<PAGE> 1
GEMINI II
ANNUAL REPORT 1993
[COVER PHOTO -- SEE EDGAR APPENDIX]
<PAGE> 2
A BRAVE NEW WORLD FOR INVESTING
With the clarity of hindsight, we can now see that the past two decades
composed one of the great cycles in the history of the financial markets, as
reflected in the chart below.
*During the 1973-1982 decade, the nominal total returns (capital change plus
income) of stocks and bonds averaged only about +6% per year; cash reserves
averaged more than +8% annually. However, high inflation rates, averaging
8.7% annually, devastated these nominal results. Real returns (nominal
returns less the inflation rate) for each of these three major asset classes
were actually negative.
*During the 1983-1992 decade, quite the opposite situation prevailed. Nominal
returns for stocks and bonds were close to their highest levels in history
and forged well into double-digit territory. To make a good investment
environment even better, inflation was tame (averaging 3.8% annually), and
real returns were solidly positive.
[A TALE OF TWO DECADES CHART -- SEE EDGAR APPENDIX]
This sharp contrast provides us with perspective for the decade that will end
in the year 2002. Some investors will fear a recurrence of the returns of the
first decade, while others will hope for a recurrence of the second; most will
likely anticipate something in between. Whatever the case, there are two
essential elements involved in considering your investment program in the light
of today's circumstances.
First, the yield of each investment class at the start of a decade has
had an important relationship to its future return. Yields were low when 1973
began, high when 1983 began, and are again low today. In fact, current income
yields are remarkably close to the levels of 20 years ago, as shown in the
following table.
<TABLE>
<CAPTION>
Income Yields (January 1)
-----------------------------------------------
1973 1983 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 6.0
RESERVES 3.8 10.5 3.1
- ----------------------------------------------------------------------------
</TABLE>
But there is a second important element to consider: inflation. It got
progressively worse during most of the first decade, but got progressively
better in the second
<TABLE>
<CAPTION>
-----------------------------------------------
1973 1981 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
INFLATION 3.4% 12.4% 2.7%
- ----------------------------------------------------------------------------
</TABLE>
Today's low yield levels suggest that more modest nominal returns are in
prospect for the coming decade than in the 1980s; indeed, returns could
gravitate
(Please turn to inside back cover)
GEMINI II SEEKS TO PROVIDE LONG-TERM CAPITAL GROWTH FOR ITS CAPITAL
SHAREHOLDERS, AND CURRENT INCOME AND INCOME GROWTH FOR ITS INCOME SHAREHOLDERS.
THE FUND INVESTS PRINCIPALLY IN COMMON STOCKS, SELECTED ON THE BASIS OF
FUNDAMENTAL VALUE, THAT ARE EXPECTED TO CONTRIBUTE TO THE FUND'S DUAL
INVESTMENT OBJECTIVES. THE FUND'S HOLDINGS ARE USUALLY CHARACTERIZED BY
RELATIVELY LOW PRICE-EARNINGS RATIOS AND ABOVE-AVERAGE INCOME YIELDS.
<PAGE> 3
CHAIRMAN'S LETTER
[PHOTO OF JOHN C. BOGLE -- SEE EDGAR APPENDIX]
FELLOW SHAREHOLDER:
When I wrote to you one year ago, I noted, "1992 was a banner year for Gemini
II. In a stock market that was up only modestly, the Fund's total return was
+18.1%." Happily, I can repeat that message--indeed an even better one--this
year. The return generated by Gemini II during 1993 was even larger, and
totaled +21.6%.
The following table compares our total return (capital change plus
income) with our customary benchmark, the unmanaged Standard & Poor's 500
Composite Stock Price Index. The table reflects the results of the Fund as a
whole; it is followed by a presentation of the financial results of our Capital
Shares and our Income Shares.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Total Return
--------------
Year Ended
December 31, 1993
- ------------------------------------------------------------------------------------------
<S> <C>
GEMINI II +21.6%
- ------------------------------------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +10.1%
- ------------------------------------------------------------------------------------------
</TABLE>
The Fund's return takes into account the increase in our net asset value,
dividends from net investment income, and Federal taxes accrued on net
long-term capital gains realized during the year.
*THE CAPITAL SHARES
Gemini II's Capital Shares provided total capital appreciation of +23.1% for
1993. The net asset value of each share rose from $18.71 on December 31, 1992,
to $22.10 on December 31, 1993, with the increase adjusted to include our
accrual for Federal taxes on realized capital gains.
During the year, the capital appreciation (excluding dividends) in the
Standard & Poor's 500 Index was +7.1%. Thus, the return on our Capital Shares
was in fact more than three times the capital return of this widely recognized
Index, which depicts the performance of blue-chip stocks with very large market
capitalizations.
You will recall that the Capital Shares provided one-half of the
Fund's assets at our initial public offering on February 15, 1985. Thus, their
initial "capital leverage" ratio was 2.0 times. With appreciation in the Fund's
net asset value over the years, this ratio has now fallen to 1.4, meaning that
the Capital Shares' volatility--in both up and down markets--has been
significantly reduced. Considering the significant contribution of income
return to the Fund's total return in a given year, the full impact of the
capital leverage in rising markets appears muted relative to the Fund's total
return.
*THE INCOME SHARES
Gemini II's Income Shares received dividends totaling $1.66 per share from net
investment income in 1993, with four quarterly dividends paid at the rate of
$.25 per share and an "extra" dividend of $.66 per share at year-end. This
so-called extra dividend is simply the amount by which our net investment
income for the year exceeds the total of our quarterly payments. Our total
dividend was the same in 1993 as it was in 1992, and only slightly above our
total for 1991.
(continued)
1
<PAGE> 4
[CUMLATIVE PERFORMANCE: 1989-1993 GRAPH -- SEE EDGAR APPENDIX]
Our ability to "hold the line" on, or even increase, net income is
limited by the payments that the Fund must make for taxes on realized capital
gains. These payments, of course, reduce the Fund's asset base, meaning that a
smaller amount of assets is available on which to earn income. Since the Fund's
inception, cumulative tax payments have been substantial, totaling $3.48 per
share through 1992. The $.94 per share payment for 1993 brings the total to
$4.42 per share, equivalent to 22% of our initial capital in 1985.
While income growth in recent years has been slow, we need make no
apologies for the Fund's dividend yield. Last year, our total investment
portfolio provided a yield of 5.1% after expenses, nearly double the 2.7%
dividend yield on the Standard & Poor's 500 Stock Index. Based on a net asset
value of $9.33 at year-end, the yield on our Income Shares, benefiting from
"income leverage," was 17.8%.
*THE STOCK MARKET IN 1993
On an historical basis, 1993 was a good year for stocks. Indeed, the Standard &
Poor's 500 Index provided a return of +10.1%, virtually identical with its
long-term (since 1926) average annual total return of +10.3%. This 68-year
historical span is by far the longest of any diversified stock market index.
During the year, the market's returns accumulated gradually and with
relative consistency, inch-by-inch, step-by-step, month-by-month. There were
neither explosive rises nor plummeting declines. It is probably fair to say
that such a steady course is the exception rather than the rule in market
history. It remains a virtual certainty that most years will witness the kind
of spasmodic market action--and hence the higher volatility and risk--that has
been typical of the stock market in the past.
The precipitating factor in the market's advance almost certainly was
the decline in long-term interest rates. The yield on the long- term U.S.
Treasury bond, which opened the year at 7.4%, fell to 6.4% by year-end,
engendering a price gain of about +14%. This sharp rate decline seemed to be
driven largely by two factors: (1) a stubbornly weak economic recovery that
encouraged the Federal Reserve to make ample credit available; and (2)
continuing evidence that inflation remained under control. The U.S. Consumer
Price Index (CPI) increased 2.7% during 1993, down from 2.9% in 1992. As a
result, despite the decline in interest rates, "real" yields (nominal yields
less the inflation rate) on long-term bonds remain at healthy levels.
Since one factor that investors consider in setting their asset
allocations is the relative yield of stocks versus bonds, falling bond yields
provided impetus to stock prices. During 1993, the dividend yield on stocks (as
measured by the Standard & Poor's 500 Index) declined from 2.8% to 2.7%,
enough, in and of itself, to add some +5% to the price of the stocks in the
Index. This upward revaluation, when added to a dividend yield that is
extremely low by historical standards, accounted for the lion's share of the
+10.1% total return achieved by the Standard & Poor's 500 Index.
What was most interesting about 1993 was the striking bias that the
market exhibited toward "value" stocks--usually defined as those with
above-average dividend yields and below-average price-earnings ratios--over
"growth" stocks--those
2
<PAGE> 5
that provide lower yields but presumably richer prospects for sustainable
earnings growth. (The Standard & Poor's 500 Index is divided so that one-half
of its total market capitalization is included in each category.) The disparity
between the two groups' returns during 1993 was little short of astonishing:
value stocks provided a return of +18.6%, while growth stocks provided a return
of but +1.7%.
I should note that, based on the historical record, such dichotomies
are unlikely to persist. Indeed, as shown in the chart on page 2, value stocks
lagged during the first three years, only to lead growth stocks for the final
two years. For the full five-year period, the returns of the market segments
have been fairly consistent--an annual return of +15.1% for the growth segment
and +13.5% for the value segment. So, while we are pleased that value
stocks--the core of Gemini II's investment philosophy--were "in the spotlight"
during 1993, we caution that no market trend endures forever.
*GEMINI II IN 1993
Achieving a total return of more than double that of the Standard & Poor's 500
Index speaks for itself. But we thought you might be interested in the "behind
the scenes" reasons for the Fund's success. Two factors predominated: (1) The
financial stocks (46% of equities at year-end) selected by John B. Neff, Gemini
II's outstanding portfolio manager, provided excellent returns. (2) We held a
far below-average representation in consumer
[GEMINI II PERFORMANCE: FEBRUARY 15, 1985 TO DECEMBER 31, 1993 CHART -- SEE
EDGAR APPENDIX]
3
<PAGE> 6
staples stocks (3% of equities at year-end versus 20% for the Index), which
provided many of the year's greatest disappointments. Their problems were
largely manifested in the sharp price declines of drug stocks (engendered in
part by fears about the Administration's health-care proposals) and of "name
brand" stocks (for which brand loyalty no longer seems to preclude vigorous
price competition).
Our second performance standard is, of course, the average growth and
income (value) mutual fund. Here, we were almost equally as successful as we
were against the Standard & Poor's 500 Index, with our average competitor
providing a total return of +11.2%. Typically, these competitors maintained a
smaller weighting than our Fund in the financial stocks and a larger weighting
in the consumer staples stocks. The competitive group funds also maintained a
lower representation in the energy group, which performed well.
I should note that the construction of the Gemini II portfolio differs
substantially from that of the Standard & Poor's 500 Index (100% common stocks)
or the average value fund (86% common stocks). While our portfolio relies
heavily on common stocks (61% of net assets), it also includes a substantial
representation in other "equity equivalents" (38%), held for both yield and
growth potential. This table compares our portfolio's composition at year-end
1993 and one year ago:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Percentage of Net Assets
------------------------
December 31,
------------------------
1993 1992
- -----------------------------------------------------------------------------------------
<S> <C> <C>
EQUITY EQUIVALENTS
COMMON STOCKS 61% 60%
CONVERTIBLE SECURITIES 28 22
LOWER-GRADE BONDS 10 8
- ------------------------------------------------------------------------------------------
SUBTOTAL 99% 90%
- ------------------------------------------------------------------------------------------
RESERVE EQUIVALENTS
U.S. TREASURY NOTES 3% 12%
OTHER TEMPORARY INVESTMENTS 2 1
NET CASH -4 -3
- ------------------------------------------------------------------------------------------
SUBTOTAL 1% 10%
- ------------------------------------------------------------------------------------------
TOTAL PORTFOLIO 100% 100%
- ------------------------------------------------------------------------------------------
</TABLE>
I should also call your attention to the Fund's heavy weighting in a
relatively small number of securities. Our ten largest holdings account for 50%
of our "equity" position. For most stock funds, that percentage would be about
25%. This limited diversification relative to other funds suggests a higher
risk potential for Gemini II. It also suggests a higher return potential, as
was realized in 1993. Our investment adviser's review of the year, prepared as
usual by Mr. Neff, appears on page 6 of this Annual Report. I urge you to read
it carefully; I am confident it will make for pleasant reading.
*A LONGER-TERM VIEW
Gemini II began operations on February 15, 1985, and will conclude its
existence as a "closed-end" investment company on January 31, 1997, now-
- -unbelievably to me--a mere three years away. In other words, fully
three-quarters of our corporate lifetime is now history, and it is illuminating
to review our record so far. This table presents our total returns since our
inception compared with the returns of the average value (or growth and income)
mutual fund and the Standard & Poor's 500 Index:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Total Return
------------
February 15, 1985, to
December 31, 1993
- ------------------------------------------------------------------------------------------
Cumulative Annual Rate
- ------------------------------------------------------------------------------------------
<S> <C> <C>
GEMINI II +248% +15.1%
- ------------------------------------------------------------------------------------------
AVERAGE VALUE FUND +192% +12.9%
STANDARD & POOR'S 500 INDEX +245 +15.0
- ------------------------------------------------------------------------------------------
</TABLE>
I should note that these returns are well above historical norms. In no way
should they be considered a prediction of future results.
As our veteran shareholders know, Gemini II went through quite a "rough patch"
in 1989 and 1990. Through December 31, 1990, our annual rate of return (+10.5%)
was well short of that of the Standard & Poor's 500 Index (+14.7%). At that
time, I expressed my confidence that Mr. Neff's "experience, judgment, and
mental toughness should return the Fund to solid performance
4
<PAGE> 7
relative to competitive norms." Our return now nicely exceeds that of our
competitive group, and is, once again, greater--albeit by only a hair--than the
return of the Standard & Poor's 500 Index. I count that as a great recovery.
*PREMIUMS AND DISCOUNTS
When Gemini II "matures" on January 31, 1997, the Capital Shares and the Income
Shares will be "valued" at their actual net asset values on that date. Thus,
for each class of shares, I want to call attention to the difference between
its current net asset value and the price at which it trades on the New York
Stock Exchange. Here are the figures:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
December 31, 1993
- ---------------------------------------------------------------------------------
Net Asset Market
Value Price Difference
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
CAPITAL SHARES $22.10 $19.875 -10.1%
INCOME SHARES 9.33 11.750 +25.9
TOTAL $31.43 $31.625 + 0.6%
- ---------------------------------------------------------------------------------
</TABLE>
I call your special attention to the remarkable narrowing of the discount on
the Capital Shares. One year ago, the Capital Shares sold in the market at a
price of $14.875, a discount of -20%, or double what it is today. The Income
Shares then sold at $12.00, a premium of +29%, about the same as today.
Combining the two classes, the aggregate market price is virtually identical to
their combined net asset values.
As you know, both the discount on the Capital Shares and the premium
on the Income Shares should continue to narrow as the Fund approaches its
"maturity" date of January 31, 1997, when, in essence, the market price of each
class will converge with its then current net asset value. Shareholders should
bear this principle in mind in making their own evaluation of today's "fair
market value" of both classes of shares.
*LOOKING AHEAD
The 1993 rise in the stock market is its eleventh in the past twelve years. The
equity markets have come a long way since the end of 1981. Stock yields are
near all-time historical lows and interest rates are at their lowest levels in
two decades. So, it would be imprudent not to offer a word of caution about the
stock market, which is surely due for its share of difficult bumps along the
way during the next few years.
What should Gemini II investors do in this environment? Because of our
capital leverage, the Capital Shares of Gemini II are apt to be more volatile
than the overall stock market. Due to our income leverage, our Income Shares
will continue to provide higher yields than stocks in general. Your holdings in
either class (or both) should be considered in the light of the exposure of
your total investment portfolio to equities, bonds, and short-term reserves.
Whatever course you choose, we recommend that you focus not on annual
fluctuations in absolute and relative performance, but on the long term. Timing
the markets is an inevitably fallible endeavor; therefore we believe that,
provided your overall account is soundly balanced, "stay the course" is
virtually always the best advice.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
January 25, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
5
<PAGE> 8
REPORT FROM THE INVESTMENT ADVISER
For the third year in a row, your Fund not only bested the unmanaged S&P 500
Index handily, but it also turned in a good absolute result as well. These
three stellar years were finally enough to give us a slight margin versus the
Index over the life of the Fund. Even though improved, the total experience is
not up to our usual standard, meaning, of course, that we are going to have to
accomplish rather smartly in the last three years of Gemini II's closed-end
life. Rest assured, we will give it our all, while at the same time continuing
to be conscious of risk because we recognize not only the market's aggressive
valuation but also the leverage of the Capital Shares as well.
Particularly contributory to our good 1993 results were excellent
gains in such disparate large positions as Columbia Healthcare (nee Humana),
Telefonica, Ultramar, Aetna, and Commonwealth Edison, as well as journeyman
appreciation in Bankers Trust, Chase Manhattan, and Phillips Petroleum.
Additionally, a number of the convertible securities chipped in with
substantial gains. This is particularly significant and gratifying because it
goes right to the heart of what Gemini II is all about; namely, that meaningful
appreciation can be garnered on securities which have very good yields. This in
the face of the school which says yield is necessarily at the expense of
appreciation. We think you can snare both even in the same security.
The economy sustains its moderate growth with about a 2.5% advance in
constant dollar GDP. General merchandise sales continue to labor for the most
part, with the consumer still wary and seemingly motivated by either price or
perceived style. On the other hand, "big ticket" sales are quite encouraging.
Light duty truck sales continue to grow from an already ebullient level, but
now passenger car sales have lifted nicely from a depressed level as, finally,
the consumer's debt reduction has stopped and is now gently expanding.
Additionally, housing starts are growing again. These are not the earmarks of a
consumer in the bomb shelter as some media reports would suggest, but rather
one who is gradually gaining confidence. To the degree we have absorbed, if not
corrected, the excesses of overzealous expansion of commercial real estate and
burgeoning consumer debt, the economy seems poised for continuing moderate
growth, not only in 1994, but into 1995 and perhaps 1996 as well.
We still think the market is a bit "long in the tooth" at almost 17
times 1994 estimated earnings and a 2.7% yield. This is particularly pertinent
in that we don't visualize a breakout in earnings in a moderate growth
environment.
Additionally, what market happiness we have experienced in the last
couple of years has been engendered importantly by a pronounced decline in
interest rates that obviously will not be repeated. If anything, in our view,
interest rates have seen their lows and could well retrace a bit as private
credit demand picks up and inflation increases toward 3.5%-4.0%. We believe
inflation will trend upward because the past year's very sharp price increases
logged in natural gas, lumber, and scrap steel are precursors of what should
happen in some other basic industrial commodities. Operating rates in these
industries are quite close to effective capacity and are near potential price
inflection points. This is because little new capacity is being added due to
currently insufficient selling prices. In addition, the poor domestic grain
crops experienced in 1993 will pressure these prices upward, not to mention the
potential for world crude oil prices to move up.
If all of this is close to the mark, the equity marketplace will be
tough. However, we think any "indigestion" would be constructive, because it
would remind market participants that there is risk in owning common stocks. In
our judgment, this would be healthy and help improve the quality, integrity,
and longevity of the market advance.
Respectfully,
John B. Neff, Managing Partner
Charles T. Freeman, Senior Vice President
Wellington Management Company
January 26, 1994
6
<PAGE> 9
[LOGO] STATEMENT OF NET ASSETS FINANCIAL STATEMENTS
DECEMBER 31, 1993
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------------------------
COMMON STOCKS (61.1%)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
BANKS (19.2%)
BankAmerica Corp. 130,267 $ 6,041
Bankers Trust New York Corp. 238,592 18,879
The Chase Manhattan Corp. 180,361 6,110
First Union Corp. 341,800 14,099
KeyCorp. 351,900 12,448
NationsBank, Inc. 82,200 4,028
Society Corp. 148,100 4,406
----------
GROUP TOTAL 66,011
----------
- ----------------------------------------------------------------------------------------------
CHEMICALS (1.7%)
Lyondell Petrochemical Co. 272,400 5,788
----------
- ----------------------------------------------------------------------------------------------
ELECTRIC UTILITIES (4.0%)
Commonwealth Edison Co. 483,137 13,649
----------
- ----------------------------------------------------------------------------------------------
INSURANCE (10.7%)
Aetna Life & Casualty Co. 311,060 18,780
CIGNA Corp. 287,100 18,016
----------
GROUP TOTAL 36,796
----------
- ----------------------------------------------------------------------------------------------
MEDICAL (2.9%)
Columbia Healthcare Corp. 288,009 9,576
*Humana, Inc. 24,900 439
----------
GROUP TOTAL 10,015
----------
- ----------------------------------------------------------------------------------------------
NON-FERROUS METALS (2.2%)
Aluminum Co. of America 109,500 7,596
----------
- ----------------------------------------------------------------------------------------------
OIL (9.5%)
Pennzoil Co. 164,600 8,765
Phillips Petroleum Co. 150,300 4,359
USX-Marathon Group 867,100 14,307
Ultramar Corp. 203,400 5,161
----------
GROUP TOTAL 32,592
----------
- ----------------------------------------------------------------------------------------------
SAVINGS & LOAN (8.3%)
H. F. Ahmanson & Co. 703,100 13,798
Great Western Financial Corp. 738,280 14,766
----------
GROUP TOTAL 28,564
----------
- ----------------------------------------------------------------------------------------------
STEEL (.6%)
*Weirton Steel 299,100 1,907
----------
- ----------------------------------------------------------------------------------------------
TELEPHONE (1.8%)
Telefonica de Espana ADR 157,900 6,158
----------
- ----------------------------------------------------------------------------------------------
OTHER (.2%) 820
- ----------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $187,366) 209,896
- ----------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (21.9%)
- ----------------------------------------------------------------------------------------------
Advanced Micro
Devices, Inc. $3.00 250,000 $11,813
Alumax, Inc. $4.00 10,000 985
Bethlehem Steel Corp.
$2.50 86,400 2,354
$3.50 125,000 7,375
$5.00 93,600 4,961
Citicorp 10.75% 78,000 8,541
Cyprus Amax Mines $4.00 60,000 3,915
Kmart Corp. PERCS $3.41 330,000 14,561
(1)Kaiser Aluminum $.65 1,300,000 10,238
Sea Containers, Ltd. $4.00 109,900 5,550
UAL Corp. 6.25% 45,000 4,950
- ----------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $66,722) 75,243
- ----------------------------------------------------------------------------------------------
BONDS (15.8%)
- ----------------------------------------------------------------------------------------------
Face Amount
CONVERTIBLE(6.0%) (000)
-----------
Conner Peripherals
6.75%, 3/1/01 $ 3,750 3,263
6.5%, 3/1/02 2,000 1,800
Data General Corp.
7.75%, 6/1/01 5,750 5,549
Seagate Technology
6.75%, 5/1/12 11,000 9,955
----------
GROUP TOTAL 20,567
----------
- ----------------------------------------------------------------------------------------------
NON-CONVERTIBLE (9.8%)
Chrysler Corp.
10.4%, 8/1/99 12,000 13,740
Geneva Steel
11.125%, 3/15/01 7,000 7,507
Quantum Chemical Corp.
12.5%, 3/15/99 8,000 8,493
13.0%, 3/15/04 3,500 3,778
----------
GROUP TOTAL 33,518
----------
- ----------------------------------------------------------------------------------------------
TOTAL BONDS (Cost $43,980) 54,085
- ----------------------------------------------------------------------------------------------
TEMPORARY INVESTMENTS (4.9%)
- ----------------------------------------------------------------------------------------------
U.S. TREASURY NOTES (2.5%)
8.625%, 1/15/95 2,500 2,621
7.75%, 2/15/95 2,500 2,607
7.375%, 5/15/96 3,000 3,200
----------
GROUP TOTAL 8,428
----------
- ----------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
[LOGO] STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL PAPER (.6%)
General Electric Capital Corp.
3.18%, 1/19/94 $2,000 $ 1,997
-----------
- -----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (1.8%)
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account, 3.26%, 1/3/94 6,224 6,224
-----------
- -----------------------------------------------------------------------------------------------
TOTAL TEMPORARY INVESTMENTS
(Cost $16,413) 16,649
- -----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (103.7%)
(Cost $314,481) 355,873
- -----------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.7%)
- -----------------------------------------------------------------------------------------------
Other Assets--Notes D and F 10,940
Federal Income Tax Payable (10,265)
Distribution Payable (7,208)
Other Liabilities--Note F (6,055)
-----------
(12,588)
- -----------------------------------------------------------------------------------------------
NET ASSETS (100%) $343,285
===============================================================================================
+See Note A to Financial Statements.
*Non-Income Producing Security.
(1)Mandatory conversion June 30, 1996.
</TABLE>
8
<PAGE> 11
[LOGO] STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1993
(000)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends $12,754
Interest 7,437
- -------------------------------------------------------------------------------------------
Total Income 20,191
- -------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note C
Basic Fee $1,167
Performance Adjustment 255 1,422
--------
The Vanguard Group--Note D 431
Custodian's Fees 11
Taxes (other than income taxes) 27
Auditing Fees 9
Shareholders' Reports 105
Annual Meeting and Proxy Costs 21
Directors' Fees and Expenses 1
- -------------------------------------------------------------------------------------------
Total Expenses 2,027
- -------------------------------------------------------------------------------------------
Net Investment Income 18,164
===========================================================================================
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized Net Gain on Investment Securities Sold--Note E 29,329
Change in Unrealized Appreciation (Depreciation)--Note E 17,951
- -------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain on Investments $47,280
===========================================================================================
</TABLE>
9
<PAGE> 12
[LOGO] STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
DECEMBER 31, 1993 December 31, 1992
(000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INCOME AVAILABLE FOR DISTRIBUTION
Balance, Beginning of Year $ 327 $ 472
Net Investment Income 18,164 18,092
Distributions to Income Shareholders
($1.66 and $1.67 per share, respectively) (18,128) (18,237)
- -----------------------------------------------------------------------------------------------
Balance, End of Year $ 363 $ 327
- -----------------------------------------------------------------------------------------------
UNDISTRIBUTED CAPITAL GAINS
Balance, Beginning of Year $79,344 $71,456
Realized Net Gain on Investment Securities Sold 29,329 12,786
Provision for Taxes on Capital Gains Retained (10,265) (4,024)
Distributions to Capital Shareholders ($.08 per share) -- (874)
- -----------------------------------------------------------------------------------------------
Balance, End of Year $98,408 $79,344
- -----------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES
Beginning of Year $23,441 $ 4,812
End of Year 41,392 23,441
- -----------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) $17,951 $18,629
- -----------------------------------------------------------------------------------------------
</TABLE>
[LOGO] STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, 1993
(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 363
- -----------------------------------------------------------------------------------------------
101,924
- -----------------------------------------------------------------------------------------------
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 98,408
Unrealized Appreciation of Investment Securities 41,392
- ----------------------------------------------------------------------------------------------
241,361
- ----------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $343,285
- ----------------------------------------------------------------------------------------------
</TABLE>
*No change during year.
10
<PAGE> 13
[LOGO] FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
For a Share Outstanding Throughout Each Year 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME SHARES
Net Asset Value, Beginning of Year $ 9.33 $ 9.34 $ 9.34 $ 9.37 $ 9.38
Net Investment Income 1.66 1.66 1.65 1.63 1.58
Distributions from Net Investment Income (1.66) (1.67) (1.65) (1.66) (1.59)
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.33 $ 9.33 $ 9.34 $ 9.34 $ 9.37
==================================================================================================
CAPITAL SHARES
Net Asset Value, Beginning of Year $18.71 $16.28 $11.51 $17.44 $16.56
Realized Net Gain on Investments 2.69 1.17 1.7 7.38 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) 1.64 1.71 3.75 (6.11) .26
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $22.10 $18.71 $16.28 $11.51 $17.44
==================================================================================================
</TABLE>
[LOGO] SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Amounts in Thousands and Per Share (Unaudited)
-----------------------------------------------------------------------
Three Months Ended
- ----------------------------------------------------------------------------------------------------------
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>
<TABLE>
<CAPTION>
March 31, 1992 June 30, 1992 September 30, 1992 December 31, 1992
----------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Investment Income $ 4,591 $ .42 $4,528 $.42 $ 4,604 $ .42 $ 4,369 $ .40
Net Realized Gain (Loss)
and Change in Unrealized
Appreciation (Depreciation) $ 4,883 $ .45 $9,693 $.89 $(4,452) $ (.41) $21,291 $1.95
- ----------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
[LOGO] 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, except for U.S. Treasury Notes maturing in 1995-1996 which
are valued at the latest quoted bid prices. Such U.S. Treasury Notes have
been classified as temporary investments as the Fund's investment adviser
does not intend to hold these securities until maturity.
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 year ended December 31, 1993,
the investment advisory fee represents an effective annual base rate of .34 of
1% of average net assets before an increase of $255,000 (.08 of 1%) based on
performance.
12
<PAGE> 15
*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 December 31, 1993, the Fund had contributed capital of
$58,000 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 year ended December 31, 1993, the Fund made purchases of
$131,428,000 and sales of $114,371,000 of investment securities other than U.S.
Government securities and temporary cash investments. Sales of U.S. Government
securities were $28,748,000. At December 31, 1993, unrealized appreciation for
financial reporting and Federal income tax purposes aggregated $41,392,000 of
which $54,179,000 related to appreciated securities and $12,787,000 related to
depreciated securities.
*F. The market value of securities on loan to broker/dealers at December 31,
1993, was $2,789,000 for which the Fund had received cash collateral of
$2,824,000.
13
<PAGE> 16
[LOGO] REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Gemini II
In our opinion, the accompanying statements of net assets and shareholders'
equity and the related statements of operations and of changes in shareholders'
equity and the financial highlights present fairly, in all material respects,
the financial position of Gemini II (the "Fund") at December 31, 1993, the
results of its operations, the changes in its shareholders' equity and the
financial highlights for each of the respective periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities by correspondence with the custodian and brokers and the application
of alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1994
14
<PAGE> 17
[LOGO] IMPORTANT TAX NOTES
CAPITAL SHAREHOLDERS:
Gemini II Capital Shares, of course, receive all capital appreciation (or
depreciation) from the Fund's investments, including any net capital gains that
are realized from the sale of portfolio securities. The net realized long-term
capital gains are retained in the value of the Capital Shares rather than being
distributed to shareholders. According to provisions of the Internal Revenue
Code, the Fund pays Federal income tax on these net realized long-term capital
gains at the corporate capital gains tax rate, and the amount of this tax is
deducted from the net asset value of the Capital Shares at year-end.
As a result of this procedure, there are three important tax steps
which you, as a Capital Shareholder, should take:
1) You should report on your 1993 personal income tax return the net
long-term capital gains realized by your Fund during the year.
2) You should take credit for the Federal taxes paid by the Fund on these
realized gains. Since the effective personal capital gains tax rate
cannot exceed 28%, no inequity is created since you receive full
credit for the tax paid by the Fund.
3) You should increase the tax cost basis of your Capital Shares by the
amount of the after-tax gains. This is the difference between the
amount of net capital gains realized and the tax paid on these gains
by the Fund (see the table to the right).
Federal tax Form 2439, which you should receive by March 1, 1994, provides
for your account the specific amounts of realized capital gains and
corresponding taxes paid as discussed in 1) and 2) above. Enclosed with this
Form are specific instructions on how to record this information for tax
purposes, but please feel free to contact us if you have any questions
regarding taxes and your Gemini II Capital Shares. IF YOUR SHARES ARE HELD FOR
YOU IN A NOMINEE REGISTRATION AND YOU HAVE NOT AS YET RECEIVED TAX FORM 2439,
YOU SHOULD CONTACT YOUR BANK OR BROKER TO OBTAIN THE FORM. A copy must be
filed with your Federal income tax return.
The table below shows: the amount of net realized capital gains per Capital
Share; the Federal taxes paid on your behalf; the Fund's capital gains tax
rate; and the amount by which your cost per share should be increased for
fiscal years 1985 through 1993.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Realized Long-Term Capital Gains
Per Capital Share
- -----------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Realized
long-term
capital gains $.21 $2.66 $3.14 $.86 $.97 $.27 $1.56 $1.08 $2.69
Federal
capital gains
taxes paid .06 .74 1.07 .29 .33 .09 .53 .37 .94
(Tax rate
in effect) (28%) (28%) (34%) (34%) (34%) (34%) (34%) (34%) (35%)
Net amount
by which
your cost
should be
increased .15 1.92 2.07 .57 .64 .18 1.03 .71 1.75
- -----------------------------------------------------------------------------------------------------
</TABLE>
INCOME SHAREHOLDERS:
Additional Tax Information--For possible use in the preparation of your state
income tax return: 5.49% of your 1993 income was derived from direct U.S.
Government obligations.
Corporate shareholders should note that 67.6% of the 1993 income
qualifies for the intercorporate dividends received deduction.
15
<PAGE> 18
[LOGO] 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.
J. LAWRENCE WILSON, Chairman and Director 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
16
<PAGE> 19
(Continued from inside front cover)
toward those of the 1970s. However, the current level of inflation suggests
that future real returns may prove to be satisfactory. Looking forward, the
main risks to the investor are two: (1) that yields on financial assets will
rise sharply, reducing the prices of stocks and bonds alike; and (2) that
inflation, presently at moderate levels, will accelerate.
SOME COURSES OF ACTION
What, if any, present action should be taken by investors to deal with these
two major risks? Should your allocation of assets among stock funds, bond
funds, and money market funds be adjusted? Here are some reasonable courses of
action to consider:
* For long-term investors who have built a substantial balanced portfolio of
stock, bond, and money market funds, stay the course. Even if withdrawing
from the stock market proves to be justified, the next decision--when to
return--will one day be required. "Being right twice" is no mean
challenge.
* For long-term investors gradually accumulating assets for, say,
retirement, stay your present course. Continue to invest regularly. By
doing so, you buy more shares of a mutual fund when its price falls, and
fewer shares when its price rises, virtually assuring a reasonable average
cost.
* For risk-averse investors who are highly confident that stock prices are
"too high," make only marginal--not "all or nothing"--changes in your
portfolio balance. Given the perils of predicting the future, any changes
should be limited to, say, 15 percentage points. That is, if your normal
portfolio allocation is 60% in stock funds, it might be reduced to 45%; if
85%, to 70%.
* For investors who simply must have more income, never lose sight of the
added principal risk involved in shifting from money market funds to bond
funds. Long-term bond funds provide a generous and durable income stream,
but their prices are highly volatile. Short-term and intermediate-term
bond funds offer a "middle way" of increasing income with more modest risk
to principal.
* For investors who are tempted to find an "easy way" to higher returns,
never forget that risk and reward go hand in hand. Precipitously replacing
certificates of deposit with broad-based common stock funds verges on the
irrational. Funds investing in other securities markets--emerging nations,
international stocks and bonds, and small U.S. companies--carry their own
special risks. Generally, limit such alternative investments to, say, 20%
of your total portfolio.
For all investors, be prepared for sharp interim swings in stock and bond
prices. The central tenet of investing is "prices fluctuate," and sensible
long-term investors simply must take such fluctuations in their stride.
Successful investing is as much a function of your own discipline and
equanimity as it is of the returns available in the securities markets.
THREE ESSENTIAL PRINCIPLES
As we confront the brave new world of investing that may well lie ahead in the
coming decade--and it is important to think in decade-length terms--we would
underscore three caveats:
1. Have "rational expectations" for future returns. At prices prevailing
today, it seems highly unlikely that the returns enjoyed by investors in
the past decade will be repeated in the coming decade.
2. Maintain a balanced portfolio consisting of stock, bond, and money market
funds. Each asset class has its own risk and reward characteristics. By
allocating your resources among the three asset classes according to your
own requirements, you can build a portfolio providing appropriate elements
of capital appreciation, capital conservation, and current income.
3. In balancing risk against reward, be sure to consider cost. Many mutual
funds carry hefty sales charges or high expense ratios, or both. Other
factors held equal, expenses reduce returns, dollar for dollar. Put
another way, high-cost funds must select investments with higher
prospective gross returns--which entail higher risks--to match the net
returns earned by low-cost funds.
This brief Annual Report essay can provide only an elementary look at the
challenges investors face today. History can give us perspective, but it cannot
give us performance. Famed British economist Lord Keynes had it right when he
said, "the inevitable never happens. It is the unexpected always."
<PAGE> 20
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
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Long-Term Portfolios
(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 Small Capitalization Stock Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
[LOGO -- SEE EDGAR APPENDIX]
Vanguard Financial Center * Valley Forge, Pennsylvania 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.
Q340-12/93
<PAGE> 21
EDGAR Appendix
This appendix describes components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the flags of The
United States of America and Vanguard flying from a halyard.
A bar chart called "A Tale of Two Decades" appears on the inside front
cover. This chart illustrates Average Annual Total Return, in nominal and real
terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades
since 1973.
A running head featuring the Vanguard flag logo appears at the top of
pages one through 16.
A photograph of John C. Bogle appears at the upper-right of page one.
A line chart illustrating cumulative performance of Standard & Poor's 500
Growth Index compared to Standard & Poor's Value Index for the fiscal years 1989
through 1993 appear on page 2.
A chart illustrating income shares and capital shares performance for
years 1985-1993.
