<PAGE> 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:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------
Total Return
----------------
Six Months Ended
June 30, 1994
- - ----------------------------------------------------------
<S> <C>
GEMINI II +1.6%
- - ----------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX -3.4%
- - ----------------------------------------------------------
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------
Premium and Discount
June 30, 1994
---------------------------------------------------
Net Asset Market
Value Price Difference
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAPITAL SHARES $21.77 $19.125 -12.1%
INCOME SHARES 9.56 11.250 +17.7
- - ------------------------------------------------------------------------------------------------
TOTAL $31.33 $30.375 - 3.0%
- - ------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 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
<PAGE> 4
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS (unaudited)
June 30, 1994
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- - ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
BONDS (12.4%)
- - ----------------------------------------------------------------------------------------------------
Face
Amount
(000)
--------
<S> <C> <C>
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
- - ----------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C>
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
====================================================================================================
</TABLE>
+ See Note A to Financial Statements.
(1) Mandatory conversion June 30, 1996.
5
<PAGE> 6
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1994
(000)
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C>
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)
=====================================================================================================
</TABLE>
6
<PAGE> 7
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
JUNE 30, 1994 December 31, 1993
(000) (000)
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- - -----------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, 1994
(000)
- - -----------------------------------------------------------------------------------------------------
<S> <C>
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
- - -----------------------------------------------------------------------------------------------------
</TABLE>
* No change during period.
7
<PAGE> 8
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
SIX MONTHS ENDED ------------------------------------------------
For a Share Outstanding Throughout Each Period JUNE 30, 1994 1993 1992 1991 1990 1989
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
=========================================================================================================================
</TABLE>
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Amounts in Thousands and Per Share (Unaudited)
---------------------------------------------------------------------------------
Three Months Ended
- - ------------------------------------------------------------------------------------------------------------------
March 31, 1994 June 30, 1994
------------------- --------------
<S> <C> <C> <C> <C>
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
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
March 31, 1993 June 30, 1993 September 30, 1993 December 31, 1993
------------------- -------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
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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.
