-----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, C43HYQTTsirKixFPsG3NJbQlDJRm/gf/NUS+SUBIxQTbByw1MBRPfE0e68Enlf2i rGc0r2amXLK3T61g1JX/yg== 0000893220-95-000568.txt : 19950905 0000893220-95-000568.hdr.sgml : 19950905 ACCESSION NUMBER: 0000893220-95-000568 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950831 SROS: NONE 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: 95569404 BUSINESS ADDRESS: STREET 1: PO BOX 2600 VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 N-30D 1 GEMINI II SEMI-ANNUAL REPORT 1 CHAIRMAN'S LETTER FELLOW SHAREHOLDER: The bull market of the first quarter of 1995 not only continued, but accelerated during the second quarter. For the six months ended June 30, the first half of our 1995 fiscal year, Gemini II was among the top performers in the investment company field. The table below presents the return (capital change plus income) for the Fund's total portfolio during the six-month period, compared to that of the unmanaged Standard & Poor's 500 Composite Stock Price Index. While our return of +21.1% was only marginally ahead of the Index, the Index itself outpaced about 83% of all general equity mutual funds during this period. So, when compared to a total return of +17.0% for the average growth and income mutual fund, Gemini II's return was singularly impressive.
- ---------------------------------------------------------------- Total Return --------------------- Six Months Ended June 30, 1995 - ---------------------------------------------------------------- GEMINI II +21.1% - ----------------------------------------------------------------- STANDARD & POOR'S 500 STOCK INDEX +20.2% - -----------------------------------------------------------------
The Fund's total return is allocated so that 100% of the portfolio's capital appreciation (or depreciation) is attributed to the Capital Shares, which provided 50% of the Fund's initial capital. By the same token, 100% of the net investment income is received by the Income Shares, which provided the remaining 50% of the Fund's initial capital. THE CAPITAL SHARE RESULTS The net asset value of each Capital Share rose from $19.03 on December 31, 1994, to $24.10 on June 30, 1995, an increase of +26.6% for the six-month period. The price of the Standard & Poor's 500 Index increased by +18.6% (excluding income). This solid advantage is a good reflection of the leverage inherent in the Fund's capital structure. On June 30, this leverage factor was 1.4 times, compared with 2.0 times at our inception in February 1985. THE INCOME SHARE RESULTS During the past six months, we distributed two dividends at the quarterly rate of $.35 per share, one on March 1 and one on June 1. As in the past, we expect to maintain this quarterly rate throughout the year and pay an "extra" dividend at year-end, representing the year's undistributed net income over and above the quarterly total of $1.40. Total dividends from net income amounted to $1.73 per share in 1994. Although there are no guarantees in this business, we currently believe that net income for 1995 should exceed last year's total. THE PERIOD IN REVIEW After a moderately disappointing 1994, the stock market sprung to life as 1995 began. During the past six months, the market moved upward, week after week, in virtually straight-line fashion, delighting the bulls and astonishing the bears. On balance, the Dow Jones Industrial Average rose from 3834 as the year began to 4556 on June 30. As usual, there were many opinions as to the source of the market's surprising strength. In my view, it resulted from a combination of: (1) the sharp decline in interest rates (the yield on the long-term U.S. Treasury bond fell from 7.8% to 6.6% during the period, a dip of 120 basis points); (2) the diminishing threat of additional increases in short-term interest rates by the Federal Reserve Board; (3) a slight softening in U.S. economic growth, resulting in continued optimism about the outlook for inflation; (4) record-breaking corporate profits; and (5) a hint of speculative fever in the marketplace. Whatever the cause, the Standard & Poor's 500 Index provided a total return of +20.2% for the six months. Our premium return of 0.9 percentage points over the Standard & Poor's Index was accounted for by the net interaction of three largely offsetting factors: (1) value added by our heavy weighting in the financial group (65% of our common stocks compared with 11% for the Index), which provided championship returns; (2) outstanding individual stock selections in the transportation sector; and (3) the negative impact of our limited participation in the technology group, the market leader for the period. That we have nicely 1 2 outpaced the Index without full representation in technology stocks says a lot about the professional skills of our portfolio managers, John B. Neff and Charles T. Freeman, and their Wellington Management Company team. Their analysis is presented on page 3 of this Report. PORTFOLIO STATISTICS The following table shows the composition of our portfolio on June 30, 1995:
- ---------------------------------------------------------------------- Percentage of Net Assets ----------------------------- EQUITY EQUIVALENTS COMMON STOCK 50% CONVERTIBLE SECURITIES 39 LOWER-GRADE BONDS 3 - ---------------------------------------------------------------------- TOTAL EQUITY EQUIVALENTS 92% TEMPORARY CASH INVESTMENTS 8 - ---------------------------------------------------------------------- TOTAL PORTFOLIO 100% - ----------------------------------------------------------------------
In general, this structure is similar to what it was at the close of our first quarter, although the common stock position declined marginally and the cash position increased commensurately. PREMIUMS AND DISCOUNTS The table below presents the current market discount for the Capital Shares and the premium for the Income Shares. Both the discount and the premium have widened slightly since year-end.
- ---------------------------------------------------------------------- June 30, 1995 --------------------------------------------- Net Asset Market Value Price Difference - ---------------------------------------------------------------------- CAPITAL SHARES $24.10 $21.50 -10.8% INCOME SHARES 9.47 11.00 +16.2 - ---------------------------------------------------------------------- TOTAL $33.57 $32.50 - 3.2% - ----------------------------------------------------------------------
The Fund will "mature" on January 31, 1997, at which time both classes of shares will be priced at their respective net asset values. Sincerely, /s/ JOHN C. BOGLE - ----------------- John C. Bogle Chairman of the Board July 17, 1995 Note: Mutual fund data from Lipper Analytical Services, Inc. 2 3 REPORT FROM THE INVESTMENT ADVISER Gemini II's results in the first half of 1995 were satisfactory, as we bested the S&P 500 on a total return basis with a 21.1% increase versus 20.2% for the Index. While this doesn't sound all that whiz-bang at only a ninety basis point superiority, it was an adrenaline-led market, particularly featuring technology, an area where we had a decent but not remarkable (7.6%) participation. We usually don't do too well in speculative markets but we "hung in" at least at a little above average. Some of our solid-citizenry weighed in with quite worthwhile gains, as exemplified by the banks, insurance, and savings and loans in the common stock portion of the portfolio. Additionally, attention-getting gains were experienced in the convertible segment of Gemini II, not only in technology, but airlines, aluminum, and housing as well. We are striving to match or better the 1994 dividend total of $1.73 but cannot give an absolute estimate at this time. As already suggested, the market has been quite bountiful thus far in 1995, perhaps somewhat better than the basic earnings backdrop would otherwise suggest with new appreciation opportunities becoming more limited accordingly. An area which is meaningfully behind the market, in our view, is the basic commodity cyclical segment, which has been built up to 25.3% of Gemini II's net assets in the aluminum, steel, and chemical industries. This is essentially represented by convertible securities, which not only offer good appreciation potential, but excellent yields as well. We think there is a very good chance that this current business expansion will persevere longer than the traditional postwar recovery, perhaps another three or four years, as we have not, in our view, built in the usual excesses that cry for correction. If we are right, these industries should not only stay "tight" in respect to pricing for this period, but accordingly demonstrate extended excellent earning power. This then should merit a better multiple in the marketplace than in previous more short-lived recoveries. Respectfully, John B. Neff, Managing Partner Charles T. Freeman, Senior Vice President Wellington Management Company August 1, 1995 3 4 FINANCIAL STATEMENTS (unaudited) June 30, 1995 STATEMENT OF NET ASSETS
Market Value Shares (000)+ - ------------------------------------------------------------------------------- COMMON STOCKS (49.6%) - ------------------------------------------------------------------------------- CONSUMER CYCLICAL (5.8%) - ------------------------------------------------------------------------------- AUTO & TRUCKS (5.4%) Chrysler Corp. 415,311 $ 19,883 RETAIL (.4%) Kmart Corp. 105,900 1,549 --------- GROUP TOTAL 21,432 --------- - ------------------------------------------------------------------------------- ENERGY (7.4%) - ------------------------------------------------------------------------------- Atlantic Richfield Co. 83,500 9,164 Pennzoil Co. 89,900 4,237 USX-Marathon Group 427,100 8,435 Ultramar Corp. 203,400 5,136 --------- GROUP TOTAL 26,972 --------- - ------------------------------------------------------------------------------- FINANCIAL (33.8%) - ------------------------------------------------------------------------------- BANKS (17.1%) Bankers Trust New York Corp. 94,592 5,865 Chemical Banking Corp. 281,500 13,301 First Union Corp. 404,000 18,281 KeyCorp 584,189 18,329 NationsBank, Inc. 127,200 6,821 INSURANCE (8.5%) Aetna Life & Casualty Co. 172,260 10,831 CIGNA Corp. 264,400 20,524 SAVINGS & LOAN (8.2%) H.F. Ahmanson & Co. 687,600 15,127 Great Western Financial Corp. 718,001 14,809 --------- GROUP TOTAL 123,888 --------- - ------------------------------------------------------------------------------- TECHNOLOGY (.3%) - ------------------------------------------------------------------------------- * Western Digital Corp. 60,804 1,056 --------- - ------------------------------------------------------------------------------- UTILITIES (2.3%) - ------------------------------------------------------------------------------- Unicom Corp. 313,737 8,353 --------- - ------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $149,972) 181,701 - ------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS (33.8%) - ------------------------------------------------------------------------------- BASIC MATERIALS (22.7%) - ------------------------------------------------------------------------------- CHEMICALS (5.5%) Atlantic Richfield Co. 9.00% 770,400 20,030 METALS & MINING (8.9%) (1)Kaiser Aluminum $.65 1,391,000 13,388 Reynolds Metals $3.00 401,400 19,267 STEEL (8.3%) AK Steel Holding 7.00% 410,000 11,685 Bethlehem Steel Corp. $2.50 20,000 525 $3.50 258,400 12,112 $5.00 93,600 4,891 WHX Corp. 7.50% 30,000 1,309 --------- GROUP TOTAL 83,207 --------- - ------------------------------------------------------------------------------- CONSUMER CYCLICAL (4.5%) - ------------------------------------------------------------------------------- Ford Motor Co. $4.20 170,000 16,448 --------- - ------------------------------------------------------------------------------- ENERGY (1.6%) - ------------------------------------------------------------------------------- Santa Fe Energy Resources, Inc. 8.25% 200,000 1,900 Valero Energy $3.125 85,000 3,910 --------- GROUP TOTAL 5,810 --------- - ------------------------------------------------------------------------------- FINANCIAL (.5%) - ------------------------------------------------------------------------------- Citicorp 10.75% 11,000 1,752 - ------------------------------------------------------------------------------- TRANSPORT & SERVICES (4.5%) - ------------------------------------------------------------------------------- AIRLINES (4.0%) Delta Air Lines $3.50 250,000 14,594 TRUCKING & SHIPPING (.5%) Sea Containers, Ltd. $4.00 48,400 2,178 --------- GROUP TOTAL 16,772 --------- - ------------------------------------------------------------------------------- TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $112,979) 123,989 - ------------------------------------------------------------------------------- CONVERTIBLE BONDS (5.3%) - ------------------------------------------------------------------------------- Face Amount (000) --------- Conner Peripherals 6.50%, 3/1/02 $ 8,380 7,123 Continental Homes 6.875%, 3/15/02 4,306 3,940 Seagate Technology 6.75%, 5/1/12 2,950 3,098 Toll Corp. 4.75%, 1/15/04 4,422 3,913 U.S. Home 4.875%, 11/1/05 1,750 1,435 - ------------------------------------------------------------------------------- TOTAL CONVERTIBLE BONDS (Cost $16,774) 19,509 - ------------------------------------------------------------------------------- BONDS (3.5%) - ------------------------------------------------------------------------------- Family Restaurants 0.00%, 2/1/04 3,000 750 Geneva Steel 11.125%, 3/15/01 7,000 5,530 Ryland Group 9.625%, 6/1/04 2,500 2,394 Weirton Steel Corp. 10.875%, 10/15/99 4,000 4,040 - ------------------------------------------------------------------------------- TOTAL BONDS (Cost $15,921) 12,714 - -------------------------------------------------------------------------------
4 5
Face Market Amount Value (000) (000)+ - ------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENTS (7.7%) - ------------------------------------------------------------------------------- COMMERCIAL PAPER Coca-Cola Co. 5.85%, 10/2/95 $ 5,000 $ 4,923 REPURCHASE AGREEMENT Collateralized by U.S. Government Obligations in a Pooled Cash Account 6.13%, 7/3/95 23,451 23,451 - ------------------------------------------------------------------------------- TOTAL TEMPORARY CASH INVESTMENTS (Cost $28,374) 28,374 - ------------------------------------------------------------------------------- TOTAL INVESTMENTS (99.9%) (Cost $324,020) 366,287 - ------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (.1%) - ------------------------------------------------------------------------------- Other Assets--Notes D and F 4,196 Liabilities--Note F (3,799) --------- 397 - ------------------------------------------------------------------------------- NET ASSETS (100%) $366,684 ===============================================================================
+ See Note A to Financial Statements. * Non-Income Producing Security. (1) Mandatory conversion June 30, 1996. 5 6 STATEMENT OF OPERATIONS
Six Months Ended June 30, 1995 (000) - ----------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends . . . . . . . . . . . . . . . . . . . . . . . $ 7,911 Interest . . . . . . . . . . . . . . . . . . . . . . . . 2,214 - ----------------------------------------------------------------------------------------------------- Total Income . . . . . . . . . . . . . . . . . . . 10,125 - ----------------------------------------------------------------------------------------------------- EXPENSES Investment Advisory Fee--Note C Basic Fee . . . . . . . . . . . . . . . . . . . . . . $586 Performance Adjustment . . . . . . . . . . . . . . . 166 752 ---- The Vanguard Group--Note D . . . . . . . . . . . . . . . 182 Custodian's Fees . . . . . . . . . . . . . . . . . . . . 12 Taxes (other than income taxes) . . . . . . . . . . . . 15 Auditing Fees . . . . . . . . . . . . . . . . . . . . . 4 Shareholders' Reports . . . . . . . . . . . . . . . . . 35 Annual Meeting and Proxy Costs . . . . . . . . . . . . . 19 Directors' Fees and Expenses . . . . . . . . . . . . . . 1 - ----------------------------------------------------------------------------------------------------- Total Expenses . . . . . . . . . . . . . . . . . . 1,020 - ----------------------------------------------------------------------------------------------------- Net Investment Income . . . . . . . . . . . . . $ 9,105 ===================================================================================================== REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Net Gain on Investment Securities Sold . . . . $ 8,696 Change in Unrealized Appreciation (Depreciation) . . . . 46,702 - ----------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain on Investments $ 55,398 =====================================================================================================
6 7 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED Year Ended JUNE 30, 1995 December 31, 1994 (000) (000) - ----------------------------------------------------------------------------------------------------- INCOME AVAILABLE FOR DISTRIBUTION Balance, Beginning of Period . . . . . . . . . . . . . . . $ 445 $ 363 Net Investment Income . . . . . . . . . . . . . . . . . . . 9,105 18,975 Distributions to Income Shareholders ($.70 and $1.73 per share, respectively) . . . . . . . . (7,644) (18,893) - ----------------------------------------------------------------------------------------------------- Balance, End of Period . . . . . . . . . . . . . . . $ 1,906 $ 445 - ----------------------------------------------------------------------------------------------------- UNDISTRIBUTED CAPITAL GAINS Balance, Beginning of Period . . . . . . . . . . . . . . . $110,693 $ 98,408 Realized Net Gain on Investment Securities Sold . . . . . . 8,696 18,900 Provision for Taxes on Capital Gains Retained . . . . . . . -- (6,615) - ----------------------------------------------------------------------------------------------------- Balance, End of Period . . . . . . . . . . . . . . . $119,389 $110,693 - ----------------------------------------------------------------------------------------------------- UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES Beginning of Period . . . . . . . . . . . . . . . . . . . . $ (4,435) $ 41,392 End of Period . . . . . . . . . . . . . . . . . . . . . . . 42,267 (4,435) - ----------------------------------------------------------------------------------------------------- Change in Unrealized Appreciation (Depreciation) . . $ 46,702 $(45,827) - -----------------------------------------------------------------------------------------------------
STATEMENT OF SHAREHOLDERS' EQUITY
June 30, 1995 (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 . . . . . . . . . . . . . . . . . . . . . . . 1,906 - ----------------------------------------------------------------------------------------------------- 103,467 - ----------------------------------------------------------------------------------------------------- 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 . . . . . . . . . . . . . . . . . . . . . . . . . . 119,389 Unrealized Depreciation of Investment Securities . . . . . . . . . . . . . . . 42,267 - ----------------------------------------------------------------------------------------------------- 263,217 - ----------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . $366,684 - -----------------------------------------------------------------------------------------------------
* No change during year. 7 8 FINANCIAL HIGHLIGHTS
Year Ended December 31, SIX MONTHS ENDED ----------------------------------------------- For a Share Outstanding Throughout Each Period JUNE 30, 1995 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------- INCOME SHARES Net Asset Value, Beginning of Period . . . . . . . . . $ 9.34 $ 9.33 $ 9.33 $ 9.34 $ 9.34 $ 9.37 Net Investment Income . . . . . . . . . . . . . . . . .83 1.74 1.66 1.66 1.65 1.63 Distributions from Net Investment Income . . . . . . . (.70) (1.73) (1.66) (1.67) (1.65) (1.66) - ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . $ 9.47 $ 9.34 $ 9.33 $ 9.33 $ 9.34 $ 9.34 ========================================================================================================================= CAPITAL SHARES Net Asset Value, Beginning of Period . . . . . . . . . $19.03 $22.10 $18.71 $16.28 $11.51 $17.44 Realized Net Gain on Investments . . . . . . . . . . . .80 1.73 2.69 1.17 1.77 .38 Distributions from Realized Capital Gains . . . . . . -- -- -- (.08) (.22) (.11) Provision for Taxes on Capital Gains Retained . . . . -- (.61) (.94) (.37) (.53) (.09) Unrealized Appreciation (Depreciation) . . . . . . . . 4.27 (4.19) 1.64 1.71 3.75 (6.11) - ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . $24.10 $19.03 $22.10 $18.71 $16.28 $11.51 =========================================================================================================================
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
Amounts in Thousands and Per Share -------------------------------------------------------------------------------------- Three Months Ended - ---------------------------------------------------------------------------------------------------------------------- March 31, 1995 June 30, 1995 -------------------- ------------------- Net Investment Income $ 4,785 $ .44 $ 4,320 $ .39 Net Realized Gain (Loss) and Change in Unrealized Appreciation (Depreciation) $22,699 $2.08 $32,699 $2.99 - ---------------------------------------------------------------------------------------------------------------------- March 31, 1994 June 30, 1994 September 30, 1994 December 31, 1994 ------------------- ------------------- ------------------- -------------------- Net Investment Income $ 4,504 $ .41 $4,542 $.42 $ 5,123 $ .47 $ 4,806 $ .44 Net Realized Gain (Loss) and Change in Unrealized Appreciation (Depreciation) $(13,003) $(1.19) $9,433 $.86 $(2,140) $(.19) $(21,217) $(1.94) - ----------------------------------------------------------------------------------------------------------------------
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 the close of the New York Stock Exchange (generally 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 cash 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 require 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, 1996, 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, 1995, the investment advisory fee represents an effective annual base rate of .34 of 1% of average net assets before an increase of $166,000 (.10 of 1%) based on performance. D. The Vanguard Group, Inc. furnishes at cost corporate management and administrative, 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, 1995, the Fund had contributed capital of $49,000 to Vanguard (included in Other Assets), representing .2% of Vanguard's capitalization. The Fund's directors and officers are also directors and officers of Vanguard. 9 10 NOTES TO FINANCIAL STATEMENTS (continued) Vanguard has requested the Fund's investment adviser to direct certain portfolio trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate or credit to the Fund a portion of the commissions generated. Such rebates or credits are used solely to reduce the Fund's administrative expenses. For the six months ended June 30, 1995, directed brokerage arrangements reduced the Fund's expenses by $8,000 (an annual rate of .01 of 1% of average net assets). E. During the six months ended June 30, 1995, the Fund made purchases of $72,614,000 and sales of $109,070,000 of investment securities other than U.S. Government securities and temporary cash investments. At June 30, 1995, unrealized appreciation for financial reporting and Federal income tax purposes aggregated $42,267,000, of which $46,633,000 related to appreciated securities and $4,366,000 related to depreciated securities. F. The market value of securities on loan to broker/dealers at June 30, 1995, was $942,000, for which the Fund had received cash collateral of $973,000. 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 of Rhone-Poulenc Rorer, Inc.; Director of Sun Company, Inc. 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 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., The Jeffrey Co., and Southern New England Communications Company. ALFRED M. RANKIN, JR., Chairman, 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. 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 ROBERT A. DISTEFANO IAN A. MacKINNON Senior Vice President Senior Vice President Information Technology Fixed Income Group JEREMY G. DUFFIELD F. WILLIAM McNABB III Senior Vice President Senior Vice President Planning & Development Institutional JAMES H. GATELY RALPH K. PACKARD Senior Vice President Senior Vice President Individual Investor Group Chief Financial Officer 11 12 THE VANGUARD FAMILY OF FUNDS FIXED INCOME FUNDS MONEY MARKET FUNDS Vanguard Admiral Funds U.S. Treasury Money Market Portfolio Vanguard Money Market Reserves TAX-EXEMPT MONEY MARKET FUNDS Vanguard Municipal Bond Fund Money Market Portfolio Vanguard State Tax-Free Funds Money Market Portfolios (CA, NJ, OH, PA) TAX-EXEMPT INCOME FUNDS Vanguard Municipal Bond Fund Vanguard State Tax-Free Funds Insured Longer-Term Portfolios (CA, FL, NJ, NY, OH, PA) INCOME FUNDS Vanguard Admiral Funds Vanguard Fixed Income Securities Fund Vanguard Preferred Stock Fund EQUITY AND BALANCED FUNDS GROWTH AND INCOME FUNDS Vanguard Convertible Securities Fund Vanguard Equity Income Fund Vanguard Quantitative Portfolios Vanguard/Trustees' Equity Fund U.S. Portfolio Vanguard/Windsor Fund Vanguard/Windsor II BALANCED FUNDS Vanguard Asset Allocation Fund Vanguard LifeStrategy Funds Income Portfolio Conservative Growth Portfolio Moderate Growth Portfolio Growth Portfolio Vanguard STAR Portfolio Vanguard/Wellesley Income Fund Vanguard/Wellington Fund 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 Growth Portfolio Vanguard/Trustees' Equity Fund International Portfolio INDEX FUNDS Vanguard Index Trust Total Stock Market Portfolio 500 Portfolio Extended Market Portfolio Growth Portfolio Value Portfolio Small Capitalization Stock Portfolio Vanguard International Equity Index Fund European Portfolio Pacific Portfolio Emerging Markets Portfolio Vanguard Bond Index Fund Vanguard Tax-Managed Fund Vanguard Balanced Index Fund [THE VANGUARD GROUP LOGO] Vanguard Financial Center Valley Forge, Pennsylvania 19482 New Account Information: Shareholder Account Services: 1-(800) 662-7447 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. Q342-6/95 [GEMINI II LOGO] SEMI-ANNUAL REPORT JUNE 30, 1995 -----END PRIVACY-ENHANCED MESSAGE-----