AVERAGE ANNUAL RETURN FOR VANGUARD/PRIMECAP FUND
<TABLE>
<CAPTION>
FISCAL PERIODS VANGUARD/PRIMECAP S&P 500 CONSUMER
ENDED 12/31/97 FUND INDEX PRICE INDEX
-------------- ----------------- ------- -----------
<S> <C> <C> <C>
1 Year +36.8% +33.4% +1.7%
5 Years +23.6 +20.3 +2.6
10 Years +19.0 +18.1 +3.4
Lifetime* +18.9 +17.9 +3.3
</TABLE>
*November 1, 1984 to December 31, 1997.
- -------------------------------------------------------------------------------
DIVIDENDS, The Fund expects to pay annual dividends from ordinary in-
CAPITAL GAINS come. Capital gains distributions, if any, will also be
AND TAXES made annually. The Fund is managed without regard to tax
ramifications.
THE FUND WILL
PAY DIVIDENDS In addition, in order to satisfy certain distribution re-
AND ANY CAPITAL quirements of the Tax Reform Act of 1986, the Fund may de-
GAINS ANNUALLY clare special year-end dividend and capital gains distri-
butions during December. Such distributions, if received
by shareholders by January 31, are deemed to have been
paid by the Fund and received by shareholders on December
31 of the prior year.
Dividend and capital gains distributions may be automati-
cally reinvested or received in cash. See "Choosing a Dis-
tribution Option" for a description of these distribution
methods.
The Fund intends to continue to qualify for taxation as a
"regulated investment company" under the Internal Revenue
Code so that it will not be subject to federal income tax
to the extent its income is distributed to shareholders.
Dividends paid by the Fund from net investment income and
net short-term capital gains, whether received in cash or
reinvested in additional shares, will be taxable to share-
holders as ordinary income. For corporate investors, divi-
dends from net investment income will generally qualify in
part for the intercorporate dividends- received deduction.
However, the portion of the dividends so qualified depends
on the aggregate taxable qualifying dividend income re-
ceived 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 addi-
tional shares, are taxable as long-term capital gains, re-
gardless of the length of time you have owned shares in
the Fund. Long-term capital gains may be taxed at differ-
ent rates depending on how long the Fund held the securi-
ties. Capital gains distributions are made when the Fund
realizes net capital gains on sales of portfolio securi-
ties during the year. The Fund does
11
<PAGE>
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 considerably
from year to year; there will be no capital gains distri-
butions in years when the Fund realizes net capital losses.
Note that if you accept capital gains distributions in
cash, instead of reinvesting them in additional shares,
you are in effect reducing the capital at work for you in
the Fund. Also, keep in mind that if you purchase shares
in the Fund shortly before the record date for a dividend
or capital gains distribution, a portion of your invest-
ment will be returned to you as a taxable distribution,
regardless of whether you are reinvesting your distribu-
tions 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
OR LOSS MAY BE result in a capital gain or loss. A capital gain or loss
REALIZED UPON may be realized from an ordinary redemption of shares or
EXCHANGE OR an exchange of shares between two mutual funds (or two
REDEMPTION portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer iden-
tification regulations. You may avoid this withholding re-
quirement by certifying on your Account Registration Form
your proper Social Security or Employer Identification
number and by certifying that you are not subject to
backup withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Fund are exempt from
Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Fund.
- -------------------------------------------------------------------------------
THE SHARE PRICE The Fund's share price or "net asset value" per share is
OF THE FUND calculated by dividing the total assets of the Fund, less
all liabilities, by the total number of shares outstand-
ing. The net asset value is determined as of the close of
trading on the New York Stock Exchange (the "Exchange"),
generally 4:00 p.m. Eastern time on each day that the Ex-
change is open for trading.
Portfolio securities for which market quotations are read-
ily available (includes those securities listed on na-
tional securities exchanges, as well as those quoted on
the NASDAQ Stock Market) will be valued at the last quoted
sales price on the day the valuation is made. Such securi-
ties which are not traded on the valuation date are valued
at the mean of the bid and ask prices. Price information
on ex-
12
<PAGE>
change-listed securities is taken from the exchange where
the security is primarily traded. Any foreign securities
are valued at the latest quoted sales price available be-
fore the time when assets are valued. Securities may be
valued on the basis of prices provided by a pricing serv-
ice when such prices are believed to reflect the fair mar-
ket value of such securities.
Short term instruments (those with remaining maturities of
60 days or less) may be valued at cost, plus or minus any
amortized discount or premium, which approximates market
value.
Bonds and other fixed income securities may be valued on
the basis of prices provided by a pricing service when
such prices are believed to reflect the fair market value
of such securities. The prices provided by a pricing serv-
ice may be determined without regard to bid or last sale
prices of each security, but take into account institu-
tional-size transactions in similar groups of securities
as well as any developments related to specific securi-
ties.
Other assets and securities for which no quotations are
readily available or which are restricted as to sale (or
resale) are valued by such methods as the Board of Direc-
tors 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
Vanguard Funds.
- -------------------------------------------------------------------------------
GENERAL The Fund is a Maryland corporation. The Fund's Articles of
INFORMATION Incorporation permit the Directors to issue 400,000,000
shares of common stock, with a $.001 par value. The Board
of Directors has the power to designate one or more clas-
ses ("Portfolios") of shares of common stock and to clas-
sify or reclassify any unissued shares with respect to
such Portfolios. Currently the Fund is offering one class
of shares.
The shares of the Fund are fully paid and nonassessable;
have no preference as to conversion, exchange, dividends,
retirement or other features; and have no pre-emptive
rights. Such shares have non-cumulative voting rights,
meaning that the holders of more than 50% of the shares
voting for the election of Directors can elect 100% of the
Directors if they so choose. A shareholder is entitled to
one vote for each full share held (and a fractional vote
for each fractional share held).
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if re-
quested in writing by the holders of not less than 10% of
the outstanding shares of the Fund.
All securities and cash are held by State Street Bank and
Trust Company, Boston, MA. CoreStates Bank, N.A., holds
daily cash balances that are used by the Fund to invest in
repurchase agreements or securities acquired in these
transactions. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP serves as independent accoun-
tants for the Fund and will audit its financial statements
annually. The Fund is not involved in any litigation.
- -------------------------------------------------------------------------------
13
<PAGE>
SHAREHOLDER GUIDE
OPENING AN You may open a regular (non-retirement) account, either by
ACCOUNT AND mail or wire. Simply complete and return an Account Regis-
PURCHASING tration Form and any required legal documentation, indi-
SHARES cating the amount you wish to invest. Your purchase must
be equal to or greater than the $3,000 minimum initial in-
vestment requirement ($1,000 for Uniform Gifts/Transfers
to Minors Act accounts, $500 minimum for an Education
IRA). You must open a new Individual Retirement Account by
mail (IRAs may not be opened by wire) using a Vanguard IRA
Adoption Agreement. Your purchase must be equal to or
greater than the $1,000 minimum initial investment re-
quirement, but no more than $2,000 if you are making a
regular IRA contribution. Rollover contributions are gen-
erally limited to the amount withdrawn within the past 60
days from an IRA or other qualified retirement plan. If
you need assistance with the forms or have any questions
about this Fund, please call our Investor Information De-
partment at 1-800-662-7447. Note: For other types of ac-
count registrations (e.g., corporations, associations,
other organizations, trusts or powers of attorney), please
call us to determine which additional forms you may need.
The Fund's shares generally are purchased at the next-de-
termined net asset value after your investment has been
received. The Fund is offered on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees).
PURCHASE 1) Because of the risks associated with common stock in-
RESTRICTIONS vestments, the Fund is intended to be a long-term in-
vestment vehicle and is not designed to provide invest-
ors 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.
2) Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check
is made payable to the Vanguard Group.
ADDITIONAL Subsequent investments to regular accounts may be made by
INVESTMENTS mail ($100 minimum), wire ($1,000 minimum), exchange from
another Vanguard Fund account ($100 minimum), or Vanguard
Fund Express. Subsequent investments to Individual Retire-
ment Accounts may be made by mail ($100 minimum) or ex-
change from another Vanguard Fund account. In some in-
stances, contributions to IRAs may be made by wire or Van-
guard Fund Express. Please call us for more information on
these options.
-----------------------------------------------------------
14
<PAGE>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY Please indicate the Additional investments
MAIL Complete amount of your initial should include the In-
and sign the investment on the reg- vest-by-Mail remittance
enclose Account istration form, make form attached to your
Registration your check payable to Fund confirmation state-
Form The Vanguard Group--59, ments. Please make your
and mail to: check payable to The
Vanguard Group--59,
THE VANGUARD GROUP write your account num-
P.O. BOX 2600 ber on your check and,
VALLEY FORGE, PA 19482- using the return enve-
2600 lope provided, mail to
the address indicated on
the Invest-by-Mail Form.
For express or THE VANGUARD GROUP All written requests
registered mail, 455 DEVON PARK DRIVE should be mailed to one
send to: WAYNE, PA 19087-1815 of the addresses indi-
cated for new accounts.
Do not send registered
or express mail to the
post office box address.
-----------------------------------------------------------
PURCHASING BY CORESTATES BANK, N.A.
WIRE Money ABA 031000011
should be wired CORESTATES NO. 0101 9897
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 in-
cludes the Fund name, the account number Vanguard has as-
signed 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 You may open a new account or purchase additional shares
EXCHANGE (from a by making an exchange from an existing Vanguard account.
Vanguard However, the Fund reserves the right to refuse any ex-
account) change purchase request. Call our Client Services Depart-
ment (1-800-662-2739) for assistance. The new account will
have the same registration as the existing account.
-----------------------------------------------------------
PURCHASING BY The Fund Express Special Purchase option lets you move
FUND EXPRESS money from your bank account to your Vanguard account on
an "as needed" basis. Or if you choose the Automatic In-
Special Purchase vestment option, money will be moved automatically from
and Automatic your bank account to your Vanguard account on the schedule
Investment (monthly, bimonthly [every other month], quarterly,
semiannually or annually) you select. 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 complete and re-
turn this form; please wait two weeks before using the
service.
- -------------------------------------------------------------------------------
15
<PAGE>
CHOOSING A You must select one of four distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION--Both dividend and capi-
tal gains distributions will be reinvested in addi-
tional 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 addi-
tional Fund shares.
3. CASH CAPITAL GAIN OPTION--Your capital gains distribu-
tions will be paid in cash and your dividends will be
reinvested in additional Fund shares.
4. ALL CASH OPTION--Both dividend and capital gains dis-
tributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
If a shareholder has chosen to receive dividend and/or
capital gains distributions in cash, and the postal or
other delivery service is unable to deliver checks to the
shareholder's address of record, we will change the dis-
tribution option so that all dividends and other distribu-
tions are automatically reinvested in additional shares.
We will not pay interest on uncashed distribution checks.
In addition, an option to invest your cash dividend and/or
capital gains distributions in another Vanguard Fund ac-
count is available. Please call our Client Services De-
partment (1-800-662-2739) for information. You may also
elect Vanguard Dividend Express which allows you to trans-
fer your cash dividends and/or capital gains distributions
automatically to your bank account. Please see "Other Van-
guard Services" for more information.
- -------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund sharehold-
INVESTORS SHOULD ers. These distributions are made to all shareholders who
ASK ABOUT THE own Fund shares as of the distribution's record date, re-
TIMING OF gardless of how long the shares have been owned. Purchas-
CAPITAL GAINS ing shares just prior to the record date could have a sig-
AND DIVIDEND nificant impact on your tax liability for the year. For
DISTRIBUTIONS example, if you purchase shares immediately prior to the
BEFORE INVESTING record date of a sizable capital gain or income dividend
distribution, you will be assessed taxes on the amount of
the capital gain and/or dividend distribution later paid
even though you owned the Fund shares for just a short pe-
riod of time. (Taxes are due on the distributions even if
the dividend or capital gain is reinvested in additional
Fund shares.) While the total value of your investment
will be the same after the distribution--the amount of the
distribution will offset the drop in the net asset value
of the shares--you should be aware of the tax implications
the timing of your purchase may have.
Prospective investors should, therefore, inquire about po-
tential distributions before investing. The Fund's annual
dividend and capital gains distributions normally occur in
December. In addition, the Fund may occasionally be re-
quired to
16
<PAGE>
make supplemental dividend or capital gains distributions
at some other time during the year. For additional infor-
mation 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.
ESTABLISHING IF YOU WISH TO ADD SHAREHOLDER OPTIONS LATER, YOU MAY NEED
OPTIONAL TO PROVIDE VANGUARD WITH ADDITIONAL INFORMATION AND A SIG-
SERVICES NATURE GUARANTEE. PLEASE CALL OUR CLIENT SERVICES DEPART-
MENT (1-800-662-2739) FOR FURTHER ASSISTANCE.
SIGNATURE For our mutual protection, we may require a signature
GUARANTEES guarantee on certain written transaction requests. A sig-
nature guarantee verifies the authenticity of your signa-
ture, and may be obtained from banks, brokers, and any
other guarantor that Vanguard deems acceptable. A SIGNA-
TURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request. If a cer-
tificate is lost, you may incur an expense to replace it.
BROKER/DEALER If you purchase shares in Vanguard Funds through a regis-
PURCHASES tered broker/dealer or investment adviser the
broker/dealer or adviser 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, once the
trade request has been received in writing or by tele-
phone.
ELECTRONIC You may receive a prospectus for the Fund or any of the
PROSPECTUS Vanguard Funds in an electronic format through Vanguard's
DELIVERY website at www.vanguard.com. For additional information
please see "Other Vanguard Services--Computer Access."
- -------------------------------------------------------------------------------
WHEN YOUR Your trade date is the date on which your account is cred-
ACCOUNT WILL BE ited. If your purchase is made by check, Federal Funds
CREDITED wire or exchange and is received by the close of regular
trading on the New York Stock Exchange (the "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 busi-
ness day. Your shares are purchased at the net asset value
determined on your trade date.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S. correspon-
dent 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
SHARES by redeeming shares at any time. (Please see "Important
Redemption Information.") You generally may initiate a re-
quest by writing or by telephoning. Your redemption pro-
ceeds are normally mailed within two business days after
the receipt of the request in Good Order. No interest will
accrue on amounts represented by uncashed redemption
checks.
17
<PAGE>
SELLING BY MAIL Requests should be mailed to THE VANGUARD GROUP,
VANGUARD/PRIMECAP FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482-1120. (For express or registered mail, send your re-
quest to The Vanguard Group, Vanguard/PRIMECAP Fund, 455
Devon Park Drive, Wayne, PA 19087-1815.)
The redemption price of shares will be the Fund's net as-
set value next determined after Vanguard has received all
required 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 may 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.
-----------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized
TELEPHONE representative may call our Client Services Department at
1-800-662-2739. The proceeds will be sent to you by mail.
PLEASE NOTE: As a protection against fraud, your telephone
mail redemption privilege will be suspended for 15 calen-
dar days following any expedited address change to your
account. An expedited address change is one that is made
by telephone or in writing, without the signatures of all
account owners. Please see "Important Information About
Telephone Transactions."
-----------------------------------------------------------
SELLING BY FUND If you select the Fund Express Automatic Withdrawal op-
EXPRESS tion, money will be automatically moved from your Vanguard
Fund account to your bank account according to the sched-
Automatic ule you have selected. The Special Redemption option lets
Withdrawal & you move money from your Vanguard account to your bank ac-
Special count on an "as needed" basis. To establish these Fund Ex-
Redemption press options, please call 1-800-662-7447 for a Fund Ex-
press application. We will send you a confirmation of your
Fund Express enrollment after you complete and return this
form; please wait two 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
REDEMPTION at any time. However, your redemption proceeds will not be
INFORMATION paid 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
REDEMPTION close of trading on the Exchange are processed on the day
PROCEEDS of receipt and the redemption proceeds are normally sent
on the following business day.
18
<PAGE>
Redemption requests received by telephone after the close
of the Exchange are processed on the business day follow-
ing receipt and the proceeds are normally sent on the sec-
ond business day following receipt.
Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order, except as de-
scribed above in "Important Redemption Information."
If you experience difficulty in making a telephone redemp-
tion 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 Van-
guard in Good Order. 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 pay-
ment 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 det-
rimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay re-
demption proceeds in whole or in part by a distribution in
kind of readily marketable securities.
-----------------------------------------------------------
VANGUARD'S If you make a redemption from a qualifying account, Van-
AVERAGE COST guard will send you an Average Cost Statement which pro-
STATEMENT vides you with the tax basis of the shares you redeemed.
Please see "Statements and Reports" for additional infor-
mation.
-----------------------------------------------------------
LOW BALANCE FEE Due to the relatively high cost of maintaining smaller ac-
AND MINIMUM counts, the Fund will automatically deduct a $10 annual
ACCOUNT BALANCE fee in either June or December fromnon-retirement accounts
REQUIREMENT with balances falling below $2,500 ($500 for Uniform
Gifts/Transfers to Minor Act accounts). The fee generally
will be waived for investors whose aggregate Vanguard as-
sets exceed $50,000.
In addition, the Fund reserves the right to liquidate any
non-retirement account that is below the minimum initial
investment amount of $3,000. If at any time your total in-
vestment does not have a value of at least $3,000, you may
be notified that your account is below the Fund's minimum
account balance requirement. You would then be allowed 60
days to make an additional investment before the account
is liquidated. Proceeds would be promptly paid to the reg-
istered shareholder.
Vanguard will not liquidate your account if it has fallen
below $3,000 solely as a result of declining markets
(i.e., a decline in a Fund's net asset value).
- -------------------------------------------------------------------------------
19
<PAGE>
EXCHANGING YOUR Should your investment goals change, you may exchange your
SHARES shares of Vanguard/PRIMECAP Fund for those of other avail-
able Vanguard Funds.
EXCHANGING BY When exchanging shares by telephone, please have ready the
TELEPHONE Fund name, account number, Social Security Number or em-
ployer identification number listed on the account and ex-
Call Client act name and address in which the account is registered.
Services (1-800- Only the registered shareholder, or his or her pre-autho-
662-2739) rized representative, may complete such an exchange. Re-
quests for telephone exchanges received prior to the close
of trading on the Exchange are processed at the close of
business that same day. Requests received after the close
of the Exchange are processed the next business day. TELE-
PHONE EXCHANGES ARE NOT ACCEPTED INTO OR FROM NON-RETIRE-
MENT INVESTMENTS IN VANGUARD INDEX TRUST, VANGUARD BAL-
ANCED INDEX FUND, VANGUARD INTERNATIONAL EQUITY INDEX
FUND, VANGUARD REIT INDEX PORTFOLIO, VANGUARD TOTAL INTER-
NATIONAL PORTFOLIO and VANGUARD GROWTH AND INCOME PORTFO-
LIO (formerly known as Vanguard Quantitative Portfolios).
If you experience difficulty in making a telephone ex-
change, your exchange request may be made by regular or
express mail, and it will be implemented at the closing
net asset value on the date received by Vanguard provided
the request is received in Good Order.
-----------------------------------------------------------
EXCHANGING BY Please be sure to include on your exchange request the
MAIL name and account number of your current Fund, the name of
the Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to THE VANGUARD GROUP,
VANGUARD/PRIMECAP FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482-1120. (For express or registered mail, send your re-
quest to The Vanguard Group, Vanguard/PRIMECAP Fund, 455
Devon Park Drive, Wayne, PA 19087-1815.)
-----------------------------------------------------------
EXCHANGING You may use your personal computer to exchange shares of
ONLINE most Vanguard funds by accessing our website
(www.vanguard.com). To establish this service for your ac-
count, you must first register through the website. We
will then send to you, by mail, an account access password
that will enable you to make online exchanges.
The Vanguard funds that you cannot purchase or sell
through online exchange are VANGUARD INDEX TRUST, VANGUARD
BALANCED INDEX FUND, VANGUARD INTERNATIONAL EQUITY INDEX
FUND, VANGUARD REIT INDEX PORTFOLIO, VANGUARD TOTAL INTER-
NATIONAL PORTFOLIO, AND VANGUARD GROWTH AND INCOME PORTFO-
LIO (formerly known as Vanguard Quantitative Portfolios).
These funds do permit online exchanges within IRAs and
other retirement accounts.
-----------------------------------------------------------
IMPORTANT Before you make an exchange, you should consider the
EXCHANGE following:
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).
20
<PAGE>
. An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on
the transaction.
. Exchanges by telephone are accepted only if the regis-
trations and the taxpayer identification numbers of the
two accounts are identical.
. In order to exchange into an account with a different
registration (including a different name, address, or
taxpayer identification number), you must provide Van-
guard with written instructions that include the guaran-
teed signatures of all current account owners.
. The shares to be exchanged must be on deposit and not
held in certificate form.
. New accounts are not currently accepted in the
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 privi-
lege. 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
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive ex-
change activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from the Fund during any twelve-month
period. "Substantive" means either a dollar amount or a
series of movements between Vanguard Funds that Vanguard
determines, in its sole discretion, could have an adverse
impact on the management of the Fund. Notwithstanding
these limitations, the Fund reserves the right to reject
any purchase request (including exchange purchases from
other Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management.
- -------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire or Fund
INFORMATION Express redemptions) and exchanges by telephone is auto-
ABOUT TELEPHONE matically established on your account unless you request
TRANSACTIONS in writing that telephone transactions on your account not
be permitted.
21
<PAGE>
To protect your account from losses resulting from unau-
thorized or fraudulent telephone instructions, Vanguard
adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio; (ii)
the 10-digit account number; (iii) the exact name 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
authenticity of transaction instructions received by tele-
phone, provided that reasonable security procedures have
been followed. Vanguard believes that the security proce-
dures described above are reasonable, and that if such
procedures are followed, you will bear the risk of any
losses resulting from unauthorized or fraudulent telephone
transactions on your account.
- -------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund
REGISTRATION shares to another person by completing a transfer form and
sending it to: THE VANGUARD GROUP, ATTENTION: TRANSFER DE-
PARTMENT, P.O. BOX 1110, VALLEY FORGE, PA 19482-1110. The
request must be in Good Order. Before mailing your re-
quest, please call our Client Services Department (1-800-
662-2739) for full instructions.
- -------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each time
REPORTS you initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market ac-
counts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The fourth-
quarter statement will be a year-end statement, listing
all transaction activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account during
the calendar year, using the average cost single category
method. This service is available for most taxable ac-
counts opened since January 1, 1986. In general, investors
who redeemed shares from a qualifying Vanguard account may
expect to receive their Average Cost Statement along with
their Portfolio Summary Statement. Please call our Client
Services Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semiannually, according to the Fund's fiscal year-end. To
keep the Fund's costs as low as possible (so that you and
other shareholders can keep more of the Fund's investment
earnings), Vanguard attempts to eliminate duplicate mail-
ings to the same address. When we find that two or more
Fund shareholders have the same last name and address, we
send just one Fund report to that address--instead of
mailing separate reports to each shareholder. If you want
us to send separate reports, however, you may notify our
Investor Information Department at 1-800-662-7447.
- -------------------------------------------------------------------------------
22
<PAGE>
OTHER VANGUARD For more information about any of these services, please
SERVICES call our Investor Information Department at 1-800-662-
7447.
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S. Govern-
DEPOSIT SERVICE ment checks (including Social Security and military pen-
sion checks) and private payroll checks may be automati-
cally deposited into your Vanguard Fund account. Separate
brochures and forms are available for direct deposit of
U.S. Government and private payroll checks.
VANGUARD Vanguard's Automatic Exchange Service allows you to move
AUTOMATIC money automatically among your Vanguard Fund accounts. For
EXCHANGE SERVICE instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or
to contribute to an IRA or other retirement plan. Please
contact our Client Services Department at 1-800-662-2739
for additional information.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money be-
EXPRESS tween your Fund account and your account at a bank, sav-
ings 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.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD Vanguard's Dividend Express allows you to transfer your
DIVIDEND EXPRESS dividend and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the Au-
tomated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our In-
vestor Information Department (1-800-662-7447) for a Van-
guard Dividend Express application.
VANGUARD Vanguard's Tele-Account is a convenient, automated service
TELE-ACCOUNT(R) that provides share price, price change and yield quota-
tions on Vanguard Funds through any TouchToneTM telephone.
This service also lets you obtain information about your
account balance, your last transaction, and your most re-
cent dividend or capital gains payment. In addition, you
may perform investment exchanges of Vanguard Fund shares
and redemptions by check using Tele-Account. To contact
Vanguard's Tele-Account service, dial 1-800-ON-BOARD (1-
800-662-6273). A brochure offering detailed operating in-
structions is available from our Investor Information De-
partment (1-800-662-7447).
23
<PAGE>
[LOGO OF VANGUARD PRIMECAP FUND
APPEARS HERE] [LOGO OF VANGUARD PRIMECAP FUND
- -------------------------------- APPEARS HERE]
THE VANGUARD GROUP P R O S P E C T U S
P.O. Box 2600
Valley Forge, PA 19482 APRIL 9, 1998
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.
P.O. Box 2600
Valley Forge, PA 19482
[LOGO OF THE VANGUARD GROUP(R) APPEARS HERE]
PO59
<PAGE>
PART B
VANGUARD/PRIMECAP FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 9, 1998
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated April 9, 1998). To obtain the Prospectus
please call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies........................................................ B-1
Investment Limitations..................................................... B-4
Purchase of Shares......................................................... B-5
Redemption of Shares....................................................... B-5
Management of the Fund..................................................... B-7
Yield and Total Return..................................................... B-10
Performance Measures....................................................... B-10
Investment Advisory Services............................................... B-12
Portfolio Transactions..................................................... B-13
Financial Statements....................................................... B-15
</TABLE>
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. As-
sets committed to futures contracts will be segregated at the Fund's custodian
bank to the extent required by law.
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
B-1
<PAGE>
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 to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
prices of underlying securities. The Fund intends to use futures contracts
only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish
any non-hedging positions do not exceed five percent of the value of the
Fund's portfolios. The Fund will only sell futures contracts to protect secu-
rities it owns against price declines or purchase contracts to protect against
an increase in the price of securities it intends to purchase. As evidence of
this hedging interest, the Fund expects that approximately 75% of its futures
contract purchases will be "completed," that is, equivalent amounts of related
securities will have been purchased or are being purchased by the Fund upon
sale of open futures contracts.
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.
B-2
<PAGE>
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 the Fund is subject to the risks of loss fre-
quently associated with futures transactions. The Fund would presumably have
sustained comparable losses if, instead of the futures contract, it had in-
vested 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
B-3
<PAGE>
foreign currencies, or other income derived with respect to the Fund's busi-
ness of investing in securities. 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.
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.
ILLIQUID SECURITIES. Illiquid securities are securities that may not be sold
or disposed of in the ordinary course of business within seven business days
at approximately the value at which they are being carried on the Fund's
books. An illiquid security includes repurchase agreements which have a matu-
rity of longer than seven days, securities which are illiquid by virtue of the
absence of a readily available market, and demand instruments with a demand
notice exceeding seven days. Illiquid securities may include securities that
are not registered under the Securities Act of 1933 (the "1933 Act"); however,
unregistered securities that can be sold to "qualified institutional buyers"
in accordance with Rule 144A under the 1933 Act will not be considered illiq-
uid so long as it is determined by the Fund's advisor that an adequate trading
market exists for the security.
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.);
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
B-4
<PAGE>
under futures contracts and not more than 20% of the Fund's assets are in-
vested in futures contracts and options at any time) or real estate al-
though the Fund may purchase and sell securities of companies which deal in
real estate, or interests therein;
8) Purchase securities on margin or sell any securities short except as
specified above in investment limitation No. 7;
9) Purchase or retain any security if (i) one or more Officers, Directors
or partners of the Fund or its investment adviser individually own or would
own, directly or beneficially, more than 1/2 of 1 per cent of the 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 (5) 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."
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 investment for or any other re-
strictions on initial and subsequent investments for certain fiduciary ac-
counts or under circumstances where certain economies can be achieved in sales
of the Fund's shares.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading
on the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not rea-
sonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods
as the Commission may permit.
The Fund has made an election with the Commission to pay in cash all 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
B-5
<PAGE>
will be made wholly in cash unless the Directors believe that economic or mar-
ket conditions exist which would make such a practice detrimental to the best
interests of the Fund. If redemptions are paid in investment securities, such
securities will be valued as set forth in the Prospectus under "The Share
Price of the Fund" and a redeeming shareholder would normally incur brokerage
expenses if he converted these securities to cash.
No charge is made by the Fund for redemptions. Any redemption may be more or
less than the shareholder's cost depending on the market value of the securi-
ties held by the Fund.
The Fund has authorized Charles Schwab & Co., Inc. ("Schwab") to accept on
its behalf purchase and redemption orders under certain terms and conditions.
Schwab is also authorized to designate other intermediaries to accept purchase
and redemption orders on the Fund's behalf subject to those terms and condi-
tions. Under this arrangement, the Fund will be deemed to have received a pur-
chase or redemption order when Schwab or, if applicable, Schwab's authorized
designee, accepts the order in accordance with the Fund's instructions. Cus-
tomer orders that are properly transmitted to the Fund by Schwab, or if appli-
cable, Schwab's authorized designee, will be priced as follows:
Orders received by Schwab before 3 p.m. Eastern time on any business day,
will be sent to Vanguard that day and your share price will be based on the
Fund's net asset value calculated at the close of trading that day. Orders re-
ceived by Schwab after 3 p.m. Eastern time, will be sent to Vanguard on the
following business day and your share price will be based on the Fund's net
asset value calculated at the close of trading that day.
B-6
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are responsi-
ble 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 Offi-
cers of the Fund and a statement of their present positions and principal oc-
cupations during the past five years. The mailing address of the Fund's Direc-
tors and Officers is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, (DOB: 5/8/1929) ALFRED M. RANKIN, JR., (DOB:
Senior Chairman and Director* 10/8/1941) Director
Senior Chairman and Director of The Chairman, President, Chief
Vanguard Group, Inc., and of each Executive Officer, and Director of
of the investment companies in The NACCO Industries, Inc.; Director of
Vanguard Group; Director of The The BFGoodrich Company, and The
Mead Corporation, General Accident Standard Products Company.
Insurance, and Chris-Craft
Industries, Inc. JOHN C. SAWHILL, (DOB: 6/12/1936)
Director
JOHN J. BRENNAN, (DOB: 7/29/1954) President and Chief Executive
Chairman, Chief Executive Officer & Officer of The Nature Conservancy;
Director* formerly, Director and Senior
Chairman, Chief Executive Officer Partner of McKinsey & Co., and
and Director of The Vanguard Group, President of New York University;
Inc., and of each of the investment Director of Pacific Gas and
companies in The Vanguard Group. Electric Company, Procter & Gamble
Company, and NACCO Industries.
ROBERT E. CAWTHORN, (DOB: 9/28/1935)
Director JAMES O. WELCH, JR., (DOB:
Chairman Emeritus and Director of 5/13/1931) Director
Rhone-Poulenc Rorer, Inc.; Managing Retired Chairman of Nabisco Brands,
Director of Global Health Care Inc.; retired Vice Chairman and
Partners/DLJ Merchant Banking Director of RJR Nabisco; Director
Partners; Director of Sun Company, of TECO Energy, Inc., and Kmart
Inc., and Westinghouse Electric Corporation.
Corporation.
J. LAWRENCE WILSON, (DOB: 3/2/1936)
BARBARA BARNES HAUPTFUHRER, (DOB: Director
10/11/1928) Director Chairman and Chief Executive
Director of The Great Atlantic and Officer of Rohm & Haas Company;
Pacific Tea Company, IKON Office Director of Cummins Engine Company,
Solutions, Inc., Raytheon Company, and the Mead Corporation; and
Knight-Ridder, Inc., Massachusetts Trustee of Vanderbilt University.
Mutual Life Insurance Co., and
Ladies Professional Golf RAYMOND J. KLAPINSKY, (DOB:
Association; and Trustee Emerita of 12/7/1938) Secretary*
Wellesley College. Managing Director and Secretary of
The Vanguard Group, Inc.; Secretary
BRUCE K. MACLAURY, (DOB: 5/7/1931) of each of the investment companies
Director in The Vanguard Group.
President Emeritus of The Brookings
Institution; Director of American RICHARD F. HYLAND, (DOB: 3/22/1937)
Express Bank, Ltd., The St. Paul Treasurer*
Companies, Inc., and National Steel Treasurer of The Vanguard Group,
Corporation. Inc. and of each of the investment
companies in The Vanguard Group.
BURTON G. MALKIEL, (DOB: 8/28/1932)
Director KAREN E. WEST, (DOB: 9/13/1946)
Chemical Bank Chairman's Professor Controller*
of Economics, Princeton University; Principal of The Vanguard Group,
Director of Prudential Insurance Inc.; Controller of each of the
Co. of America, Amdahl Corporation, investment companies in The
Baker Fentress & Co., The Jeffrey Vanguard Group.
Co., and Southern New England --------
Telecommunications Company. *Officers of the Fund are "inter-
ested persons" as defined in the In-
vestment Company Act of 1940.
B-7
<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 has invested are adjusted from time to time
in order to maintain the proportionate relationship between each Fund's rela-
tive net assets and its contribution to Vanguard's capital. At December 31,
1997, the Fund had contributed capital of $536,000 to Vanguard, representing
2.7% 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, 1997, the Fund's share of Vanguard's actual net costs of opera-
tion relating to management and administrative services (including transfer
agency) totaled approximately $14,527,000.
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 time, one or more new investment com-
panies 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.
B-8
<PAGE>
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, 1997,
the Fund paid approximately $1,192,000 of the Group's distribution and market-
ing expenses.
INVESTMENT ADVISORY SERVICES
Vanguard provides the Total International Portfolio of Vanguard STAR Fund,
Vanguard Money Market Reserves, Vanguard Admiral Funds, Vanguard Municipal
Bond Fund, the several Portfolios of Vanguard Fixed Income Securities Fund,
Vanguard Institutional Index Fund, Vanguard Bond Index Fund, several Portfo-
lios of Vanguard Variable Insurance Fund, Vanguard California Tax-Free Fund,
Vanguard Florida Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund,
Vanguard New York Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard Penn-
sylvania Tax-Free Fund, Vanguard Treasury Fund, Vanguard Balanced Index Fund,
Vanguard REIT Index Portfolio of Vanguard Specialized Portfolios, Vanguard
Tax-Managed Fund, the Aggressive Growth Portfolio of Vanguard Horizon 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.
DIRECTOR/TRUSTEE COMPENSATION
The individuals appearing in the table below serve as Directors/Trustees of
all Vanguard Funds, and each Fund pays a proportionate share of the
Directors'/Trustees' compensation. The Funds employ their officers on a shared
basis, as well. However, officers are compensated by The Vanguard Group, Inc.,
not the Funds.
INDEPENDENT DIRECTORS/TRUSTEES. The Funds compensate their independent
Directors/Trustees--that is, the ones who are not also officers of the Fund--
in three ways:
. The independent Directors/Trustees receive an annual fee for their serv-
ice to the Funds, which is subject to reduction based on absences from
scheduled Board meetings.
. The independent Directors/Trustees are reimbursed for the travel and
other expenses that they incur in attending Board meetings.
. Upon retirement, the independent Directors/Trustees receive an aggregate
annual fee of $1,000 for each year served on the Board, up to fifteen
years of service. This annual fee is paid for ten years following retire-
ment, or until the Directors'/Trustees' death.
"INTERESTED" DIRECTORS/TRUSTEES. The Funds', interested Directors/Trustees--
Messrs. Bogle and Brennan--receive no compensation for their service in that
capacity. However, they are paid in their role as officers of The Vanguard
Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for
each of the Directors. We list the amounts paid as compensation and accrued as
retirement benefits by the Fund for each Director. In addition, the table
shows the total amount of benefits that we expect each Director/Trustee to re-
ceive from all Vanguard Funds upon retirement, and the total amount of compen-
sation paid to each Director/Trustee by all Vanguard Funds. All information
shown is for the fiscal year ended December 31, 1997:
B-9
<PAGE>
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).............. None None None None
John J. Brennan(1)............ None None None None
Barbara Barnes Hauptfuhrer.... $1,562 $225 $15,000 $70,000
Robert E. Cawthorn............ $1,562 $188 $13,000 $70,000
Bruce K. MacLaury............. $1,659 $215 $12,000 $65,000
Burton G. Malkiel............. $1,572 $151 $15,000 $70,000
Alfred M. Rankin, Jr.......... $1,562 $119 $15,000 $70,000
John C. Sawhill............... $1,562 $141 $15,000 $70,000
James O. Welch, Jr............ $1,562 $173 $15,000 $70,000
J. Lawrence Wilson............ $1,562 $125 $15,000 $70,000
</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 his or her service as Director or Trustee of 35 Vanguard
Funds (34 in the case of Mr. Malkiel; 28 in the case of Mr. MacLaury).
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended December 31, 1997 was
0.89%.
The average annual total return of the Fund for the one-, five- and ten-year
periods ended December 31, 1997 was +36.79%, +23.59% and +18.95%, respective-
ly. Total return is computed by finding the average compounded rate of return
over the periods set forth above that would equate an initial amount invested
at the beginning of the period to the ending redeemable value of the invest-
ment.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of the Vanguard Group, including
Vanguard/PRIMECAP Fund, may, from time to time, use one or more of the follow-
ing 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.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S/SMALL CAP 600/BARRA VALUE INDEX--contains stocks of the
S&P SmallCap 600 Index which have a lower than average price-to-book ratio.
B-10
<PAGE>
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the
S&P SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 EQUITY INDEX--consists of more than 7,000 common equity secu-
rities, covering all stocks in the U.S. for which daily pricing is available.
WILSHIRE 4500 EQUITY INDEX--consists of all stocks in the Wilshire 5000 ex-
cept for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia, and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
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 INDEX--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 INDEX--consists of over 4,500 U.S.
treasury, 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 BOND INDEX--is a yield index on current-coupon 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--65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX--65% Lehman Long-Term Corporate AA or Better Bond Index and
a 35% weighting in a blended equity composite (75% Standard & Poor's/BARRA
Value Index, 12.5% Standard & Poor's Utilities Index, and 12.5% Standard &
Poor's Telephone Index).
B-11
<PAGE>
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of all publicly
issued, fixed-rate, nonconvertible investment grade, dollar-denominated, SEC-
registered corporate debt rated AA or AAA.
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 $1.6 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 $700 billion.
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market-weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities greater than 10 years. The in-
dex 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 October 1, 1997 to manage the invest-
ment and reinvestment of the assets of the Fund and to continuously review,
supervise and administer the Fund's investment program. The Adviser discharges
its responsibilities subject to the control of the officers and Directors of
the Fund.
The Fund pays the Adviser an advisory fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual per-
centage rates, to the Fund's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- -----
<S> <C>
First $50 million...................................................... .500%
Next $200 million...................................................... .450%
Next $250 million...................................................... .375%
Next $1,750 million.................................................... .250%
Next $2,750 million.................................................... .200%
Next $5,000 million.................................................... .175%
Over $10,000 million................................................... .150%
</TABLE>
B-12
<PAGE>
During the fiscal years ended December 31, 1995, 1996 and 1997, the Fund
paid investment advisory fees of approximately $7,700,000, $10,439,000 and
$14,455,000 respectively. These fees were paid pursuant to a previous agree-
ment that called for a higher rate of fees.
The agreement will continue until September 30, 1999 and will be renewable
thereafter for one-year periods, so long as such continuance is specifically
approved at least annually by a vote of the Fund's Board of Directors, includ-
ing the affirmative votes of a majority of the Directors who are not parties
to the contract 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 approval. In addition, the question of continuance of the Agreement may
be presented to the shareholders of the Fund; in such event, such continuance
shall be effected only if approved by the affirmative vote of a majority of
the outstanding voting securities of the Fund. The agreement is automatically
terminated if assigned, and may be terminated without penalty at any time (1)
either by vote of the Board of Directors of the Fund or by vote of its out-
standing voting securities on 60 days' written notice to the Adviser, or
(2) by the Adviser upon 90 days' written notice to the Fund.
The Fund's Board of Directors may, without the approval of shareholders,
provide for:
(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.
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,
B-13
<PAGE>
consideration may be given to those brokers which supply investment research
and statistical information and provide other services in addition to execu-
tion services to the Fund and/or the Adviser. The Adviser considers such in-
formation 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.
During the fiscal years ended December 31, 1995, 1996 and 1997, the Fund
paid approximately $1,423,618, $1,475,231 and $3,097,602 in brokerage commis-
sions, respectively.
Some securities considered for investment by the Fund may also be appropri-
ate 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.
B-14
<PAGE>
FINANCIAL STATEMENTS
The Fund's Financial Statements for the year ended December 31, 1997, in-
cluding the financial highlights for each of the five years in the period
ended December 31, 1997, appearing in the Vanguard/PRIMECAP Fund's 1997 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 1997 Annual Report to
Shareholders is enclosed with this Statement of Additional Information.
B-15
