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[PHOTO]
GEMINI II
First Quarter Report
March 31, 1997
[THE VANGUARD GROUP LOGO]
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FELLOW SHAREHOLDER,
[PHOTO]
During the first three months of 1997, the first quarter of Gemini II's
fiscal year, the stock market provided returns that were in line with very
long-term averages, but that paled a bit in comparison with its extraordinary
gains during 1995 and 1996. The performance of the Capital Shares of Gemini II
during the quarter was excellent, both on an absolute basis and relative to our
principal benchmarks.
As the table below shows, the total return of +4.7% for Capital Shares
surpassed by two percentage points the return on the unmanaged Standard &
Poor's 500 Composite Stock Price Index and by more than three percentage points
the return on the average value (growth and income) mutual fund.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
TOTAL RETURN
THREE MONTHS ENDED
MARCH 31, 1997
- ---------------------------------------------------------
<S> <C>
Gemini II Capital Shares +4.7%
- ---------------------------------------------------------
Average Value Fund +1.3%
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S&P 500 Index +2.7%
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</TABLE>
The total return was based on an increase in net asset value from $28.75 per
Capital Share on December 31, 1996, to $30.09 on March 31, 1997. The market
value of Capital Shares on the New York Stock Exchange was $29.00 per share, a
slight premium to their net asset value, on December 31, 1996, when Gemini II
was still a closed-end fund.
FIRST QUARTER OVERVIEW
The stock market registered strong gains in January and early February, only to
give back most of the gains during the remainder of the quarter. As the
following table shows, Gemini II's asset allocation at the end of the quarter
was considerably different than at the start, as the large position in cash
equivalents we accumulated last year was used to redeem the Income Shares.
<PAGE> 3
<TABLE>
<CAPTION>
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PERCENTAGE OF NET ASSETS
------------------------------------
MARCH 31, 1997 DECEMBER 31, 1996
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<S> <C> <C>
EQUITY EQUIVALENTS
Common Stocks 62% 43%
Convertible Securities 37 33
Lower-Grade Bonds 1 2
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SUBTOTAL EQUITY EQUIVALENTS 100% 78%
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TEMPORARY CASH INVESTMENTS 0% 22%
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TOTAL PORTFOLIO 100% 100%
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</TABLE>
GEMINI II CONVERSION
As you know, the first quarter was an eventful period for Gemini II. The
dual-purpose structure of the Fund ended, as planned in Gemini II's original
operating structure, on January 31, when the Fund's Income Shares were
redeemed at $9.30 per share (plus a final income dividend distribution of
$0.115 per share). On February 19, the remaining Capital shareholders approved
a proposal to convert the Fund from closed-end status to open-end status.
As an open-end fund, Gemini II now maintains shareholder records through
The Vanguard Group's system, and we distributed a statement showing your share
balance on March 3, the date of the conversion to open-end status.
MERGER PROPOSAL
Next month we will send to you a proposal for a tax-free merger of Gemini II
into Vanguard/Windsor Fund, an open-end growth-and-income fund managed by
Charles T. Freeman, who has been involved in the investment management of
Gemini II since its inception in 1985. We urge you to carefully review the
proposal when it arrives.
Sincerely,
/s/ JOHN C. BOGLE
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
John J. Brennan
President April 9, 1997
<PAGE> 4
INVESTMENTS
MARCH 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (62.2%)
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AUTO & TRANSPORTATION (16.5%)
Chrysler Corp. 830,622 $ 24,919
Delta Air Lines, Inc. 93,161 7,837
Ford Motor Co. 296,653 9,307
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42,063
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FINANCIAL SERVICES (17.0%)
BANKS (5.9%)
Chase Manhattan Corp. 26,600 2,490
First Union Corp. 156,000 12,656
INSURANCE-MULTI-LINE (2.7%)
CIGNA Corp. 46,600 6,809
REAL ESTATE INVESTMENT TRUSTS (4.7%)
Camden Property Trust REIT 125,000 3,406
Equity Residential Properties Trust REIT 192,700 8,551
SAVINGS & LOAN (3.7%)
H.F. Ahmanson & Co. 114,500 4,179
Great Western Financial Corp. 131,040 5,291
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43,382
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INTEGRATED OILS (0.7%)
USX-Marathon Group 64,500 1,798
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MATERIALS & PROCESSING (17.4%)
Bowater Inc. 437,880 17,023
British Steel PLC ADR 265,700 7,074
Reynolds Metals Co. 329,148 20,407
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44,504
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UTILITIES (0.7%)
Unicom Corp. 87,937 1,715
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OTHER (9.9%)
GCR Holdings, Ltd. 435,000 9,788
IPC Holdings, Ltd. 200,000 4,875
Miscellaneous (4.2%) 10,590
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25,253
-----------
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TOTAL COMMON STOCKS
(COST $120,735) 158,715
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CONVERTIBLE PREFERRED STOCKS (36.3%)
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AUTO & TRANSPORTATION (5.0%)
Continental Airlines, Inc. 8.50% 175,000 12,884
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INTEGRATED OILS (7.2%)
Atlantic Richfield Co. 9.00%
(Convertible into Lyondell
Petrochemical Co.) 785,500 17,281
Valero Energy $3.125 15,000 1,011
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18,292
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MATERIALS & PROCESSING (20.4%)
AK Steel Holding Corp. 7.00% 574,500 18,528
Boise Cascade Corp. $1.58 35,800 886
International Paper Co. 5.25% 238,000 10,889
Kaiser Aluminum 8.255% 979,400 10,773
Owens Corning Capital 6.50% 200,000 10,925
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52,001
-----------
</TABLE>
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MARKET
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER DURABLES (3.7%)
Beazer Homes 8.00% 370,000 $ 9,574
------------
- ---------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $91,659) 92,751
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<CAPTION>
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (0.6%)
- ---------------------------------------------------------------------------------
Toll Corp.
4.75%, 1/15/04 $ 58 57
U.S. Home
4.875%, 11/1/05 1,750 1,575
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TOTAL CONVERTIBLE BONDS
(COST $1,275) 1,632
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BOND (1.0%)
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Ryland Group
9.625%, 6/1/04 (COST $2,403) 2,500 2,469
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(COST $216,072) 255,567
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OTHER ASSETS AND LIABILITIES--
NET (-0.1%) (184)
- ---------------------------------------------------------------------------------
NET ASSETS (100%) $255,383
- ---------------------------------------------------------------------------------
</TABLE>
ADR--American Depository Receipt.
Note: Mutual fund data from Lipper Analytical Services, Inc.
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Shareholder Account Services: 1-800-420-8574
http://www.vanguard.com [email protected]
All Vanguard funds are offered by prospectus only. Prospectuses
contain more complete information on advisory fees, distribution
charges, and other expenses and should be read carefully before
investing or sending money. Prospectuses may be obtained directly from
The Vanguard Group.
<PAGE> 6
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Q341-4/97 (C) 1997 Vanguard Marketing Corporation, Distributor
