<PAGE> 1
GEMINI II
FIRST QUARTER REPORT
MARCH 31, 1996
<PAGE> 2
Fellow Shareholder:
The extraordinary bull market in stocks continued during the three months ended
March 31, the first quarter of Gemini II's 1996 fiscal year. Our Fund more
than held its own during this brief period, even as market benchmarks marched
to a succession of new highs.
The table below presents the total return (capital change plus income)
for the Fund's total portfolio during the three-month period, compared to that
of the unmanaged Standard & Poor's 500 Composite Stock Price Index. Our return
of +7.3% not only compared favorably with the +5.4% return from the Index, it
also was ahead of the +5.6% return for the average growth and income mutual
fund.
<TABLE>
<CAPTION>
- -----------------------------------------------------
TOTAL RETURN
------------------
THREE MONTHS ENDED
MARCH 31, 1996
- -----------------------------------------------------
<S> <C>
GEMINI II +7.3%
- -----------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +5.4%
- -----------------------------------------------------
</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 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 our Capital Shares rose from $26.35 on December 31,
1995, to $28.49 on March 31, 1996, an increase of +8.1% for the quarter. This
was well above the gain (income excluded) of +4.8% for the Standard & Poor's
500 Index. Our Capital Share leverage of 1.3 times accounted for part of our
advantage over the Index. Other factors being equal, the Capital Shares should
rise (or fall) about 1.3 times the percentage increase (or decrease) in the net
asset value of Gemini II's total portfolio.
THE INCOME SHARE RESULTS
Our first quarter dividend was paid on March 1, 1996, at the regular rate of
$.35 per share. As in the past, we will distribute a year-end "extra" dividend
representing the amount by which the Fund's net investment income exceeds the
total of the year's quarterly dividends. Distributions from net income totaled
$1.80 per share for 1995.
<PAGE> 3
PORTFOLIO STATISTICS
The following table shows the composition of our portfolio on March 31, 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
PERCENTAGE OF NET ASSETS
- ---------------------------------------------------------
<S> <C>
EQUITY EQUIVALENTS
COMMON STOCKS 43%
CONVERTIBLE SECURITIES 36
LOWER-GRADE BONDS 3
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TOTAL EQUITY EQUIVALENTS 82%
NET CASH 18
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TOTAL PORTFOLIO 100%
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</TABLE>
PREMIUMS AND DISCOUNTS
The Fund will "mature" on January 31, 1997, at which time both the Capital
Shares and the Income Shares will be valued at their respective net asset
values, without the premiums that have been typical of the Income Shares and
the discounts that have been typical of the Capital Shares. The table below
presents the market discount for the Capital Shares and the premium for the
Income Shares at the end of the first quarter. The discount for the Capital
Shares has widened since year-end 1995, while the premium for the Income Shares
was barely changed.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARCH 31, 1996
--------------------------------------
NET ASSET MARKET
VALUE PRICE DIFFERENCE
- ---------------------------------------------------------
<S> <C> <C> <C>
CAPITAL SHARES $28.49 $26.375 -7.4%
INCOME SHARES 9.44 10.250 +8.6
- ---------------------------------------------------------
TOTAL $37.93 $36.625 -3.4%
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</TABLE>
We look forward to providing to you a more detailed report, including an
in-depth analysis from our Portfolio Manager, Charles T. Freeman, in our
Semi-Annual Report three months hence.
Sincerely,
/s/ JOHN C. BOGLE
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
John J. Brennan
President April 17, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
<PAGE> 4
INVESTMENTS
March 31, 1996
<TABLE>
<CAPTION>
Market
Value
Shares (000)
- ----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (42.5%)
- ----------------------------------------------------------------------
BASIC MATERIALS (2.0%)
- ----------------------------------------------------------------------
British Steel PLC ADR 277,000 $ 8,172
----------
- ----------------------------------------------------------------------
CONSUMER CYCLICAL (11.5%)
- ----------------------------------------------------------------------
Chrysler Corp. 415,311 25,853
Ford Motor Co. 636,753 21,888
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GROUP TOTAL 47,741
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- ----------------------------------------------------------------------
ENERGY (4.3%)
- ----------------------------------------------------------------------
Atlantic Richfield Co. 83,500 9,936
Pennzoil Co. 48,800 1,940
USX-Marathon Group 307,100 5,912
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GROUP TOTAL 17,788
----------
- ----------------------------------------------------------------------
FINANCIAL (23.9%)
- ----------------------------------------------------------------------
BANKS (8.6%)
Chemical Banking Corp. 65,600 4,625
First Union Corp. 183,000 11,072
KeyCorp 314,889 12,163
NationsBank, Inc. 99,500 7,972
INSURANCE (1.9%)
CIGNA Corp. 67,600 7,723
REAL ESTATE INVESTMENT TRUSTS (6.6%)
Camden Property Trust 125,000 2,891
Colonial Properties Trust 74,600 1,762
Equity Residential
Properties Trust 385,000 12,031
Evans Withycombe
Residential, Inc. 195,000 4,534
Oasis Residential, Inc. 180,000 4,230
Urban Shopping Centers 82,800 1,842
SAVINGS & LOAN (6.8%)
H.F. Ahmanson & Co. 549,600 13,328
Great Western Financial Corp. 610,740 14,734
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GROUP TOTAL 98,907
----------
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TECHNOLOGY (.2%)
- ----------------------------------------------------------------------
* Western Digital Corp. 56,804 1,093
----------
- ----------------------------------------------------------------------
UTILITIES (.6%)
- ----------------------------------------------------------------------
Unicom Corp. 87,937 2,374
----------
- ----------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $130,379) 176,075
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CONVERTIBLE PREFERRED STOCKS (35.1%)
- ----------------------------------------------------------------------
BASIC MATERIALS (30.7%)
- ----------------------------------------------------------------------
CHEMICALS (5.5%)
Atlantic Richfield Co. 9.00% 785,500 22,583
METALS & MINING (8.2%)
(1)Kaiser Aluminum 8.255% 979,400 13,467
Reynolds Metals 7.00% 401,400 20,672
PAPER (8.1%)
Boise Cascade Corp. $1.58 170,800 5,850
Bowater Inc. 7.00% 534,000 16,687
International Paper Co. 5.25% 238,000 11,008
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
Market
Value
Shares (000)
- ----------------------------------------------------------------------
<S> <C>
STEEL (8.9%)
AK Steel Holding 7.00% 677,000 $ 25,811
Bethlehem Steel Corp. $3.50 258,400 11,240
----------
GROUP TOTAL 127,318
----------
- ----------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (1.8%)
- ----------------------------------------------------------------------
Beazer Homes USA, Inc. 8.00% 270,000 7,560
----------
- ----------------------------------------------------------------------
ENERGY (.8%)
- ----------------------------------------------------------------------
Santa Fe Energy Resources,
Inc. 8.25% 200,000 2,075
Valero Energy $3.125 20,000 1,038
----------
GROUP TOTAL 3,113
----------
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TRANSPORT & SERVICES (1.8%)
- ----------------------------------------------------------------------
Delta Air Lines $3.50 122,500 7,442
----------
- ----------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $130,495) 145,433
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CONVERTIBLE BONDS (.7%)
- ----------------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
--------
<S> <C> <C>
Apache Corp.
6.00%, 1/15/02 $ 1,000 1,080
Toll Corp.
4.75%, 1/15/04 58 56
U.S. Home
4.875%, 11/1/05 1,750 1,575
- ----------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $2,297) 2,711
- ----------------------------------------------------------------------
BONDS (3.0%)
- ----------------------------------------------------------------------
Geneva Steel
11.125%, 3/15/01 7,000 5,985
Ryland Group
9.625%, 6/1/04 2,500 2,494
Weirton Steel Corp.
10.875%, 10/15/99 4,000 4,090
- ----------------------------------------------------------------------
TOTAL BONDS
(Cost $13,577) 12,569
- ----------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (18.3%)
- ----------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.40%, 4/1/96
(Cost $75,628) 75,628 75,628
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(Cost $352,376) 412,416
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--
NET (.4%) 1,811
- ----------------------------------------------------------------------
NET ASSETS (100%) $414,227
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</TABLE>
*Non-Income Producing Security.
(1)Mandatory conversion June 30, 1996.
ADR-American Depository Receipt
<PAGE> 6
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<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1-(800) 662-7447 1-(800) 662-2739
</TABLE>
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.
Q341-3/96
