-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Kgju5daRkB1uu8iRYuuzwW6w59RJmAqnN/NrILZ9TJif1lcia3Rc8PspNwmvU2Q0 uyc9Mnsjmy76811yqUw5pA== 0000893220-94-000391.txt : 19940902 0000893220-94-000391.hdr.sgml : 19940902 ACCESSION NUMBER: 0000893220-94-000391 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940831 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEMINI II INC CENTRAL INDEX KEY: 0000759277 STANDARD INDUSTRIAL CLASSIFICATION: STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-04168 FILM NUMBER: 94547427 BUSINESS ADDRESS: STREET 1: PO BOX 2600 VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 N-30D 1 GEMINI II,INC.--SEMI-ANNUAL REPORT 1 CHAIRMAN'S LETTER FELLOW SHAREHOLDER: Common stocks experienced two significant downdrafts--one in late March, the other in late June--during the six months ended June 30, the first half of Gemini II Fund's 1994 fiscal year. Nonetheless, reasonable strength during the remainder of the six-month period held the net decline in the total return of all U.S. stocks to -4.5%. In this challenging environment, Gemini II gave a fine account of itself, earning a total return (capital change plus income) of +1.6% for the period. This table presents our usual comparison of the Fund (in terms of its aggregate portfolio) and the Standard & Poor's 500 Composite Stock Price Index, a good reflection of the returns on large capitalization "blue chip" stocks:
- - ---------------------------------------------------------- Total Return ---------------- Six Months Ended June 30, 1994 - - ---------------------------------------------------------- GEMINI II +1.6% - - ---------------------------------------------------------- STANDARD & POOR'S 500 STOCK INDEX -3.4% - - ----------------------------------------------------------
The Fund's return, of course, represents the combined returns of our Capital Shares and our Income Shares. The Capital Shares, which provided 50% of the Fund's total initial capital, receive 100% of the total portfolio capital appreciation (or depreciation). The Income Shares, which provided the remaining 50% of the initial capital, receive 100% of the net investment income earned by the total portfolio. * CAPITAL SHARE RESULTS Given the major contribution of income in the Fund's total return, it should be no surprise that the net asset value of each Capital Share fell modestly during the six months, from $22.10 on December 31, 1993, to $21.77 on June 30, 1994. This decline of -1.5% was less than one-third of the -4.8% decline in the price (excluding income) of the Standard & Poor's 500 Index. This successful relative performance is yet one more credit to portfolio manager John B. Neff and his team, and reflects a continuation of the resurgence in our relative returns that has been manifested steadily since 1990. (You will recall that we had more than our share of performance difficulties during 1989-90.) * INCOME SHARE RESULTS Each Income Share received two quarterly dividends totaling $.60 during the past six months, reflecting the May increase in our quarterly rate from $.25 per share to $.35 per share. This increase, in and of itself, does not suggest that our income will rise this year; rather, it means that a higher proportion of net income will be distributed on a quarterly basis, and a lower proportion will be distributed with our year-end "extra" dividend, representing income earned in excess of the quarterly payments. As mentioned to you in our First Quarter Report, our objective continues to be "to reach or even exceed" the total income dividends of $1.66 per share that we distributed in 1993. * THE PERIOD IN REVIEW Following two years of relative tranquility, substantial volatility returned to the stock market during the past six months, and stocks in the aggregate showed a net decline. While the decline in stock prices from the February high to the June low (-8%) was fairly significant, it was a far cry from the market's sharp dips in 1990 (-20%), 1987 (-34%), 1981 (-18%), and 1973-74 (-48%). (Price change from high to low, excluding income.) Although the recent price decline could be described as "moderate" in an historical sense, it seemed to reflect investor concerns beyond the actual dimensions of the problems confronting the market, most notably possible future inflation. Surely, investor concerns were increased by the sharp six-month decline (-15%) in the prices of long-term U.S. Treasury bonds, as interest rates leaped upward--from 6.4% at the start of our fiscal period to 7.6% at its close. By way of perspective, this yield was 7.4% when 1993 began. (continued) 1 2 While these inflationary concerns have yet to be reflected in the Consumer Price Index, the Federal Reserve has acted to "tighten" the money supply and slow economic growth and potential future inflation, raising the Federal funds rate (at which banks borrow from one another) four times--in February, March, April, and again in May--from 3.00% to 4.25%. Theory suggests that increases in short-term rates should be regarded by market participants as a restraint on potential inflation, and thus cause long- term rates to fall. However, this theory seldom holds true in practice, and 1994 has proved to be no exception. In the stock market, the past six months was the reverse of 1993 in at least two respects: (1) stocks with large market capitalizations outpaced those with medium and small market capitalizations; and (2) more conservative growth and income ("value") mutual funds outpaced more speculative funds. The average value fund (Gemini II's peer group) declined -3.6% over the past six months, only a bit more than the Standard & Poor's 500 Index. In comparison, aggressive growth funds provided an average return of - 7.8%, small cap funds -8.5%, and emerging markets funds -12.6%. * IN SUMMARY As the performance comparisons suggest, Gemini II continues to "do its own thing." Our portfolio remains strongly value-oriented, and is concentrated in a relatively small number of major positions. As a result, our portfolio is less broadly diversified than typical investment companies and, in this narrow sense, carries some extra risk. On June 30, our ten largest common stock holdings comprised 49% of net assets, and our total "equity" position (63% common stocks, 28% convertible securities, and 8% high-yield bonds) represented 99% of total net assets. I look forward to reporting to you again in our Third Quarter Report three months hence. Sincerely, /s/ JOHN C. BOGLE - - ------------------ John C. Bogle Chairman of the Board July 18, 1994 Note: Mutual fund data from Lipper Analytical Services, Inc.
- - ------------------------------------------------------------------------------------------------ Premium and Discount June 30, 1994 --------------------------------------------------- Net Asset Market Value Price Difference - - ------------------------------------------------------------------------------------------------ CAPITAL SHARES $21.77 $19.125 -12.1% INCOME SHARES 9.56 11.250 +17.7 - - ------------------------------------------------------------------------------------------------ TOTAL $31.33 $30.375 - 3.0% - - ------------------------------------------------------------------------------------------------
2 3 REPORT FROM THE INVESTMENT ADVISER We continue to put up fairly good numbers in a somewhat difficult environment, as we bested the S&P 500 in 1994's first half by 500 basis points (5.00%) on a total return basis. (See Chairman's letter for performance details.) Particularly contributory to these results were banks, aluminums, and oils in general; CIGNA, Columbia Healthcare, Advanced Micro Devices, and Lyondell Petrochemical in particular. Poor performers were Bankers Trust, an exception among the banks, Kmart PERCS, and the UAL Convertible Preferred. Significant new purchases included a major position in Atlantic Richfield--a prime participation in a potential increase in the price of crude oil (which subsequently happened)--and Reynolds Metals convertibles. We garnered good profits in Columbia Healthcare and Telefonica. Despite the recent interest rate increases, the economy is still firm in our view, with moderate growth of 212%-3% in GDP seemingly an achievable prospect for not only 1994, but, to the degree it is solidly based, for 1995 and 1996 as well. There has been a little hesitation in the pace of big-ticket sales in the housing and automotive areas, but they continue at a high and confident level in our judgment. If anything, long- and intermediate-term interest rates have surged upward too much. While we still think inflation, as measured by the Consumer Price Index, is moving up towards a 312%-4% annual rate, interest rates, after a 180 basis point increase, seem to have overcompensated and could well come down 60-70 basis points to a level more consistent with even heightened inflation. As all too often happens, the pendulum swings widely and wildly as momentum seems to capture the marketplace over the short term. We would concede that the stock market could well continue to prove challenging for some period. However, it is not bereft of exploitable opportunities from our perspective, as out-of-favor areas continue to be discovered. This, of course, is our stock- in-trade. Accordingly, we are continuing our never-ending quest to keep Gemini shareholders represented in these fertile segments of the marketplace. Respectfully, John B. Neff, Managing Partner Charles T. Freeman, Senior Vice President Wellington Management Company July 27, 1994 3 4 STATEMENT OF NET ASSETS FINANCIAL STATEMENTS (unaudited) June 30, 1994
Market Value Shares (000)+ - - ---------------------------------------------------------------------------------------------------- COMMON STOCKS (62.7%) - - ---------------------------------------------------------------------------------------------------- BANKS (22.0%) BankAmerica Corp. 118,167 $ 5,406 Bankers Trust New York Corp. 254,592 16,962 The Chase Manhattan Corp. 150,266 5,748 Chemical Banking Corp. 102,500 3,946 First Tennessee National Corp. 21,300 927 First Union Corp. 404,000 18,635 KeyCorp 584,189 18,621 NationsBank, Inc. 100,000 5,137 ---------- GROUP TOTAL 75,382 ---------- - - ---------------------------------------------------------------------------------------------------- CHEMICALS (.8%) Lyondell Petrochemical Co. 112,900 2,780 ---------- - - ---------------------------------------------------------------------------------------------------- ELECTRIC UTILITIES (3.4%) Commonwealth Edison Co. 508,937 11,578 ---------- - - ---------------------------------------------------------------------------------------------------- INSURANCE (11.7%) Aetna Life & Casualty Co. 342,260 19,124 CIGNA Corp. 287,100 20,994 ---------- GROUP TOTAL 40,118 ---------- - - ---------------------------------------------------------------------------------------------------- NON-FERROUS METALS (1.7%) Aluminum Co. of America 79,500 5,814 ---------- - - ---------------------------------------------------------------------------------------------------- OIL (14.6%) Atlantic Richfield Co. 188,500 19,251 Pennzoil Co. 185,500 9,507 Phillips Petroleum Co. 40,300 1,259 USX-Marathon Group 867,100 14,524 Ultramar Corp. 203,400 5,339 ---------- GROUP TOTAL 49,880 ---------- - - ---------------------------------------------------------------------------------------------------- SAVINGS & LOAN (7.9%) H. F. Ahmanson & Co. 703,100 13,271 Great Western Financial Corp. 757,875 13,926 ---------- GROUP TOTAL 27,197 ---------- - - ---------------------------------------------------------------------------------------------------- TELEPHONE (.6%) Telefonica de Espana ADR 48,100 1,936 ---------- - - ---------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $196,404) 214,685 ---------- - - ---------------------------------------------------------------------------------------------------- - - ---------------------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS (23.7%) - - ---------------------------------------------------------------------------------------------------- AMR Corp. 6% 80,000 3,540 Advanced Micro Devices, Inc. $3.00 250,000 13,125 Bethlehem Steel Corp. $2.50 86,400 2,322 $3.50 125,000 6,500 $5.00 93,600 5,008 Citicorp 10.75% 73,000 8,213 (1) Kaiser Aluminum $.65 1,300,000 9,587 Kmart Corp. PERCS $3.41 327,400 10,231 Reynolds Metals $3.31 124,400 6,204 Santa Fe Energy Resources, Inc. 8.25% 200,000 1,925 Sea Containers, Ltd. $4.00 124,400 5,660 UAL Corp. 6.25% 90,000 7,515 Valero Energy $3.125 30,000 1,283 - - ---------------------------------------------------------------------------------------------------- TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $80,476) 81,113 - - ----------------------------------------------------------------------------------------------------
BONDS (12.4%) - - ---------------------------------------------------------------------------------------------------- Face Amount (000) -------- Convertible (3.5%) Conner Peripherals 6.5%, 3/1/02 $ 3,250 2,649 Seagate Technology 6.75%, 5/1/12 11,000 9,185 ---------- GROUP TOTAL 11,834 ---------- - - ---------------------------------------------------------------------------------------------------- NON-CONVERTIBLE (8.3%) Chrysler Corp. 10.4%, 8/1/99 12,000 13,050 Family Restaurants 0.0%, 2/1/04 3,000 1,920 Geneva Steel 11.125%, 3/15/01 7,000 7,210 Ryland Group 9.625%, 6/1/04 2,500 2,337 Weirton Steel Corp. 10.875%, 10/15/99 4,000 4,020 ---------- GROUP TOTAL 28,537 ---------- - - ---------------------------------------------------------------------------------------------------- OTHER (.6%) 2,100 ---------- - - ---------------------------------------------------------------------------------------------------- TOTAL BONDS (COST $35,735) 42,471 - - ----------------------------------------------------------------------------------------------------
4 5
Face Market Amount Value (000) (000)+ - - ---------------------------------------------------------------------------------------------------- TEMPORARY INVESTMENTS (1.2%) - - ---------------------------------------------------------------------------------------------------- U.S. TREASURY NOTE (.6%) 7.25%, 11/15/96 $2,000 $ 2,039 - - ---------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT (.6%) Collateralized by U.S. Government Obligations in a Pooled Cash Account, 4.26%, 7/1/94 1,828 1,828 - - ---------------------------------------------------------------------------------------------------- TOTAL TEMPORARY INVESTMENTS (Cost $3,916) 3,867 - - ---------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.0%) (Cost $316,531) 342,136 - - ---------------------------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES - - ---------------------------------------------------------------------------------------------------- Other Assets--Notes D and F $ 5,299 Liabilities--Note F (5,226) ---------- 73 - - ---------------------------------------------------------------------------------------------------- NET ASSETS (100%) $342,209 ====================================================================================================
+ See Note A to Financial Statements. (1) Mandatory conversion June 30, 1996. 5 6 STATEMENT OF OPERATIONS
Six Months Ended June 30, 1994 (000) - - ----------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,600 Interest . . . . . . . . . . . . . . . . . . . . . . . . . 2,496 - - ----------------------------------------------------------------------------------------------------- Total Income . . . . . . . . . . . . . . . . . . . . . 10,096 - - ----------------------------------------------------------------------------------------------------- EXPENSES Investment Advisory Fees--Note C Basic Fees . . . . . . . . . . . . . . . . . . . . . . . $586 Performance Adjustment . . . . . . . . . . . . . . . . . 158 744 The Vanguard Group--Note D . . . . . . . . . . . . . . . . ---- 254 Custodian's Fees . . . . . . . . . . . . . . . . . . . . . 7 Taxes (other than income taxes) . . . . . . . . . . . . . . 14 Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . 4 Shareholders' Reports . . . . . . . . . . . . . . . . . . . 16 Annual Meeting and Proxy Costs . . . . . . . . . . . . . . 10 Directors' Fees and Expenses . . . . . . . . . . . . . . . 1 - - ----------------------------------------------------------------------------------------------------- Total Expenses . . . . . . . . . . . . . . . . . . . . 1,050 - - ----------------------------------------------------------------------------------------------------- Net Investment Income . . . . . . . . . . . . . . . . 9,046 ===================================================================================================== REALIZED AND UNREALIZED GAIN ON INVESTMENTS Realized Net Gain on Investment Securities Sold . . . . . . 12,217 Change in Unrealized Appreciation (Depreciation) . . . . . (15,787) - - ----------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain on Investments . . . $ (3,570) =====================================================================================================
6 7 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED Year Ended JUNE 30, 1994 December 31, 1993 (000) (000) - - ----------------------------------------------------------------------------------------------------- INCOME AVAILABLE FOR DISTRIBUTION Balance, Beginning of Period . . . . . . . . . . . . . . . . . $ 363 $ 327 Net Investment Income . . . . . . . . . . . . . . . . . . . . . 9,046 18,164 Distributions to Income Shareholders ($.60 and $1.66 per share, respectively) . . . . . . . . . . (6,552) (18,128) - - ----------------------------------------------------------------------------------------------------- Balance, End of Period . . . . . . . . . . . . . . . . . . $ 2,857 $ 363 - - ----------------------------------------------------------------------------------------------------- UNDISTRIBUTED CAPITAL GAINS Balance, Beginning of Period . . . . . . . . . . . . . . . . . $ 98,408 $ 79,344 Realized Net Gain on Investment Securities Sold . . . . . . . . 12,217 29,329 Provision for Taxes on Capital Gains Retained . . . . . . . . . -- (10,265) - - ----------------------------------------------------------------------------------------------------- Balance, End of Period . . . . . . . . . . . . . . . . . . $110,625 $ 98,408 - - ----------------------------------------------------------------------------------------------------- UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES Beginning of Period . . . . . . . . . . . . . . . . . . . . . . $ 41,392 $ 23,441 End of Period . . . . . . . . . . . . . . . . . . . . . . . . . 25,605 41,392 - - ----------------------------------------------------------------------------------------------------- Change in Unrealized Appreciation (Depreciation) . . . . . $(15,787) $ 17,951 - - -----------------------------------------------------------------------------------------------------
STATEMENT OF SHAREHOLDERS' EQUITY
June 30, 1994 (000) - - ----------------------------------------------------------------------------------------------------- Income Shares, $1.00 Par Value--Redeemable at $9.30 per Share on January 31, 1997: Authorized 15,000,000 Shares; Issued and Outstanding 10,920,550 Shares . . . . . . $ 10,920* Capital Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,641* Income Available for Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 2,857 - - ----------------------------------------------------------------------------------------------------- 104,418 - - ----------------------------------------------------------------------------------------------------- Capital Shares, $1.00 Par Value; Authorized 15,000,000 Shares; Issued and Outstanding 10,920,550 Shares . . . . . . . . . . . . . . . . . . . . . 10,920* Capital Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,641* Undistributed Capital Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,625 Unrealized Appreciation of Investment Securities . . . . . . . . . . . . . . . . . . 25,605 - - ----------------------------------------------------------------------------------------------------- 237,791 - - ----------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . $342,209 - - -----------------------------------------------------------------------------------------------------
* No change during period. 7 8 FINANCIAL HIGHLIGHTS
Year Ended December 31, SIX MONTHS ENDED ------------------------------------------------ For a Share Outstanding Throughout Each Period JUNE 30, 1994 1993 1992 1991 1990 1989 - - ------------------------------------------------------------------------------------------------------------------------- INCOME SHARES Net Asset Value, Beginning of Period . . . . . . . . . . $ 9.33 $ 9.33 $ 9.34 $ 9.34 $ 9.37 $ 9.38 Net Investment Income . . . . . . . . . . . . . . . . . .83 1.66 1.66 1.65 1.63 1.58 Distributions from Net Investment Income . . . . . . . . (.60) (1.66) (1.67) (1.65) (1.66) (1.59) - - ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . $ 9.56 $ 9.33 $ 9.33 $ 9.34 $ 9.34 $ 9.37 ========================================================================================================================= CAPITAL SHARES Net Asset Value, Beginning of Period . . . . . . . . . . $22.10 $18.71 $16.28 $11.51 $17.44 $16.56 Realized Net Gain on Investments . . . . . . . . . . . . 1.12 2.69 1.17 1.77 .38 1.14 Distributions from Realized Capital Gains . . . . . . . -- -- (.08) (.22) (.11) (.19) Provision for Taxes on Capital Gains Retained . . . . . -- (.94) (.37) (.53) (.09) (.33) Unrealized Appreciation (Depreciation) . . . . . . . . . (1.45) 1.64 1.71 3.75 (6.11) .26 - - ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . $21.77 $22.10 $18.71 $16.28 $11.51 $17.44 =========================================================================================================================
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
Amounts in Thousands and Per Share (Unaudited) --------------------------------------------------------------------------------- Three Months Ended - - ------------------------------------------------------------------------------------------------------------------ March 31, 1994 June 30, 1994 ------------------- -------------- Net Investment Income $ 4,504 $ .41 $4,542 $.42 Net Realized Gain (Loss) and Change in Unrealized Appreciation (Depreciation) $(13,003) $(1.19) $9,433 $.86 - - ------------------------------------------------------------------------------------------------------------------
March 31, 1993 June 30, 1993 September 30, 1993 December 31, 1993 ------------------- -------------- ------------------- ----------------- Net Investment Income $ 4,332 $ .40 $4,311 $.39 $ 4,621 $ .42 $ 4,900 $ .45 Net Realized Gain (Loss) and Change in Unrealized Appreciation (Depreciation) $ 23,032 $ 2.11 $5,742 $.53 $21,301 $1.95 $(2,795) $(.26) - - ------------------------------------------------------------------------------------------------------------------
8 9 NOTES TO FINANCIAL STATEMENTS Gemini II is registered under the Investment Company Act of 1940 as a diversified closed-end investment company. Certain of the Fund's investments are in corporate debt instruments; the issuers' abilities to meet these obligations may be affected by economic developments in their respective industries. * A. The following significant accounting policies are in conformity with generally accepted accounting principles for investment companies. Such policies are consistently followed by the Fund in the preparation of financial statements. 1. SECURITY VALUATION: Securities listed on an exchange are valued at the latest quoted sales prices as of 4:00 PM on the valuation date; securities not traded are valued at the mean of the latest quoted bid and asked prices. Securities not listed are valued at the latest quoted bid prices. Temporary investments are valued at amortized cost which approximates market value. 2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for Federal income taxes is required in the financial statements. Realized net long-term gains, if any, on security transactions are retained and applicable taxes thereon are accrued at the end of the Fund's fiscal year (see Note B). 3. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard Group of Investment Companies, transfers uninvested cash balances into a Pooled Cash Account, the daily aggregate of which is invested in repurchase agreements secured by U.S. Government obligations. Securities pledged as collateral for repurchase agreements are held by the Fund's custodian bank until maturity of each repurchase agreement. Provisions of the agreement ensure that the market value of this collateral is sufficient in the event of default; however, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. 4. OTHER: Security transactions are accounted for on the date the securities are purchased or sold. Costs used in determining realized gains and losses on the sale of investment securities are those of specific securities sold. Dividend income and distributions to shareholders are recorded on the ex- dividend date. Discounts and premiums on debt securities purchased are amortized to interest income over the lives of the respective securities. * B. Income Shareholders are entitled to receive as distributions the higher of $.80 per share (annually) or all of the net investment income available for distribution. Income distributions to Capital Shareholders are prohibited as long as any Income Shares remain outstanding. Capital Shareholders are entitled to any net realized short-term gains on investment securities annually. * C. Under the terms of a contract expiring January 31, 1995, the Fund pays Wellington Management Company a basic investment advisory fee calculated at an annual percentage rate of average net assets of the Fund. The basic fee thus computed is subject to quarterly adjustments based on performance relative to the Standard & Poor's 500 Stock Index. For the six months ended June 30, 1994, the investment advisory fee represents an effective annual base rate of .34 of 1% of average net assets before an increase of $158,000 (.09 of 1%) based on performance. * D. The Vanguard Group, Inc. furnishes at cost corporate management and administration, transfer agency, marketing, and distribution services. The costs of such services are allocated to the Fund under methods approved by the Board of Directors. At June 30, 1994, the Fund had contributed capital 9 10 NOTES TO FINANCIAL STATEMENTS (continued) of $54,000 to Vanguard (included in Other Assets), representing .3% of Vanguard's capitalization. The Fund's directors and officers are also directors and officers of Vanguard. * E. During the six months ended June 30, 1994, the Fund made purchases of $60,195,000 and sales of $58,089,000 of investment securities other than U.S. Government securities and temporary cash investments. Purchases and sales of U.S. Government securities were $7,343,000 and $13,416,000, respectively. At June 30, 1994, unrealized appreciation for financial reporting and Federal income tax purposes aggregated $25,605,000, of which $43,128,000 related to appreciated securities and $17,523,000 related to depreciated securities. * F. The market value of securities on loan to broker/dealers at June 30, 1994, was $1,282,000, for which the Fund had received cash collateral of $1,314,000. 10 11 DIRECTORS AND OFFICERS JOHN C. BOGLE, Chairman and Chief Executive Officer Chairman and Director of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. JOHN J. BRENNAN, President President and Director of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc Rorer Inc.; Director of Sun Company, Inc. and Immune Response Corporation; Trustee of the Universal Health Realty Income Trust. BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Company, Alco Standard Corp., Raytheon Company, Knight- Ridder, Inc., and Massachusetts Mutual Life Insurance Co. BRUCE K. MACLAURY, President of The Brookings Institution; Director of Dayton Hudson Corporation, American Express Bank Ltd., The St. Paul Companies, Inc., and Scott Paper Company. BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton University; Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker Fentress & Co., and The Southern New England Telephone Company. ALFRED M. RANKIN, JR., President and Chief Executive Officer of NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company, and The Standard Products Company. JOHN C. SAWHILL, President and Chief Executive Officer of The Nature Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and President of New York University; Director of Pacific Gas and Electric Company and NACCO Industries. JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Company; Director of Cummins Engine Company; Trustee of Vanderbilt University and the Culver Educational Foundation. OTHER FUND OFFICERS RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary of each of the investment companies in The Vanguard Group. KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.; Controller of each of the investment companies in The Vanguard Group. OTHER VANGUARD GROUP OFFICERS JEREMY G. DUFFIELD Senior Vice President Planning & Development JAMES H. GATELY Senior Vice President Institutional IAN A. MACKINNON Senior Vice President Fixed Income Group VINCENT S. MCCORMACK Senior Vice President Operations RALPH K. PACKARD Senior Vice President Chief Financial Officer 11 12 THE VANGUARD FAMILY OF FUNDS MONEY MARKET FUNDS Vanguard Money Market Reserves TAX-EXEMPT MONEY MARKET FUNDS Vanguard Municipal Bond Fund-Money Market Portfolio Vanguard State Tax-Free Funds (CA, NJ, OH, PA) TAX-EXEMPT INCOME FUNDS Vanguard Municipal Bond Fund Vanguard State Tax-Free Funds (CA, FL, NJ, NY, OH, PA) FIXED INCOME FUNDS Vanguard Admiral Funds Vanguard Bond Index Fund Vanguard Fixed Income Securities Fund Vanguard Preferred Stock Fund BALANCED FUNDS Vanguard Asset Allocation Fund Vanguard Balanced Index Fund Vanguard STAR Fund Vanguard/Wellesley Income Fund Vanguard/Wellington Fund EQUITY FUNDS GROWTH AND INCOME FUNDS Vanguard Convertible Securities Fund Vanguard Equity Income Fund Vanguard Index Trust Vanguard Quantitative Portfolios Vanguard/Trustees' Equity Fund-U.S. Portfolio Vanguard/Windsor Fund Vanguard/Windsor II GROWTH FUNDS Vanguard/Morgan Growth Fund Vanguard/PRIMECAP Fund Vanguard U.S. Growth Portfolio AGGRESSIVE GROWTH FUNDS Vanguard Explorer Fund Vanguard Specialized Portfolios INTERNATIONAL FUNDS Vanguard International Equity Index Fund Vanguard International Growth Portfolio Vanguard/Trustees' Equity Fund-International Portfolio The Vanguard Group * Vanguard Financial Center Valley Forge, PA 19482 New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739 This Report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus. All Funds in the Vanguard Family are offered by prospectus only. Q342-06/94 GEMINI II [PHOTO -- SEE EDGAR APPENDIX] SEMI-ANNUAL REPORT JUNE 30, 1994 13 EDGAR APPENDIX The back cover of the printed version of this report features the flags of the United States of America and Vanguard flying from a halyard. -----END PRIVACY-ENHANCED MESSAGE-----