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[VANGUARD LOGO]
GEMINI II
FIRST QUARTER REPORT
MARCH 31, 1995
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FELLOW SHAREHOLDER:
The stock market rose smartly during the three months ended March 31, the first
quarter of Gemini II's 1995 fiscal year. Our Fund enjoyed a solid participation
in the market rally.
That said, the unmanaged Standard & Poor's 500 Composite Stock Price
Index--our stock market measurement standard--again proved to be a tough bogey
for portfolio managers. This Index has a distinct tilt toward stocks of
companies with large capitalizations, including both growth and value stocks.
Thus, it is a reasonable benchmark for Gemini II, which emphasizes value stocks
and stocks with medium-sized capitalizations. The performance comparison
follows:
<TABLE>
<CAPTION>
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Total Return
Three Months Ended
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March 31, 1995
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<S> <C>
GEMINI II +8.9%
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STANDARD & POOR'S 500 STOCK INDEX +9.7%
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</TABLE>
The Fund's total return is allocated so that 100% of the portfolio's capital
appreciation (or depreciation) is received by the Capital Shares, which
provided 50% of the Fund's initial capital. By the same token, 100% of 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 our Capital Shares rose from $19.03 on December 31,
1994, to $21.11 on March 31, 1995, an increase of +10.9% for the quarter. This
increase was marginally better than the gain of +9.0% for the Standard & Poor's
500 Index (income excluded). Our Capital Share leverage of 1.4 times might
have suggested a larger advantage for the Fund; however, an important part of
our total return is accounted for by income (which is paid to the Income
Shareholders) as distinct from capital appreciation.
THE INCOME SHARE RESULTS
Our first quarter dividend was paid on March 1, 1995, at the regular rate of
$.35 per share. (You may recall that the dividend was increased from a regular
rate of $.25 one year ago.) As in the past, we will distribute a year-end
"extra" dividend representing the amount by
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which the Fund's net investment income exceeds the total of the year's
quarterly dividends. Net income totaled $1.73 per share for 1994. While it is
too early to accurately estimate income for 1995, we are striving to reach, or
even exceed, last year's total.
PORTFOLIO STATISTICS
The following table shows the composition of our portfolio on March 31, 1995:
<TABLE>
<CAPTION>
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Percentage of Net Assets
------------------------
<S> <C>
EQUITY EQUIVALENTS
COMMON STOCK 57%
CONVERTIBLE SECURITIES 38
LOWER-GRADE BONDS 4
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TOTAL EQUITY EQUIVALENTS 99%
NET CASH 1
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TOTAL PORTFOLIO 100%
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</TABLE>
In general, this structure is quite similar to our portfolio allocation at
year-end 1994, although the cash position has increased marginally and the
lower-grade bond position has been reduced slightly.
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>
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March 31, 1995
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Net Asset Market
Value Price Difference
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<S> <C> <C> <C>
CAPITAL SHARES $21.11 $18.250 -13.5%
INCOME SHARES 9.43 10.875 +15.3
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TOTAL $30.54 $29.125 - 4.6%
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</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.
I look forward to providing you with a more detailed report, including
an in-depth analysis from our Portfolio Manager, John B. Neff, in our
Semi-Annual Report three months hence.
Sincerely,
/s/ JOHN C. BOGLE
John C. Bogle
Chairman of the Board April 17, 1995
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INVESTMENTS
March 31, 1995
<TABLE>
<CAPTION>
Market
Value
Shares (000)
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<S> <C> <C>
COMMON STOCKS (56.6%)
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BANKS (21.2%)
Bankers Trust New York Corp. 254,292 $ 13,287
The Chase Manhattan Corp. 35,630 1,269
Chemical Banking Corp. 396,400 14,964
First Tennessee National Corp. 21,300 879
First Union Corp. 404,000 17,523
KeyCorp 584,189 16,503
NationsBank, Inc. 127,200 6,456
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GROUP TOTAL 70,881
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ELECTRIC UTILITIES (4.7%)
Unicom Corp. 658,937 15,650
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INSURANCE (10.3%)
Aetna Life & Casualty Co. 253,360 14,442
CIGNA Corp. 265,500 19,846
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GROUP TOTAL 34,288
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OIL (9.4%)
Atlantic Richfield Co. 101,600 11,684
Pennzoil Co. 145,500 6,893
USX-Marathon Group 427,100 7,474
Ultramar Corp. 203,400 5,289
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GROUP TOTAL 31,340
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RETAILERS (2.7%)
Kmart Corp. 654,800 9,003
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SAVINGS & LOAN (8.3%)
H.F. Ahmanson & Co. 703,100 12,656
Great Western Financial Corp. 798,001 14,962
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GROUP TOTAL 27,618
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TOTAL COMMON STOCKS
(Cost $181,254) 188,780
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CONVERTIBLE PREFERRED STOCKS (31.2%)
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Bethlehem Steel Corp.
$2.50 36,400 910
$3.50 170,000 7,778
$5.00 93,600 4,575
Chrysler Corp. $4.625 149,500 17,435
Citicorp 10.75% 73,000 8,605
Delta Air Lines $3.50 250,000 13,281
Ford Motor Co. $4.20 170,000 14,918
(1)Kaiser Aluminum $.65 1,391,000 11,302
Reynolds Metals $3.31 124,400 5,893
Santa Fe Energy Resources,
Inc. 8.25% 200,000 1,925
Sea Containers, Ltd. $4.00 112,700 4,649
Valero Energy $3.125 85,000 3,634
WHX Corp. 7.50% 30,000 1,260
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OTHER (2.4%) 8,000
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TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $98,433) 104,165
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</TABLE>
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<TABLE>
<CAPTION>
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BONDS (11.1%)
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Face Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
CONVERTIBLE (7.0%)
Conner Peripherals
6.50%, 3/1/02 $ 5,250 $ 4,042
Continental Homes
6.875%, 3/15/02 3,406 2,725
Owens-Corning Fiberglas
8.00%, 12/30/05 300 354
Seagate Technology
6.75%, 5/1/12 11,000 9,955
Toll Corp.
4.75%, 1/15/04 4,422 3,405
U.S. Home
4.875%, 11/1/05 1,750 1,190
Western Digital
9.00%, 6/1/14 1,500 1,665
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GROUP TOTAL 23,336
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NON-CONVERTIBLE (4.1%)
Family Restaurants
0.00%, 2/1/04 3,000 1,140
Geneva Steel
11.125%, 3/15/01 7,000 6,352
Ryland Group
9.625%, 6/1/04 2,500 2,200
Weirton Steel Corp.
10.875%, 10/15/99 4,000 3,900
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GROUP TOTAL 13,592
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TOTAL BONDS
(Cost $35,921) 36,928
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TEMPORARY CASH INVESTMENT (.3%)
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REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.27%, 4/3/95 (Cost $930) 930 930
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TOTAL INVESTMENTS (99.2%)
(Cost $316,538) 330,803
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OTHER ASSETS AND LIABILITIES--
NET (.8%) 2,684
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NET ASSETS (100%) $333,487
==============================================================================
(1) Mandatory conversion June 30, 1996.
</TABLE>
<PAGE> 6
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Vanguard Family are offered by prospectus only.
Q341-3/95
