<PAGE> 1
Fellow Shareholder:
The accompanying Combined Proxy Statement and Prospectus presents an
important proposal for your consideration as a shareholder of Vanguard
Specialized Portfolios-Service Economy Portfolio (the "Service Economy
Portfolio"). In substance, your Board of Directors has proposed that the Service
Economy Portfolio be merged with Vanguard/Morgan Growth Fund, Inc. ("Morgan
Growth Fund"), by having all of its assets acquired, in a tax-free
reorganization, in exchange for shares of Morgan Growth Fund on June 2, 1994
(the "Closing Date"). If this proposal is approved by shareholders, your Service
Economy Portfolio shares will be exchanged for an equal dollar-amount of Morgan
Growth Fund shares on the Closing Date.
BACKGROUND
The Service Economy Portfolio began operations in 1984 with the objective of
providing investors with long-term capital appreciation by investing in common
stocks of companies in the service sector of the economy. Over the period since
its inception the performance of the Service Economy Portfolio has lagged the
performance of competitive funds with similar objectives and that of the overall
stock market. Additionally, the level of investor interest in the Portfolio has
been modest. Accordingly, the Directors of the Service Economy Portfolio have
determined that it would be in the best interest of the Portfolio's shareholders
to merge the Portfolio into the larger and more broadly diversified Morgan
Growth Fund.
Morgan Growth Fund is considered to be the most appropriate Vanguard Fund to
acquire the shares of the Service Economy Portfolio because, of all the Vanguard
equity funds, Morgan Growth Fund has the most similar sector weightings and most
similar market capitalization (company size) to the Service Economy Portfolio's.
Wellington Management Company serves as investment adviser to the Service
Economy Portfolio and also serves as investment adviser with respect to
approximately 40% of Morgan Growth Fund's assets. The remainder of Morgan Growth
Fund's assets are managed by Franklin Portfolio Associates (33%), Husic Capital
Management (13%) and Vanguard's Core Management Group (9%). Approximately 5% of
the Fund's net assets are held in cash.
SHAREHOLDERS OF THE SERVICE ECONOMY PORTFOLIO WILL NOT BE ASSESSED THE
PORTFOLIO'S 1% REDEMPTION FEE ON THE EXCHANGE OF PORTFOLIO SHARES FOR MORGAN
GROWTH FUND SHARES. ADDITIONALLY, SHARES OF THE SERVICE ECONOMY PORTFOLIO
REDEEMED OR EXCHANGED TO ANY OTHER VANGUARD FUND ON OR AFTER APRIL 18, 1994 WILL
NOT BE ASSESSED THE PORTFOLIO'S 1% REDEMPTION FEE. THE SERVICE ECONOMY PORTFOLIO
WILL DISTRIBUTE ALL CURRENT INCOME DIVIDENDS AND REALIZED CAPITAL GAINS TO
SHAREHOLDERS PRIOR TO THE MERGER.
The Officers and Directors of the Service Economy Portfolio have carefully
evaluated the Service Economy Portfolio's performance record since inception,
giving careful consideration to the risks and opportunities of making changes.
The Officers and Directors have concluded that shareholders would be best served
by "merging" the Portfolio through the acquisition of its assets by Morgan
Growth Fund. The proposed reorganization of the Service Economy Portfolio must
be approved by the owners of a majority of the outstanding shares of the Service
Economy Portfolio.
We hope this Proxy statement and the Morgan Growth Fund prospectus will
answer all of your questions, but if you have further questions at any time,
please do not hesitate to call Vanguard's Investor Information Department at
1-800-662-7447.
Sincerely,
John C. Bogle
April 18, 1994 Chairman of the Board
<PAGE> 2
COMBINED PROXY STATEMENT AND PROSPECTUS
DATED APRIL 18, 1994
This combined Proxy Statement and Prospectus includes this cover page, a
Notice of Special Meeting of Shareholders for Vanguard Specialized
Portfolios-Service Economy Portfolio (the "Service Economy Portfolio"), a Proxy
Statement, a form of proxy and the current prospectus for Vanguard/Morgan Growth
Fund, Inc. ("Morgan Growth Fund").
Morgan Growth Fund is an open-end diversified investment company. The
investment objective of Morgan Growth Fund is to provide long-term capital
growth by investing in the equity securities of growth companies.
The principal executive offices of the Service Economy Portfolio and Morgan
Growth Fund are located at Vanguard Financial Center, One Hundred Vanguard
Boulevard, Malvern, PA 19355 (Telephone No.: 1-800-662-7447).
This Combined Proxy Statement and Prospectus sets forth concisely the
information that a shareholder of the Service Economy Portfolio should know
before voting on the proposed reorganization. It should be read and retained for
future reference.
A Prospectus, Statement of Additional information, and the 1993 Annual
Report to Shareholders of Morgan Growth Fund, including financial statements,
and the 1994 Annual Report of the Service Economy Portfolio, including financial
statements, are on file with the Securities and Exchange Commission (the
"Commission"). Morgan Growth Fund's prospectus and statement of additional
information (dated March 31, 1994) and Morgan Growth Fund's 1993 Annual Report
to Shareholders are incorporated by reference into this Combined Proxy Statement
and Prospectus. The Morgan Growth Fund Prospectus is included with this document
as Exhibit II. The Morgan Growth Fund Statement of Additional Information and
the Service Economy Portfolio's 1994 Annual Report to Shareholders are
available, without charge, by writing to Vanguard Financial Center, P.O. Box
876, Valley Forge, PA 19482 or by calling the toll-free telephone number listed
above.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
2
<PAGE> 3
VANGUARD SPECIALIZED PORTFOLIOS-SERVICE ECONOMY PORTFOLIO
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO THE SHAREHOLDERS OF VANGUARD SPECIALIZED PORTFOLIOS-SERVICE ECONOMY
PORTFOLIO:
Notice is hereby given that a special meeting of shareholders of Vanguard
Specialized Portfolios-Service Economy Portfolio (the "Service Economy
Portfolio") will be held in the Majestic Building, Room 118A, Vanguard Financial
Center, 100 Vanguard Boulevard, Malvern, PA 19355, on June 1, 1994, at 9:30
A.M., E.T. for the following purposes:
1. To approve or disapprove a proposal providing for the acquisition of all
of the Service Economy Portfolio's assets by Vanguard/Morgan Growth Fund
("Morgan Growth Fund").
2. To consider and act upon any other matters which may properly come
before this meeting.
By Order of the Board of Directors
Raymond J. Klapinsky, Secretary
April 18, 1994
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN
PLEASE INDICATE YOUR VOTING INSTRUCTIONS ON THE ENCLOSED PROXY CARD, DATE
AND SIGN IT, AND RETURN IT IN THE ENVELOPE PROVIDED, WHICH IS ADDRESSED FOR YOUR
CONVENIENCE AND NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. IN ORDER TO
AVOID THE ADDITIONAL EXPENSE TO THE FUND OF FURTHER SOLICITATION, WE ASK YOU TO
COOPERATE IN MAILING YOUR PROXY PROMPTLY.
- --------------------------------------------------------------------------------
3
<PAGE> 4
VANGUARD SPECIALIZED PORTFOLIOS-SERVICE ECONOMY PORTFOLIO
VANGUARD/MORGAN GROWTH FUND
SPECIAL MEETING OF SHAREHOLDERS
APRIL 18, 1994
PROXY STATEMENT
The enclosed proxy is solicited by and on behalf of the management of
Vanguard Specialized Portfolios-Service Economy Portfolio (the "Service Economy
Portfolio"). In addition to the solicitation of proxies by mail, officers and
employees of the Service Economy Portfolio may solicit in person or by
telephone. Persons holding stock as nominees will, upon request, be reimbursed
for their reasonable expenses in sending soliciting materials to their
principals.
Holders of record as of the close of business on March 31, 1994 are
entitled to vote at the meeting or any adjourned session. As of the record date
there were issued and outstanding approximately 1,471,422 shares of common stock
of the Service Economy Portfolio.
Shares represented by a properly executed proxy will be voted in accordance
with the instructions thereon, or if no specification is made, the persons named
as proxies will vote in favor of the proposals set forth in the Notice of
Meeting and in this Proxy Statement. Abstentions and broker non-votes will be
included for purposes of determining whether a quorum is present at the meeting,
but will not be counted as votes in favor of or against the proposal. Proxies
may be revoked at any time before they are exercised by the subsequent execution
and submission of a revised proxy, by written notice of revocation to the
Secretary of the Fund, or by voting in person at the meeting. The business
address of the Service Economy Portfolio is c/o Vanguard Financial Center, 100
Vanguard Boulevard (P.O. Box 876), Valley Forge, PA 19482.
A copy of the Service Economy Portfolio's Annual Report for the fiscal year
ended January 31, 1994, including financial statements, has been mailed to each
shareholder of the Service Economy Portfolio as of the record date. This
Combined Prospectus and Proxy Statement was mailed to shareholders on or about
April 18, 1994.
APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION
SUMMARY
The following is a summary of the proposed reorganization and the parties
thereto contained elsewhere in this Combined Proxy Statement and Prospectus
(including documents incorporated by reference herein).
COMPARISON OF THE SERVICE ECONOMY PORTFOLIO AND MORGAN GROWTH FUND
1. Investment Objectives and Policies
The investment objective of the Service Economy Portfolio is to provide
long-term capital appreciation by investing in the stocks of companies in the
service economy industry. Morgan Growth Fund seeks to provide long-term capital
appreciation by investing primarily in the equity securities of growth
companies. Morgan Growth Fund invests a majority of its assets in "established
growth companies"--i.e. larger capitalization
4
<PAGE> 5
firms that have generally exhibited above-average rates of growth in sales and
earnings over an extended period. Morgan Growth Fund may also invest in
"emerging growth companies"--expanding firms with generally smaller stock market
capitalizations. Finally, Morgan Growth Fund may hold investments in "cyclical
growth and other companies." These are firms which, while they may not have a
history of stable long-term growth, are nonetheless expected to represent
attractive investments.
2. Advisory Fees
The investment adviser to the Service Economy Portfolio is Wellington
Management Company ("WMC"). WMC also serves as investment adviser with respect
to approximately 40% of Morgan Growth Fund's assets. The remainder of Morgan
Growth Fund's assets are managed by Franklin Portfolio Associates (33%), Husic
Capital Management (13%) and Vanguard's Core Management Group (9%), with
approximately 5% of the Fund's net assets held in cash.
The Service Economy Portfolio, along with the other portfolios of Vanguard
Specialized Portfolios ("VSP"), for which WMC serves as adviser (Health Care,
Technology, Energy and Utilities Income) pays an aggregate investment advisory
fee, at the end of each fiscal quarter, calculated by applying the following
annual percentage rates to the average month-end net assets for the quarter of
the five portfolios, as follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
----------------------------------------------------------------------------- -------
<S> <C>
First $100 million........................................................... 0.300%
Next $150 million............................................................ 0.200%
Next $250 million............................................................ 0.150%
Next $500 million............................................................ 0.125%
Over $1 billion.............................................................. 0.100%
</TABLE>
The advisory fee is based on the net assets for the five Portfolios of VSP
for which WMC serves as adviser and is allocated to each Portfolio based on the
net assets of each Portfolio. For the fiscal year ended January 31, 1994, the
investment advisory fee represented an effective annual rate of .14 of 1% of
average net assets for each Portfolio. Matthew E. Megargel, Vice President of
WMC serves as portfolio manager of the Service Economy Portfolio.
Morgan Growth Fund pays WMC a basic advisory fee calculated by applying
varying percentage rates to the average net assets of the fund managed by WMC as
follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
----------------------------------------------------------------------------- -------
<S> <C>
First $50 million............................................................ 0.325%
Next $100 million............................................................ 0.225%
Next $150 million............................................................ 0.150%
</TABLE>
This basic advisory fee may be increased or decreased by applying an
adjustment formula ("incentive/penalty fee") based on WMC's investment
performance relative to the investment record of the Growth Fund Stock Index
(the "Index") which is described in detail in the Morgan Growth Fund Prospectus.
5
<PAGE> 6
The following table sets forth the incentive/penalty fee rates payable by
the Fund to WMC under the proposed investment advisory agreement:
<TABLE>
<CAPTION>
THREE YEAR PERFORMANCE ANNUAL INCENTIVE (+)/
DIFFERENTIAL VS. THE PENALTY (-) FEE
INDEX RATE
---------------------------------------------- ----------------------
<S> <C>
+12% or more above............................ +.075%
+6% but less than +12%........................ +.0375%
Between +6% and -6%........................... -0-
-6% but less than -12%........................ -.0375%
-12% or more below............................ -.075%
</TABLE>
Accordingly, the maximum possible fee payable to WMC under the agreement
would be .40 of 1% of net assets and the minimum possible fee payable thereunder
would be .075 of 1% of net assets. Robert D. Rands, Senior Vice President of WMC
serves as portfolio manager of the assets of Morgan Growth Fund assigned to WMC.
Morgan Growth Fund pays Franklin Portfolio Associates ("FPA") a basic
advisory fee calculated by applying varying percentage rates to the average net
assets of the Fund managed by FPA as follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
----------------------------------------------------------------------------- -------
<S> <C>
First $100 million........................................................... 0.250%
Next $200 million............................................................ 0.200%
Next $300 million............................................................ 0.150%
</TABLE>
The basic advisory fee may be increased or decreased by applying an
adjustment formula ("incentive/penalty fee") based on FPA's investment
performance relative to the Growth Fund Stock Index.
<TABLE>
<CAPTION>
THREE YEAR PERFORMANCE ANNUAL INCENTIVE (+)/
DIFFERENTIAL VS. THE PENALTY (-) FEE
INDEX RATE
---------------------------------------------- ----------------------
<S> <C>
+6% or more above............................. +.100%
Between +6% and -6%........................... -0-
-6% or more below............................. -.100%
</TABLE>
Accordingly, the maximum possible fee payable to FPA under the agreement
would be .35 of 1% of net assets and the minimum possible fee payable thereunder
would be .05 of 1% of net assets. John J. Nagorniak, President of FPA, serves as
portfolio manager of the assets of Morgan Growth Fund assigned to FPA.
Morgan Growth Fund pays Husic Capital Management ("Husic") a basic advisory
fee at the end of each fiscal quarter, calculated by applying a quarterly rate,
based on the following annual percentage rates, to the average month-end assets
of the Morgan Growth managed by Husic for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------------------------------------------------------------------ ------
<S> <C>
First $25 million............................................................. 0.40%
Next $125 million............................................................. 0.35%
Next $350 million............................................................. 0.25%
Next $500 million............................................................. 0.20%
Over $1 billion............................................................... 0.15%
</TABLE>
6
<PAGE> 7
The basic fee paid to Husic, as provided above, may be increased or
decreased by applying an incentive/penalty fee based on the investment
performance of the assets managed by Husic (the "Husic Portfolio") relative to
the return of the Index.
Effective with the quarter ending September 30, 1994, the basic fee paid to
Husic, as provided above, may be increased or decreased by applying an
incentive/penalty fee based on the investment performance of the Husic Portfolio
relative to the investment record of the Index. Under the incentive/penalty fee
schedule, the basic fee payable to Husic may be increased or decreased by as
much as 75% of the basic fee depending on the investment performance of the
equity investment managed by Husic.
The incentive/penalty fee rates will be determined by measuring the
investment performance of the Husic Portfolio relative to the investment record
of the Index in accordance with the following table:
<TABLE>
<CAPTION>
ANNUAL RATE AS A
PERCENTAGE OF BASIC FEE
------------------------------------
THREE YEAR PERFORMANCE FIRST ASSETS
DIFFERENTIAL VS. THE $200 MILLION IN EXCESS
GROWTH INDEX OF ASSETS OF $200 MILLION
------------------------------------------- ------------ ---------------
<S> <C> <C>
+12% points or more above.................. 175.0% 150.0%
Between +6% points and +12% points above... 137.5% 125.0%
Between +6% points and -6% points.......... 100.0% 100.0%
Between -6% points and -12% points......... 62.5% 75.0%
-12% points or more below.................. 25.0% 50.0%
</TABLE>
Until the Quarter ending September 30, 1996, the incentive/penalty fee for
Husic will be calculated according to the following transition rules:
(a) Prior to June 30, 1994. For the quarters ending on or prior to June 30,
1994, the incentive/penalty fee adjustment will not be operable. The advisory
fee payable by the Fund shall be the basic fee, calculated as set forth above.
(b) July 1, 1994 through September 30, 1996. Beginning with the quarter
ending September 30, 1994, and until the quarter ending September 30, 1996, the
incentive/penalty fee will be computed based upon a comparison of the investment
performance of the Husic Portfolio and that of the Growth Index over the number
of months that have elapsed between October 1, 1993 and the end of the quarter
for which the fee is computed. The number of percentage points by which the
investment performance of the Husic Portfolio
7
<PAGE> 8
must exceed or fall below the investment record of the Growth Index for the
quarters ending during this period are as follows:
<TABLE>
<CAPTION>
NUMBER OF
QUARTER ENDING PERCENTAGE POINTS
------------------------------------- -----------------
<S> <C>
September 30, 1994................... 4
December 31, 1994.................... 5
March 31, 1995....................... 6
June 30, 1995........................ 7
September 30, 1995................... 8
December 31, 1995.................... 9
March 31, 1996....................... 10
June 30, 1996........................ 11
September 30, 1996................... 12
</TABLE>
(c) On and After September 30, 1996. For the quarter ending September 30,
1996 and thereafter, the period used to calculate the incentive/penalty fee
shall be the 36 months preceding the end of the quarter for which the fee is
being computed and the number of percentage points used shall be 12.
Accordingly, after the incentive/penalty fee is in full effect, the maximum
possible fee payable to Husic under the agreement would be .70 of 1% and the
minimum possible fee payable thereunder would be .10 of 1%. Frank Husic,
president of Husic, serves as portfolio manager for the assets of Morgan Growth
Fund managed by Husic.
The remaining assets of Morgan Growth Fund are managed on an at-cost basis
by Vanguard's Core Management Group under the direction of George U. Sauter,
Vice President of Vanguard.
For the fiscal year ended December 31, 1993, the aggregate investment
advisory fee paid by Morgan Growth Fund represented an effective annual base
rate of .18 of 1% of the Fund's net assets before a decrease of .03 of 1% based
on performance. The advisory fee rates paid to WMC, FPA and Husic for the 1993
fiscal year were as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
BASIC FEE BASED ON PERFORMANCE TOTAL FEE
--------- -------------------- ----------
<S> <C> <C> <C>
WMC.................. .18 of 1% (.08) of 1% .12 of 1%
FPA.................. .41 of 1% -- .41 of 1%
Husic................ .12 of 1% -- .12 of 1%
</TABLE>
The maximum possible advisory fee payable by the Service Economy Portfolio
would be .30 of 1% of net assets, while the maximum possible aggregate advisory
fee payable by Morgan Growth Fund would be .38 of 1% of net assets. However, at
current asset levels, the maximum possible aggregate advisory fee payable by
Morgan Growth Fund would be .28 of 1%.
3. Management, Administrative and Distribution Services
The Service Economy Portfolio and Morgan Growth Fund are members of The
Vanguard Group of Investment Companies. Through their jointly-owned subsidiary,
The Vanguard Group, Inc. ("Vanguard"), the member funds of the Vanguard Group
obtain at cost virtually all of their corporate management, administrative, and
distribution services. Each Fund pays its share of Vanguard's total expenses
relating to these services, which are allocated among the Funds under methods
approved by the Board of Directors of each Fund.
8
<PAGE> 9
4. Asset Size and Expense Ratios
On March 1, 1994 the Service Economy Portfolio had total net assets of
approximately $34 million. On the same date, Morgan Growth Fund had total net
assets of approximately $1.1 billion. For the fiscal year ended January 31,
1994, the Service Economy Portfolio had an expense ratio of .41 of 1% of its
average net assets. The expense ratio for Morgan Growth Fund for its 1993 fiscal
year was .49 of 1% of its average net assets. Redemptions from Morgan Growth
Fund are not assessed the 1% redemption fee that is incurred by shareholders of
the Service Economy Portfolio upon redemption.
5. Purchase, Redemption and Exchange Procedures
Purchase procedures for the Service Economy Portfolio and Morgan Growth
Fund are virtually identical, and are described on page 16 of the Morgan Growth
Fund prospectus. Under normal circumstances redemptions from the Service Economy
Portfolio are assessed a 1% redemption fee. However, no fee will be charged for
the exchange of Service Economy Portfolio shares for Morgan Growth Fund shares.
Also, beginning on April 18, 1994, there will be no redemption fee applied on
redemptions from the Service Economy Portfolio. Morgan Growth Fund does not
charge a fee for redemptions. In addition, shareholders of both the Service
Economy Portfolio and Morgan Growth Fund may exchange shares for shares of other
Vanguard Funds by following the procedures described on page 21 of the Morgan
Growth Fund Prospectus which are identical to the existing procedures for the
Service Economy Portfolio with the exception that Morgan Growth Fund
shareholders are limited to two substantive exchange redemptions in any twelve
month period, while Service Economy Portfolio shareholders are allowed to make
three such exchanges.
6. Income Dividends and Capital Gains Distributions
Both the Service Economy Portfolio and Morgan Growth Fund pay income
dividends and distribute capital gains on an annual basis. Shareholders may
elect to accept such dividends in additional shares or take them in cash.
If the proposal meets shareholder approval, the Service Economy Portfolio
will distribute all accumulated ordinary income and realized net capital gains
to shareholders of record on or about June 1, 1994. These distributions will be
subject to income taxes for the year in which distributed. For your reference,
the table below shows all realized net capital gains on a per share basis as of
March 31, 1994. The actual per share capital gains distribution will differ from
the figures below depending on portfolio management activity prior to the
distributions. Only those capital gains (net of realized capital losses) that
have been realized will be distributed prior to the merger. Unrealized capital
gains can become realized capital gains as a byproduct of portfolio management
activities.
SERVICE ECONOMY PORTFOLIO
<TABLE>
<CAPTION>
MARCH 31, 1994
--------------
<S> <C>
Net Asset Value Per Share $22.08
Realized Net Capital Gains Per Share $ 0.25
Unrealized Net Capital Gains Per Share $ 5.16
</TABLE>
9
<PAGE> 10
Morgan Growth Fund expects to pay dividends from ordinary income annually
in December. Net capital gains distributions, if any, will also be made annually
in December.
If you are a Morgan Growth Fund shareholder on the record date for the
annual income and capital gains distribution, you will receive the distribution
and will be responsible for any applicable income taxes.
For your reference, the table below shows all realized net capital gains
and unrealized net capital gains on a per share basis as of March 31, 1994. The
actual per share annual capital gains distribution will differ from the figures
below depending on portfolio management activity prior to the distribution. Only
those capital gains (net of realized capital losses) that have been realized
will be distributed. Unrealized capital gains can become realized capital gains
as a byproduct of portfolio management activities.
MORGAN GROWTH FUND
<TABLE>
<CAPTION>
MARCH 31, 1994
--------------
<S> <C>
Net Asset Value Per Share $11.43
Realized Net Capital Gains Per Share $ 0.21
Unrealized Net Capital Gains Per Share $ 0.92
</TABLE>
7. Performance
The following chart illustrates the average annual total return of each
Fund, as well as that of the unmanaged Standard & Poor's 500 Composite Stock
Price Index, for the one-, three-and five-year periods ended December 31, 1993,
as well as since the inception of the Service Economy Portfolio on May 23, 1984.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS 5/23/84
-------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Morgan Growth Fund*....................... 7.3% 15.0% 12.9% 14.2%
Service Economy Portfolio................. 12.0 18.5 13.1 14.3
S&P 500 Index............................. 10.1 15.6 14.5 16.2
</TABLE>
*Includes advisory fee waivers of $17,000 for 1993 and $8,000 for 1994.
RISK FACTORS
Both the Service Economy Portfolio and Morgan Growth Fund invest
principally in common stocks with the objective of long-term capital
appreciation. The Service Economy Portfolio concentrates its investments in the
service economy industry, while Morgan Growth Fund is more broadly diversified
across several industries. The Service Economy Portfolio held 61 securities on
January 31, 1994, while Morgan Growth Fund held approximately 325 securities on
the same date.
THE PROPOSED REORGANIZATION
1. The Agreement and Plan of Reorganization
The Directors of the Service Economy Portfolio and Morgan Growth Fund,
including a majority of the independent Directors of each Fund, have determined
that the proposed reorganization is in the best interests of the shareholders of
each Fund. The Directors of each Fund, including a majority of the indepen-
10
<PAGE> 11
dent Directors of each Fund, have further determined that the interest of
shareholders of each Fund will not be diluted as a result of the proposed
reorganization. The terms and conditions under which the proposed reorganization
may be consummated are set forth in the Agreement and Plan of Reorganization,
dated as of March 1, 1994, between the Service Economy Portfolio and Morgan
Growth Fund (the "Agreement"). The Agreement is attached as Exhibit I to this
Combined Proxy Statement and Prospectus. Significant provisions of the Agreement
are summarized elsewhere in this Combined Proxy Statement and Prospectus.
2. The Closing Date
The Agreement provides that Morgan Growth Fund will acquire substantially
all of the assets of the Service Economy Portfolio in exchange solely for shares
of Morgan Growth Fund to be issued to shareholders of the Service Economy
Portfolio on June 2, 1994, or such later date as may be agreed upon by the
parties (the "Closing Date"). The number of shares of Morgan Growth Fund to be
issued to shareholders of the Service Economy Portfolio will be determined on
the basis of the relative net assets per share of the two funds computed as of
the close of the New York Stock Exchange on the Closing Date. Immediately
following the Closing Date, the Service Economy Portfolio will dissolve and
distribute pro rata to its shareholders of record, as of the close of business
on the Closing Date, the shares of Morgan Growth Fund received by the Service
Economy Portfolio.
3. Federal Income Tax Consequences
Consummation of the reorganization is subject to the condition that the
Service Economy Portfolio and Morgan Growth Fund receive an opinion of counsel
to the effect that the reorganization will not result in a recognition of gain
or loss for Federal income tax purposes for either the Service Economy Portfolio
or Morgan Growth Fund, or their respective shareholders.
4. Vote Required for Shareholder Approval of the Reorganization
Approval of the Plan of Reorganization will require the affirmative vote of
a majority of the shares of common stock outstanding and entitled to vote at
this special meeting of shareholders.
ADDITIONAL INFORMATION ABOUT THE PROPOSED REORGANIZATION
REASONS FOR THE PROPOSED REORGANIZATION
The Service Economy Portfolio was formed as a member of The Vanguard Group
of Investment Companies in 1984, with the objective of providing long-term
capital appreciation by concentrating its investments in the service sector of
the economy. Over the period since its inception, the performance of the Service
Economy Portfolio has lagged that of competitive standards, as well as that of
the overall stock market. Additionally, investor interest in the Portfolio has
been modest, limiting the growth of the Portfolio. Consequently, the Service
Economy Portfolio's Board of Directors has determined that the expenses involved
in maintaining a separate Portfolio for this purpose are no longer warranted.
Due to the Service Economy's focus on a particular sector of the economy,
the Portfolio's performance results have also fluctuated in a wider range than
many broadly diversified funds. Morgan Growth Fund does
11
<PAGE> 12
not concentrate its investments in any single industry but invests in a
diversified portfolio of stocks covering many sectors of the economy. Thus,
Morgan Growth Fund provides shareholders of the Service Economy Portfolio a much
more broadly diversified portfolio. Morgan Growth Fund is similar to the Service
Economy Portfolio in several ways. After the merger, shareholders would still
maintain a significant interest in the service sector as Morgan Growth Fund
invests a substantial portion of its assets in the service sector of the
economy. In addition, the Morgan Growth Fund invests in companies covering a
wide range of market capitalizations. On average the market capitalization of
the two portfolios are similar. Both Portfolios emphasize growth stocks. The
respective investment returns of each Fund are as shown on page 19 under
"Performance Summary". The Service Economy Portfolio and approximately 40% of
the assets of Morgan Growth Fund are managed by WMC. Over longer-term periods,
the total return of the Service Economy Portfolio and Morgan Growth Fund have
been similar, however, Morgan Growth Fund has been less volatile, reflecting its
broader diversification.
Given this background, the Officers and Directors of the Service Economy
Portfolio have carefully evaluated the Service Economy Portfolio's performance
record since inception, giving careful consideration to the risks and
opportunities of making changes. The Officers and Directors have concluded that
it would be in the best interest of the Portfolio and its shareholders that the
assets of the Portfolio be acquired by Morgan Growth Fund.
THE PLAN OF REORGANIZATION
The Agreement provides that Morgan Growth Fund will acquire substantially
all of the assets of the Service Economy Portfolio in exchange solely for shares
of common stock ($.001 par value) of Morgan Growth Fund on the Closing Date,
June 2, 1994 or such later date as may be agreed upon by the parties. The number
of shares of Morgan Growth Fund to be issued to shareholders of the Service
Economy Portfolio will be determined on the basis of relative net asset values
per share of the two Funds computed as of the close of the New York Stock
Exchange on the Closing Date. The net asset value per share for each Fund will
be determined by dividing the total value of each Fund's investments and other
assets, less any liabilities, by the total of its outstanding shares using the
valuation procedures set forth under "The Fund's Share Price" on page 14 of the
accompanying Morgan Growth Fund Prospectus.
As of the close of business on March 1, 1994, each share of the Service
Economy Portfolio was valued at $23.42 and each share of Morgan Growth Fund was
valued at $12.09, for purposes of computing the exchange ratio. Using this
value, a total of approximately 2,841,682 shares of Morgan Growth Fund would
have been issuable to the Service Economy Portfolio pursuant to the Agreement,
representing an exchange ratio of 1.94 shares of Morgan Growth Fund for each
share of the Service Economy Portfolio then outstanding. The computation of this
exchange ratio, had the transaction taken place on March 1, 1994, is set forth
as Appendix A to the Agreement.
Immediately following the Closing Date, the Service Economy Portfolio will
dissolve and distribute pro rata to its shareholders of record as of the close
of business on the Closing Date, the shares of Morgan Growth Fund received by
the Service Economy Portfolio. Such liquidation and distribution will be
accomplished by the establishment of open accounts on the share records of
Morgan Growth Fund in the names of such Service Economy Portfolio shareholders
and representing the respective pro rata number of shares of Morgan Growth Fund
due such shareholders. Fractional shares of Morgan Growth Fund will be carried
to the
12
<PAGE> 13
third decimal place. As promptly as practicable after the Closing Date, each
holder of any outstanding certificate or certificates representing shares of the
Service Economy Portfolio may surrender the same to The Vanguard Group, Inc., as
transfer agent for Morgan Growth Fund, and request in exchange therefore a
certificate representing the number of whole shares of Morgan Growth Fund into
which shares of the Service Economy Portfolio theretofore represented by the
certificate or certificates so surrendered shall have been converted. However,
no fractional share certificates will be issued. Morgan Growth Fund will issue
new certificates only upon written request. Until so surrendered, each
outstanding certificate, which, prior to the Closing Date, represented shares of
the Service Economy Portfolio shall be deemed for all purposes to evidence
ownership of the number of shares of Morgan Growth Fund into which the former
shares of the Service Economy Portfolio have been converted.
The consummation of the Agreement is further subject to the customary
conditions applicable to corporate reorganizations of this type as set forth in
Section 8 of the Agreement. Moreover, the Agreement may be terminated and the
reorganization abandoned at any time, before or after consent of the two
parties, or by either party if any condition set forth in Section 8 has not been
fulfilled by the other party or waived by the party entitled to its benefits.
EXPENSES OF THE REORGANIZATION
The Service Economy Portfolio and Morgan Growth Fund will each bear such
expenses of entering into and carrying out the provisions of the Agreement as
will be separately incurred by it. The expenses of Morgan Growth Fund will
include legal and accounting fees, and are expected to be minimal. The Service
Economy Portfolio expenses will include: the costs of the special meeting; proxy
costs (including all costs of solicitation, printing and mailing of this Proxy
Statement); the expenses of its proposed liquidation and dissolution; and legal
and accounting fees. It is estimated that these expenses will not exceed
$15,000.
TAX CONSEQUENCES
Consummation of the proposed reorganization is conditioned upon receipt of
an opinion of Stradley, Ronon, Stevens and Young, counsel to the Service Economy
Portfolio and Morgan Growth Fund, that the acquisition will qualify as a
reorganization within the meaning of Section 368(a)(1)(c) of the Internal
Revenue Code of 1986, as amended, and that the proposed reorganization will not
result in the recognition of gain or loss for Federal income tax purposes for
either the Service Economy Portfolio, Morgan Growth Fund or their respective
shareholders. See Section 8(f ) of the Agreement.
SHAREHOLDERS' RIGHTS
There are no material differences between the rights of the Service Economy
Portfolio's shareholders and the rights of Morgan Growth Fund's shareholders.
Morgan Growth Fund and the Service Economy Portfolio are each Maryland
corporations. Shares of both Funds are fully paid and nonassessable. Holders
thereof have noncumulative voting rights and equal rights with respect to
dividends, assets and liquidations, but no preemptive rights. Shareholders of
the Service Economy Portfolio will not be entitled to any "dissenters rights"
under Maryland law since the reorganization is between two open-end investment
companies registered under the Investment Company Act of 1940.
13
<PAGE> 14
However, shareholders who find that the proposed reorganization does not
meet their particular investment needs and objectives, may consider two
additional options: (1) exchanging their holdings without sales commissions into
another mutual fund in The Vanguard Group, currently offering its shares to new
investors, which is better suited to their goals; or (2) redeeming shares for
cash. These options are available to a Service Economy Portfolio shareholder
both before and, as a Morgan Growth Fund shareholder, after the reorganization.
Shareholders who exercise either of these options on or after April 18, 1994
will not be subject to the 1% redemption fee. Exchanges and redemptions are both
taxable events so either action will result in the realization of a capital gain
or capital loss to the shareholder, depending upon the original cost basis of
the shareholder's investment.
CAPITALIZATION
The following table shows the capitalization of the Service Economy
Portfolio and Morgan Growth Fund as of March 1, 1994, and on a pro forma basis
as of that date giving effect to the proposed acquisition of assets at net asset
value.
<TABLE>
<CAPTION>
SERVICE MORGAN
ECONOMY GROWTH PRO FORMA
PORTFOLIO FUND COMBINED
------- ----------- -----------
<S> <C> <C> <C>
Net Assets (000)................................ $34,483 $ 1,131,549 $ 1,166,032
Net Assets Per Share............................ $ 23.42 $ 12.09 $ 12.09
Shares Outstanding (000)........................ 1,472 93,593 96,435
</TABLE>
The relative net asset values do not include the respective expenses to
each Fund connected with the reorganization; however, such expenses would not be
expected to cause the net asset value to change by more than $.01 per share for
either Fund.
ADDITIONAL INFORMATION ON THE SERVICE ECONOMY PORTFOLIO
AND MORGAN GROWTH FUND
THE SERVICE ECONOMY PORTFOLIO
1. Background
The Service Economy Portfolio was established in 1984. The objective in
forming the Service Economy Portfolio was to provide investors with a means to
concentrate their investments in the service economy industry.
2. Investment Objective and Policies
The objective of the Service Economy Portfolio is to provide long-term
growth of capital for its shareholders by investing primarily in common stocks
concentrated in the service economy industry.
14
<PAGE> 15
3. Investment Adviser
The Service Economy Portfolio employs Wellington Management Company ("WMC")
to manage the investment and reinvestment of the assets of the Portfolio and to
continuously review, supervise and administer the Portfolio's investment
program. WMC discharges its responsibilities subject to the control of the
officers and Directors of the Service Economy Portfolio. Mr. Matthew E. Megargel
serves as portfolio manager of the Fund.
The Service Economy Portfolio pays WMC a Basic Fee at the end of each
fiscal quarter, calculated by applying a quarterly rate, based on the annual
percentage rates set forth on page 5.
The advisory fee is based on the total assets for five of the Portfolios of
Vanguard Specialized Portfolios (Health Care, Service Economy, Energy,
Technology and Utilities Income) and is allocated to each Portfolio based on the
net assets of each. For the fiscal year ended January 31, 1994, the investment
advisory fee represented an effective annual rate of .14 of 1% of average net
assets for each Portfolio.
During the fiscal years ended January 31, 1992, 1993 and 1994, the Service
Economy Portfolio paid the advisory fees of $50,000, $40,000, and $46,000.
MORGAN GROWTH FUND
1. Background
Morgan Growth Fund was organized in 1968 as an open-end diversified
management investment company.
2. Investment Objective and Policies
Morgan Growth Fund seeks to provide long-term capital appreciation by
investing primarily in the equity securities of growth companies. See
"Investment Objective" and "Investment Policies" on page 4 of the Morgan Growth
Fund Prospectus.
3. Investment Adviser
Morgan Growth Fund employs a multi-manager approach with Wellington
Management Company ("WMC") managing approximately 40% of the Fund's assets. FPA
is responsible for the investment of approximately 33% of the Fund's assets,
Husic Capital Management serves as investment adviser with respect to
approximately 13% of the Fund's assets, Vanguard's Core Management Group is
responsible for the investment of approximately 9% of the Funds assets, and
approximately 5% of the Fund's assets are held in cash.
Morgan Growth Fund pays WMC a Basic Fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the annual percentage rates
set forth on page 5, to WMC's portion of Morgan Growth Fund's average month-end
net assets for the quarter.
The Fund pays FPA a basic advisory fee calculated by applying varying
percentage rates to the average net assets of the Fund managed by FPA as set
forth on page 6.
15
<PAGE> 16
The Fund pays Husic a basic advisory fee calculated by applying various
percentage rates to the average net assets of the Fund managed by Husic as set
forth on page 6.
The basic advisory fees payable to WMC, FPA and Husic may be increased or
decreased by applying an adjustment formula ("incentive/penalty fee") based on
the respective adviser's performance relative to that of the Growth Fund Stock
Index as set forth beginning on page 6.
The investment performance of Morgan Growth Fund for any period, expressed
as a percentage of Morgan Growth Fund's net asset value per share at the
beginning of such period, is the sum of: (i) the change in Morgan Growth Fund's
net asset value per share during such period; (ii) the value of Morgan Growth
Fund's cash distributions per share having an ex-dividend date occurring within
such period; and (iii) the per share amount of capital gains taxes paid or
accrued during such period by Morgan Growth Fund for undistributed realized
long-term capital gains. The investment record of the Growth Stock Fund Index
for any period, expressed as a percentage of the Growth Fund Stock Index level
at the beginning of such period, is the sum of (i) the change in the level of
the Growth Fund Stock Index, during such period and (ii) the value, computed
consistently with the Growth Fund Stock Index, of cash distributions having an
ex-dividend date occurring within such period made by companies whose securities
comprise the Growth Fund Stock Index all subject to and in accordance with any
then applicable rules of the Securities and Exchange Commission.
For the purpose of determining the fee adjustment for investment
performance, the net assets of Morgan Growth Fund are averaged over the same
period as the investment performance of Morgan Growth Fund and the investment
record of the Growth Fund Stock Index are computed.
During the three fiscal years ended December 31, 1993, Morgan Growth Fund
paid WMC the following advisory fees:
<TABLE>
<CAPTION>
1991 1992 1993
---------- ---------- ----------
<S> <C> <C> <C>
Basic Fee...................................... $1,022,000 $1,146,158 $1,198,679
Increase (Decrease) for Performance
Adjustment................................... (169,000) -- (235,201)
---------- ---------- ----------
Total..................................... $ 950,000 $1,146,158 963,478
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
During the three fiscal years ended December 31, 1993, Morgan Growth Fund
paid FPA the following advisory fees:
<TABLE>
<CAPTION>
1991 1992 1993
---------- -------- --------
<S> <C> <C> <C>
Basic Fee.......................................... $ 322,618 $ 96,012 470,526
Increase for Performance Adjustment................ 92,051 -- --
---------- -------- --------
Total......................................... $ 414,669 $ 96,012 470,526
---------- -------- --------
---------- -------- --------
</TABLE>
For the period June 28, 1993 to December 31, 1993, the Fund paid Husic an
advisory fee of $140,254.
The present agreements with WMC and FPA continue until April 23, 1994 and
the present agreement with Husic continues until September 30, 1995. The
agreements are renewable thereafter for successive one year periods, only if
each renewal is specifically approved by a vote of the Board of Directors,
including the
16
<PAGE> 17
affirmative votes of a majority of the Directors who are not parties to the
contract or "interested persons" (as defined in the Investment Company Act of
1940) of any such party, cast in person at a meeting called for the purpose of
considering such approval. The agreements are 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 (2) by WMC, FPA and Husic upon 90 days
written notice to Morgan Growth Fund.
INVESTMENT LIMITATIONS
The investment limitations for Morgan Growth Fund summarized on page 7 of
the Prospectus are substantially identical to those applicable to the Service
Economy Portfolio. These investment limitations may not be changed without
shareholder approval except that Morgan Growth Fund is prohibited from investing
more than 25% of its assets in any one industry.
PORTFOLIO BROKERAGE
The portfolio brokerage policies of the Service Economy Portfolio and
Morgan Growth Fund are identical. In this respect the investment advisory
agreements for each Fund authorize the investment advisers, with the approval of
such Fund's Board of Directors, to select the brokers or dealers that will
execute the purchases and sales of portfolio securities for the Fund and directs
the investment advisers to use their best efforts to obtain the best available
price and most favorable execution with respect to all transactions for the
Fund. The investment advisers have undertaken to execute each investment
transaction at a price and commission which provides the most favorable total
cost or proceeds obtainable under the circumstances.
In placing portfolio transactions, the investment advisers use their 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 are considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers who supply investment research and statistical information and
provide other services in addition to execution services to the Fund and/or the
investment advisers. Each investment adviser considers the investment services
it receives 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.
Each 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 investment adviser may
cause the Fund to pay a broker-dealer which furnishes brokerage and research
services at a higher commission than that which might be charged by another
broker-dealer for effecting the same transaction; provided that such commission
is deemed reasonable in terms of either that particular transaction or the
overall responsibilities of the investment adviser to the Fund and the other
Funds in the Group.
Currently, it is Morgan Growth Fund's policy that the investment advisers
may at times pay higher commissions in recognition of brokerage services felt
necessary for the achievement of better execution of certain securities
transactions that otherwise might not be available. Each investment adviser will
pay such higher commissions only if it believes this to be in the best interest
of the Fund. Some brokers or dealers who
17
<PAGE> 18
may receive such higher commissions in recognition of brokerage services related
to execution of securities transactions are also providers of research
information to the investment adviser and/or the Fund. However, each investment
adviser has informed the Fund that it will not pay higher commission rates
specifically for the purpose of obtaining research services.
Since each Fund does not market its shares through intermediary brokers or
dealers, it is not Morgan Growth Fund's practice to allocate brokerage or
principal business on the basis of sales of its shares which may be through such
firms. However, each Fund may place portfolio orders with qualified brokers or
dealers who recommend the Fund to clients, or who act as agent in the purchase
of shares of Morgan Growth Fund for their clients, and may, when a number of
brokers and dealers can provide comparable best price and execution on a
particular transaction, consider the sale of Fund shares by a broker or dealer
in selecting among qualified brokers or dealers.
During the fiscal year ended January 31, 1994, the Service Economy
Portfolio paid approximately $30,000 in brokerage commissions and had a
portfolio turnover rate of 29%. During the fiscal year ended December 31, 1993,
Morgan Growth Fund paid approximately $1,577,672 in brokerage commissions, and
had a portfolio turnover rate of 72%.
THE VANGUARD GROUP
The Service Economy Portfolio and Morgan Growth Fund are members of The
Vanguard Group of Investment Companies. Through their jointly-owned subsidiary,
The Vanguard Group, Inc., the member Funds obtain at cost virtually all of their
corporate management, administrative and distribution services. See page 8 of
the Morgan Growth Fund Prospectus.
LITIGATION
Neither the Service Economy Portfolio nor Morgan Growth Fund is involved in
any litigation.
18
<PAGE> 19
PERFORMANCE SUMMARY
The following table shows the investment results of the Service Economy
Portfolio and Morgan Growth Fund as compared to changes in the unmanaged
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500"). This
comparison is designed to provide an historical basis for evaluation of the
proposed reorganization by covering the relative investment performance of the
Service Economy Portfolio, Morgan Growth Fund and the S&P 500 since the
inception of the Service Economy Portfolio. The results shown represent "total
return" investment performance which assumes the reinvestment of all capital
gains and income dividends for the indicated periods. The investment performance
should be considered in light of each Fund's investment objectives and policies,
the characteristics and quality of each Fund's investments, and the period
selected. Future investment results cannot be predicted.
<TABLE>
<CAPTION>
SERVICE MORGAN
ECONOMY GROWTH S&P 500
YEAR ENDED DECEMBER 31 PORTFOLIO FUND INDEX
- ---------------------------------------------------------------- --------- ------ -----------
<S> <C> <C> <C>
1985............................................................ 43.7% 30.3% 31.6%
1986............................................................ 12.8 7.8 18.6
1987............................................................ -13.0 5.0 5.2
1988............................................................ 19.1 22.3 16.5
1989............................................................ 31.5 22.7 31.6
1990............................................................ -15.4 -1.5 -3.1
1991............................................................ 34.3 29.3 30.4
1992............................................................ 10.6 9.5 7.6
1993............................................................ 12.0 7.3 10.1
--------- ------ -----
Cumulative 3 Year............................................... 66.5 52.0 54.4
Cumulative 5 Year............................................... 85.3 83.7 96.9
Cumulative Since 5/23/84........................................ 259.8 258.5 323.0
Annualized 3 Year............................................... 18.5 15.0 15.6
Annualized 5 Year............................................... 13.1 12.9 14.5
Annualized Since 5/23/84........................................ 14.3 14.2 16.2
</TABLE>
19
<PAGE> 20
MORGAN GROWTH FUND FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding throughout each
period, insofar as it relates to each of the five years in the period ended
December 31, 1993, have been audited by Price Waterhouse, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the Fund's financial statements and notes thereto,
which are incorporated by reference in the Statement of Additional Information
and in this Prospectus, and which appear, along with the report of Price
Waterhouse, in the Fund's 1993 Annual Report to the Shareholders.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR....... $12.65 $12.20 $10.40 $11.72 $10.27 $ 9.39 $11.50 $13.82 $11.45 $13.84
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income... .18 .18 .29 .32 .28 .25 .23 .21 .23 .25
Net Realized and
Unrealized
Gain (Loss) on
Investments........... .71 .97 2.66 (.50) 2.04 1.85 .31 .78 2.99 (.94)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS.......... .89 1.15 2.95 (.18) 2.32 2.10 .54 .99 3.22 (.69)
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income..... (.18) (.18) (.29) (.34) (.28) (.24) (.20) (.43) (.25) (.31)
Distributions from
Realized
Capital Gains......... (1.35) (.52) (.86) (.80) (.59) (.98) (2.45) (2.88) (.60) (1.39)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS... (1.53) (.70) (1.15) (1.14) (.87) (1.22) (2.65) (3.31) (.85) (1.70)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR............. $12.01 $12.65 $12.20 $10.40 $11.72 $10.27 $ 9.39 $11.50 $13.82 $11.45
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN.............. 7.32% 9.54% 29.33% (1.51%) 22.66% 22.34% 5.02% 7.63% 30.29% (6.06%)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions).............. $1,135 $1,116 $957 $697 $733 $ 622 $ 538 $594 $665 $468
Ratios of Expenses to
Average Net Assets...... .49% .48% .46% .55% .51% .55% .46% .54% .60% .68%
Ratio of Net Investment
Income to Average Net
Assets.................. 1.36% 1.51% 2.36% 2.77% 2.38% 2.20% 1.52% 1.49% 1.96% 2.51%
Portfolio Turnover Rate... 72% 64% 52% 73% 27% 32% 43% 31% 42% 38%
</TABLE>
20
<PAGE> 21
SERVICE ECONOMY PORTFOLIO FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding throughout each
period, insofar as it relates to each of the five years in the period ended
January 31, 1994, has been audited by Price Waterhouse, independent accountants,
whose report thereon was unqualified. This information should be read in
conjunction with the Fund's financial statements and notes thereto, which are
incorporated by reference in the Statement of Additional Information and in this
Prospectus, and which appear, along with the report of Price Waterhouse, in the
Fund's 1994 Annual Report to the Shareholders.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------------------------------------------------------------------------------------
MAY 23, 1984,
1994 1993 1992 1991 1990 1989 1988 1987 1986 TO JAN. 31, 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF
PERIOD.............. $22.36 $19.89 $15.77 $16.87 $16.05 $13.63 $19.45 $16.88 $12.69 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------------
INVESTMENT OPERATIONS
Net Investment
Income............ .22 .17 .28 .34 .41 .26 .51 .38 .20 .12
Net Realized and
Unrealized
Gain (Loss) on
Investments....... 3.51 2.47 4.16 (.78) 1.66 2.41 (3.40) 3.05 4.20 2.57
------ ------ ------ ------ ------ ------ ------ ------ ------ ------------
TOTAL FROM
INVESTMENT
OPERATIONS...... 2.73 2.64 4.44 (.44) 2.07 2.67 (2.89) 3.43 4.40 2.69
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from
Net Investment
Income............ (.22) (.17) (.28) (.39) (.41) (.25) (.88) (.16) (.09) --
Distributions from
Realized
Capital Gain...... (.93) -- (.04) (.27) (.84) -- (2.05) (.70) (.12) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------------
TOTAL
DISTRIBUTIONS... (1.15) (.17) (.32) (.66) (1.25) (.25) (2.93) (.86) (.21) --
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD....... $23.94 $22.36 $19.89 $15.77 $16.87 $16.05 $13.63 $19.45 $16.88 $12.69
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN*......... 12.45% 13.30% 28.31% (2.54%) 12.33% 19.73% (16.40%) 20.77% 35.16% 26.90%
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions)..... $35 $30 $22 $17 $21 $22 $24 $49 $34 $3
Ratios of Expenses to
Average Net
Assets.............. .41% .56% .48% .59% .43% .86% .44% .48% .57% .38%**
Ratio of Net
Investment
Income to Average
Net Assets.......... .96% .93% 1.47% 1.99% 2.10% 1.57% 2.08% 1.61% 2.24% 2.92%**
Portfolio Turnover
Rate................ 29% 38% 43% 34% 83% 33% 49% 96% 54% 125%**
</TABLE>
*Total return figures do not reflect the redemption fee equaling 1% of the
value of shares redeemed, which is withheld from the redemption proceeds and
paid directly to the Portfolio.
**Annualized.
21
<PAGE> 22
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of the Service Economy Portfolio and Morgan Growth
Fund have been audited by Price Waterhouse, independent accountants, for the
periods indicated in said firm's reports thereon which are included in the
respective 1993 and 1994 Annual Reports to Shareholders. Such financial
statements have been referred to herein in reliance on the reports of Price
Waterhouse given on the authority of said firm as experts in auditing and
accounting.
INFORMATION FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
The Service Economy Portfolio and Morgan Growth Fund are subject to the
informational requirements of the Securities and Exchange Act of 1934 and the
Investment Company Act of 1940, and in accordance therewith file reports, proxy
material and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy material and other information can be
inspected and copied at the Public Reference Room maintained by the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material
can be obtained at prescribed rates from the Public Reference Section of the
Commission., Washington, D.C. 20549.
VOTE REQUIRED
Approval of the Agreement and Plan of Reorganization, including the
dissolution of the Service Economy Portfolio, will require the favorable vote of
a majority of the shares of common stock of the Portfolio outstanding and
entitled to vote at this Special Meeting of Shareholders. THE DIRECTORS
RECOMMEND APPROVAL OF THE AGREEMENT AND PLAN OF REORGANIZATION.
The Board of Directors of the Service Economy Portfolio has not determined
what action it will take in the event shareholders fail to approve the
Reorganization or for any reason the transaction with Morgan Growth Fund is not
consummated. However, if the Reorganization is not approved by the shareholders
of the Service Economy Portfolio, the Board of Directors will consider
alternative dispositions of the Fund's net assets, including the sale of assets
to, or merger with, another investment company.
OTHER MATTERS
On March 1, 1994, the following shareholders held more than 5% of the
outstanding shares of the Service Economy Portfolio:
The Board of Directors knows of no other business to be brought before the
meeting. However, if any other matters come before the meeting, it is the
intention that proxies which do not contain specific restrictions to the
contrary will be voted on such matters in accordance with the judgment of the
persons named in the enclosed form of proxy.
Further information about Morgan Growth Fund is contained in the
accompanying Morgan Growth Fund Prospectus (Exhibit II). Shareholders of the
Service Economy Portfolio are urged to read this Proxy Statement and the Morgan
Growth Fund Prospectus carefully prior to executing and returning their proxies
and to retain the Prospectus for future reference.
22
<PAGE> 23
EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, made as of this 1st day of March,
1994, by and between Vanguard Specialized Portfolios, Inc. (hereinafter called
"VSP"), a Maryland corporation, with its principal place of business at 100
Vanguard Boulevard, Malvern Pennsylvania 19355 and Vanguard/Morgan Growth Fund,
Inc. (hereinafter called "Vanguard/Morgan Growth"), a Maryland corporation, with
its principal place of business at 100 Vanguard Boulevard, Malvern, Pennsylvania
19355.
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of
Reorganization") will consist of (i) the acquisition by Vanguard/Morgan Growth
Fund of substantially all of the property, assets and goodwill of the class of
shares of VSP known as the Service Economy Portfolio (the "Service Economy
Portfolio") in exchange solely for shares of common stock, $.001 par value per
share, of Vanguard/Morgan Growth Fund, (ii) the distribution of such shares of
Vanguard/Morgan Growth Fund common stock to the stockholders of the Service
Economy Portfolio according to their respective interests, and (iii) the
dissolution of the Service Economy Portfolio as soon as practicable after the
closing provided for in Section 3, all upon and subject to the terms and
conditions of the Agreement hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration of
the premises and of the covenants and agreements hereinafter set forth, the
parties hereto covenant and agree as follows:
1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF THE SERVICE
ECONOMY PORTFOLIO
a. The Service Economy Portfolio agrees that it will convey, transfer and
deliver to Vanguard/Morgan Growth Fund at the closing provided for in Section 3
(hereinafter called the "Closing") all of its then existing assets free and
clear of all liens, encumbrances and claims whatsoever, except for cash or bank
deposits in an amount necessary to pay: (1) its costs and expenses of carrying
out this Agreement (including but not limited to fees of counsel and
accountants, its income dividend payable prior to the Closing Date, and expenses
of its liquidation and dissolution contemplated hereunder); (2) to discharge its
unpaid liabilities on its books at the Closing Date; and (3) to pay such
contingent liabilities as the directors shall reasonably deem to exist against
the Service Economy Portfolio, if any, at the Closing Date, for which contingent
and other appropriate liability reserves shall be established on the Service
Economy Portfolio's books. Any unspent portion of such funds retained shall be
delivered to Vanguard/Morgan Growth Fund upon dissolution of the Service Economy
Portfolio.
b. Subject to the terms and conditions of this Agreement and in reliance on
the representations and warranties of the Service Economy Portfolio herein
contained, and in consideration of such sale, conveyance, transfer and delivery,
Vanguard/Morgan Growth Fund agrees at the Closing to deliver to the Service
Economy Portfolio the number of shares of common stock of the Vanguard/Morgan
Growth Fund ($.10 par value) determined as set forth in Section 2 hereof.
<PAGE> 24
c. Immediately following the Closing Date, the Service Economy Portfolio
will liquidate and distribute pro rata to its stockholders of record as of the
close of business on the Closing Date, the shares of Vanguard/Morgan Growth Fund
common stock received by the Service Economy Portfolio pursuant to this Section
1. Such liquidation and distribution will be accompanied by the establishment of
open accounts on the stock records of Vanguard/Morgan Growth Fund in the names
of such stockholders of the Service Economy Portfolio representing the
respective pro rata number of Vanguard/Morgan Growth Fund shares due such
stockholders. Fractional shares of Vanguard/Morgan Growth's common stock will be
carried to the third decimal place. As promptly as practicable after the Closing
Date, each holder of any outstanding certificate or certificates theretofore
representing shares of common stock of the Service Economy Portfolio may
surrender the same to a Transfer Agent designated by Vanguard/Morgan Growth Fund
and request in exchange therefore a certificate or certificates representing the
number of whole and fractional shares of common stock of Vanguard/Morgan Growth
into which the shares of common stock of the Service Economy Portfolio
theretofore represented by the certificate or certificates so surrendered shall
have been converted. Certificates for fractional shares of Vanguard/Morgan
Growth will not be issued, however, but shall continue to be carried for the
open account of such stockholder. Until so surrendered, each outstanding
certificate which, prior to the Closing Date, represented common stock of the
Service Economy Portfolio shall be deemed for all corporate purposes to evidence
ownership of the number of shares of common stock of Vanguard/Morgan Growth into
which the common stock of the Service Economy Portfolio (which, prior to the
Closing Date, were represented thereby) have been so converted.
d. As promptly as practicable after the liquidation of the Service Economy
Portfolio as aforesaid, the Service Economy Portfolio shall be dissolved
pursuant to the provisions of the General Laws of the State of Maryland and its
legal existence shall be terminated as provided therein.
2. EXCHANGE RATIO
a. The value of the Service Economy Portfolio's assets to be acquired by
Vanguard/Morgan Growth Fund hereunder shall be the net asset value computed as
of the close of business (close of the New York Stock Exchange) on the Closing
Date, using the valuation procedures set forth in Vanguard/Morgan Growth Fund's
registration statement under the Securities Act of 1933.
b. The total net assets of the Service Economy Portfolio determined under
(a) shall be divided by the number of shares of its outstanding common stock,
excluding treasury shares, to determine the Service Economy Portfolio's net
asset value per share as of the close of business on the Closing Date.
c. The net asset value of a Vanguard/Morgan Growth share of common stock
shall be determined to the nearest full cent as of the close of business on the
Closing Date, using the valuation as set forth in Vanguard/Morgan Growth Fund's
registration statement under the Securities Act of 1933.
d. The net asset value per share for the Service Economy Portfolio as
determined in (b) shall then be divided by the Vanguard/Morgan Growth net asset
value per share as determined in (c) to determine the exchange ratio. See
Appendix A to this Agreement for an example of how to determine the exchange
ratio.
2
<PAGE> 25
3. CLOSING AND CLOSING DATE
The Closing shall be June 2, 1994, or such later date as the parties may
mutually agree. The Closing shall take place at the principal office of
Vanguard/Morgan Growth Fund, 100 Vanguard Boulevard, Malvern Pennsylvania 19355,
at 4:30 P.M., E.S.T. The Service Economy Portfolio shall have provided for
delivery at the Closing of its assets to State Street Bank and Trust Company,
Boston, Massachusetts, as Custodian for Vanguard/Morgan Growth Fund. The Service
Economy Portfolio shall deliver at the Closing a list of names and addresses of
the stockholders of the Service Economy Portfolio and the number of shares owned
by each such stockholder, indicating thereon which such shares are represented
by outstanding certificates and which by open accounts, all as of the close of
business on the Closing Date, certified by its Transfer Agent. Vanguard/Morgan
Growth Fund shall issue and deliver a certificate or certificates evidencing the
shares of Vanguard/Morgan Growth's common stock to be delivered at the Closing
to said Transfer Agent registered in such manner as the Service Economy
Portfolio may request, or provide evidence satisfactory to the Service Economy
Portfolio that such shares of Vanguard/Morgan Growth's common stock have been
registered in an open account on the books of Vanguard/Morgan Growth Fund in
such manner as the Service Economy Portfolio may request. Simultaneous with the
Closing, the parties shall cause the filing of Articles of Transfer with respect
to the sale and transfer of assets contemplated hereunder with the Department of
Assessments and Taxation of the State of Maryland.
4. REPRESENTATIONS AND WARRANTIES BY THE SERVICE ECONOMY PORTFOLIO
The Service Economy Portfolio represents and warrants that:
a. The Service Economy Portfolio is a series of shares of a corporation
duly organized, validly existing and in good standing under the laws of the
State of Maryland and has all corporate power and authority to conduct its
business as such business is now being conducted.
b. The Service Economy Portfolio has a duly authorized capital consisting
of 120,000,000 shares of common stock ($.001 par value) of which approximately
1,472,096 shares were issued and outstanding on the date hereof. All of its
presently outstanding shares are validly issued, fully paid and non-assessable
by it.
c. The Service Economy Portfolio is duly registered as a diversified,
open-end management company under the Investment Company Act of 1940.
d. There has been mailed to each stockholder of record of the Service
Economy Portfolio entitled to vote at the meeting of stockholders, at which
action on this Agreement is to be considered, a Combined Proxy Statement and
Prospectus which complies in all material respects with the applicable
provisions of the federal securities laws and the rules and regulations
thereunder.
e. The financial statements appearing in the Service Economy Portfolio's
annual report for the year ended January 31, 1994, audited by Price Waterhouse,
a copy of which has been delivered to Vanguard/Morgan Growth Fund, and similar
unaudited financial statements and other financial data as of May 31, 1994, and
for the period then ended, which will be delivered to Vanguard/ Morgan Growth
Fund by the principal financial officer of the Service Economy Portfolio prior
to Closing, fairly present the financial position of the Service Economy
Portfolio as of the respective dates indicated and the results of its operations
3
<PAGE> 26
and changes in net assets for the respective periods indicated, in conformity
with generally accepted accounting principles applied on a consistent basis.
5. REPRESENTATIONS AND WARRANTIES BY VANGUARD/MORGAN GROWTH FUND
Vanguard/Morgan Growth Fund represents and warrants that:
a. Vanguard/Morgan Growth Fund is a corporation duly organized, validly
existing and in good standing under the laws of the State of Maryland and has
all corporate power and authority to conduct its business as such business is
presently being conducted.
b. Vanguard/Morgan Growth Fund has a duly authorized capital consisting of
150,000,000 shares of common stock ($.10 par value). On the date of this
Agreement Vanguard/Morgan Growth had issued and outstanding approximately
93,593,796 shares of common stock. All of its presently outstanding shares are
validly issued, fully paid and non-assessable by it.
c. Vanguard/Morgan Growth Fund is duly registered as a diversified, openend
investment company under the Investment Company Act of 1940 and is authorized to
offer and sell shares of common stock of its two series.
d. Vanguard/Morgan Growth Fund will file with the United States Securities
and Exchange Commission a Registration Statement on Form N-14 under the
Securities Act of 1933 relating to the shares of Vanguard/Morgan Growth common
stock issuable hereunder. Appropriate portions of such Registration Statement
after effectiveness will be delivered to stockholders of the Service Economy
Portfolio as proxy materials in connection with the solicitation of proxies
approving the proposed transaction, and other portions will be available upon
request by stockholders. The Registration Statement will note, on its facing
page, that the securities proposed to be distributed thereunder have previously
been registered in accordance with Rule 24f-2 under the Investment Company Act
of 1940. At the time such Registration Statement becomes effective, it (i) will
comply in all material respects with the provisions of the Securities Act of
1933 and the rules and regulations promulgated thereunder, and (ii) will not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated herein or necessary to make the statements therein not
misleading; and at the time the Registration Statement becomes effective, at the
time of the Service Economy Portfolio's stockholders' meeting and at the Closing
Date, the prospectus included therein will not contain an untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
e. The common stock of Vanguard/Morgan Growth is duly qualified for
offering to the public in all states of the United States, and there are a
sufficient number or value of shares of such stock so qualified and a sufficient
number of shares registered under the Securities Act of 1933 pursuant to the
Investment Company Act of 1940 Rule 24f-2 to permit the transfers contemplated
by this Agreement to be consummated.
f. The financial statements appearing in the Vanguard/Morgan Growth Fund
Annual Report for the year ended December 31, 1993, audited by Price Waterhouse,
copies of which have been delivered to the Service Economy Portfolio, and
similar unaudited financial statements and other financial data as of April 30,
1994, and for the period then ended, which will be delivered to the Service
Economy Portfolio prior to the Closing by the principal financial officer of
Vanguard/Morgan Growth Fund, fairly present the financial position of
4
<PAGE> 27
Vanguard/Morgan Growth Fund, as of the respective dates indicated and the
results of its operations and changes in its net assets for the respective
periods indicated, in conformity with generally accepted accounting principles
applied on a consistent basis.
6. REPRESENTATIONS AND WARRANTIES BY SERVICE ECONOMY PORTFOLIO AND
VANGUARD/MORGAN GROWTH FUND
The Service Economy Portfolio and Vanguard/Morgan Growth Fund each
represents and warrants to the other that:
a. The statement of assets and liabilities to be furnished by it as of the
close of business on the Closing Date for the purpose of determining the number
of shares of Vanguard/Morgan Growth common stock to be issued pursuant to
Section 1 of this Agreement will accurately reflect its net assets and
outstanding shares of common stock as of such date in conformity with generally
accepted accounting principles applied on a consistent basis.
b. On the Closing Date it will have good and marketable title to all of the
securities and other assets shown on the statement of assets and liabilities
referred to in (a) above free and clear of all liens or encumbrances of any
nature whatever except such imperfections of title or encumbrances as do not
materially detract from the value or use of the assets subject thereto, or
materially affect title thereto.
c. There is no material suit, action or legal or administrative proceeding
pending or threatened against it, other than as disclosed in the Combined Proxy
Statement and Prospectus prepared in connection with the meeting at which action
on this Agreement will be taken.
d. By Closing Date, all of its Federal and other tax returns and reports
required by law to be filed shall have been filed, and all Federal and other
taxes shown due on said returns shall have been paid.
e. The execution, delivery and performance of this Agreement will have been
duly authorized prior to the Closing Date by all necessary corporate action on
the part of each corporation and this Agreement constitutes the valid and
binding obligation of each corporation enforceable in accordance with its terms.
7. COVENANTS OF THE SERVICE ECONOMY PORTFOLIO AND VANGUARD/MORGAN GROWTH FUND
a. The Service Economy Portfolio and Vanguard/Morgan Growth Fund each
covenant to operate its business in the ordinary course between the date hereof
and the Closing Date.
b. The Service Economy Portfolio undertakes that it will not acquire the
Vanguard/Morgan Growth Fund shares for the purpose of making any distribution
thereof other than to its own stockholders.
c. The Service Economy Portfolio undertakes that it will at its own expense
prepare and file with the Securities and Exchange Commission a Report on Form
N-SAR pursuant to the requirements of the Investment Company Act of 1940 for the
period January 31, 1994 through the Closing Date.
5
<PAGE> 28
8. CONDITIONS PRECEDENT TO BE FULFILLED BY SERVICE ECONOMY PORTFOLIO AND
VANGUARD/MORGAN GROWTH FUND
The obligations of each of the parties to effectuate the Plan of
Reorganization hereunder shall be subject to the following conditions:
a. The representations and warranties of each Party contained herein shall
be true as of and at the Closing Date with the same effect as though made at
such date; each Party shall have performed all obligations required by this
Agreement to be performed by it prior to the Closing Date; and each Party shall
have delivered to it a certificate dated the Closing Date signed by its Chairman
of the Board or President and by its Secretary or Assistant Secretary to the
foregoing effect.
b. Each Party shall have delivered a certified copy of the resolution
approving this Agreement adopted by at least a majority vote of its directors,
including a majority of its directors who are not "interested persons" as
defined in the Investment Company Act of 1940.
c. The Securities and Exchange Commission shall not have issued an
unfavorable advisory report under Section 25(b) of the Investment Company Act of
1940 nor instituted any proceeding seeking to enjoin consummation of the
reorganization under Section 25(c) of the Investment Company Act of 1940.
d. The holders of at least a majority of the outstanding shares of common
stock of the Service Economy Portfolio shall have voted in favor of the adoption
of this Agreement and the reorganization contemplated hereby at an annual or
special meeting.
e. The Service Economy Portfolio shall have declared a distribution or
distributions prior to the Closing Date which, together with all previous
distributions, shall have the effect of distributing to its stockholders all of
its net investment income and capital gains since the close of its last fiscal
year.
f. That there shall be delivered to the Fund an opinion from Messrs.
Stradley, Ronon, Stevens & Young, counsel to the Fund, to the effect that
provided the acquisition contemplated hereby is carried out in accordance with
this Plan:
(1) Provided the acquisition is carried out in accordance with the
applicable laws of Maryland, the acquisition by Vanguard/Morgan Growth Fund
of substantially all of the assets of the Service Economy Portfolio as
provided for herein in exchange for Vanguard/Morgan Growth Fund shares will
qualify as a reorganization within the meaning of Section 368(a)(1)(C) of
the Code, and Vanguard/Morgan Growth Fund will each be a party to the
respective reorganization within the meaning of Section 368(b) of the Code;
for purposes of this opinion, "substantially all" means at least 70% of the
fair market of the gross assets and at least 90% of the fair market value
of the net assets;
(2) No gain or loss will be recognized by Service Economy Portfolio
upon the transfer of substantially all of its assets to Vanguard/Morgan
Growth Fund in exchange solely for voting shares of Vanguard/Morgan Growth
Fund (Code Section 361(a));
(3) No gain or loss will be recognized by Vanguard/Morgan Growth Fund
upon the receipt of substantially all of the assets of Growth Fund in
exchange solely for voting shares of Vanguard/Morgan Growth Fund (Code
Section 1032(a));
6
<PAGE> 29
(4) The basis of the assets of Service Economy Portfolio received by
Vanguard/Morgan Growth Fund will be the same as the basis of such assets to
Growth Fund immediately prior to the exchange (Code Section 362(b));
(5) The holding period of the assets of Service Economy Portfolio
received by Vanguard/Morgan Growth Fund will include the period during
which such assets were held by the Service Economy Portfolio (Code Section
1223(2));
(6) No gain or loss will be recognized to the shareholders of Service
Economy Portfolio upon the exchange of their shares in Service Economy
Portfolio for voting shares of Vanguard/Morgan Growth Fund (including
fractional shares to which they may be entitled) (Code Section 354(a)(1));
(7) The basis of Vanguard/Morgan Growth Fund voting shares received by
Service Economy Portfolio shareholders (including fractional shares to
which they may be entitled) will be the same as the basis of the shares of
Service Economy Portfolio surrendered in exchange therefor (Code Section
358(a)(1));
(8) The holding period of Vanguard/Morgan Growth Fund voting shares
received by Service Economy Portfolio shareholders (including fractional
shares to which they may be entitled) will include the holding period of
Service Economy Portfolio shares surrendered in exchange therefor, provided
that Service Economy Portfolio shares were held as a capital asset on the
date of the exchange (Code Section 1223(1)); and
(9) Pursuant to Section 381(a) of the Code and Treasury Regulation
Section 1.381-1(a), Vanguard/Morgan Growth Fund will succeed to and take
into account as of the date of the proposed transfer (as defined in
Treasury Regulation sec. 1.381 (b)-1(b)) the items of Service Economy
Portfolio described in Section 381(c) of the Code, including any
"pro-change capital loss" of Service Economy Portfolio within the meaning
of Treasury Regulation sec. 1.383-1(c)(2), subject to the conditions and
limitations specified in Sections 381(b) and (c), 382, 383 and 384 of the
Code.
(10) Where a dissenting shareholder of Service Economy Portfolio
receives cash solely in exchange for his or her stock, such cash will be
treated as having been received by the shareholder as a distribution in
redemption of his or her stock subject to the provisions and limitations of
Section 302 of the Code.
9. BROKERAGE FEES AND EXPENSES
The Service Economy Portfolio and Vanguard/Morgan Growth Fund each
represent and warrant to the other that there are no brokers or finders fees
payable in connection with the transactions provided for herein.
The Service Economy Portfolio and Vanguard/Morgan Growth Fund shall each
bear such expenses of entering into and carrying out the provisions of this
Agreement as have been separately incurred by it. No Party shall pay any
expenses, if any, of its stockholders arising out of the reorganization.
7
<PAGE> 30
10. TERMINATION; WAIVER; ORDER
a. Anything contained in this Agreement to the contrary notwithstanding,
this Agreement may be terminated and the reorganization abandoned at any time
whether before or after adoption hereof by the stockholders of the Service
Economy Portfolio prior to the Closing Date.
(1) by mutual consent of the Parties;
(2) by either of the Parties if any condition set forth in Section 8
hereof has not been fulfilled or waived by it;
b. An election by a Party to terminate this Agreement and abandon the
reorganization shall be exercised by its Board of Directors.
c. In the event of termination of this Agreement pursuant to the provisions
hereof the same shall become void and have no effect without any liability on
the part of either of the Parties or persons who are its directors, officers or
stockholders in respect of this Agreement, provided that this provision shall
not protect any director or officer of either of the Parties against any
liability to such Party or its stockholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
d. At any time prior to the filing of the Articles of Transfer with the
State of Maryland any of the terms or conditions of this Agreement may be waived
by the Party entitled to the benefit thereof by action taken by its Board of
Directors, or its Chairman of the Board, if, in the judgment of the Board of
Directors or Chairman of the Board taking such action, such waiver will not have
material adverse effect on the benefits intended under this Agreement to the
stockholders of the Party on behalf of which such action is taken.
e. The respective representations and warranties of the Parties contained
in Sections 4 through 7 hereof shall expire with, and be terminated by, the
reorganization contemplated by this Agreement, and neither the respective
Parties nor any of their directors shall be under any liability with respect to
any such representations or warranties after the Closing Date. This provision
shall not protect any director or officer of a corporation against any liability
to such corporation or to its stockholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
f. If any order or orders of the Securities and Exchange Commission with
respect to this Agreement shall impose any terms or conditions which are
acceptable to both the Service Economy Portfolio and Vanguard/Morgan Growth
Fund, such terms and conditions shall be binding as if a part of this Agreement
without further vote or approval of the stockholders of the Service Economy
Portfolio, unless such terms and conditions shall result in a change in the
method of computing the number of shares of Vanguard/Morgan Growth to be issued
to the Service Economy Portfolio, in which event, unless such terms and
conditions shall have been included in the Combined Proxy Statement and
Prospectus solicitation material furnished to the stockholders of the Service
Economy Portfolio prior to the meeting at which the transactions contemplated by
this Agreement shall have been approved, this Agreement shall not be consummated
and shall terminate unless the Service Economy Portfolio shall promptly call a
special meeting of stockholders at which conditions so imposed shall be
submitted for approval.
8
<PAGE> 31
11. ENTIRE AGREEMENT AND AMENDMENTS
This Agreement embodies the entire agreement between the parties and there
are no agreements, understandings, restrictions or warranties among the parties
other than those set forth herein or herein provided for.
12. COUNTERPARTS
This Agreement may be executed in any number of counterparts each of which
shall be deemed to be an original but all such counterparts together shall
constitute but one instrument.
13. NOTICES
Any notice, report or demand required or permitted by any provision of this
Agreement shall be in writing and shall be deemed to have been given if
delivered or mailed, first class postage postpaid, addressed to the Service
Economy Portfolio or Vanguard/Morgan Growth, as the case may be, at 100 Vanguard
Boulevard, Malvern, Pennsylvania 19355.
IN WITNESS WHEREOF, each of the Parties has caused this Agreement and Plan
of Reorganization to be executed on its behalf by its President or a Vice
President and its corporate seal to be affixed hereto and attested by its
Secretary or Assistant Secretary, all as of the day and year first above
written.
<TABLE>
<S> <C>
Attest: VANGUARD SPECIALIZED PORTFOLIOS, INC.
/s/ RAYMOND J. KLAPINSKY By: /s/ JOHN J. BRENNAN
- --------------------------------------------- ---------------------------------------------
Secretary President
(Corporate Seal)
Attest: VANGUARD/MORGAN GROWTH FUND, INC.
/s/ RAYMOND J. KLAPINSKY By: /s/ JOHN J. BRENNAN
- --------------------------------------------- ---------------------------------------------
Secretary President
</TABLE>
9
<PAGE> 32
APPENDIX A
SERVICE ECONOMY PORTFOLIO AND VANGUARD/MORGAN GROWTH FUND
PRO FORMA COMPUTATION OF EXCHANGE RATIO
AS OF MARCH 1, 1994
<TABLE>
<CAPTION>
VANGUARD/
MORGAN GROWTH SERVICE ECONOMY
FUND PORTFOLIO PRO FORMA
-------------- --------------- --------------
<S> <C> <C> <C>
Net assets................................. $1,131,549,000 $34,483,000 $1,166,032,000
-------------- --------------- --------------
-------------- --------------- --------------
Percent of combined assets................. 97% 3% 100%
-------------- --------------- --------------
-------------- --------------- --------------
Issued and outstanding shares.............. 93,593,796 1,472,374 96,435,478
-------------- --------------- --------------
-------------- --------------- --------------
Net asset value per share.................. $12.09 $23.42 $12.09
-------------- --------------- --------------
-------------- --------------- --------------
Vanguard/Morgan Growth Fund shares to be
issued for each Service Economy Portfolio
share ($23.42 / $12.09).................. 1.93
--------------
--------------
</TABLE>
<PAGE> 33
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT II
A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS--APRIL 30, 1993
- --------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT Vanguard/Morgan Growth Fund, Inc. (the "Fund") is an open-end
OBJECTIVE diversified investment company that seeks to provide long-term growth
AND POLICIES of capital. The Fund invests primarily in common stocks. Dividend
income is incidental to this objective. There is no assurance that the
Fund will achieve its stated objective.
- -------------------------------------------------------------------------------------------------
OPENING AN Please complete and return the Account Registration Form. If you need
ACCOUNT assistance in completing this Form, please call our Investor
Information Department. The minimum initial investment is $3,000 ($500
for Individual Retirement Accounts and Uniform Gifts to Minors Act
accounts). The Fund is offered on a no-load basis (i.e., there are no
sales commissions or 12b-1 fees). However, the Fund incurs expenses for
investment advisory, management, administrative, and distribution
services.
- -------------------------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely the information you
PROSPECTUS 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 30,
1993 and has been incorporated by reference into this Prospectus. A
copy may be obtained without charge by writing to the Fund or by
calling the Investor Information Department.
- -------------------------------------------------------------------------------------------------
</TABLE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Fund Expenses ................ 2 Implementation of Policies ...... 6 SHAREHOLDER GUIDE
Selected Per Share Data and Investment Limitations .......... 7 Opening an Account and
Ratios ..................... 2 Management of the Fund .......... 8 Purchasing Shares .............. 16
Yield and Total Return ....... 3 Investment Advisers ............. 8 When Your Account Will
FUND INFORMATION Performance Record .............. 12 Be Credited .................... 18
Investment Objective ......... 4 Dividends, Capital Gains Selling Your Shares ............ 19
Investment Policies .......... 4 and Taxes ...................... 13 Exchanging Your Shares ......... 21
Investment Risks ............. 5 The Fund's Share Price .......... 14 Transferring Registration ...... 22
Who Should Invest ............ 5 General Information ............. 15 Other Vanguard Services ........ 22
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 34
<TABLE>
<S> <C>
FUND EXPENSES The following table illustrates all expenses and fees that you would
incur as a shareholder of the Fund. The expenses and fees set forth in
the table are for the 1992 fiscal year.
</TABLE>
<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
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
<S> <C> <C>
----------------------------------------------------------------------
Management Expenses........................................... 0.08%
Investment Advisory Fees...................................... 0.19
12b-1 Fees.................................................... None
Other Expenses
Distribution Costs................................. 0.02%
Shareholder Accounting Costs....................... 0.17
Miscellaneous Expenses............................. 0.02
-----
Total Other Expenses.......................................... 0.21
-----
TOTAL OPERATING EXPENSES............................. 0.48%
-----
-----
The purpose of this table is to assist you in understanding the various
costs and expenses that you would bear directly or indirectly as an
investor in the Fund.
The following example illustrates the expenses that you would incur on
a $1,000 investment over various periods, assuming (1) a 5% annual rate
of return and (2) redemption at the end of each period. As noted in the
table above, the Fund charges no redemption fees of any kind.
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C>
$5 $15 $27 $61
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.
- -------------------------------------------------------------------------------------------------
SELECTED PER The following information on selected per share data and ratios, for a
SHARE DATA share outstanding throughout each period, insofar as it relates to each
AND RATIOS of the five years in the period ended December 31, 1992, has been
audited by Price Waterhouse, independent accountants, whose report
thereon was unqualified. This information should be read in conjunction
with the Fund's financial statements and notes thereto which are
incorporated by reference in the Statement of Additional Information
and in this Prospectus, and which appear, along with the report of
Price Waterhouse, in the Fund's 1992 Annual Report to the Shareholders.
</TABLE>
2
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1992 1991 1990 1989 1988 1987 1986 1985 1984 1983
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR..... $12.20 $10.40 $11.72 $10.27 $ 9.39 $11.50 $13.82 $11.45 $13.84 $12.01
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT ACTIVITIES
Income................ .24 .35 .38 .34 .31 .30 .29 .30 .32 .42
Expenses.............. (.06) (.O6) (.06) (.06) (.06) (.07) (.08) (.07) (.07) (.11)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Investment
Income.............. .18 .29 .32 .28 .25 .23 .21 .23 .25 .31
Net Realized and
Unrealized
Gain (Loss) on
Investments......... .97 2.66 (.50) 2.04 1.85 .31 .78 2.99 (.94) 2.81
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM
INVESTMENT
ACTIVITIES........ 1.15 2.95 (.18) 2.32 2.10 .54 .99 3.22 (.69) 3.12
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment
Income.............. (.18) (.29) (.34) (.28) (.24) (.20) (.43) (.25) (.31) (.25)
Realized Net Gain..... (.52) (.86) (.80) (.59) (.98) (2.45) (2.88) (.60) (1.39) (1.04)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL
DISTRIBUTIONS..... (.70) (1.15) (1.14) (.87) (1.22) (2.65) (3.31) (.85) (1.70) (1.29)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR.................. $12.65 $12.20 $10.40 $11.72 $10.27 $ 9.39 $11.50 $13.82 $11.45 $13.84
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to
Average
Net Assets............ .48% .46% .55% .51% .55% .46% .54% .60% .68% .85%
Ratio of Net Investment
Income to Average Net
Assets................ 1.51% 2.36% 2.77% 2.38% 2.20% 1.52% 1.49% 1.96% 2.51% 2.33%
Portfolio Turnover
Rate.................. 64% 52% 73% 27% 32% 43% 31% 42% 38% 31%
Number of Shares
Outstanding, End of
Year (thousands)...... 88,243 78,410 67,008 62,524 60,563 57,296 51,682 48,121 40,859 29,022
- -------------------------------------------------------------------------------------------------
YIELD AND From time-to-time the Fund may advertise its yield and total return.
TOTAL RETURN Both yield and total return figures are based on historical earnings
and are not intended to indicate future performance. The "total return"
of the Fund refers to the average annual compounded rates of return
over one-, five-and ten-year periods or for the life of the Fund (as
stated in the advertisement) that would equate an initial amount
invested at the beginning of a stated period to the ending redeemable
value of the investment, assuming the reinvestment of all dividend and
capital gains distributions.
The "30-day yield" of the Fund is calculated by dividing net investment
income per share earned during a 30-day period by the net asset value
per share on the last day of the period. Net investment income includes
interest and dividend income earned on the Fund's securities; it is net
of all expenses and all recurring and nonrecurring charges that have
been applied to all shareholder accounts. The yield calculation assumes
that 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.
However, these methods differ from the accounting methods used by the
Fund to maintain its books and records, and so the advertised 30-day
yield may not fully reflect the income paid to your own account or the
yield reported in the Fund's reports to shareholders.
- -------------------------------------------------------------------------------------------------
</TABLE>
3
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<TABLE>
<S> <C>
INVESTMENT The Fund is an open-end diversified investment company. The objective
OBJECTIVE of the Fund is to provide long-term growth of capital by investing
primarily in common stocks. Dividend income is incidental to this
objective. There is no assurance that the Fund will achieve its stated
objective.
- -------------------------------------------------------------------------------------------------
INVESTMENT The Fund invests primarily in the equity securities of growth
POLICIES companies. Under normal circumstances, at least 65% of the Fund's
THE FUND INVESTS assets will be invested in such securities. The Fund is managed without
PRIMARILY IN regard to tax ramifications. The Fund will generally invest in a
"GROWTH STOCKS" diversified portfolio of common stocks but may also, from time-to-time,
hold securities that are convertible into common stocks.
The Fund is expected to invest a majority of its assets in "established
growth companies" -- i.e., larger capitalization firms that have
generally exhibited above-average rates of growth in sales and earnings
over an extended period. The Fund may also invest in "emerging growth
companies" -- expanding firms with generally smaller stock market
capitalizations. Finally, the Fund may hold investments in "cyclical
growth and other companies." These are firms which, while they may not
have a history of stable long-term growth, are nonetheless expected to
represent attractive investments.
The Fund employs three investment advisers, each of which independently
chooses common stock investments for the Fund. Wellington Management
Company, which is currently responsible for approximately two-thirds of
the Fund's equity investments, utilizes traditional methods of security
selection, including fundamental company research and relative
valuation techniques, in selecting growth stocks for the Fund. In
contrast, Franklin Portfolio Associates Trust and Roll and Ross Asset
Management Corporation, which are each responsible for approximately
one-sixth of the Fund's equity investments, are "quantitative"
investment managers. They utilize computerized techniques designed to
track -- and, if possible, outperform -- the returns of a specific
standard, the Growth Fund Stock Index. The Growth Fund Stock Index, a
benchmark calculated by Morningstar, Inc., is a measure of the
composite performance of the common stock holdings of the 50 largest
growth mutual funds.
In addition to investing in common stocks, the Fund is also authorized
to invest in certain short-term fixed income securities as cash
reserves and to use stock index futures and options to a limited
extent. See "Implementation of Policies" for a description of these and
other investment practices of the Fund.
The investment objective and policies of the Fund are not fundamental
and so may be changed by the Board of Directors without shareholder
approval. However, shareholders would be notified prior to a material
change in either.
- -------------------------------------------------------------------------------------------------
</TABLE>
4
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<TABLE>
<S> <C>
INVESTMENT As a mutual fund investing primarily in common stocks, the Fund is
RISKS subject to market risk -- i.e., the possibility that common stock
THE FUND IS SUBJECT prices will decline over short or even extended periods. The U.S. stock
TO STOCK MARKET RISK market tends to be cyclical, with periods when stock prices generally
rise and periods when prices generally decline.
To illustrate the volatility of stock prices, the following table sets
forth the extremes for stock market returns as well as the average
return for the period from 1926 to 1992, as measured by the Standard &
Poor's 500 Composite Stock Price Index:
U.S. STOCK MARKET RETURNS (1926-1992)
OVER VARIOUS TIME HORIZONS
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------- ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.2 +10.1 +10.4 +10.4
As shown, from 1926 to 1992, common stocks have provided an average
annual total return (capital appreciation plus dividend income) of
+12.2%. While this average return can be used as a guide for setting
reasonable expectations for future stock market returns, it may not be
useful for forecasting future returns in any particular period, as
stock returns are quite volatile from year-to-year.
The chart above should not be viewed as a representation of future
investment performance of the stock market or the Fund. The illustrated
returns represent historical investment performance, which may be a
poor guide to future returns. Also, stock market indexes are based on
unmanaged portfolios of securities before transaction costs and other
expenses. Such costs reduce the relative performance of the Fund and
other "real world" portfolios. Finally, given its emphasis on "growth
stock" investments, the Fund is likely to differ significantly in terms
of portfolio composition and investment performance from broad market
averages like the S&P 500.
- -------------------------------------------------------------------------------------------------
WHO SHOULD The Fund is designed for investors who have the perspective, patience
INVEST and financial ability to assume above-average interim investment risk
INVESTORS SEEKING in pursuit of long-term capital growth. Because of the risks associated
LONG-TERM GROWTH with common stock investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide investors with a
means of speculating on short-term stock market movements. Since the
Fund will focus on common stocks that offer below-average levels of
current income, greater-than-average investment risk -- for a common
stock fund -- is likely. The Fund's share price is expected to be
volatile.
No assurance can be given that the Fund will attain its objective or
that shareholders will be protected from the risk of loss that is
inherent in equity investing. Investors may wish to reduce the
potential risk of investing in the Fund by purchasing shares on a
periodic basis (dollar-cost averaging) rather than making an investment
in one lump sum.
</TABLE>
5
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<TABLE>
<S> <C>
Investors should not consider the Fund a complete investment program,
but should also maintain holdings in investments with different risk
characteristics, such as bonds and money market instruments. Investors
may also wish to complement an investment in the Fund with other types
of common stock investments.
- -------------------------------------------------------------------------------------------------
IMPLEMENTATION The Fund follows a number of distinctive investment practices in an
OF POLICIES effort to achieve its investment objective.
A PORTION OF THE Two of the Fund's investment advisers, Franklin Portfolio Associates
FUND'S ASSETS ARE Trust ("FPA") and Roll and Ross Asset Management Corporation ("R&R"),
MANAGED USING use quantitative investment techniques in managing their respective
QUANTITATIVE portions of the Fund's common stock investments. For the portfolio of
TECHNIQUES securities they manage, FPA and R&R independently seek to track and, if
possible, outperform the investment returns of the Growth Fund Stock
Index. Currently, FPA and R&R are each responsible for approximately
one-sixth of the Fund's equity investments.
The Growth Stock Fund Index (the "Index") represents the composite
common stock portfolio of the 50 largest growth mutual funds, as
calculated by Morningstar, Inc. ("Morningstar"), an independent company
which provides mutual fund statistics. The 50 mutual funds included in
that Index are determined annually (as of December 31) by Morningstar.
For the two quantitative investment managers (FPA and R&R), the Index
is an essential tool in developing portfolios that will be designed to
track and, hopefully, outperform the Index. For Wellington Management
Company, the composition of the Index serves as a guideline for setting
portfolio policy. For all three investment advisers, the Index is
utilized as a benchmark for determining incentive/penalty investment
advisory fees. See "Investment Advisers" and the Statement of
Additional Information for further information on the Index and its use
as a benchmark for incentive/penalty fees.
THE FUND MAY INVEST Although it normally seeks to remain substantially fully invested in
IN SHORT-TERM FIXED equity securities, the Fund may invest temporarily in certain
INCOME SECURITIES short-term fixed income securities. Such securities may be used to
invest uncommitted cash balances, to maintain liquidity to meet
shareholder redemptions, or to take a temporarily defensive position
against potential stock market declines. These securities include:
obligations of the United States Government and its agencies or
instrumentalities; commercial paper, bank certificates of deposit, and
bankers' acceptances; and repurchase agreements collateralized by these
securities. Approximately 5% of the Fund's net assets are expected to
be held as cash reserves, which will be managed by The Vanguard Group,
Inc. at no charge to the Fund.
THE FUND MAY USE The Fund may utilize stock futures contracts and options to a limited
FUTURES CONTRACTS extent. Specifically, the Fund may enter into futures contracts
AND OPTIONS provided that not more than 5% of its assets are required as a futures
contract deposit. In addition, the Fund may enter into futures
contracts and options transactions only to the extent
</TABLE>
6
<PAGE> 39
<TABLE>
<S> <C>
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 reasons: to
maintain cash reserves while remaining fully invested, 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. The Fund may not use futures
contracts or options transactions to leverage its net assets.
THE FUND MAY LEND The Fund may lend its investment securities on a short-term basis (less
ITS SECURITIES than nine months) to qualified institutional investors for the purpose
of realizing additional income. Loans of securities by the Fund will be
collateralized by cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The collateral will
equal at least 100% of the current market value of the loaned
securities.
BORROWING The Fund may borrow money, subject to the limits set forth on page 7,
for temporary or emergency purposes, including the meeting of
redemption requests which might otherwise require the untimely
disposition of securities.
PORTFOLIO TURNOVER Although it generally seeks to invest for the long term, the Fund
IS NOT EXPECTED TO retains the right to sell securities irrespective of how long they have
EXCEED 100% been held. It is anticipated that the annual portfolio turnover of the
Fund will not exceed 100%. A turnover rate of 100% would occur, for
example, if all of the securities of the Fund were replaced within one
year.
- -------------------------------------------------------------------------------------------------
INVESTMENT The Fund has adopted certain limitations on its investment practices.
LIMITATIONS Specifically, the Fund will not:
THE FUND HAS ADOPTED (a) with respect to 75% of the value of its total assets, invest more
CERTAIN FUNDAMENTAL than 5% of its assets in the securities of any single company;
LIMITATIONS (b) with respect to 75% of the value of its total assets, purchase more
than 10% of the voting securities of any issuer;
(c) invest more than 25% of its assets in any one industry; and
(d) borrow money, except from banks (or through repurchase agreements)
for temporary or emergency (not leveraging) purposes, and then not in
an amount exceeding 10% of the value of the Fund's net assets at
the time the borrowing is made. Whenever borrowing exceeds 5% of
the value of the Fund's net assets, the Fund will not make any
additional investments.
These investment limitations are considered at the time investment
securities are purchased. The limitations described here and in the
Statement of Additional Information may be changed only with the
approval of a majority of the Fund's shareholders.
- -------------------------------------------------------------------------------------------------
</TABLE>
7
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<TABLE>
<S> <C>
MANAGEMENT The Fund is a member of The Vanguard Group of Investment Companies, a
OF THE FUND family of 33 investment companies with 71 distinct mutual fund
VANGUARD ADMINISTERS portfolios and total assets in excess of $100 billion. Through their
AND DISTRIBUTES jointly owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
THE FUND Fund and the other Funds in the Group obtain at cost virtually all of
their corporate management, administrative and distribution services.
Vanguard also provides investment advisory services on an at-cost basis
to certain 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 1992, the average expense ratio
(annual costs including advisory fees divided by total net assets) for
the Vanguard Funds amounted to .31% compared to an average of 1.03% for
the mutual fund industry (data provided by Lipper Analytical Services).
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad
policies for the Fund and choose its Officers. A list of the Directors
and Officers of the Fund and a statement of their present positions and
principal occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and
also furnishes the Funds with necessary office space, furnishings and
equipment. Each Fund pays its share of Vanguard's net expenses, which
are allocated among the Funds under methods approved by the Board of
Directors (Trustees) of each Fund. In addition, each Fund bears its own
direct expenses, such as legal, auditing and custodian fees.
Vanguard provides distribution and marketing services to the Funds. The
Funds are available on a no-load basis (i.e., there are no sales
commissions or 12b-1 fees). However, each Fund bears its share of the
Group's distribution costs.
- -------------------------------------------------------------------------------------------------
INVESTMENT The Fund currently employs three investment advisers: Wellington
ADVISERS Management Company ("WMC"), 75 State Street, Boston, MA 02109; Franklin
THE FUND EMPLOYS Portfolio Associates Trust ("FPA"), One Post Office Square, Boston, MA
THREE INDEPENDENT 02109; and Roll and Ross Asset Management Corporation ("R&R"), 585
INVESTMENT ADVISERS Skippack Pike, Blue Bell, PA 19422. Prior to April 24, 1990, WMC was
the sole investment adviser to the Fund (then known as W.L. Morgan
Growth Fund). FPA and R&R were added as advisers to the Fund on that
date.
The proportion of the net assets of the Fund managed by each adviser
was established by the Board of Directors, and may be changed in the
future by the Board of Directors as circumstances warrant. Presently
WMC is responsible for approximately two-thirds of the equity
investments of the Fund; FPA and R&R are each responsible for
one-sixth. (The cash portion of the Fund's net assets is managed by The
Vanguard Group, Inc. at no charge to the Fund.)
</TABLE>
8
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<TABLE>
<S> <C>
The Fund has entered into investment advisory agreements with WMC, FPA,
and R&R which provide that the advisers manage the investment and
reinvestment of the Fund's assets and continuously review, supervise
and administer the Fund's investment program. The advisers discharge
their responsibilities subject to the control of the Officers and
Directors of the Fund.
. . .WELLINGTON WMC is a professional investment advisory firm which globally provides
MANAGEMENT services to investment companies, institutions, and individuals. Among
COMPANY (WMC) the clients of WMC are 12 of the 33 investment companies of The
Vanguard Group. As of December 31, 1992, WMC held discretionary
management authority with respect to approximately $67.4 billion of
assets. WMC and its predecessor organizations have provided advisory
services to investment companies since 1933 and to investment
counseling clients since 1960.
Frank V. Wisneski and Nancy T. August, Senior Vice Presidents of WMC,
serve as portfolio managers of the assets of the Fund assigned to WMC.
Each separately oversees one-half of the assets assigned to WMC. Mr.
Wisneski, who has been employed at WMC for 21 years, served as the sole
portfolio manager of the Fund from September 1979 to December 1989. At
that time, the responsibility for approximately one-half of the Fund's
assets was transferred to Ms. August. In addition to her work for the
Fund, Ms. August, who has also been employed at WMC for 21 years,
oversees various investment portfolios with objectives and policies
similar to those of the Fund. In managing the assets assigned to WMC,
Mr. Wisneski and Ms. August are supported by research and other
investment services provided by the professional staff of WMC.
The Fund pays WMC a basic advisory fee calculated by applying varying
percentage rates to the average net assets of the Fund managed by WMC.
The basic fee schedule is as follows:
</TABLE>
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------ -------
<S> <C>
First $50 million 0.325%
Next $100 million 0.225%
Over $150 million 0.150%
This basic advisory fee may be increased or decreased by applying an
adjustment formula ("incentive/penalty fee") based on WMC's investment
performance relative to the investment record of Growth Fund Stock
Index. Under the incentive/ penalty fee schedule, the basic fee payable
to WMC may be increased or decreased by as much as .075% depending on
the investment performance of the equity investments managed by WMC.
Prior to April 24, 1990 WMC served as sole investment adviser to the
Fund. At that time the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500") was used as the benchmark for determining any
incentive/penalty fee paid to WMC. However, while the S&P 500 does
serve as a broad gauge of stock market
</TABLE>
9
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<TABLE>
<S> <C>
performance, it does not directly measure the investment performance of
"growth stocks," the primary investments of the Fund. To assess the
performance of its advisers relative to comparable "growth stock"
investments, the Fund has adopted as a benchmark for incentive/penalty
fees the Growth Fund Stock Index, an index of the equity holdings of
the 50 largest growth stock mutual funds.
Under rules of the Securities and Exchange Commission, the
incentive/penalty fee will not be fully operable until the quarter
ending June 30, 1993, and, until that date, will be calculated
according to certain transition rules. See the Statement of Additional
Information for a detailed description of the incentive/penalty fee
schedule for WMC and the applicable transition rules.
. . .FRANKLIN PORTFOLIO FPA is a professional investment advisory firm which specializes in the
ASSOCIATES (FPA) management of common stock portfolios through the use of quantitative
investment models. Founded in 1982, FPA, a Massachusetts business
trust, is a wholly owned subsidiary of Mellon Financial Services
Corporation #1, which itself is a wholly owned subsidiary of Mellon
Bank Corporation. As of December 31, 1992, FPA provided investment
advisory services to 28 clients and managed assets with an approximate
value of $4.98 million, including $407.9 million in assets for Vanguard
Quantitative Portfolios, Inc., another mutual fund member of The
Vanguard Group.
FPA employs proprietary computer models in selecting individual equity
securities and in structuring investment portfolios for its clients,
including the Fund. John J. Nagorniak, President of FPA, has been
designated as the portfolio manager of the assets of the Fund assigned
to FPA; he is responsible for overseeing the application of FPA's
quantitative techniques to those assets. Mr. Nagorniak and the other
investment principals of FPA are responsible for the ongoing develop-
ment and enhancement of FPA's quantitative investment techniques.
The Fund pays FPA a basic advisory fee calculated by applying varying
percentage rates to the average net assets of the Fund managed by FPA.
The basic fee schedule is as follows:
</TABLE>
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------ -------
<S> <C>
First $100 million 0.250%
Next $200 million 0.200%
Over $300 million 0.150%
This basic advisory fee may be increased or decreased by applying an
incentive/penalty fee based on FPA's investment performance relative to
the investment record of the Growth Fund Stock Index. Under the
incentive/penalty fee schedule, the basic fee payable to FPA may be
increased or decreased by as much as .10% depending on the investment
performance of the equity investments managed by FPA.
</TABLE>
10
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<TABLE>
<S> <C>
Under rules of the Securities and Exchange Commission, the
incentive/penalty fee structure will not be fully operable until the
quarter ending June 30, 1993, and, until that date, will be calculated
according to certain transition rules. See the Statement of Additional
Information for a detailed description of the incentive/ penalty fee
schedule for FPA and the applicable transition rules.
. . .AND ROLL AND ROSS R&R, a Pennsylvania corporation founded in 1986, is a professional
ASSET MANAGEMENT investment advisory firm which specializes in the management of common
CORPORATION (R&R) stock portfolios through the use of quantitative investment models.
Messrs. Stephen A. Ross, Co-Chairman, Richard W. Roll, Co-Chairman, and
Alan T. Yuhas, President, are the controlling persons and sole
stockholders of R&R. As of December 31, 1992, R&R provided investment
advisory services to 49 clients and managed assets with an approximate
value of $5.1 billion.
R&R employs proprietary computer models in selecting individual equity
securities and in structuring investment portfolios for its clients,
including the Fund. Richard W. Roll, Co-Chairman of R&R, has been
designated as the portfolio manager of the assets of the Fund assigned
to R&R; he is responsible for overseeing the application of R&R's
quantitative techniques to those assets. Mr. Roll and the other
investment principals of R&R are responsible for the ongoing
development enhancement of R&R's quantitative investment techniques.
The Fund pays R&R a basic advisory fee calculated by applying varying
percentage rates to the average net assets of the Fund managed by R&R.
The basic fee schedule is as follows:
</TABLE>
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------ -------
<S> <C>
First $150 million 0.400%
Next $100 million 0.200%
Over $250 million 0.100%
This basic advisory fee may be increased or decreased by applying an
incentive/ penalty fee based on R&R's investment performance relative
to the investment record of the Growth Fund Stock Index. Under the
incentive/penalty fee schedule, the basic fee payable to R&R may be
increased or decreased by as much as .05% to .20%, depending on the
dollar amount and the relative performance of the equity investments
managed by R&R. Moreover, the incentive/penalty fee schedule is
structured in such a way that, in order to earn the basic fee, the
investment performance of R&R's equity assets must exceed that of the
Index by at least 6% over the preceding 36 month period.
</TABLE>
11
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<TABLE>
<S> <C>
Under rules of the Securities and Exchange Commission, the
incentive/penalty fee structure will not be fully operable until the
quarter ending June 30, 1993, and, until that date, will be calculated
according to certain transition rules. See the Statement of Additional
Information for a detailed description of the incentive/ penalty fee
schedule for R&R and the applicable transition rules.
For the fiscal year ended December 31, 1992, the aggregate investment
advisory fees paid by Vanguard/Morgan Growth Fund to WMC, FPA and R&R
represented an effective annual rate of .21 of 1% of average net
assets, before a net decrease of .02 of 1% based on performance. The
investment advisory fees paid by the Fund for this period to WMC, FPA
and R&R represented an effective annual rate of .17%, .23% and .22% of
1%, respectively, of the average net assets managed by WMC, FPA and
R&R.
The investment advisory agreements with WMC, FPA and R&R authorize the
advisers to select brokers or dealers to execute the purchase and sale
of the Fund's portfolio securities, and direct the advisers to use
their best efforts to obtain the best available price and most
favorable execution with respect to all transactions. The full range
and quality of brokerage services available are considered in making
their determinations.
The Fund has authorized WMC, FPA and R&R to pay higher commissions in
recognition of brokerage services felt necessary for the achievement of
better execution, provided the advisers believe this to be in the best
interests of the Fund. Although the Fund does not market its shares
through intermediary brokers or dealers, the Fund's advisers may place
orders with qualified broker-dealers who recommend the Fund to clients
if the Officers of the Fund believe that the quality of the transaction
and the commission are comparable to what they would be with other
qualified brokerage firms.
- -------------------------------------------------------------------------------------------------
PERFORMANCE The table below provides investment results for the Fund for several
RECORD periods throughout the Fund's lifetime. The results shown represent
"total return" investment performance, which assumes the reinvestment
of all capital gains and income dividends for the indicated periods.
Also included is comparative information with respect to the unmanaged
Standard & Poor's 500 Composite Stock Price Index, a widely-used
barometer of stock market activity, and the Consumer Price Index, a
statistical measure of changes in the prices of goods and services. The
tables do not make any allowance for federal, state or local income
taxes, which shareholders must pay on a current basis.
The results should not be considered a representation of the total
return from an investment made in the Fund today. This information is
provided to help investors better understand the Fund and may not
provide a basis for comparison with other investments or mutual funds
which use a different method to calculate performance.
</TABLE>
12
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<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN FOR
VANGUARD/MORGAN GROWTH FUND
-------------------------------------------
FISCAL PERIODS VANGUARD/MORGAN S&P 500 CONSUMER
ENDED 12/31/92 GROWTH FUND INDEX PRICE INDEX
-------------- --------------- ------- -----------
<S> <C> <C> <C>
1 Year + 9.5% + 7.6% +2.9%
5 Years +15.9 +15.8 +4.2
10 Years +14.1 +16.1 +3.8
Lifetime* +11.4 +10.5 +5.9
*December 31, 1968 to December 31, 1992.
- -------------------------------------------------------------------------------------------------
DIVIDENDS, The Fund expects to pay dividends annually from ordinary income. Net
CAPITAL GAINS capital gains distributions, if any, will also be made annually.
AND TAXES Dividend and capital gains distributions may be automatically
THE FUND PAYS reinvested or received in cash. See "Choosing a Distribution Option"
DIVIDENDS AND ANY (page 15) for a description of these distribution methods.
CAPITAL GAINS In order to satisfy certain requirements of the Tax Reform Act of 1986,
ANNUALLY the Fund may declare special year-end dividend and capital gains
distributions during December. Such distributions, if received by
shareholders by January 31, are deemed to have been paid by the Fund
and received by shareholders on December 31 of the prior year.
The Fund intends to qualify for taxation as a "regulated investment
company" under the Internal Revenue Code so that it will not be subject
to federal income tax to the extent its income is distributed to
shareholders. Dividends paid by the Fund from net investment income,
whether received in cash or reinvested in additional shares, will be
taxable to shareholders as ordinary income. For corporate investors,
dividends from net investment income will generally qualify in part for
the intercorporate dividends-received deduction. However, the portion
of the dividends so qualified depends on the aggregate taxable
qualifying dividend income received by the Fund from domestic (U.S.)
sources.
Distributions paid by the Fund from long-term capital gains, whether
received in cash or reinvested in additional shares, are taxable as
long-term capital gains, regardless of the length of time you have
owned shares in the Fund. Capital gains distributions are made when the
Fund realizes net capital gains on sales of portfolio securities during
the year. The Fund does not seek to realize any particular amount of
capital gains during a year; rather, realized gains are a byproduct of
portfolio management activities. Consequently, capital gains distri-
butions may be expected to vary considerably from year-to-year. There
will be no capital gains distributions 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
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the record date for a dividend or capital gains distribution, a portion
of your investment will be returned to you as a taxable distribution,
regardless of whether you are reinvesting your distributions or
receiving them in cash.
The Fund will notify you annually as to the tax status of dividend and
capital gains distributions paid by the Fund.
A CAPITAL GAIN OR A sale of shares of the Fund is a taxable event, and may result in a
LOSS MAY BE REALIZED capital gain or loss. A capital gain or loss may be realized from an
UPON EXCHANGE OR ordinary redemption of shares or an exchange of shares between two
REDEMPTION mutual funds (or two portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and capital gains
or losses from redemptions and exchanges may be subject to state and
local taxes.
The Fund is required to withhold 31% of taxable dividends, capital
gains distributions, and redemptions paid to shareholders who have not
complied with IRS taxpayer identification regulations. You may avoid
this withholding requirement by certifying on your Account Registration
Form your proper Social Security or Taxpayer Identification Number and
by certifying that you are not subject to backup withholding.
The Fund has obtained a Certificate of Authority to do business as a
foreign corporation in Pennsylvania and does business and maintains an
office in that state. In the opinion of counsel, the shares of the Fund
are exempt from Pennsylvania personal property taxes.
The tax discussion set forth above is included for general information
only. Prospective investors should consult their own tax advisers
concerning the tax consequences of an investment in the Fund.
- -------------------------------------------------------------------------------------------------
THE FUND'S The Fund's share price or "net asset value" per share is determined by
SHARE PRICE dividing the total market value of the Fund's investments and other
assets, less any liabilities, by the number of outstanding shares of
the Fund. Net asset value per share is determined once daily at the
close of regular trading on the New York Stock Exchange (generally 4:00
p.m. Eastern time) on each day that the Exchange is open for business.
Portfolio securities that are listed on a securities exchange are
valued at the last quoted sales price on the day the valuation is made.
Price information on listed securities is taken from the exchange where
the security is primarily traded. Securities which are listed on an
exchange and which are not traded on the valuation date are valued at
the mean between the bid and ask prices. Unlisted securities for which
market quotations are readily available are valued at the latest quoted
bid price. Other assets and securities for which no quotations are
readily available are valued at fair value as determined in good faith
by the Directors. Securities may be valued on the basis of prices
provided by a
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pricing service when such prices are believed to reflect the fair
market value of such securities.
The Fund's share price can be found daily in the mutual fund listings
of most major newspapers under the heading of The Vanguard Group.
- -------------------------------------------------------------------------------------------------
GENERAL The Fund is a Maryland corporation. The name of the Fund was changed
INFORMATION from W.L. Morgan Growth Fund, Inc. to Vanguard/Morgan Growth Fund, Inc.
as of April 24, 1990. The Articles of Incorporation permit the
Directors to issue 150 million shares of common stock, with a $.10 par
value. The Board of Directors has the power to designate one or more
classes ("series") of shares of common stock and to classify or
reclassify any unissued shares with respect to such series. Currently
the Fund is offering one class of shares.
The shares of the Fund are fully paid and non-assessable; 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.
Annual meetings of shareholders will not be held except as required by
the Investment Company Act of 1940 and other applicable law. An annual
meeting will be held to vote on the removal of a Director or Directors
of the Fund if requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash are held by State Street Bank and Trust
Company, Boston, MA. The Vanguard Group, Inc., Valley Forge, PA, serves
as the Fund's Transfer and Dividend Disbursing Agent. Price Waterhouse
serves as independent accountants for the Fund and will audit its
financial statements annually. The Fund is not involved in any
litigation.
- -------------------------------------------------------------------------------------------------
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SHAREHOLDER GUIDE
OPENING AN To open a new account, either by mail or by wire, simply complete and
ACCOUNT AND return an Account Registration Form and any required legal
PURCHASING documentation. Please indicate the amount you wish to invest. Your
SHARES purchase must be equal to or greater than the $3,000 minimum initial
investment requirement ($500 for Individual Retirement Accounts and
Uniform Gifts to Minors Act accounts). If you need assistance with the
Account Registration Form or have any questions about the Fund, please
call our Investor Information Department (1-800-662-7447). Note: For
other types of account registrations (e.g., corporations, associations,
other organizations, trusts or powers of attorney), please call us to
determine which additional forms you may need.
The Fund's shares are purchased at the next-determined net asset value
after your investment has been received. The Fund is offered on a
no-load basis (i.e., there are no sales commissions or 12b-1 fees).
ADDITIONAL Subsequent investments may be made by mail ($100 minimum), wire ($1,000
INVESTMENTS minimum), exchange from another Vanguard Fund account ($100 minimum),
or Vanguard Fund Express. However, the Fund reserves the right to
reject any specific purchase request, whether it be made by check,
wire, exchange from another Vanguard Fund account, or Vanguard Fund
Express.
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ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
Complete and sign the your initial investment on the include the Invest-by-Mail
enclosed Account registration form, make your remittance form attached to
Registration Form check payable to The Vanguard your Fund confirmation
Group-26, and mail to: statements. Please make your
check payable to The Vanguard
VANGUARD FINANCIAL CENTER Group-26, write your account
P.O. BOX 2600 number on your check, and,
VALLEY FORGE, PA 19482 using the return envelope
provided, mail to the address
indicated on the Invest-by-Mail
Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 1200 MORRIS DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts.
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PURCHASING BY WIRE CORESTATES BANK, N.A.
Money should be ABA 031000011
wired to: CORESTATES NO. 0101 9897
ATTN VANGUARD
BEFORE WIRING VANGUARD/MORGAN GROWTH FUND
Please contact ACCOUNT NUMBER
Client Services ACCOUNT REGISTRATION
(1-800-662-2739)
To assure proper receipt, please be sure your bank includes the name of
the Fund and the account number Vanguard has assigned to you. If you
are opening a new account, please complete the Account Registration
Form and mail it to the "New Account" address above after completing
your wire arrangement. Note: Federal Funds wire purchase orders will be
accepted only when the Fund and Custodian Bank are open for business.
-----------------------------------------------------------------------
PURCHASING BY You may open an account or purchase additional shares by making an
EXCHANGE (from a exchange from another Vanguard Fund account. However, the Fund reserves
Vanguard account) the right to refuse any exchange purchase request. Call Vanguard's
Client Services Department (1-800-662-2739) for assistance. The new
account will have the same registration as the existing account.
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PURCHASING BY The Fund Express Special Purchase option lets you move money from your
FUND EXPRESS bank account to your Vanguard account at your request. Or if you choose
Special Purchase and the Automatic Investment option, money moves from your bank account to
Automatic Investment your Vanguard account on the schedule -- monthly, bimonthly (every
other month), quarterly or yearly -- you select. To establish these
Fund Express options, please provide the appropriate information on the
Account Registration Form. We will send you a confirmation of your Fund
Express enrollment; please wait three weeks before using the service.
- -------------------------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION 1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and capital gains
OPTION distributions will be reinvested in additional Fund shares. This option
will be selected for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in cash and your
capital gains will be reinvested in additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains distributions
will be paid in cash.
You may change your option by calling our Client Services Department
(1-800-662-2739). An option to invest your dividend and/or capital
gains distributions automatically in another Vanguard Fund account is
also available.
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Please call our Client Services Department (1-800-662-2739) for
information on establishing this option.
IMPORTANT TAX NOTE If you purchase shares shortly before a distribution of dividends or
capital gains, a portion of your investment will be classified as a
taxable distribution (regardless of whether you are reinvesting your
distributions or taking them in cash).
- -------------------------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on your account
INFORMATION is to select the options you desire when you complete your Account
ESTABLISHING OPTIONAL Registration Form. IF YOU WISH TO ADD OPTIONS LATER, YOU MAY NEED TO
SERVICES PROVIDE VANGUARD WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE.
PLEASE CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FURTHER
ASSISTANCE.
SIGNATURE GUARANTEES For our mutual protection, we may require a signature guarantee on
certain written transaction requests. A signature guarantee verifies
the authenticity of your signature and may be obtained from banks,
brokers and any other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request. If a certificate is
lost, you may incur an expense to replace it.
BROKER-DEALER If you purchase shares in Vanguard Funds through a registered
PURCHASES broker-dealer or investment adviser, the broker-dealer or adviser may
charge a service fee.
CANCELLING TRADES The Fund will not cancel any trade (e.g., a purchase, exchange or
redemption) believed to be authentic, received in writing or by
telephone, once the trade has been received.
- -------------------------------------------------------------------------------------------------
WHEN YOUR Your trade date is the date on which your account is credited. If your
ACCOUNT WILL purchase is made by check, Federal Funds wire or exchange, and is
BE CREDITED received by the close of the New York Stock Exchange (generally 4:00
p.m. Eastern time), your trade date is the day of receipt. If your
purchase is received after the close of the Exchange, your trade date
is the next business day. Your shares are purchased at the net asset
value determined on your trade date.
In order to prevent lengthy processing delays caused by the clearing of
foreign checks, Vanguard will only accept a foreign check which has
been drawn in U.S. dollars and has been issued by a foreign bank with a
U.S. correspondent bank.
Because of the risks associated with common stock investments, the Fund
is intended to be a long-term investment vehicle and is not designed to
provide investors with a means of speculating on short-term stock
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.
- -------------------------------------------------------------------------------------------------
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SELLING YOUR You may withdraw any portion of the funds in your account by redeeming
SHARES shares at any time. You may initiate a request by writing or by
telephoning. Your redemption proceeds are normally mailed within two
business days after the receipt of the request in Good Order.
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER, VANGUARD/MORGAN
GROWTH FUND, P.O. BOX 1120, VALLEY FORGE, PA 19482. (For express or
registered mail, send your request to Vanguard Financial Center,
Vanguard/Morgan Growth Fund, 1200 Morris Drive, Wayne, PA 19087.)
The redemption price of shares will be the Fund's net asset value next
determined after Vanguard has received all required documents in Good
Order.
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 registered on the
account.
4. Any required signature guarantees (if applicable).
5. Other supporting legal documentation that might be required in the
case of estates, corporations, trusts, and certain other accounts.
6. Any certificates that you are holding for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS TO YOUR
ACCOUNT, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739).
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SELLING BY To sell shares by telephone, you or your pre-authorized representative
TELEPHONE may call our Client Services Department at 1-800-662-2739. For
telephone redemptions, you may have the proceeds sent to you by mail.
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SELLING BY FUND If you select the Fund Express Automatic Withdrawal option, money will
EXPRESS be automatically moved from your Vanguard Fund account to your bank
Automatic Withdrawal account according to the schedule you have selected. The Special
& Special Redemption Redemption option lets you move money from your Vanguard account to
your bank account on your request. You may elect Fund Express on the
Account Registration Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
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SELLING BY You may sell shares by making an exchange into another Vanguard Fund.
EXCHANGE Call our Client Services Department (1-800-662-2739). For more
information on exchanges, see page 18.
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IMPORTANT REDEMPTION Shares purchased by check may not be redeemed until payment for the
INFORMATION purchase is collected, which may take up to ten calendar days. Your
money is invested during the holding period.
DELIVERY OF Redemption requests received by telephone prior to the close of the New
REDEMPTION York Stock Exchange (generally 4:00 p.m. Eastern time) are processed on
PROCEEDS the day of receipt and the redemption proceeds are normally sent on the
following business day.
Redemption requests received by telephone after the close of the
Exchange are processed on the business day following receipt and the
proceeds are normally sent on the second business day following
receipt.
Redemption proceeds must be sent to you within seven days of receipt of
your request in Good Order.
If you experience difficulty in making a telephone redemption during
periods of drastic economic or market changes, your redemption request
may be made by regular or express mail. It will be implemented at the
net asset value next determined after your request has been received by
Vanguard in Good Order. The Fund reserves the right to revise or
terminate the telephone redemption privilege at any time.
The Fund may suspend the redemption right or postpone payment at times
when the New York Stock Exchange is closed or under any emergency
circumstances as determined by the United States Securities and
Exchange Commission.
If the Board of Directors determines that it would be detrimental to
the best interests of the Fund's remaining shareholders to make payment
in cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in kind of readily marketable securities.
MINIMUM ACCOUNT Due to the relatively high cost of maintaining smaller accounts, the
BALANCE Fund reserves the right to redeem shares in any account that is below
REQUIREMENT the minimum initial investment amount of $3,000. In addition, if at any
time the total investment does not have a value of at least $1,000, you
may be notified that the value of your account is below the Fund's
minimum account balance requirement. You would then be allowed 60 days
to make an additional investment before the account is liquidated.
Proceeds would be promptly paid to the shareholder. This minimum does
not apply to IRAs, other retirement accounts, and Uniform Gifts to
Minors Act accounts.
- -------------------------------------------------------------------------------------------------
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EXCHANGING YOUR Should your investment goals change, you may exchange your shares of
SHARES Vanguard/Morgan Growth Fund for those of other available Vanguard
Funds.
EXCHANGING BY When exchanging shares by telephone, please have ready the Fund name,
TELEPHONE: account number, Social Security Number or Tax I.D. Number, and account
Call Client Services address. Requests for telephone exchanges received prior to the close
(1-800-662-2739) of the New York Stock Exchange (generally 4:00 p.m. Eastern time) are
processed at the close of business that same day. Requests received
after the close of the Exchange are processed the next business day.
TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR FROM VANGUARD BALANCED
INDEX FUND, VANGUARD EXPLORER FUND, VANGUARD INDEX TRUST -- 500,
EXTENDED MARKET, TOTAL STOCK MARKET, VALUE AND GROWTH PORTFOLIOS,
VANGUARD INTERNATIONAL EQUITY INDEX FUND -- EUROPEAN AND PACIFIC
PORTFOLIOS, VANGUARD SMALL CAPITALIZATION STOCK FUND, AND VANGUARD
QUANTITATIVE PORTFOLIOS. If you experience difficulty in making a
telephone exchange, your exchange request may be made by regular or
express mail, and it will be implemented at the closing net asset value
on the date received by Vanguard, provided the request is received in
Good Order.
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EXCHANGING BY MAIL Please be sure to include on your exchange request the name and account
number of your current Fund, the name of the Fund you wish to exchange
into, the amount you wish to exchange, and the signatures of all
registered account holders. Send your request to VANGUARD FINANCIAL
CENTER, VANGUARD/MORGAN GROWTH FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request to Vanguard
Financial Center, Vanguard/Morgan Growth Fund, 1200 Morris Drive,
Wayne, PA 19087.)
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IMPORTANT EXCHANGE Before you make an exchange, you should consider the following:
INFORMATION
- Please read the Fund's prospectus before making an exchange. For a
copy and for answers to any questions you may have, call our Investor
Information Department (1-800-662-7447).
- An exchange is treated as a redemption and a purchase. Therefore, you
could realize a taxable gain or loss on the transaction.
- Exchanges are accepted only if the registrations and the tax
identification numbers of the two accounts are identical.
- The shares to be exchanged must be on deposit and not held in
certificate form.
- New accounts are not currently accepted in Windsor Fund.
- The redemption price of shares redeemed by exchange is the net asset
value next determined after Vanguard has received all required
documents in Good Order.
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- When opening a new account by exchange, you must meet the minimum
investment requirement of the new Fund.
Neither the Fund nor Vanguard is responsible for the authenticity of
exchange instructions received by telephone. Investors bear the full
risk of loss arising from unauthorized telephone exchanges. To prohibit
telephone exchanges on your account, please notify the Fund in writing.
Otherwise, the telephone exchange privilege will be automatically
established on your account.
Every effort will be made to maintain the exchange privilege. However,
the Fund reserves the right to revise or terminate its provisions,
limit the amount of or reject any exchange, as deemed necessary, at any
time.
- -------------------------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford shareholders a
PRIVILEGE way to speculate on short-term movements in the market. Accordingly, in
LIMITATIONS order to prevent excessive use of the exchange privilege that may
potentially disrupt the management of the Fund and increase transaction
costs, the Fund has established a policy of limiting excessive exchange
activity.
Exchange activity will not be deemed excessive if limited to TWO
SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30 DAYS APART) from the Fund
during any calendar year. These limitations do not apply to exchanges
from Vanguard's money market portfolios.
- -------------------------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund shares to another
REGISTRATION person by completing a transfer form and mailing it to: VANGUARD
FINANCIAL CENTER, P.O. BOX 1110, VALLEY FORGE, PA 19482, ATTENTION:
TRANSFER DEPARTMENT. The request must be in Good Order (see page 16).
To obtain a transfer form and complete instructions, please call our
Client Services Department (1-800-662-2739).
- -------------------------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please call our
SERVICES Investor Information Department at 1-800-662-7447.
STATEMENTS AND Vanguard will send you a confirmation statement each time you initiate
REPORTS a transaction in your account (except for checkwriting redemptions from
Vanguard money market accounts). You will also receive a comprehensive
account statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement, listing all
transaction activity for the entire calendar year.
Financial reports on the Fund will be mailed to you semi-annually,
according to the Fund's fiscal year-end.
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S. Government checks
DEPOSIT SERVICE (including Social Security and military pension checks) and private
payroll checks may be automatically deposited into your Vanguard Fund
account. Separate brochures and forms are available for direct deposit
of U.S. Government and private payroll checks.
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VANGUARD AUTOMATIC Vanguard's Automatic Exchange Service allows you to move money
EXCHANGE SERVICE automatically among your Vanguard Fund accounts. For instance, the
service can be used to "dollar cost average" from a money market
portfolio into a stock or bond fund or to contribute to an IRA or other
retirement plan.
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VANGUARD FUND Vanguard Fund Express allows you to transfer money between your Fund
EXPRESS account and your account at a bank, savings and loan association, or a
credit union that is a member of the Automated Clearing House (ACH)
system. You may elect this service on the Account Registration Form or
call the 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 Tele-Account is a convenient, automated service that provides
TELE-ACCOUNT share price, price change and yield quotations on Vanguard Funds
through any TouchTone(TM) telephone. This free service also lets you
obtain information about your account balance, your last transaction,
and your most recent dividend or capital gains payment. To contact
Vanguard's Tele-Account service, dial 1-800-ON-BOARD (1-800-662-6273).
A free brochure offering detailed operating instructions is available
from the Investor Information Department (1-800-662-7447).
- -------------------------------------------------------------------------------------------------
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23
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VANGUARD/MORGAN GROWTH FUND, INC.
PROSPECTUS SUPPLEMENT
MARCH 11, 1994
On February 25, 1994, Vanguard/Morgan Growth Fund announced a change in the
proportion of the net assets of the Fund managed by each of the Fund's
investment advisers, to be completed by March 31, 1994. The portion of the
Fund's assets managed by Wellington Management Company ("Wellington Management")
will be reduced from 51% to approximately 40% of net assets. The share of net
assets managed by Franklin Portfolio Associates will be increased from 22% to
approximately 33%. The shares managed by the Fund's other two advisers will
remain unchanged: Husic Capital Management (13%) and Vanguard Core Management
(9%). Approximately 5% of the Fund's net assets is held in cash.
In addition, the Fund announced the following portfolio manager change to
be completed prior to March 31, 1994. Robert D. Rands, 51, Senior Vice President
of Wellington Management, will assume responsibility for Wellington Management's
portion of the Fund's net assets. Mr. Rands has been associated with Wellington
Management for 16 years.
The investment objectives and policies of the Fund will remain unchanged.
24
<PAGE> 57
VANGUARD/MORGAN GROWTH FUND, INC.
PROSPECTUS SUPPLEMENT
JUNE 28, 1993
On June 18, 1993, the Board of Directors of Vanguard/Morgan Growth Fund,
Inc. (the "Fund") approved the appointment of Husic Capital Management of San
Francisco, California ("Husic") as an additional investment adviser to manage
approximately 15% of the Fund's assets. The proportion of the net assets of the
Fund managed by each of the Fund's investment advisers (see page 8) may be
changed by the Board of Directors as circumstances warrant.
An Information Statement providing detailed information concerning this new
investment advisory relationship will be mailed to shareholders of the Fund at
least 30 days before the effective date of the new investment advisory
agreement. It is expected that the effective date of the agreement will be on or
about September 15, 1993. Under the terms of the agreement, the Fund will pay
Husic a basic advisory fee at the end of each fiscal quarter, calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the average month-end assets of the Fund managed by Husic for the quarter:
<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
- ------------------ -----------
<S> <C>
First $25 million 0.40%
Next $125 million 0.35%
Next $350 million 0.25%
Next $500 million 0.20%
Over $1 billion 0.15%
</TABLE>
Effective with the quarter ending September 30, 1994, the basic fee paid to
Husic, as provided above, may be increased or decreased by as much as 75% by
applying an incentive/penalty fee based on the investment performance of the
assets managed by Husic relative to the return of the Growth Fund Stock Index
(described on page 9).
25
<PAGE> 58
VANGUARD/MORGAN GROWTH FUND, INC.
PROSPECTUS SUPPLEMENT
JUNE 1, 1993
As of May 4, 1993, Roll and Ross Asset Management Corporation ("Roll and
Ross") no longer serves investment advisory services to Vanguard/Morgan Growth
Fund, Inc. (the "Fund"). The assets previously allocated to Roll and Ross
(approximately 15% of the Fund's assets) will be managed on an at-cost basis by
Vanguard's Core Management Department until a replacement investment adviser is
selected in accordance with the Investment Company Act of 1940. The Fund's Board
of Directors may, without the approval of shareholders, provide for the
employment of a new adviser pursuant to the terms of a new advisory agreement.
Any such change will only be made upon not less than 30 days' prior written
notice to shareholders, which shall include detailed information concerning the
new adviser.
26
<PAGE> 59
VANGUARD SPECIALIZED PORTFOLIOS -- SERVICE ECONOMY PORTFOLIO
VANGUARD/MORGAN GROWTH FUND
COMBINED PROXY STATEMENT AND PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Cover Page............................................................................. 2
Notice of Special Meeting of Shareholders.............................................. 3
Approval or Disapproval of the Proposed Reorganization................................. 4
Summary................................................................................ 4
Comparison of the Service Economy Portfolio and Morgan Growth Fund................ 4
The Proposed Reorganization....................................................... 10
Additional Information about the Proposed Reorganization............................... 11
Reasons for the Proposed Reorganization........................................... 11
The Plan of Reorganization........................................................ 12
Expenses of the Reorganization.................................................... 13
Tax Consequences.................................................................. 13
Shareholders' Rights.............................................................. 13
Capitalization......................................................................... 14
Additional Information on the Service Economy Portfolio and Morgan Growth Fund......... 14
The Service Economy Portfolio..................................................... 14
Morgan Growth Fund................................................................ 15
The Vanguard Group................................................................ 18
Litigation........................................................................ 18
Performance Summary.................................................................... 19
Financial Highlights................................................................... 20
Financial Statements and Experts....................................................... 22
Information filed with the Securities and Exchange Commission.......................... 22
Vote Required.......................................................................... 22
Other Matters.......................................................................... 22
Agreement and Plan of Reorganization................................................... Exhibit I
Morgan Growth Fund Prospectus.......................................................... Exhibit II
</TABLE>
(LOGO)
