<PAGE> 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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Total Return
---------------------
Six Months Ended
June 30, 1995
- ----------------------------------------------------------------
<S> <C>
GEMINI II +21.1%
- -----------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +20.2%
- -----------------------------------------------------------------
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Percentage of Net Assets
-----------------------------
<S> <C>
EQUITY EQUIVALENTS
COMMON STOCK 50%
CONVERTIBLE SECURITIES 39
LOWER-GRADE BONDS 3
- ----------------------------------------------------------------------
TOTAL EQUITY EQUIVALENTS 92%
TEMPORARY CASH INVESTMENTS 8
- ----------------------------------------------------------------------
TOTAL PORTFOLIO 100%
- ----------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
June 30, 1995
---------------------------------------------
Net Asset Market
Value Price Difference
- ----------------------------------------------------------------------
<S> <C> <C> <C>
CAPITAL SHARES $24.10 $21.50 -10.8%
INCOME SHARES 9.47 11.00 +16.2
- ----------------------------------------------------------------------
TOTAL $33.57 $32.50 - 3.2%
- ----------------------------------------------------------------------
</TABLE>
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
<PAGE> 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
<PAGE> 4
FINANCIAL STATEMENTS
(unaudited)
June 30, 1995
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------
<S> <C> <C>
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
- -------------------------------------------------------------------------------
<CAPTION>
CONVERTIBLE BONDS (5.3%)
- -------------------------------------------------------------------------------
Face
Amount
(000)
---------
<S> <C> <C>
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
- -------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------------------
<S> <C> <C>
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
===============================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
(1) Mandatory conversion June 30, 1996.
5
<PAGE> 6
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1995
(000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
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
=====================================================================================================
</TABLE>
6
<PAGE> 7
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
JUNE 30, 1995 December 31, 1994
(000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
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)
- -----------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, 1995
(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 . . . . . . . . . . . . . . . . . . . . . . . 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
- -----------------------------------------------------------------------------------------------------
</TABLE>
* No change during year.
7
<PAGE> 8
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
SIX MONTHS ENDED -----------------------------------------------
For a Share Outstanding Throughout Each Period JUNE 30, 1995 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
=========================================================================================================================
</TABLE>
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Amounts in Thousands and Per Share
--------------------------------------------------------------------------------------
Three Months Ended
- ----------------------------------------------------------------------------------------------------------------------
March 31, 1995 June 30, 1995
-------------------- -------------------
<S> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
March 31, 1994 June 30, 1994 September 30, 1994 December 31, 1994
------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
- ----------------------------------------------------------------------------------------------------------------------
</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 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
<PAGE> 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
<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 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
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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
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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
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SEMI-ANNUAL REPORT
JUNE 30, 1995