<PAGE> 1
[GEMINI II LOGO]
THIRD QUARTER REPORT
SEPTEMBER 30, 1995
<PAGE> 2
FELLOW SHAREHOLDER:
The stock market continued to rise at a torrid pace during the three months
ended September 30, the third quarter of Gemini II's 1995 fiscal year. During
the first half of the year, the Fund outpaced the market by a narrow margin;
during the third quarter, our margin of advantage was substantial.
As a result, the total return of +33.4% achieved by Gemini II for the
full nine-month period was exceptional on an absolute basis and also on a
relative basis compared to both the +25.5% return achieved by the average
growth and income mutual fund and the +29.7% return of our basic evaluation
standard, the unmanaged Standard & Poor's 500 Composite Stock Price Index. Our
customary table follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Total Return
------------------
Nine Months Ended
September 30, 1995
- ------------------------------------------------------------
<S> <C>
GEMINI II +33.4%
- ------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +29.7%
AVERAGE GROWTH AND INCOME FUND +25.5
- ------------------------------------------------------------
</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 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 $27.01 on September 30, 1995, an increase of +41.9% for the nine-month
period, far in excess of the price increase of +27.2% for the Standard & Poor's
500 Stock Index (excluding income). This substantial advantage reflects the
leverage inherent in the Fund's capital structure. On September 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 nine months, we distributed three quarterly dividends--at the
beginning of March, June, and September--at the rate of $.35 per share. As in
the past, we expect to maintain this quarterly rate throughout the year, and
pay an "extra" dividend at
<PAGE> 3
year end, representing the year's undistributed net income over and above the
quarterly total of $1.40. Although there are no guarantees in this business, we
currently believe that net income for 1995 will exceed last year's total
distribution of $1.73 per share.
PORTFOLIO STATISTICS
The following table shows the composition of our portfolio on September 30,
1995:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Percentage of Net Assets
------------------------
<S> <C>
EQUITY EQUIVALENTS
COMMON STOCK 49%
CONVERTIBLE SECURITIES 34
LOWER-GRADE BONDS 3
- ----------------------------------------------------------
TOTAL EQUITY EQUIVALENTS 86%
CASH RESERVES 14
- ----------------------------------------------------------
TOTAL PORTFOLIO 100%
- ----------------------------------------------------------
</TABLE>
In general, this structure is similar to what it was at the close of our second
quarter, although the convertible securities position declined marginally and
the cash position increased commensurately.
PREMIUMS AND DISCOUNTS
The table that follows presents the current market discount for the Capital
Shares and the premium for the Income Shares. Both the discount on the Capital
Shares and the premium on the Income Shares have widened slightly since
year-end 1994.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
September 30, 1995
-------------------------------------------
Net Asset Market
Value Price Difference
- ------------------------------------------------------------------
<S> <C> <C> <C>
CAPITAL SHARES $27.01 $24.125 -10.7%
INCOME SHARES 9.60 11.000 +14.6
- ------------------------------------------------------------------
TOTAL $36.61 $35.125 - 4.1%
- ------------------------------------------------------------------
</TABLE>
As you know, 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 reporting to you in more detail in Gemini II's
forthcoming Annual Report for 1995.
Sincerely,
/s/ JOHN C. BOGLE
- ------------------------
John C. Bogle
Chairman of the Board October 10, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
<PAGE> 4
INVESTMENTS
September 30, 1995
<TABLE>
<CAPTION>
Market
Value
Shares (000)
- ---------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (49.4%)
- ---------------------------------------------------------------------
CONSUMER CYCLICAL (5.7%)
- ---------------------------------------------------------------------
AUTO & TRUCKS (5.5%)
Chrysler Corp. 415,311 $ 22,011
RETAIL (.2%)
Kmart Corp. 44,600 647
----------
GROUP TOTAL 22,658
----------
- ---------------------------------------------------------------------
ENERGY (5.5%)
- ---------------------------------------------------------------------
Atlantic Richfield Co. 83,500 8,966
Pennzoil Co. 89,900 3,944
USX-Marathon Group 307,100 6,065
Ultramar Corp. 132,500 3,147
----------
GROUP TOTAL 22,122
----------
- ---------------------------------------------------------------------
FINANCIAL (35.7%)
- ---------------------------------------------------------------------
BANKS (16.2%)
Bankers Trust New York Corp. 75,192 5,282
Chemical Banking Corp. 173,100 10,537
First Union Corp. 404,000 20,604
KeyCorp 581,389 19,913
NationsBank, Inc. 127,200 8,554
INSURANCE (5.1%)
Aetna Life & Casualty Co. 88,760 6,513
CIGNA Corp. 131,700 13,713
REAL ESTATE (5.6%)
Colonial Properties Trust 74,600 1,856
Equity Residential
Properties Trust 367,800 11,080
Evans Withycombe
Residential, Inc. 181,800 3,681
Oasis Residential, Inc. 180,000 4,050
Urban Shopping Centers REIT 82,800 1,822
SAVINGS & LOAN (8.8%)
H.F. Ahmanson & Co. 687,600 17,448
Great Western Financial Corp. 734,860 17,453
----------
GROUP TOTAL 142,506
----------
- ---------------------------------------------------------------------
TECHNOLOGY (.2%)
- ---------------------------------------------------------------------
* Western Digital Corp. 60,804 965
----------
- ---------------------------------------------------------------------
UTILITIES (2.3%)
- ---------------------------------------------------------------------
Unicom Corp. 296,937 8,983
----------
- ---------------------------------------------------------------------
OTHER 20
----------
- ---------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $150,033) 197,254
- ---------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (29.5%)
- ---------------------------------------------------------------------
BASIC MATERIALS (21.1%)
- ---------------------------------------------------------------------
CHEMICALS (5.1%)
Atlantic Richfield Co. 9.00% 807,000 20,578
METALS & MINING (6.5%)
Kaiser Aluminum 8.255% 400,000 5,350
Reynolds Metals $3.00 401,400 20,622
STEEL (9.5%)
AK Steel Holding 7.00% 677,000 20,310
Bethlehem Steel Corp.
$3.50 258,400 11,208
$5.00 93,600 5,078
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
Market
Value
Shares (000)
- ---------------------------------------------------------------------
<S> <C> <C>
WHX Corp. 7.50% 30,000 $ 1,305
----------
GROUP TOTAL 84,451
----------
- ---------------------------------------------------------------------
CONSUMER CYCLICAL (5.0%)
- ---------------------------------------------------------------------
Ford Motor Co. $4.20 195,000 19,792
----------
- ---------------------------------------------------------------------
ENERGY (1.6%)
- ---------------------------------------------------------------------
Santa Fe Energy Resources,
Inc. 8.25% 200,000 2,000
Valero Energy $3.125 85,000 4,367
----------
GROUP TOTAL 6,367
----------
- ---------------------------------------------------------------------
TRANSPORT & SERVICES (1.8%)
- ---------------------------------------------------------------------
Delta Air Lines $3.50 127,500 7,204
----------
- ---------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $109,743) 117,814
- ---------------------------------------------------------------------
CONVERTIBLE BONDS (4.8%)
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Amount
(000)
-----------
<S> <C> <C>
Conner Peripherals
6.50%, 3/1/02 $11,230 10,598
Continental Homes
6.875%, 3/15/02 2,706 2,693
Seagate Technology
6.75%, 5/1/12 1,497 1,617
Toll Corp.
4.75%, 1/15/04 2,908 2,915
U.S. Home
4.875%, 11/1/05 1,750 1,518
- ---------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $15,965) 19,341
- ---------------------------------------------------------------------
BONDS (3.1%)
- ---------------------------------------------------------------------
Family Restaurants
0.00%, 2/1/04 3,000 300
Geneva Steel
11.125%, 3/15/01 7,000 5,740
Ryland Group
9.625%, 6/1/04 2,500 2,413
Weirton Steel Corp.
10.875%, 10/15/99 4,000 4,040
- ---------------------------------------------------------------------
TOTAL BONDS
(Cost $15,986) 12,493
- ---------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (12.1%)
- ---------------------------------------------------------------------
COMMERCIAL PAPER
The Coca-Cola Co.
5.85%, 10/2/95 5,000 4,998
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.41%, 10/2/95 43,339 43,339
- ---------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $48,337) 48,337
- ---------------------------------------------------------------------
TOTAL INVESTMENTS (98.9%)
(Cost $340,064) 395,239
- ---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--
NET (1.1%) 4,518
- ---------------------------------------------------------------------
NET ASSETS (100%) $399,757
=====================================================================
</TABLE>
*Non-Income Producing Security.
<PAGE> 6
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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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.
Q343-9/95
