<PAGE> 1
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
The stock market continued its inexorable climb during the six months
ended June 30--even as interest rates moved persistently higher--posting
positive returns in each month of the period. In this environment, the return
of Gemini II fell short of the return of the market.
The table below presents the total return (capital change plus
reinvested dividends) for the Fund's total portfolio during the six-month
period, compared with that of the unmanaged Standard & Poor's 500 Composite
Stock Price Index, and the average value (growth and income) mutual fund. Our
return of +6.5% paled in comparison with the +10.1% return of the Index;
however, we fared slightly better when compared with the +9.3% return of the
average value mutual fund.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
TOTAL RETURN
-----------------
SIX MONTHS ENDED
JUNE 30, 1996
- -----------------------------------------------------------------------
<S> p <C>
GEMINI II + 6.5%
- -----------------------------------------------------------------------
AVERAGE VALUE MUTUAL FUND + 9.3%
STANDARD & POOR'S 500 STOCK INDEX +10.1
- -----------------------------------------------------------------------
</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 each Capital Share rose from $26.35 on December 31,
1995, to $27.71 on June 30, 1996, an increase of +5.2% for the six-month
period. In comparison, the price of the Standard & Poor's 500 Index climbed by
+8.9% (excluding income). Our leverage factor--which helps our performance in
rising markets but hampers our performance in falling markets--stood at 1.3
times on June 30, compared with 2.0 times at our inception in February 1985.
THE INCOME SHARE RESULTS
During the past six months, we distributed two dividends--one on March 1 and
one on June 3--at the regular quarterly rate of $.35 per share. As in the past,
we expect to maintain this quarterly rate throughout the remainder of our final
year. We will also pay an "extra" dividend at the end of the year, representing
the undistributed net income above the total of $1.40. In 1995, total annual
dividends from net income amounted to $1.80 per share. Though we can offer no
guarantees, we believe that net income for 1996 should slightly exceed last
year's figure.
THE PERIOD IN REVIEW
The U.S. stock market continued to surge upward during the first half of our
Fund's fiscal year, albeit below the near-record pace that prevailed in 1995.
Even so, the advance was impressive, occurring as it did in the face of a sharp
rise in long-term interest rates.
While the stock market, as measured by the Standard & Poor's 500 Index,
chalked up a +10.1% return from January through June, the bond market slumped.
The price of the benchmark 30-year U.S. Treasury bond fell -12% during the half
year, as its yield rose from 6.0% at the beginning of the year to 7.0% at the
end of June. The Lehman Aggregate Bond Index, a good measure of the overall
bond market, provided a total return of -1.2% for the half year, earning income
of 3.3% combined with a price decline of -4.5%.
The primary reason for the divergence in the returns of stocks and bonds
appears to be differing responses by equity and bond investors to the
surprising strength of the U.S. economy. The faster-than-expected economic
growth during the first half of 1996 led stock investors to anticipate
accelerated growth in corporate earnings, even as bond investors worried about
higher inflation. It remains to be seen whether the bull market in stocks can
continue in the face of higher interest rates, which may provide heightened
competition for investors' dollars at a time when stocks offer historically low
dividend yields.
(continued)
1
<PAGE> 2
Several factors combined to impede our first-half performance, resulting
in our 3.6-percentage-point shortfall to the Standard & Poor's 500 Index. Most
notably, our overweighting in the basic materials sector (29% of net assets for
the Fund versus 7% for the Index) was a distinct negative. This sector fell out
of favor as a defensive shift in investor sentiment turned their attention away
from economically sensitive stocks toward more predictable earners. Our
overweighting was compounded by some poor individual stock selections within the
sector.
Our lack of representation in the consumer staples, technology, and
health-care sectors--all solid performers during most of the first half of
1996--further dampened our return. Finally, our 18% position in cash reserves
represented a "drag" on our performance, given the sharp advance in the stock
market.
These negative factors were offset to some extent by our modest holdings
in utility stocks (1% of assets versus 12% for the Index), the market's
worst-performing sector. In addition, our consumer cyclical stocks provided a
positive contribution to our return.
PORTFOLIO STATISTICS
The following table shows the composition of our portfolio on June 30, 1996:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
PERCENTAGE OF NET ASSETS
- -----------------------------------------------------------------
<S> <C>
EQUITY EQUIVALENTS
COMMON STOCKS 45%
CONVERTIBLE SECURITIES 34
LOWER-GRADE BONDS 3
- -----------------------------------------------------------------
TOTAL EQUITY EQUIVALENTS 82%
- -----------------------------------------------------------------
TEMPORARY CASH INVESTMENTS 18%
- -----------------------------------------------------------------
TOTAL PORTFOLIO 100%
- -----------------------------------------------------------------
</TABLE>
In general, this structure is similar to what it was at the close of our first
quarter.
PREMIUMS AND DISCOUNTS
The table below presents the current market discount for the Capital Shares and
the premium for the Income Shares. Since the end of 1995, the discount on the
Capital Shares has widened, while the premium on the Income Shares has
narrowed.
<TABLE>
<CAPTION>
- --------------------------------------------------------
JUNE 30, 1996
-----------------------------------
NET ASSET MARKET
VALUE PRICE DIFFERENCE
- --------------------------------------------------------
<S> <C> <C> <C>
CAPITAL SHARES $27.71 $26.00 -6.2%
INCOME SHARES 9.59 10.00 +4.3
- --------------------------------------------------------
TOTAL $37.30 $36.00 -3.5%
- --------------------------------------------------------
</TABLE>
In closing, we would remind shareholders that Gemini II will maintain its
dual-purpose structure until January 31, 1997, when the Income Shares will be
redeemed at their initial net asset value of $9.30 per share, plus accumulated
and unpaid dividends. At present, the Board of Directors is evaluating several
options for the disposition of the Capital Shares.
Sincerely,
/s/ JOHN C. BOGLE
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
John J. Brennan
President
July 15, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
2
<PAGE> 3
REPORT FROM THE INVESTMENT ADVISER
During the first half of 1996, the performance of Gemini II was well
below the market at +6.5%, versus +10.1% for the S&P 500. The shortfall came
exclusively during the second quarter, as Gemini II outperformed nicely in the
first quarter. What changed was that the market turned skittish about the
overall economic outlook midway through the second quarter, leading to a
significant--virtually across-the-board--underperformance in the cyclical
concentration that we built importantly last year to some 43% of the Fund.
While the market expresses its concern about the economy, in our view
the economy itself continues to roll along nicely. Our original case for a
sustainable U.S. economic growth rate of +2.5% to +3% still looks valid. The
key is the consumer, whose increased spending this year is the logical result
of good jobs and income growth. Globally, the Japanese and European economies
are starting to recover, although the vigor of these recoveries is still an
open question. We believe that 1997 could well be a year of synchronous
economic growth in virtually all the major developed world. If that proves to
be the case, our basic commodity cyclicals (aluminum, chemicals, paper, and
steel--in total about 32% of the Fund) will be sitting pretty.
Among the cyclicals, auto stocks have been particularly weak lately,
with Chrysler and Ford--about 11% of the Fund--off 15% to 20% from their highs
of early June with zero fundamental explanation. Industry sales are rolling
along at a continued good (but not too high) clip; inventories are low;
incentives are in check; and production levels are, if anything, moving up--all
of which bode well for the earnings outlook for these companies.
Purchases of about $30 million during the half were slightly outweighed
by sales of $48 million. The sales were largely of the profit-realization
variety, sold into the surprisingly strong 10% market advance. Gemini's
invested ratio, counting equities, convertibles, and straight corporate bonds,
was 82.1%.
In the 1995 year-end letter to shareholders, we said that we would
strive to achieve an increase in the dividend per income share that would at
least match last year's 4% increase. While still early, it looks as though we
should be able to achieve this objective.
Respectfully,
Charles T. Freeman, Senior Vice President
Wellington Management Company
August 1, 1996
3
<PAGE> 4
SUMMARY OF ANNUAL MEETING RESULTS
The Annual Meeting of shareholders of Gemini II was held at Vanguard's
corporate headquarters on April 24, 1996, for the following purposes:
1) To elect a Board of Directors.
2) To select Price Waterhouse LLP, independent accountants, as auditor
of the Fund.
The following table summarizes the results from the meeting:
<TABLE>
<CAPTION>
CAPITAL SHARES INCOME SHARES
--------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN NOT VOTED FOR AGAINST ABSTAIN NOT VOTED
- ------------------------------------------------------------------------------------------------------------------
DIRECTORS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JOHN C. BOGLE 8,601,687 47,512 0 2,271,351 7,219,484 87,089 0 3,613,977
JOHN J. BRENNAN 8,594,780 54,419 0 2,271,351 -- -- -- --
ROBERT E. CAWTHORN 8,562,133 87,066 0 2,271,351 7,174,660 131,913 0 3,613,977
BARBARA B. HAUPTFUHRER 8,590,549 58,650 0 2,271,351 7,196,213 110,360 0 3,613,977
BRUCE K. MACLAURY 8,564,166 85,033 0 2,271,351 -- -- -- --
BURTON G. MALKIEL 8,599,707 49,492 0 2,271,351 7,220,065 86,508 0 3,613,977
ALFRED M. RANKIN, JR. 8,563,666 85,533 0 2,271,351 7,179,360 127,213 0 3,613,977
JOHN C. SAWHILL -- -- -- -- 7,183,943 122,630 0 3,613,977
J. LAWRENCE WILSON -- -- -- -- 7,179,646 126,927 0 3,613,977
- ------------------------------------------------------------------------------------------------------------------
AUDITOR
PRICE WATERHOUSE 8,579,281 32,695 37,223 2,271,351 7,195,929 22,816 87,828 3,613,977
</TABLE>
4
<PAGE> 5
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
June 30, 1996
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (44.7%)
- -------------------------------------------------------
BASIC MATERIALS (1.7%)
- -------------------------------------------------------
British Steel PLC ADR 277,000 $ 7,029
-----------
- -------------------------------------------------------
CONSUMER CYCLICAL (10.9%)
- -------------------------------------------------------
Chrysler Corp. 415,311 25,749
Ford Motor Co. 571,653 18,507
-----------
SECTOR TOTAL 44,256
-----------
- -------------------------------------------------------
ENERGY (4.5%)
- -------------------------------------------------------
Atlantic Richfield Co. 83,500 9,895
Pennzoil Co. 48,800 2,257
USX-Marathon Group 307,100 6,180
-----------
SECTOR TOTAL 18,332
-----------
- -------------------------------------------------------
FINANCIAL (24.8%)
- -------------------------------------------------------
BANKS (8.9%)
Chase Manhattan Corp. 65,600 4,633
First Union Corp. 181,500 11,049
KeyCorp 314,889 12,202
NationsBank Corp. 99,500 8,221
INSURANCE (2.0%)
CIGNA Corp. 67,600 7,968
REAL ESTATE INVESTMENT
TRUSTS (6.7%)
Camden Property Trust REIT 125,000 2,969
Colonial Properties Trust REIT 74,600 1,809
Equity Residential
Properties Trust REIT 385,000 12,657
Evans Withycombe
Residential, Inc. REIT 195,000 4,071
Oasis Residential, Inc. REIT 180,000 3,938
Urban Shopping Centers REIT 82,800 1,967
SAVINGS & LOAN (7.2%)
H.F. Ahmanson & Co. 549,600 14,839
Great Western Financial Corp. 610,740 14,581
-----------
SECTOR TOTAL 100,904
-----------
- -------------------------------------------------------
UTILITIES (.6%)
- -------------------------------------------------------
Unicom Corp. 87,937 2,451
- -------------------------------------------------------
OTHER (2.2%) 9,177
- -------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $136,718) 182,149
- -------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS
(33.9%)
- -------------------------------------------------------
BASIC MATERIALS (27.5%)
- -------------------------------------------------------
CHEMICALS (4.7%)
Atlantic Richfield Co. 9.00% 785,500 $ 19,147
METALS & MINING (7.1%)
Kaiser Aluminum 8.255% 979,400 10,284
Reynolds Metals 7.00% 401,400 18,665
PAPER (7.1%)
Boise Cascade Corp. $1.58 35,800 1,074
Bowater, Inc. 7.00% 534,000 17,355
International Paper Co. 5.25% 238,000 10,472
STEEL (8.6%)
AK Steel Holding 7.00% 674,500 24,619
Bethlehem Steel Corp. $3.50 258,400 10,724
-----------
SECTOR TOTAL 112,340
-----------
- -------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (2.4%)
- -------------------------------------------------------
Beazer Homes 8.00% 370,000 9,759
-----------
- -------------------------------------------------------
ENERGY (2.1%)
- -------------------------------------------------------
Santa Fe Energy Resources,
Inc. 8.25% 200,000 2,175
Sun Co. $1.80 184,600 5,423
Valero Energy $3.125 15,000 788
-----------
SECTOR TOTAL 8,386
-----------
- -------------------------------------------------------
TRANSPORT & SERVICES (1.9%)
- -------------------------------------------------------
Delta Air Lines $3.50 122,500 7,702
-----------
- -------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $133,981) 138,187
- -------------------------------------------------------
CONVERTIBLE BONDS (.4%)
- -------------------------------------------------------
<CAPTION>
Face
Amount
(000)
--------
<S> <C> <C>
Toll Corp.
4.75%, 1/15/04 $ 58 56
U.S. Home
4.875%, 11/1/05 1,750 1,549
- -------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $1,246) 1,605
- -------------------------------------------------------
</TABLE>
5
<PAGE> 6
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ---------------------------------------------------------------
<S> <C> <C>
BONDS (3.1%)
- ---------------------------------------------------------------
Geneva Steel
11.125%, 3/15/01 $ 7,000 $ 6,081
Ryland Group
9.625%, 6/1/04 2,500 2,363
Weirton Steel Corp.
10.875%, 10/15/99 4,000 4,204
- ---------------------------------------------------------------
TOTAL BONDS
(Cost $13,569) 12,648
- ---------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (17.4%)
- ---------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS
Federal Home Loan Bank
5.28%, 7/22/96 10,000 9,969
5.52%, 7/01/96 15,000 15,000
Federal Home Loan Mortgage Corp.
5.25%, 7/15/96 20,000 19,959
COMMERCIAL PAPER
Chevron Oil Finance
5.35%, 7/24/96 5,000 4,983
MetLife Funding, Inc.
5.26%, 7/23/96 5,000 4,981
Shell Oil Co.
5.33%, 7/22/96 5,000 4,984
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.35%, 7/1/96 10,753 10,753
- ---------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $70,633) 70,629
- ---------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(Cost $356,147) 405,218
- ---------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.5%)
- ---------------------------------------------------------------
Other Assets--Notes D and F 9,761
Liabilities--Note F (7,611)
------------
2,150
- ---------------------------------------------------------------
NET ASSETS (100%) $407,368
- ---------------------------------------------------------------
</TABLE>
+See Note A to Financial Statements.
6
<PAGE> 7
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1996
(000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,722
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,853
- ------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . 11,575
- ------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note C
Basic Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $671
Performance Adjustment . . . . . . . . . . . . . . . . . . . . . . . -- 671
-----
The Vanguard Group--Note D . . . . . . . . . . . . . . . . . . . . . . 290
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . . 16
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . 16
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . 19
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . 1
- ------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . 1,026
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . $10,549
==================================================================================================================
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized Net Gain on Investment Securities Sold . . . . . . . . . . . . $13,658
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . 1,217
- ------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain on Investments . . . . . . $14,875
==================================================================================================================
</TABLE>
7
<PAGE> 8
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
JUNE 30, 1996 Dec. 31, 1995
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCOME AVAILABLE FOR DISTRIBUTION
Balance, Beginning of Period . . . . . . . . . . . . . . . . . . . . . . $ 280 $ 445
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . 10,549 19,491
Distributions to Income Shareholders
($.70 and $1.80 per share, respectively) . . . . . . . . . . . . . . (7,644) (19,656)
- -------------------------------------------------------------------------------------------------------------------
Balance, End of Period . . . . . . . . . . . . . . . . . . . . . . $ 3,185 $ 280
- -------------------------------------------------------------------------------------------------------------------
UNDISTRIBUTED CAPITAL GAINS
Balance, Beginning of Period . . . . . . . . . . . . . . . . . . . . . . $ 138,332 $ 110,693
Realized Net Gain on Investment Securities Sold . . . . . . . . . . . . 13,658 43,748
Distribution to Capital Shareholders ($.11 per share) . . . . . . . . . -- (1,201)
Provision for Taxes on Capital Gains Retained . . . . . . . . . . . . . -- (14,908)
- -------------------------------------------------------------------------------------------------------------------
Balance, End of Period . . . . . . . . . . . . . . . . . . . . . . $ 151,990 $ 138,332
- -------------------------------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . 47,854 $ (4,435)
End of Period--Note E . . . . . . . . . . . . . . . . . . . . . . . . . 49,071 47,854
- -------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . $ 1,217 $ 52,289
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, 1996
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,185
- -------------------------------------------------------------------------------------------------------------------
104,746
- -------------------------------------------------------------------------------------------------------------------
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151,990
Unrealized Appreciation of Investment Securities . . . . . . . . . . . . . . . . . . . . 49,071
- -------------------------------------------------------------------------------------------------------------------
302,622
- -------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . $407,368
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*No change during period.
8
<PAGE> 9
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
SIX MONTHS ENDED --------------------------------------------------
For a Share Outstanding Throughout Each Period JUNE 30, 1996 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME SHARES
Net Asset Value, Beginning of Period . . . . . $9.33 $9.34 $9.33 $9.33 $9.34 $9.34
Net Investment Income . . . . . . . . . . . . .96 1.79 1.74 1.66 1.66 1.65
Distributions from Net Investment Income . . (.70) (1.80) (1.73) (1.66) (1.67) (1.65)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $9.59 $9.33 $9.34 $9.33 $9.33 $9.34
===================================================================================================================
CAPITAL SHARES
Net Asset Value, Beginning of Period . . . . . $26.35 $19.03 $22.10 $18.71 $16.28 $11.51
Realized Net Gain on Investments . . . . . . 1.25 4.01 1.73 2.69 1.17 1.77
Distributions from Realized Capital Gains . . -- (.11) -- -- (.08) (.22)
Provision for Taxes on Capital Gains Retained -- (1.37) (.61) (.94) (.37) (.53)
Unrealized Appreciation (Depreciation) . . . .11 4.79 (4.19) 1.64 1.71 3.75
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $27.71 $26.35 $19.03 $22.10 $18.71 $16.28
===================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Amounts in Thousands and Per Share
-----------------------------------------------------------------------------------
Three Months Ended
- -------------------------------------------------------------------------------------------------------------------
March 31, 1996 June 30, 1996
-------------------- -----------------
<S> <C> <C> <C> <C>
Net Investment Income $ 5,098 $ .46 $ 5,451 $ .50
Net Realized Gain (Loss)
and Change in Unrealized
Appreciation (Depreciation) 23,364 2.14 (8,489) (.78)
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
March 31, 1995 June 30, 1995 September 30, 1995 December 31, 1995
-------------------- ------------------ --------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Investment Income $ 4,785 $ .44 $ 4,320 $ .39 $ 5,181 $ .48 $5,205 $.48
Net Realized Gain (Loss)
and Change in Unrealized
Appreciation (Depreciation) 22,699 2.08 32,699 2.99 31,715 2.91 8,924 .82
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
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, 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 a custodian bank until maturity of each
repurchase agreement. Provisions of each 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, 1997, 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, 1996,
the investment advisory fee represents an effective annual base rate of .33 of
1% of average net assets. No performance adjustment was required during the
period.
D. The Vanguard Group furnishes at cost corporate management, 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, 1996, the Fund had contributed capital of $42,000 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.
10
<PAGE> 11
E. During the six months ended June 30, 1996, the Fund made purchases of
$29,387,000 and sales of $47,800,000 of investment securities other than U.S.
Government securities and temporary cash investments. There were no purchases
or sales of U.S. Government securities. At June 30, 1996, unrealized
appreciation for financial reporting and Federal income tax purposes aggregated
$49,071,000, of which $55,678,000 related to appreciated securities and
$6,607,000 related to depreciated securities.
F. The market value of securities on loan to broker/dealers at June 30, 1996,
was $6,661,000, for which the Fund had received cash collateral of $7,087,000.
11
<PAGE> 12
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 Selected Value Portfolio
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
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 Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
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
[THE VANGUARD GROUP LOGO]
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.
Q342-6/96
GEMINI II
SEMI-ANNUAL REPORT
JUNE 30, 1996
