<PAGE>
GEMINI II
LOGO
November 22, 1996
Fellow Capital Shareholder:
As you probably are aware, the Income Shares of Gemini II (the "Fund")
will be redeemed on January 31, 1997. Capital shares will then be the sole
remaining class of shares of the Fund entitled to all the assets, capital
appreciation and net income earned by the Fund.
The accompanying Proxy Statement contains information about the Board of
Directors' proposal that the Capital Shares be converted to an open-end
investment company (mutual fund) after the Fund's dual-purpose structure
terminates on January 31, 1997. We ask for your support for this important
recommendation which would allow you to redeem--free of charge--your Fund
shares at net asset value at any time after the conversion date (expected to
be February 3, 1997). At that time, you may also elect to exchange your
shares into one of the other Vanguard funds or elect to not make any changes,
resulting in holding shares in the Fund as an open-end fund. For more
information on the right of redemption and exchange, please see Proposal 3
beginning on page 5.
In anticipation of shareholder approval of the Board's proposal, public
trading of the Fund's shares on the New York Stock Exchange would stop on or
about January 15, 1997. Accordingly, Capital shareholders wishing to sell
their shares in the open market prior to the conversion date should do so
prior to January 15, 1997.
The enclosed Proxy Statement describes the investment objectives and
policies that the Fund will pursue as an open-end fund. However, the Fund's
Board of Directors believes that, over the long term, it is in the best
interests of the Fund and the Capital shareholders that the Fund be merged --
in a tax-free organization -- into Windsor Fund, another member of The
Vanguard Group with similar investment objectives and policies. Windsor Fund
is managed by the same Wellington Management Company, LLP investment team
that currently manages the Fund's assets. The Board also believes that this
outcome will be better accomplished in two stages. The first stage (proposed
in this Proxy Statement) is the conversion to an open-end investment company,
which will give shareholders the right to redeem their shares at net asset
value as soon as possible. The second stage (to be proposed in a subsequent
Proxy Statement) will involve the tax-free merger into Windsor Fund. In this
respect, Capital shareholders should expect to receive proxy materials
relating to the merger in late March 1997, for a Special Meeting of
Shareholders to take place in May 1997. If approved by shareholders, the
proposed merger is expected to be consummated in June 1997. The proposed
merger is more fully described on page 9 of the Proxy Statement under "Future
of the Fund."
<PAGE>
We hope this Proxy Statement will answer all of your questions, but if you
have any further questions at any time, please call us at 1-800-420-8574. A
Vanguard Associate will be happy to assist you.
Sincerely,
- ----------------------------------------
John C. Bogle
Chairman
- ----------------------------------------
John J. Brennan
President
<PAGE>
LOGO
GEMINI II
NOTICE OF SPECIAL MEETING IN LIEU OF
1997 ANNUAL MEETING OF SHAREHOLDERS
TO THE CAPITAL SHAREHOLDERS OF GEMINI II, INC.
Notice is hereby given that a special meeting in lieu of the 1997 Annual
Meeting of Shareholders of Gemini II, Inc. (the "Fund") will be held in the
Majestic Building, Room 118A, Vanguard Financial Center, 100 Vanguard
Boulevard, Malvern, Pennsylvania, on Tuesday, January 21, 1997, 9:30 A.M.,
E.S.T., for the following purposes:
1. To elect a Board of nine Directors to serve until the next Annual
Meeting of Shareholders.
2. To ratify or reject the selection of Price Waterhouse, independent
accountants, as auditors of the Fund for the fiscal year ending December
31, 1997.
3. To approve or disapprove an amendment and restatement of the charter of
the Fund to delete the authority to issue stock of the income series, to
redesignate stock of the capital series as the sole class of common
stock, and to convert the Fund into an open-end investment company all
as summarized in the accompanying proxy statement and deemed advisable
by the Directors.
4. To approve or disapprove the modification of the Fund's investment
objectives and policies as set forth in the accompanying proxy
statement.
5. To approve or disapprove an amendment to the Fund's charter relating to
shareholder voting.
6. To consider and act upon any other matters which may properly come
before the meeting.
By Order of the Board of Directors
RAYMOND J. KLAPINSKY, Secretary
November 22, 1996
- -------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN
Please indicate your voting instructions on the enclosed Proxy Card, date
and sign it, and return it in the envelope provided, which is addressed for
your convenience and needs no postage if mailed in the United States. In
order to avoid the additional expense to the Fund of further solicitation, we
ask your cooperation in mailing your proxy promptly.
- -------------------------------------------------------------------------------
<PAGE>
LOGO
GEMINI II
SPECIAL MEETING IN LIEU OF
1997 ANNUAL MEETING OF CAPITAL SHAREHOLDERS
January 21, 1997
PROXY STATEMENT
The enclosed proxy is solicited by and on behalf of the Board of Directors
of Gemini II, Inc. All costs of solicitation (including printing and mailing
this proxy statement, meeting notice and form of proxy, as well as any
necessary supplementary solicitations) will be paid by the Fund. In addition
to the solicitation of proxies by mail, officers and employees of the Fund
and The Vanguard Group, Inc. ("Vanguard") may solicit proxies in person or by
telephone. Arrangements will be made with brokerage houses and other
custodians, nominees, and fiduciaries to forward proxies and proxy materials
to their principals, and the Fund will reimburse them for their expenses.
Holders of record of the Capital Shares at the close of business on
November 15, 1996, are the only persons entitled to vote at the meeting or at
any adjourned session. As of the date of this proxy statement, there were
10,920,550 Capital Shares and 10,920,550 Income Shares issued and
outstanding. All Income Shares will be redeemed as of the close of business
on January 31, 1997 and are not entitled to be considered present or to vote
at this meeting.
Shares represented by a properly executed proxy will be voted in
accordance with the instructions thereon, or if no specification is made, the
persons named as proxies will vote such for management's slate of nine
directors and on other matters as recommended by the Board of Directors.
Proxies may be revoked at any time before they are exercised by the
subsequent execution and submission of a revised proxy, by written notice of
revocation to the Secretary of the Fund, or by voting in person at the
meeting. The mailing address of the Fund is Vanguard Financial Center, P.O.
Box 2600, Valley Forge, Pennsylvania 19482.
Under Maryland law, abstentions and broker non-votes will be included for
purposes of determining whether a quorum is present at the meeting, but will
be treated as votes not cast and, therefore, will not be counted for purposes
of determining whether the proposals have been approved.
Shareholders who need directions to the location of the Special Meeting
should call 1-800-852-6999, between the hours of 8:00 A.M. and 9:00 P.M.,
Eastern Time, on any business day.
1
<PAGE>
1. ELECTION OF DIRECTORS
It is intended that all properly executed proxies will be voted (unless
such authority has been withheld in the proxy) in favor of the nine (9)
persons nominated as Directors by the Board's Nominating Committee. If any
such nominee is not available for election at the time of the meeting, the
persons named as proxies will vote for such substitute nominee as the Board
of Directors may recommend unless the number of Directors serving on the
Board is reduced. The Directors, if elected, will serve as Directors of the
Fund until the next annual meeting of shareholders and until their successors
have been elected and qualified. All of the nominees are presently Directors
of the Fund and were elected by shareholders. On November 15, 1996, all
Directors and officers of the Fund, as a group, owned less than 1% of the
outstanding Capital Shares of the Fund.
<TABLE>
<CAPTION>
Capital
Principal Occupation, Year First Share Holdings
Business Experience Became a as of
Name Age and Other Directorships Director November 15, 1996
- ----------------------- ----- ------------------------------ ------------ ------------------
<S> <C> <C> <C> <C>
John C.
Bogle (1)(2) ......... 67 Chairman and Director of the 1984 3,000
Fund, Vanguard, and each of
the Vanguard Funds; Director
of The Mead Corporation,
Chris-Craft Industries, Inc.
and General Accident
Insurance.
John J.
Brennan (1)(2) ....... 42 President, Chief Executive 1987 200
Officer of the Fund, Vanguard,
and each of the Vanguard
Funds.
Robert E.
Cawthorn (2) ......... 61 Chairman, Emeritus and 1992 None
Director of Rhone-Poulenc
Rorer, Inc.; Director of Sun
Company, Inc.; and
Westinghouse Electric
Corporation.
Barbara B.
Hauptfuhrer (2) ...... 68 Director of The Great Atlantic 1984 200
and Pacific Tea Company,
Raytheon Company,
Knight-Ridder, Inc.,
Massachusetts Mutual Life
Insurance Co. and ALCO
Standard Corp.; Trustee
Emerita of Wellesley College.
Bruce K.
MacLaury (3) ......... 65 President Emeritus of The 1989 None
Brooking Institution; Director
of American Express Bank,
Ltd., The St. Paul Companies,
Inc. and National Steel
Corporation.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Capital
Principal Occupation, Year First Share Holdings
Business Experience Became a as of
Name Age and Other Directorships Director November 15, 1996
- ----------------------- ----- ------------------------------ ------------ ------------------
<S> <C> <C> <C> <C>
Burton G.
Malkiel (4) .......... 64 Chemical Bank Chairman's 1984 1,000
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. (2) ...... 54 Chairman, President and Chief 1992 None
Executive Officer of NACCO
Industries; Director of The
B.F. Goodrich Company and The
Standard Products Co.
John C.
Sawhill (2) .......... 60 President and Chief Executive 1991 None
Officer, The Nature
Conservancy; formerly,
Director and Senior Partner,
McKinsey & Co., and President,
New York University; Director
of Pacific Gas and Electric
Company and NACCO Industries.
J. Lawrence
Wilson (2) ........... 60 Chairman and Chief Executive 1985 None
Officer of Rohm & Haas
Company; Director of Cummins
Engine Company; Trustee of
Vanderbilt University.
</TABLE>
- ------
(1) An officer is considered an "interested person" of the Fund as defined in
the 1940 Act.
(2) A Director (Trustee) of Vanguard and each of the Vanguard Funds.
(3) A Director (Trustee) of each of the Vanguard Funds, except Vanguard
Municipal Bond Fund and the six Vanguard State Tax-Free Funds.
(4) A Director (Trustee) of Vanguard and each of the Vanguard Funds, except
Vanguard Equity Income Fund.
BOARD MEETINGS AND COMMITTEES
During the fiscal year ended December 31, 1995, the Fund's Board of
Directors held 10 meetings.
The Board of Directors of the Fund has a standing Compensation, Nomination
and Audit Committee, which is composed of the Directors who are not "inter-
3
<PAGE>
ested persons" of the Fund. During the fiscal year ended December 31, 1995,
the Committee held 6 meetings. The Committee is responsible principally for:
(1) selecting the Fund's independent accountants, and reviewing their fees;
(2) meeting with the Fund's independent accountants for the purpose of
reviewing the adequacy of the Fund's internal accounting controls; (3)
evaluating the performance of the Fund's officers and employees, and
developing and approving the overall compensation plan (including basic
salary, customary insurance and other benefits, and incentives) for such
officers and employees (who are paid through Vanguard); and (4) interviewing,
evaluating and recommending to shareholders candidates for election to the
Fund's Board of Directors.
The Committee will consider Director nominations recommended by
shareholders. Such nominations can be made by submitting a written request
for consideration of a candidate, including a resume, to Mr. J. Lawrence
Wilson, the Chairman of the Committee.
PRINCIPAL EXECUTIVE OFFICERS
The following individuals are officers of the Fund and have held these
positions since the Fund's inception, except for Mr. Brennan who was elected
President of the Fund on May 17, 1989 and Chief Executive Officer on January
19, 1996. The officers have held similar positions with the other Vanguard
Funds and Vanguard for at least the past five years.
Name Age Office
---- --- ------
John C. Bogle .......... 67 Chairman
John J. Brennan ........ 42 President and Chief
Executive Officer
Raymond J. Klapinsky ... 57 Secretary
Richard F. Hyland ...... 59 Treasurer
Karen E. West .......... 50 Controller
REMUNERATION OF DIRECTORS AND OFFICERS
The Fund pays each Director, who is not also an officer, an annual fee
plus a proportionate share of travel and other expenses incurred in attending
Board meetings. Directors who are also officers receive no remuneration for
their services as Directors. The Fund's proportionate share of remuneration
paid by Vanguard (and reimbursed by the Fund) during the fiscal year ended
December 31, 1995 to all officers of the Fund, as a group, was approximately
$13,899.
Directors who are not officers are paid an annual fee based on the number
of years of service on the board, up to fifteen years of service, upon
retirement. The fee is equal to $1,000 for each year of service and each
investment company member of The Vanguard Group contributes a proportionate
amount of this fee based on its relative net assets. This fee is paid,
subsequent to a Director's retirement, for a maximum period of ten years or
until the death of a retired Director. The Fund's proportionate share of
benefits paid by Vanguard under its retirement and thrift plans to all
Directors of the Fund, as a group, during the fiscal year ended December 31,
1995, was approximately $300.
4
<PAGE>
Compensation Table
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued as part Annual From Fund and
Compensation of Fund Benefits Upon Fund Complex
Name of Director from Fund Expenses Retirement Paid to Director
- -------------------------- -------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
John C. Bogle* ........... -- -- -- --
John J. Brennan* ......... -- -- -- --
Robert E. Cawthorn ....... $118 $17 $13,000 $59,000
Barbara B. Hauptfuhrer ... $118 $20 $15,000 $59,000
Burton G. Malkiel ........ $120 $13 $15,000 $60,000
Bruce K. MacLaury ........ $130 $20 $12,000 $55,000
James O. Welch, Jr. ...... $118 $16 $15,000 $59,000
J. Lawrence Wilson ....... $120 $11 $15,000 $60,000
John C. Sawhill .......... $120 $13 $15,000 $60,000
Alfred M. Rankin, Jr. .... $120 $11 $15,000 $60,000
</TABLE>
- ------
*As "Interested Directors", Messrs. Bogle and Brennan receive no compensation
for their service as Directors.
2. RATIFICATION OR REJECTION OF AUDITORS
The Board of Directors has selected Price Waterhouse LLP as independent
accountants to audit and certify financial statements of the Fund for the
fiscal year ending December 31, 1997. Price Waterhouse LLP has served the
Fund in this capacity since the Fund's inception. In connection with the
audit function, Price Waterhouse LLP also reviews the Fund's Annual Report to
shareholders and the Fund's filings with the Securities and Exchange
Commission. Neither Price Waterhouse LLP nor any of its partners has any
direct or material indirect financial interest in the Fund.
A representative of Price Waterhouse LLP will be present at the meeting if
requested by a shareholder (either by telephone or in writing) in advance of
the meeting. Such requests should be directed to the Secretary of the Fund.
REQUIRED VOTE
An affirmative vote of a majority of the Capital Shares of the Fund
represented at the meeting will be required to ratify this appointment.
3. AMENDMENT AND RESTATEMENT OF THE FUND'S CHARTER
Gemini II, Inc. was originally incorporated in the State of Maryland on
December 6, 1984. The Fund was organized and offered as a closed-end
investment company with two classes of capital stock outstanding, Income
Shares of the par value of $1.00 per share ("Income Shares") and Capital
Shares of the par value of $1.00 per share ("Capital Shares"). Equal numbers
of each class of shares were
5
<PAGE>
authorized (15,000,000 per class) and issued (10,920,550). Neither class of
shares was redeemable, but both classes were listed for trading on the New
York Stock Exchange. The Fund is a dual purpose fund with the holders of the
Income Shares entitled to all net investment income which has been paid
quarterly as a cumulative dividend in the minimum annual amount of $0.80 per
share. All appreciation or depreciation in the value of the portfolio of the
Fund was reflected in the net asset value of the Capital Shares; the holders
of the Capital Shares were alone entitled to any net realized capital gains.
To date, long-term capital gains have been retained by the Fund and the
Federal capital gains tax paid on them, and the credit for such taxes paid
has been distributed pro rata to the holders of the Capital Shares.
Short-term capital gains have been distributed to Capital shareholders. No
dividends will be paid to the holders of the Capital Shares so long as any
Income Shares remain outstanding, and Capital Shares are not redeemable by
the Fund so long as any Income Shares remain outstanding.
As required by the charter of the Fund, all of the issued and outstanding
Income Shares will be redeemed by the Fund on January 31, 1997 (the
"Redemption Date") by payment of the "Redemption Price" to such holders on
that date. The Redemption Price is $9.30 per share. In addition, an amount
equal to the accumulated and unpaid dividend on the Income Shares up to and
including the Redemption Date will be paid to holders of the Income Shares.
The Redemption Price will be deposited with an independent depository bank in
accordance with the terms of the charter on January 31, 1997, and at that
point the Income Shares will be deemed to have been totally redeemed and will
no longer be outstanding or entitled to any vote. Thus, the only shares that
are entitled to vote at this meeting are the holders of the Capital Shares of
record on the established record date set forth in the notice of this meeting
and the Proxy Statement.
Also in accordance with the charter of the Fund, the Board of Directors
has unanimously decided to call this special meeting of the holders of the
Capital Shares to vote, among other things, upon its proposal that the Fund
become an open-end investment company. To that end it has determined
advisable and is submitting to the holders of the Capital Shares at this
meeting this proposal that the charter of the Fund be amended in various
respects to effect this conversion to an open-end investment company and to
restate the charter fully including such amendments. If approved by the
holders of Capital Shares, it is expected that the Fund will be converted to
an open-end investment company effective February 3, 1997, or as soon as
practical thereafter.
Such a conversion to an open-end investment company would permit the
holders of the Capital Shares after its effectiveness to redeem their
respective holdings at the per share net asset value next determined after
receipt of a proper request for redemption and, if applicable, a properly
executed assignment along with the relevant share certificate(s), with
signatures guaranteed by a bank or a member firm of the New York Stock
Exchange. Payment for any such redemption must be made within seven days
after its receipt, subject to the suspension of such right in case of a
suspension of the determination of the net asset value of the Fund
6
<PAGE>
because the New York Stock Exchange is closed for other than weekends or
holidays, because trading on the Exchange is restricted or an emergency
exists as a result of which disposal by the Fund of its securities is not
reasonably practicable, or it is not reasonably practicable for the Fund to
value its assets, or in the event that the Securities and Exchange Commission
has provided for such suspension for the protection of shareholders.
After the Fund converts to an open-end structure, a Capital shareholder
may also elect to exchange shares into one of the other Vanguard Funds.
Shareholders wishing to redeem or exchange shares on or after February 3,
1997, should contact Vanguard's Client Service Department at 1-800-420-8574
for precise instructions. A redemption or exchange of shares of the Fund is a
taxable event and may result in a capital gain or loss. Shareholders will
need to present their Gemini II certificates in order to redeem or exchange
their shares.
In anticipation of the approval by Capital shareholders of the amendments
to and restatement of the Fund's charter and the conversion to an open-end
investment company, the Capital Shares will cease trading on the New York
Stock Exchange on or about January 15, 1997. Accordingly, Capital
shareholders wishing to sell their shares prior to such conversion, should do
so prior to January 15, 1997. The price at which shares are sold may reflect
either a premium or discount to the underlying net asset value of the shares.
After that date, Capital Shares will no longer be traded on the New York
Stock Exchange or any other Exchange, and it is probable that no
over-the-counter market for such trading will exist; thus the only way by
which a holder would be able to realize the value of his Capital Shares is
the exercise of his right of redemption on or after February 3, 1997. After
February 3, 1997, shareholders will automatically receive all dividends and
capital gains distributions in additional shares rather than in cash.
Shareholders who desire to receive dividends and capital gains distributions
in cash should contact Vanguard's Client Service Department at the telephone
number set forth above.
The holders of Capital Shares have been trading them on the New York Stock
Exchange over the past 12 months at prices ranging from a % premium to a
. % discount from net asset value. In addition, the holders of Capital
Shares who have wished to liquidate their holdings and who have done so by
selling them over the Exchange or in other transactions through investment
brokers and dealers have had to pay commissions for this service. If the
conversion to an open-end investment company is approved and effected, the
shares will be redeemable for their net asset value, as set forth above, and
no commissions need be paid for any such transaction. Redemptions will be
handled directly with the Fund. However, the Fund, as a member of The
Vanguard Group of Investment Companies, will continue to pay a portion of the
distribution and marketing expenses of The Vanguard Group. (See "The Vanguard
Group", page 16). During the fiscal year ended December 31, 1995, the Fund
paid approximately $46,700 of the Group's distribution and marketing
expenses.
7
<PAGE>
The specific amendments approved by the Directors and deemed advisable by
them, all of which amendments will be incorporated in the restatement of the
charter deemed advisable by the Directors, are in summary as follows:
a. All references to a "closed-end" fund will be deleted, and where
appropriate such references will be made to an "open-end" fund.
b. The Fund will have authority to issue 30,000,000 shares of stock, all of
which will be of a single class and will be designated common stock with
a par value of $1.00 per share.
c. Since there will be a single class, there will be no divergence between
the voting rights -- all of them will vest in the holders of the present
Capital Shares, henceforth to be known as common stock, and all
Directors will be representative of the entire body of shareholders.
d. There will be no minimum or cumulative dividend, and the holders of the
present Capital Shares, to be redesignated shares of common stock, will
be entitled to all dividends and distributions as may from time to time
be declared by the Board of Directors.
e. There will be no provisions with respect to allocation of expenses in
determining entitlement to dividends and realized capital appreciation
since there will be only a single class of common stock issued and
outstanding.
f. The provisions relating to redemption and liquidation will be those
applicable to an open-end investment company and in connection therewith
the net asset value of the Fund will be calculated as of the close of
business on each business day and will be applicable entirely to the
single class of stock.
g. The provisions for redemption of the Income Shares in the current
charter of the Fund will be deleted as no longer necessary or
appropriate.
h. Conforming amendments will be made throughout the charter.
Those holders of Capital Shares who continue as such if the proposal is
approved will not realize any gain or loss on their investment as a result of
its being approved, but will realize a gain or loss if they later redeem or
exchange their shares of the then common stock to the extent that the
redemption or exchange proceeds are greater or less than their respective
adjusted bases for Federal income tax and state tax purposes. Since the Fund
will be required to dispose of approximately one-fourth of its portfolio
securities to meet the needs to pay the Redemption Price on the Redemption
Date to the holders of the Income Shares, it is expected to realize capital
gains. Short-term capital gains will be distributed to the holders of Capital
shares and will be taxable to such holders in the year such short-term
capital gains are realized. Long-term capital gains realized in 1996, as in
the past, will be retained by the Fund and the Fund will pay Federal capital
gains taxes on them with shareholders getting credit for such tax paid by the
Fund. Long-term capital gains realized in 1997 will be distributed to the
holders of the
8
<PAGE>
Fund's single class of shares with any other capital gains realized during
1997. This result will come about whether or not the proposal to change the
Fund into an open-end investment company is approved by the Capital
shareholders.
The Fund presently qualifies and intends to continue to qualify as a
"regulated investment company" under the applicable provisions of the
Internal Revenue Code and to take all action required to insure that no
Federal income taxes will be payable by the Fund as a result of its
operations in 1997. Consequently, the Fund intends to distribute annually to
its shareholders all of its net investment income and all of its net realized
capital gains attributable to operations in 1997, and such dividends and
distributions will be required to be taken into account by the holders of the
Capital Shares. Income dividends and capital gain distributions received by
such holders in 1997 and thereafter will be taxable to such shareholders as
dividends and as long-term capital gains, respectively, whether accepted in
additional Fund shares or received in cash. The Fund will provide appropriate
notices to shareholders with respect to categorization of these items for
Federal income tax purposes.
If this proposal is not approved by holders of the Capital Shares, the
charter provides that the Board of Directors has discretion to advise such
shareholders, by notice not later than September 1, 1997, that each such
shareholder may have all or a portion of such shareholdings bought by the
Fund for an amount determined by the Board to comprise an equitable
distribution or, alternatively, if this is not completed by January 31, 1998,
to liquidate the assets of the Fund and distribute them pro rata to the
holders of the Capital Shares on March 1, 1998, without further vote,
meeting, or notice. The Board of Directors has not as yet determined whether
or not to exercise such discretion in the event of the disapproval of this
proposal.
FUTURE OF THE FUND
The Board of Directors believes that it is in the best interests of the
Fund to convert to an open-end investment company and stand ready to redeem
its shares at the Fund's net asset value per share as soon as possible
following the January 31, 1997 redemption of the Income Shares. However, the
Board of Directors does not believe that it is in the best interests of the
Fund and its Capital shareholders to continue operations as a separate
open-end investment company over the long term. Since the Fund does not
expect to offer additional shares to new investors, the assets of the Fund
will necessarily decrease because of redemptions by existing shareholders. As
assets decline, the Fund's expense ratio will tend to increase, since certain
of its costs are relatively fixed.
Accordingly, the Board of Directors has proposed that the assets of the
Fund be acquired -- in a tax-free reorganization -- by Windsor Fund (another
member of The Vanguard Group) in exchange for shares of Windsor Fund, and
that the Fund be dissolved. The Fund and Windsor have similar investment
objectives and policies, and are managed by the same Wellington Management
Company, LLP
9
<PAGE>
investment team. The Fund has filed for a private ruling letter requesting
that the Internal Revenue Service approve the acquisition as a tax-free
reorganization. Pending receipt of such private ruling letter, it is expected
that the Board will call a Special Meeting of Shareholders in May, 1997 to
vote on the proposal. If approved by shareholders, the proposed tax-free
reorganization is expected to be consummated in June, 1997.
REQUIRED VOTE
The amendment and restatement of the charter of the Fund as proposed by
the Board of Directors and deemed advisable by it as set forth above requires
a vote of two-thirds of the Capital Shares issued and outstanding and
entitled to vote on the record date. YOUR BOARD OF DIRECTORS RECOMMENDS
APPROVAL OF SUCH AMENDMENT AND RESTATEMENT. If the amendment and restatement
are approved, they will be contained in an appropriate set of Articles of
Amendment and Restatement to be filed with the State of Maryland, Department
of Assessments and Taxation to become effective on or about February 3, 1997.
4. MODIFICATION OF INVESTMENT OBJECTIVES AND POLICIES
The Fund's present investment objectives are to seek (a) long-term capital
appreciation and (b) current and long-term growth of income, primarily
through investment in dividend paying common stocks. These objectives are
consistent with the Fund's original dual purpose structure in which holders
of the Capital Shares were entitled soley to the Fund's capital appreciation,
and the holders of the Income Shares were entitled solely to its income
return.
The proposed investment objectives and policies of the Fund in the event
that Proposal 3 is approved are, for the most part, similar to those
presently guiding the Fund. If the proposed revisions discussed in more
detail below are approved at this meeting, the Fund will, under normal
circumstances, invest at least 80% of its total assets in common stocks. The
Fund may also invest in other equity securities, bonds, notes and money
market instruments although it will not invest more than 20% of its total
assets in such securities except for temporary defensive purposes. There can
be no assurance, of course, that these objectives will be achieved, since the
market price (net asset value) and yield will fluctuate with changes in
financial market conditions.
The Fund's stocks will be selected principally on the basis of fundamental
investment value and, at the time of purchase, may be deemed by the
investment adviser to be overlooked or undervalued in the marketplace. Key to
the valuation process is the relationship of a company's underlying earning
power and dividend payout to the market price of its stock. The Fund's
holdings will usually be characterized by relatively low price-earnings
ratios and above-average income yields, in each case as compared to the
Standard & Poor's 500 Composite Price Index (the "S&P 500 Index"). The S&P
500 Index, which is heavily weighted towards stocks with large market
capitalizations, emphasizes established companies with consis-
10
<PAGE>
tent dividend records and strong balance sheets. The investment adviser
intends to emphasize stocks with similar financial characteristics, with the
emphasis, however, on "value" stocks with relatively high current yields and
relatively low price-earnings ratios.
An important difference between the Fund as presently constituted and as
constituted after it has ceased to be a "dual purpose" investment company
relates to dividend policy. The Fund now has a Minimum Yield Objective
("MYO") for the entire portfolio equaling 110% of the dividend yield of the
S&P 500 Index (computed at the close of each calendar quarter for the
preceding twelve months period), in addition to a $0.80 minimum annual
dividend on the Income Shares which cumulates whether or not the MYO is
attained. While it is proposed that the MYO be discontinued for the Capital
Shares and under the Fund's charter dividends are not cumulative or in a
minimum mandatory amount for the Capital Shares, it is anticipated that, in
most years, the Fund's gross yield before expenses will exceed the yield of
the S&P 500 Index. However, there can be no assurance that the yield
expectations will be realized, and past results may not be assumed to be
indicative of future performance.
The elimination of the MYO as proposed also entails an approval by
shareholders of the elimination of that provision of the investment advisory
agreement dated February 1, 1985, with Wellington Management Company which
provides that if the MYO is not met by the Fund as of the close of any
calendar quarter, the aggregate investment advisory fee is reduced by 25% of
the fee payable for that quarter. (See "Investment Advisory Services", page
14.) Such elimination could possibly result in the Fund's not being able to
take advantage of a reduced fee in the event of a lower yield. However, the
Fund has never had the fee so reduced.
In addition to proposing the discontinuance of the MYO, it is proposed
that the Fund's current limitation regarding the purchase of securities not
providing dividends be eliminated. At present, the Fund may invest in
non-dividend-paying securities if after such investment the proportion of the
current value of the Fund's assets invested in such securities does not
exceed 10%.
While the proposed investment objectives and policies of the Fund are
similar to those under the existing dual purpose structure, certain rights of
shareholders will change significantly. Following the redemption of the
Income Shares on January 31, 1997, the Capital Shares will be the sole class
of shares of the Fund. As such, the Capital shareholders will not only be
entitled to all capital gains accruing to the Fund, as before, but also will
receive all of its net investment income. Dividend distributions, whether
accepted in additional shares or taken in cash, will be treated as ordinary
income for Federal income tax purposes. Also, whereas previously the Fund had
retained and paid Federal taxes on net-realized long-term capital gains and
distributed the resulting Federal income tax credit pro- rata to the Capital
shareholders, the Fund will henceforth distribute to shareholders net
realized long term capital gains, if any, after the close of the Fund's
fiscal year. Shareholders will receive such distributions in additional
shares of the Fund unless they elect to take them in cash.
11
<PAGE>
It is proposed that the Capital shareholders approve the modification of
the Fund's investment objectives and policies by voting in favor of the
following to become effective at the conclusion of this meeting.
a. Discontinuance of the Minimum Yield Objective ("MYO"). Currently, the
MYO equals 110% of the dividend yield of the S&P 500 Index (computed at
the close of each calendar quarter for the preceding twelve month's
period); this discontinuance encompasses approval of an amendment to the
investment advisory agreement eliminating the provision for reducing the
quarterly investment advisory fee payable to Wellington Management
Company by 25% for any calendar quarter if the MYO is not met by the
Fund for such quarter.
b. Elimination of all restrictions on the Fund's purchase of non-dividend-
paying securities. (Presently the Fund is permitted to invest in such
securities only if after any such investment the current value of all
such securities does not exceed 10% of the current value of its total
assets.)
c. Revision of the restriction on the Fund's ability to borrow money to
permit the Fund to borrow money (1) from a bank, (or through repurchase
agreements) (2) then only as a temporary measure for extraordinary or
emergency purposes, and (3) in no event in excess of 15% of the lower of
the market value or cost of its net assets.
The Directors of the Fund, personally present at a meeting called for the
purpose, on November 15, 1996, by a majority vote including a vote of a
majority of the non-interested directors, have approved the foregoing changes
in the investment objectives and policies and the related amendment to the
investment advisory agreement.
Accordingly, if the changes are approved, the Fund will thenceforth
observe the following investment restrictions. Except for the change
regarding the borrowing of money, the restrictions are identical to those
presently imposed on the Fund. Thus, without the approval of a "majority" (as
defined below) of the Capital Shares, under these fundamental policies, the
Fund may not:
(1) with respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Fund would
hold more than 10% of the outstanding voting securities of the issuer,
or more than 5% of the value of the Fund's total assets would be
invested in the securities of such issuer;
(2) invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of assets
approved by the Fund's shareholders or otherwise to the extent
permitted by Section 12 of the Investment Company Act of 1940. The Fund
will invest only in investment companies which have investment
objectives
12
<PAGE>
and investment policies consistent with those of the Fund;
(3) borrow money, except that the Fund may borrow from banks (or through
reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests
which might otherwise require the untimely disposition of securities,
in an amount not exceeding 15% of the value of the Fund's net assets
(including the amount borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of the Fund's net assets, the Fund
will not make any additional investments;
(4) purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are
illiquid;
(5) purchase securities on margin, nor sell securities short;
(6) invest for the purpose of exercising control over management of any
company;
(7) make loans, except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements) which are either publicly
distributed or customarily purchased by institutional investors, and
(ii) lending its securities to qualified brokers, dealers, banks and
other financial institutions for the purpose of realizing additional
income, as long as the terms, structure and aggregate amount of such
loans are not inconsistent with the Investment Company Act of 1940, or
the rules and regulations or interpretations of the Securities and
Exchange Commission.
(8) underwrite the securities of other issuers, except to the extent that
in connection with the disposition of portfolio securities the Fund may
be deemed an underwriter;
(9) purchase real estate commodities or commodity contracts, although the
Fund may purchase or sell securities if companies which deal in real
estate or interests therein;
(10) invest in or write put, call, straddle or spread options;
(11) invest directly in oil, gas or other mineral exploration development
programs; or
(12) invest more than 25% of the value of its total assets in any one
industry.
REQUIRED VOTE
Approval of the foregoing changes will require the affirmative vote of the
holders of at least a majority of the outstanding Capital Shares. Such a
"majority" is comprised of the lesser of (1) 67 percent of the Capital Shares
present at this
13
<PAGE>
meeting if holders of more than 50 percent of such shares are present in
person or by proxy or (2) 50 percent of the total outstanding Capital Shares.
THE DIRECTORS OF THE FUND RECOMMEND APPROVAL OF THIS PROPOSAL.
5. AMENDMENT OF FUND'S CHARTER TO REDUCE
REQUIRED VOTE FOR MERGER
As described above in Proposal 3, the Board has proposed that, during the
second quarter of 1997, the assets of the Fund be acquired, in a tax-free
reorganization, by Windsor Fund in exchange for shares of Windsor Fund.
Approval of such a reorganization would, under the Fund's current charter,
require the affirmative vote of the holders of two-thirds of the outstanding
Income Shares and two-thirds of the outstanding Capital Shares. Approval of
Proposal 3 would result in the removal of reference to the Income Shares
vote, and would change the reference to Capital Shares in the charter to
common stock. Thus, approval of the reorganization would require the
affirmative vote of the holders of two-thirds of the outstanding Capital
Shares.
Under Maryland law, Maryland corporations may engage in an asset sale or
other merger or consolidation upon the affirmative vote of only a majority of
the outstanding shares entitled to vote provided that the Corporation's
charter specifically provides for a majority vote, as opposed to a two-thirds
vote. In light of the current intention of the Board of Directors to seek in
the future a shareholder vote for an asset acquisition by Windsor Fund, the
Board of Directors is seeking approval of the Capital Shares shareholders to
amend the charter to reduce the vote required in order to approve an asset
sale, merger or other consolidation of the Fund to a majority vote, from a
two-thirds vote. Approving such a change will facilitate effectuating the
sale of the Fund's assets to Windsor Fund.
REQUIRED VOTE
The amendment of the charter of the Fund as proposed by the Board of
Directors and deemed advisable by it as set forth above requires a vote of
two- thirds of the Capital Shares issued and outstanding and entitled to vote
on the record date. YOUR BOARD OF DIRECTORS RECOMMENDS APPROVAL OF SUCH
AMENDMENT. If the amendment is approved, it will be contained in the Articles
of Amendment and Restatement with the State of Maryland, Department of
Assessments and Taxation in connection with Proposal 3 and to become
effective on or about February 1, 1997.
6. OTHER INFORMATION
INVESTMENT ADVISORY SERVICES
The Fund employs Wellington Management Company (the "Adviser"), 75 State
Street, Boston, Massachusetts 02109, under an investment advisory agreement
dated as of February 1, 1985 (the "Agreement") to manage the investment
14
<PAGE>
and reinvestment of the assets of the Fund and to continuously review,
supervise and administer the Fund's investment program. The Adviser
discharges its responsibilities subject to the control of the officers and
Directors of the Fund. Pursuant to the Agreement, the Fund pays the Adviser a
fee (the "Basic Fee") at the end of each fiscal quarter, calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the Fund's average month-end net assets for the quarter:
Net Assets Rate
--------------------------- --------
First $300 million ........ 0.350%
Over $300 million ......... 0.275%
The Basic Fee, as provided above, may be increased or decreased by an
amount equal to 0.10% per annum (0.025%) per quarter of the average month-end
net assets of the Fund if the Fund's investment performance for the
thirty-six months preceding the end of the quarter is twelve percentage
points or more above or below, respectively, the investment record of the
Standard & Poor's Composite Stock Price Index of 500 Common Stocks (the "S&P
Index") for the same period; or by an amount equal to 0.05% per annum
(0.0125% per quarter) if the Fund's investment performance for such
thirty-six months is six or more but less than twelve percentage points above
or below, respectively, the investment record of the S&P Index.
Under the investment advisory agreement as presently in force, if, at the
end of any quarter, the Fund's Minimum Yield Objective (as defined in its
registration statement on Form N-8B-1) has not been met as of the close of
any calendar quarter, the aggregate investment advisory fee for such quarter
(computed as described above) shall be reduced by 25% of the fee payable for
that quarter. If the Capital shareholders approve the modifications to the
investment objectives and policies proposed for action by holders of the
Capital Shares at this meeting, the advisory agreement will be amended to
eliminate the foregoing provision for a reduction of the advisory fee under
the stated circumstances. (See Section 4, MODIFICATION OF INVESTMENT
OBJECTIVES AND POLICIES.)
During the fiscal year ended December 31, 1995, the Fund paid the Adviser
a base advisory fee of approximately $1,244,000 (.34 of 1% of average net
assets), before an increase of approximately $297,000 (.08 of 1% of average
net assets) based on the Fund's investment performance.
The Adviser is a Massachusetts limited liability partnership of which the
following persons are managing partners; Messrs. Robert W. Doran, Duncan M.
McFarland, and John R. Ryan.
PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes the Adviser (with the ap-
proval of the Fund's Board of Directors) to select the brokers or dealers
that will
15
<PAGE>
execute the purchases and sales of portfolio securities for the Fund and
directs the Adviser to use its best efforts to obtain the best available
price and most favorable execution with respect to all transactions for the
Fund. The Adviser has undertaken to execute each investment transaction at a
price and commission which provides that most favorable total cost or
proceeds reasonably obtainable under the circumstances.
The investment advisory agreement also incorporates the concepts of Sec-
tion 28(e) of the Securities Exchange Act of 1934 by providing that, subject
to the approval of the Fund's Board of Directors, the Adviser may cause the
Fund to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer
for effecting that same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the Adviser to the Fund and the other Funds in the Group.
The agreement continues until January 31, 1997, but the Board of Directors
may continue the agreement beyond that date, for successive one-year periods,
or until the acquisition by Windsor Fund is consummated.
THE VANGUARD GROUP
The Fund is a member of The Vanguard Group of Investment Companies, a
family of investment companies with distinct investment portfolios and total
assets in excess of $225 billion. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. ("Vanguard"), the Fund and the other Funds in the Group
obtain at cost virtually all of their corporate management, administrative
and distribution services. Vanguard also provides investment advisory
services on an at-cost basis to some of the Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment.
Each Fund pays its share of Vanguard's total expenses which are allocated
among the Funds under appropriate methods approved by the Board of Directors
(Trustees) of each Fund. In addition, each Fund bears its own direct
expenses, such as legal, auditing and custodian fees.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
Funds' Service Agreement was amended on May 15, 1993 to provide as follows:
(a) each Vanguard Fund may invest up to .40% of its current net assets in
Vanguard, and (b) there is no limit on the amount that each Vanguard Fund may
contribute to Vanguard's capitalization. The amounts which each of the Funds
have invested are adjusted from time to time in order to maintain the
proportionate relationship between each Fund's relative net assets and its
contribution to Vanguard's capital. At December 31, 1995, the Fund had
contributed capital of $48,000 to Vanguard, representing 0.2% of Vanguard's
capitalization.
16
<PAGE>
Management. Corporate management and administrative services include:
(1) executive staff; (2) accounting and financial; (3) legal and regulatory;
(4) shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During
the fiscal year ended December 31, 1995, the Fund's share of Vanguard's
actual net costs of operation relating to management and administrative
services totaled approximately $519,000.
Distribution. Vanguard provides all distribution and marketing activities
for the Funds in the Group, except the Fund, which does not offer additional
shares for sale. The principal distribution expenses are for advertising,
promotional materials, and marketing personnel. Distribution services may
also include organizing and offering to the public, from time to time, one or
more new investment companies which will become members of the Group. The
Directors and officers of Vanguard determine the amount to be spent annually
on distribution activities, the manner and amount to be spent on each Fund,
and whether to organize new investment companies.
One-half of the distribution expenses of a marketing and promotional
nature is allocated among the Funds based upon their relative net assets
(including the Fund). The remaining one-half of these expenses is allocated
among the Funds (except the Fund) based upon each Fund's sales for the
preceding 24 months relative to the total sales of the Funds as a Group,
provided, however, that no Fund's aggregate quarterly rate of contribution
for distribution expenses of a marketing and promotional nature shall exceed
125% of the average distribution expense rate for the Group, and that no Fund
shall incur annual distribution expenses in excess of 20/100 of 1% of its
average month-end net assets. During the fiscal year ended December 31, 1995,
the Fund paid approximately $46,700 of the Group's distribution and marketing
expenses.
LITIGATION
The Fund is not involved in any litigation.
SHAREHOLDER PROPOSALS
The Fund does not currently intend to hold an annual meeting in 1998.
Shareholder proposals for inclusion in the proxy statement for any subsequent
meeting must be received by the Fund within a reasonable period of time prior
to its next annual meeting.
ADJOURNMENT
If sufficient votes in favor of any of the proposals set forth herein are
not received by the time scheduled for the meeting, the persons named as
proxies may propose one or more adjournments of the meeting for a period or
periods of not more than 60 days in the aggregate to permit further
solicitation of proxies with respect to any of such proposals. Any
adjournment will require the affirmative vote
17
<PAGE>
of a majority of the votes cast on the question in person or by proxy at the
session of the meeting to be adjourned. The persons named as proxies will
vote in favor of such adjournment those proxies which they are entitled to
vote in favor of such proposals. They will vote against any such adjournment
those proxies required to be voted against any such proposals. The Fund pays
the costs of any additional solicitation and of any adjourned session.
OTHER MATTERS
On November 15, 1996, approximately Capital Shares were registered in
the name of Cede & Co., 7 Hanover Square, New York, N.Y.
The Board of Directors know of no other business to be brought before the
meeting. However, if any other matters come before the meeting, it is the
intention that proxies which do not contain specific restrictions to the
contrary will be voted on such matters in accordance with the judgment of the
persons named in the enclosed form of proxy.
SHAREHOLDER REPORTS
The most recent Annual and Semi-Annual Reports for the Fund are available
at no cost to Fund shareholders upon written or oral request by contacting
the Fund at Vanguard Financial Center, P.O. Box 2600, Valley Forge, PA 19482,
or by calling 1-800-662-7447. Proxy material, reports and other information
filed by the Fund can be inspected and copied at the public reference
facilities maintained by the Securities and Exchange Commission in
Washington, D.C., and at certain of its Regional Offices. Copies of such
material can also be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C. 20549 at prescribed rates.
18
<PAGE>
DETACH HERE
P
R
O
X GEMINI II ("FUND"): Capital Shares
Y PROXY SOLICITED BY THE BOARD OF DIRECTORS
The undersigned, revoking previous proxies, hereby appoints John C. Bogle,
J. Lawrence Wilson and Raymond J. Klapinsky, or any one or more of them,
attorneys, with full power of substitution, to vote all shares of the Fund
which the undersigned is entitled to vote at the Special Meeting in Lieu of the
1997 Annual Meeting of Shareholders to be held in the Majestic Building
Room 118B, Vanguard Financial Center, 100 Vanguard Boulevard, Malvern, PA on
January 21, 1997, at 9:30 A.M., E.T., and at any adjournments thereof. All
powers may be exercised by a majority of said proxy holders or substitutes
voting or acting or, if only one votes and acts, then by that one. This Proxy
shall be voted on the proposals described in the Proxy Statement as specified
on the reverse side. Receipt of the Notice of the Meeting and the accompanying
Proxy Statement is hereby acknowledged.
SEE REVERSE
SIDE
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE>
/X/ Please mark
votes as in
this example.
Please refer to the Proxy Statement discussion of each of these matters.
IF NO SPECIFICATION IS MADE, THE PROXY SHALL BE VOTED FOR THE PROPOSALS.
As to any other matter, said attorneys shall vote in accordance with their
best judgment.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE FOLLOWING:
1. To elect the nine nominees specified below as Directors:
Nominees: John C. Bogle, John J. Brennan, Robert E. Cawthorn, Barbara B.
Hauptfuhrer, Bruce K. MacLaury, Burton G. Maikiel, Alfred M. Rankin, Jr.,
John C. Sawhill and Lawrence Wilson.
FOR WITHHELD
/ / / /
/ / MARK HERE / /
----------------------------------- FOR ADDRESS
For all nominees except as noted above CHANGE AND
NOTE BELOW
FOR AGAINST ABSTAIN
2. To ratify the selection of Price / / / / / /
Waterhouse LLP as auditors of the Fund.
3. To approve an amendment and restatement of / / / / / /
the Fund's charter to become an open-end
investment company.
4. To approve amendments to the Fund's / / / / / /
investment objectives and policies.
5. To approve an amendment to the Fund's / / / / / /
Articles of Incorporation relating to
shareholder voting.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN ENCLOSED ENVELOPE.
NOTE: Please sign exactly as your name appears on this Proxy. When signing in a
fiduciary capacity, such as executor, administrator, trustee, attorney,
guardian, etc., please so indicate. Corporate and partnership proxies should be
signed by an authorized person indicating the person's title.
Signature _________________ Date _____ Signature _________________ Date _____
