ANNUAL REPORT TO CONTRACTOWNERS
THE GUARDIAN INVESTOR
Retirement Asset Manager(SM)
December 31, 1997
THE GUARDIAN
SEPARATE ACCOUNT E
> THE GUARDIAN STOCK FUND, INC.
> THE GUARDIAN BOND FUND, INC.
> THE GUARDIAN CASH FUND, INC.
> GABELLI CAPITAL ASSET FUND
> BAILLIE GIFFORD INTERNATIONAL FUND
> BAILLIE GIFFORD EMERGING MARKETS FUND
> THE GUARDIAN SMALL CAP STOCK FUND
> VALUE LINE CENTURION FUND, INC.
> VALUE LINE STRATEGIC ASSET MANAGEMENT TRUST
> MFS GROWTH WITH INCOME SERIES
EXECUTIVE OFFICES
201 Park Avenue South
New York, New York 10003
CUSTOMER SERVICE OFFICE
P.O. Box 26210
Lehigh Valley, Pennsylvania
18002-6210
1-800-221-3253
[LOGO]
Guardian Investor Services
Corporation(R)
[LOGO] The Guardian(R)
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Performance Summary
[Graphic Omitted]
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Investment Option Total Return*
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The Guardian Stock Fund ............................. 4.98%
Baillie Gifford International Fund .................. -2.27%
Baillie Gifford Emerging Markets Fund ............... -14.92%
Value Line Centurion Fund ........................... -2.15%
Value Line Strategic Asset Mgt. Trust ............... 2.59%
Gabelli Capital Asset Fund .......................... 8.89%
The Guardian Bond Fund .............................. 2.61%
The Guardian Cash Fund .............................. 1.08%
The Guardian Small Cap Stock Fund ................... 2.17%
MFS Growth with Income Series ....................... 6.37%
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Fixed-Rate Option
The annual rates of interest for amounts deposited or renewed (on a
contract anniversary) in the Fixed-Rate Option during 1997 were as follows: for
the months of September through December, 5.40%.
Rates paid by the Fixed-Rate Option are subject to change at any time, and
may be higher or lower for new deposits or renewals, but are guaranteed from the
date of deposit or renewal to the next contract anniversary.
* The chart above shows the total returns for each investment option under
The Guardian Investor Retirement Asset Manager based on the percentage
change in unit values during the period from September 15, 1997 (the date
The Guardian Investor Retirement Asset Manager was first offered to the
public) to December 31, 1997. In contrast to the returns presented in the
portfolio managers' interviews, changes in unit values reflect the effects
of mortality and expense risk and administrative service charges as well
as each option's expenses to give you a better picture of an investment
option's performance under the contract. Total return performance figures
stated above do not, however, reflect the annual contract fee or possible
withdrawal charges. Deduction of these amounts would reduce the stated
total returns. Past performance is not a guarantee of future results.
Investment returns and principal value will vary with market conditions.
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Dear Contractowner:
[Photo of Joseph D. Sargent, CLU President & CEO]
As the President and Chief Executive Officer of The Guardian Insurance &
Annuity Company, Inc. (GIAC) and its parent, The Guardian Life Insurance Company
of America, I am pleased to introduce this annual report on the performance
results of your contract's separate account and its underlying investment
options for the year ended December 31, 1997.
On Our Ratings
Once again, we are proud to report that as of December 31, 1997, the date
of this report, GIAC continues to enjoy exemplary ratings from four of the
nation's leading insurance company evaluators: Moody's, Standard & Poor's, A.M.
Best, and Duff & Phelps. GIAC's solid ratings reflect its ability to meet its
guarantee of your contract's Fixed-Rate Option and pre-retirement death benefit.
However, these ratings do not apply to the investment options available under
The Guardian Investor Retirement Asset Manager variable annuity which are
subject to the risks of investing in securities. We are very proud of our
ratings as they reflect the strength of GIAC, which stands behind the contract's
guarantees.
Our Commitment to You
We at GIAC are proud of our tradition of commitment to you, our
contractowners. Following this letter is an economic report from Frank J. Jones,
Ph.D., Chief Investment Officer of GIAC. I believe that you will enjoy reading
his insightful economic overview presented to you as part of our ongoing
commitment to provide increasing levels of information and service.
Following Dr. Jones' economic report are interviews with the managers of
the underlying variable options. I invite you to read the interviews to learn
more about the strategies used to manage your investment options during 1997.
Thank you for continuing to invest for your future through GIAC.
Regards,
/s/ Joseph D. Sargent, CLU
Joseph D. Sargent, CLU
President and Chief Executive Officer
The Guardian Insurance & Annuity Company, Inc.
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THE GUARDIAN INVESTOR
Retirement Asset Manager
Table of Contents
Portfolio Schedule
Manager of
Interview Investments
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Economic Report 5
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The Guardian Stock Fund 8 40
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Objective: Long-term growth of capital
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Portfolio: At least 80% common stocks and
securities convertible into
common stocks
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Inception: April 13, 1983
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Net Assets at December 31, 1997: $3,222,186,845
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"We believe that soundly-based quantitative models provide a valuable tool. At
the same time, fast-breaking news and unusual investment issues require the
balanced judgment of a capable portfolio manager. We believe the surest path to
consistently above-average returns requires the synergistic results of combining
good quantitative tools with good manager judgment."
-- Charles E. Albers, C.F.A.
Portfolio Manager
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The Guardian Bond Fund 12 52
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Objective: Maximum current income without
undue risk of principal. Capital
appreciation is a secondary
objective
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Portfolio: At least 80% investment-grade debt
securities and U.S. government
securities
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Inception: May 1, 1983
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Net Assets at December 31, 1997: $355,411,911
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"The Fund's overall strategy was to maximize the total return of a diversified
fixed-income portfolio of investment grade corporate, mortgage-backed,
asset-backed, and U.S. Government securities. Specifically, we sought to
identify attractive asset allocation weightings based on relative valuation
analysis and then invest in securities that had superior risk/return profiles
while not engaging in interest rate or market timing strategies."
-- Thomas G. Sorell, C.F.A.
Co-Portfolio Manager
-- Howard W. Chin
Co-Portfolio Manager
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The Guardian Cash Fund 28 58
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Objective: As high a level of current income
as is consistent with preservation
of capital and liquidity
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Portfolio: Short-term money market instruments
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Inception: November 1, 1981
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Net Assets at December 31, 1997: $368,122,449
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"The Guardian Cash Fund is a place for our investors to put their money while
they decide their preferred long-term investment vehicle, be it stocks or bonds.
Also, some of our investors prefer the relative stability of the money markets.
To best accommodate all our investors, we will continue to try to provide a
strong 7-day yield, while offering safety and liquidity"
-- Alexander M. Grant, Jr.
Portfolio Manager
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Gabelli Capital Asset Fund 14 70
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Objective: Growth of capital. Current income
is a secondary objective
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Portfolio: Primarily common and preferred
stocks and other securities
representing the right to acquire
common stocks
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Inception: May 1, 1995
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Net Assets at December 31, 1997: $105,350,265
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"Our conclusion after all this conjecture is that in 1998, we believe that the
market will be up 5% to down 15%. We hope the market surprises on the upside.
However, we believe in the Boy Scout motto: "Be prepared." Although value stocks
will not likely be immune to a substantial market correction, we believe they
will perform significantly better than the more fully valued market darlings."
-- Mario J. Gabelli, C.F.A.
Portfolio Manager
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Portfolio Schedule
Manager of
Interview Investments
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Baillie Gifford International Fund 16 80
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Objective: Long-term capital appreciation
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Portfolio: At least 80% in a diversified
portfolio of common stocks of
companies domiciled outside of the
United States
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Inception: February 8, 1991
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Net Assets at December 31, 1997: $534,711,470
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"Guardian Baillie Gifford Limited continued to employ its strategy of managing a
diversified portfolio of international equities, paying particular attention to
the fundamental attractions of individual companies in terms of their
profitability, strength of balance sheet, and earnings growth prospects."
-- R. Robin Menzies
Portfolio Manager
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Baillie Gifford Emerging Markets Fund 18 88
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Objective: Long-term capital appreciation
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Portfolio: At least 65% in a portfolio of
common stocks issued by emerging
market companies
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Inception: October 17, 1994
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Net Assets at December 31, 1997: $87,013,709
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"It is difficult to predict how long it will take for the financial storms in
the emerging markets to blow over; the situation is still very fluid. We believe
that many emerging markets are now good value as a result, and that they will
perform well as investors' confidence returns, rather as the unaffected markets
recovered in the wake of Mexico's problems in 1993. We believe that the Fund is
well positioned to take advantage of such a recovery, and we are confident that
the companies and countries in which we have invested have good long-term
prospects and stand at reasonable valuations."
-- Edward H. Hocknell
Portfolio Manager
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The Guardian Small Cap Stock Fund 20 96
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Objective: Long-term growth of capital
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Portfolio: At least 85% in a diversified
portfolio of common stocks and
convertible securities issued by
companies with small market
capitalization
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Inception: July 16, 1997
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Net Assets at December 31, 1997: $87,749,403
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"Our basic approach during 1997 and into 1998 is to combine our quantitative
methodologies with fundamental judgments from our portfolio managers and
analysts. Particularly when dealing with smaller companies, many of which have
shorter operating histories, more variable operations and less research
coverage, our knowledge of the companies and their industries is a useful
adjunct to our quantitative approach."
-- Charles E. Albers, C.F.A.
Co-Portfolio Manager
-- Larry Luxenberg, C.F.A.
Co-Portfolio Manager
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Value Line Centurion Fund 22 110
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Objective: Long-term growth of capital
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Portfolio: At least 90% common stocks
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Inception: November 15, 1983
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Net Assets at December 31, 1997: $720,090,546
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"We believe that industry focus and bottoms-up stock selection from among the #1
and #2 ranked stocks in The Value Line Ranking System are critical, with an
emphasis on those areas which can produce well-above-trendline revenue and
profit growth. We expect that these sectors will continue to include:
technology, financials, consumer nondurables (especially health care), and
energy (particularly oil service and equipment)."
-- Value Line, Inc.
Investment Adviser
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Portfolio Schedule
Manager of
Interview Investments
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Value Line Strategic Asset Management Trust 24 120
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Objective: High total return consistent with
reasonable risk
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Portfolio: Stock, bonds and money market
instruments
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Inception: October 1, 1987
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Net Assets at December 31, 1997: $1,196,589,447
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"For stock selection, we rely primarily on the Value Line Timeliness Ranking
System, which favors stocks with strong earnings and price momentum. To reduce
risk, we maintain a diversified portfolio that doesn't stray too far from the
industry weightings of the S&P 500."
-- Value Line, Inc.
Investment Adviser
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MFS Growth with Income Series 26 134
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Objective: Reasonable current income and
long-term growth of capital and
income
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Portfolio: At least 65% of its assets in
equity securities that are believed
to have long-term prospects for
growth and income
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Inception: October 9, 1995
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Net Assets at December 31, 1997: $58,045,070
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"We see a continuation of the lower-inflation environment for 1998. The turmoil
in emerging markets will probably have a positive effect on both interest rates
and inflation here in the United States. In 1998, the risk will be not
valuations, but earnings, and we're trying to be very careful that the companies
in the portfolio are capable of making their earnings estimates."
-- John D. Laupheimer, Jr.
Co-Portfolio Manager
-- Kevin R. Parke
Co-Portfolio Manager
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The Guardian Separate Account E 30
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Economic Report:
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[Photo of Frank J. Jones, Ph.D. Chief Investment Officer]
1997 In The Economic/ Financial Hall of Fame
Recently a new member has been elected into the Baseball Hall of Fame, the
Heisman Trophy winner has been selected, and the Number 1 college football
team(s) in the country has (have) been picked. In the spirit of the times, and
given the end of the year, I thought it would be interesting to consider various
calendar years for inclusion in the U.S. economic/financial Hall of Fame.
To begin with my conclusion, I believe that 1997 should be included in the
U.S. economic/financial Hall of Fame. And perhaps a statue of 1997 should even
be positioned in the Hall's entrance, just as a statue of Babe Ruth appears in
the entrance of the Baseball Hall of Fame in Cooperstown. The year 1997 may be
the best U.S. economic/financial year ever.
Let me begin my case for 1997 in the Hall of Fame with some supporting
statistics. First, consider economic statistics:
o Strong economic growth: the real Gross Domestic Product growth for
the year was 3.8%, the highest since 1988;
o The unemployment rate decreased to 4.6% during November, the lowest
since October 1973;
o Capacity utilization increased to 83.4% at year end, the highest
since September 1995;
o Industrial production increased by 5% during 1997, the strongest
year since 1994;
o Labor productivity, specifically manufacturing productivity,
increased by 9.8% during the third quarter of 1997, the strongest
growth in a quarter since the second quarter of 1982;
o And, not surprisingly, consumer confidence is at a 28-year high.
These economic growth statistics are strong in isolation, but are even
stronger considering that the economy is ending its seventh year of expansion
(which started during March 1991), the second longest post- WWII expansion,
exceeded only by the 34 quarter expansion that began during 1960.
Given such strong growth seven years into an expansion, inflation would
have been expected to be a problem. Consider, however, the following:
o The Consumer Price Index (CPI) during 1997 increased by only 1.7%,
the lowest level since 1986 (1.1%), which was caused by declining
oil prices; core CPI (excluding food and energy) increased by 2.2%,
the lowest since 1965 (1.5%);
o The Producer Price Index (PPI) declined by 1.2% during 1997,
following a 2.8% increase in 1996; this decrease was the largest
decrease since a 3.3% decrease in 1986, due mainly to falling oil
prices. The core rate of PPI, which excludes food and energy, rose
by only 0.1% during 1997, the smallest annual gain on record;
o Gold prices have fallen below $280 as of January 1998, the lowest
since June 1979 -- recall that in January 1980, gold prices hit $850
an ounce. As a result, gold mutual funds were the worst performing
mutual funds during 1997;
o Despite the low unemployment, due mainly to strong productivity
increases, wages have increased to a level of moderate concern, but
not as much as might have been expected. Specifically, during 1997
hourly earnings increased by 3.7%, the highest year over year level
since 1989, and the unemployment cost index increased by 3.3%, the
highest since 1993.
With respect to monetary policy during 1997, there was only one Fed
action, a tightening from 5% to 5.25% on March 25, 1997. Although subsequent
potential Fed tightenings were widely discussed and, indeed, the Fed was on the
fence twice during the year, no such tightening occurred. And at the end of
1997, the markets believed that a Fed ease was more likely than a
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5
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tightening. The Fed, however, seems unlikely to increase or decrease rates soon,
and could remain on the sidelines all year.
With respect to fiscal policy, the federal budget deficit, which was
$290.4 billion during 1992, decreased to a deficit of only $22.6 billion during
1997, essentially a rounding error in a $1.6 trillion budget. This is the lowest
deficit since 1974, and represented only 0.3% of GDP, which was the lowest since
1970. Many analysts, however, assert, with considerable justification, that the
decline in the budget was mainly due to the strong economy, which led to high
individual and business income tax receipts, and the strong stock market, which
led to large capital gains tax receipts, rather than government policy. Many
analysts are forecasting a budget surplus for 1998, the first since 1969.
This remarkable combination of strong growth and low unemployment, on one
hand, and declining inflation, on the other hand, has led to the assertion that
"inflation is missing." To respond to this conundrum of the missing inflation, a
new paradigm has evolved. This paradigm's proponents state that, due mainly to
improvements in technology, productivity has increased significantly, but this
increase is not being captured in our current productivity measures. Thus, they
assert, potential GDP has now increased to 3% or more. They further assert that
inflation has not increased due to this increase in productivity and potential
real GDP growth.
Those espousing the traditional view, who would expect higher inflation,
given the current unemployment rate/capacity utilization/economic growth
environment, may cede that some fundamental changes may be occurring, but that
the major factors in explaining the current lack of inflation are temporary. The
temporary factors include the strong dollar, the reduction in the growth rate of
health care costs, declining computer prices and low energy and food costs.
As a result of stable Fed policy, low inflation, and the declining federal
budget deficit, the 30-year Treasury yield decreased to 5.69% on January 12,
1998, its lowest level since 30-year Treasuries have been auctioned beginning in
1977. And these low yields increased housing sales to eleven-year highs.
Overall, the U.S. economy of 1997 was not a bad economy! In fact, if
someone made us an offer today to "can" the 1997 economy and open the can again
at the end of 1998 and repeat it, I believe that we would quickly agree.
But to be in the Hall of Fame, in addition to having a good economy, the
stock and bond markets must also perform well. In a year of such ideal economic
conditions, the bond and stock markets would be expected to perform well. In
fact, both had strong years during 1997. Specifically, after reaching a high of
7.11% during April 1997, the 30-year Treasury bond yield declined to 5.92% by
the end of 1997. The Lehman Aggregate Bond Index returned 9.65% during 1997.(1)
Perhaps even more surprising, the stock market followed very strong
performances during 1995 and 1996 with another strong performance during 1997,
as summarized in the table below. This was the first time in history that the
DJIA has returned over 20% three years in a row.(2)
DJIA S&P 500(3)
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1995 24.91% 37.38%
1996 28.90% 22.83%
1997 36.89% 33.28%
10-year Average 19.23% 17.92%
My case for inducting 1997 into the economic/financial Hall of Fame and
perhaps even putting a statue in the hall entrance rests. Long live 1997.
But What Are the Prospects For 1998?
Economic and financial performance is often driven by unexpected economic
shocks. And despite the strong performance in the economy and the financial
markets during 1997, there was an unexpected shock, commonly called the "Asian
flu." The Asian flu began with the devaluation of the Thai baht on July 2, 1997
and continued with significant pressure on the
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1 The Lehman Aggregate Bond Index is an unmanaged index that is generally
considered to be representative of U.S. bond market activity.
2 The Dow Jones Industrial Average (DJIA) is an unmanaged average of 30
industrial stocks listed on the New York Stock Exchange that is generally
considered to be representative of U.S. stock market performance.
3 The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity.
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6
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Hong Kong markets, which prompted the October 25th one-day decline in the DJIA
by 554 points or 7.2%. In addition to spreading from Thailand to Malaysia,
Indonesia and the Philippines, the flu spread immediately to Korea and continues
to provide major concerns for Hong Kong and Japan. Concerns for the economies in
not only non-Japan Asia, but also their impacts on Japan, Europe and the U.S.,
appear to be diverging rather than converging.
The unexpected event of 1998 could be a continuation of the Asian flu. The
IMF "flu shots" might not be enough to cure the patients. The effect of the
Asian flu on the U.S. stock market is indicated by the fact that the DJIA
reached its 1997 high of 8259.31 on August 6 and closed the year at 7908.25,
4.3% below this record level.
The moderating effects of the Asian flu on the U.S. economy, however,
while causing significant problems, may have obviated another problem. Had the
Asian flu not occurred, the Fed would have been faced with a strong economy and
growing wage rates and, despite the absence of actual inflation, may well have
made one or more preemptive tightenings during the second half of 1997. Even one
tightening may have had a significant effect on the U.S. stock and bond markets
through expectations of subsequent tightenings. The onset of the Asian flu
probably averted a Fed tightening for two reasons. First, the common view was
that the Asian situation would reduce real GDP in the U.S. by 0.5% or more, a
decline in economic growth which has been sufficient for the Fed to avoid
tightening. Second, the Fed was handcuffed from tightening because of the effect
it would have had on the world markets, which may have been much more severe
than its minimal effect on the U.S. economy.
What about 1998? First, do not expect another 1997 in terms of stock
market performance. The major uncertainty for 1998 continues to be the effect of
the Asian situation on U.S. economic growth and U.S. corporate profits. While
the Asian situation will certainly mitigate U.S. inflation, it will also
certainly reduce exports by the U.S. to Asia, not only the Flying Tigers, but
also Korea and very importantly Japan, and also reduce the pricing power of U.S.
corporations which export to these countries or compete with imports from those
countries. While the operating earnings growth of S&P 500 companies was 10.5%
during 1997, it is likely to be less than that, perhaps 5% - 8%, during 1998.
But the stock market appears more attractive now than it did on August 6 when
the Dow was at 8,259.31. Other potential threats, however, include slow European
growth and the effects of the European Monetary Unit, the maturation of the U.S.
economic expansion and trade wars induced by developing protectionism and
isolationism.
Our expectations for 1998 are modest. However, modest expectations are not
negative expectations. We do not expect a recession during 1998 and in general
our expectations are ambivalent regarding whether the next Fed movement will be
an easing due to the inflationary effects of Asia or a tightening due to
increasing employment growth and wage increases. The balance is between a strong
domestic economy and an economic drag from Asia. The year 1998 could be a solid
performer, even if not a "Ruthian" look-alike or even a Hall of Fame candidate,
for both the economy and the markets.
Regards,
/s/ Frank J. Jones
Frank J. Jones, Ph.D.
Chief Investment Officer
The Guardian Insurance & Annuity Company, Inc.
7
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The Guardian Stock Fund
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[Photo of Charles E. Albers, C.F.A. Portfolio Manager]
Q. How did the Fund perform in 1997?
A. The year 1997 was terrific for most U.S. equity investors. Despite
challenging crosscurrents within the market, the Fund performed very well, both
absolutely and relative to our mutual fund peer group.
During 1997, the Fund provided a return of 35.58% to its shareholders.(1)
That result bettered the 33.28% total return of the benchmark S&P 500 Composite
Index.(2) Also, the Fund's 1997 return substantially exceeded the return of the
average fund in our peer group, Lipper's U.S. Growth Funds offered through
variable insurance products, which was 25.51% over the same period.(3) For the
year, the Fund ranked in the top 3.9% of the Lipper peer group.
Of course, from a shareholder's viewpoint, what matters most is the
long-term investment record. Here, too, the Fund looks good. For the 5-year
period ended December 31, 1997, the Fund ranked in the top 1.8% of the Lipper
peer group; for the period of the last 10 years, it ranked in the top 2.6% of
the peer group.(4) (See details in the following table.) We think these
statistics are pretty impressive!
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Comparative Average Ranking Information
Annual Total Returns for Periods Ended
for Periods December 31, 1997
ended December 31, 1997 ---------------------------
----------------------------------- Guardian Guardian
Guardian Lipper U.S. Underlying Stock Fund Stock Fund
Stock Fund Growth Fund Average Lipper Rank Percent Rank
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1 Year 35.58% 25.51% 5 (out of 127) 3.9%
5 Year 22.37% 16.88% 1 (out of 55) 1.8%
10 Year 19.37% 15.85% 1 (out of 38) 2.6%
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Q. What factors affected the Fund's performance in 1997?
A. Looking back, three factors were critical.
First, we did a comparatively good job of addressing the important
cap-size issue. In 1997, for the third consecutive year, large cap stocks
performed better than small caps, as shown in this table:
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Total Returns (%)
-----------------------------
1995 1996 1997
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Large-Caps
(S&P 500 Composite Index) + 37.4% + 22.8% + 33.3%
Small-Caps
(Russell 2000 Index)(5) + 28.4% + 16.5% + 22.2%
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Throughout this period, the Fund has correctly maintained a weighted
average cap size which was larger than our peer group of mutual funds, and this
has benefited the Fund's relative performance. We tilted the GPAF portfolio
slightly more towards small caps in the second quarter, which proved timely as
small caps outperformed large caps during the second and third quarters.
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1 Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
2 The S&P 500 Composite Index is an unmanaged index of 500 large-cap U.S.
stocks that is generally considered to be representative of U.S. stock
market activity. The S&P 500 Index is not available for direct investment
and its returns do not reflect expenses, which are deducted from the
Fund's return.
3 Lipper Analytical Services, Inc. is an independent mutual fund monitoring
and rating service and its database of performance information is based on
historical total returns, which assume the reinvestment of dividends and
distributions, and the deduction of all fund expenses. Lipper returns do
not reflect the deduction of sales loads, and performance would be
different if sales loads were deducted.
4 Lipper rankings were reported by Lipper Variable Insurance Products
Performance Analysis Service, in its underlying Fund report dated December
31, 1997.
5 The Russell 2000 Index is generally considered to be representative of
small-capitalization issues in the U.S. stock market.
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8
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Next, during the third quarter, we perceived the developing Asian
contagion a bit earlier than most U.S. money managers. In the fall of 1997, we
reacted by paring back positions in many companies with significant Asian
exposure, while re-deploying the proceeds into other companies with more
domestically-oriented businesses. That move undoubtedly benefited our results in
the fourth quarter, when the impact of the Asian financial collapse became
widely discounted in U.S. market prices.
And, finally, another factor which contributed to our relatively good
investment performance was our multi-factor quantitative stock scoring system.
This system has generally provided us solid guidance over the years in stock
selection, and this favorable record continued in 1997.
Q. What strategies do you use to manage the Fund?
A. There was no change in our strategic approach during this period. We believe
that soundly-based quantitative models provide a valuable tool. At the same
time, fast-breaking news and unusual investment issues require the balanced
judgment of a capable portfolio manager. We believe the surest path to
consistently above-average returns requires the synergistic results of combining
good quantitative tools with good manager judgment.
Our quantitative models look at the portfolio two different ways:
"top-down" and "bottom-up." The "top-down" approach involves a cluster of
different predictive models that we use to identify which overall portfolio
style has the best performance prospects. The "bottom-up" approach uses our
multi-factor stock scoring system to identify specific attractive stocks within
our 2,000-stock research universe. We believe that both the "top-down" and
"bottom-up" perspectives are important, and the best results can be achieved by
combining both within one portfolio.
Q. How has the portfolio been positioned in different economic sectors?
A. The portfolio's principal sector overweight during 1997 has been Financials,
which represented 30.7% of the portfolio at year-end, compared with 17.1% in the
S&P 500 Composite Index. This sector was a strong outperformer during the year,
benefiting from a decline in interest rates, the best asset quality in a
generation, industry consolidation and more efficient use of capital.
The portfolio at year-end also had major stakes in the Energy (17.3%) and
Capital Goods/Technology (13.4%) sectors. (See following pie chart for the
complete portfolio breakdown.) Importantly, the major sector with the worst
relative market performance in 1997 was Basic Industries, and the Fund was
underweighted there compared with the benchmark.
Q. Have you any comments on the outlook for 1998?
A. We are certainly not market timers. We are cautiously optimistic about market
prospects for 1998. As usual, we counsel investors to take a long-term view of
the equity investment process.
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Stock Fund Profile
as of December 31, 1997
- ---------------------------------------
Sector Weightings of Common Stocks
Held by the Fund on December 31, 1997
[The following was represented as a pie chart in the printed material.]
Consumer Cyclicals -- 5.7%
Credit Cyclicals -- 0.5%
Consumer Staples -- 9.5%
Financial -- 30.7%
Basic Industry -- 4.9%
Capital Goods -- 7.3%
Conglomerates -- 1.6%
Consumer Services -- 2.5%
Transportation -- 2.8%
Utilities -- 3.8%
Energy -- 17.3%
Capital Goods/Technology -- 13.4%
- --------------------------------------------------------------------------------
The Guardian Stock Fund
Top 10 Holdings as of 12/31/97
1. General Electric Co. 3.50%
2. Exxon Corp. 2.92%
3. Int'l Business Machines 2.12%
4. Citicorp 1.64%
5. BankAmerica Corp. 1.63%
6. Microsoft Corp. 1.62%
7. E.I. Dupont deNemours, Inc. 1.49%
8. Chase Manhattan Corp. 1.48%
9. Storage Technology Corp. 1.42%
10. Travelers Group, Inc. 1.41%
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Returns for Periods Ended 12/31/97(1)
Life of Fund
1 Year 5 Years 10 Years (since 4/13/83)
- --------------------------------------------------------------------------------
The Guardian Stock Fund 35.58% 22.37% 19.37% 17.87%
- --------------------------------------------------------------------------------
S&P 500 Index(2) 33.28% 20.17% 17.92% 16.80%
- --------------------------------------------------------------------------------
1 Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
2 The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 Index is not available for direct investment and its
returns do not reflect expenses, which have been deducted from the Fund's
return.
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment
[The following table was depicted as a line graph in the printed material]
- --------------------------------------------------------------------------------
GSF S&P CPI
--- --- ---
4/13/83 10000 10000 10000
10891 10844 10333
83 11028 10867 10336
10684 10328 10571
84 12218 11529 10754
14360 13501 10958
85 16130 15169 11162
20326 18307 11152
86 18889 17985 11295
22920 22898 11580
87 19241 18903 11794
23115 21283 12029
88 23160 21989 12314
26541 25595 12650
89 28613 28887 12885
28334 29749 13252
90 25224 27959 13680
29788 31938 13874
91 34293 36439 14088
34598 36196 14302
92 41178 39207 14516
46490 41100 14720
93 49396 43130 14913
47471 41667 15097
94 48767 43679 15311
58848 52468 15545
95 65667 59992 15668
72792 66015 15973
96 83330 73770 16176
110475 91429 16627
Dec 31, 97 112983 94035 16827
- --------------------------------------------------------------------------------
A hypothetical $10,000 investment made at the inception of The Guardian Stock
Fund on April 13, 1983 would have grown to $112,983 on December 31, 1997. We
compare our performance to that of the S&P 500 Index, which is an unmanaged
index that is generally considered the performance benchmark of the U.S. stock
market. While you cannot invest directly in the S&P 500 Index, a similar
hypothetical investment would now be worth $94,035. The Cost of Living, as
measured by the Consumer Price Index, which is generally representative of the
level of U.S. inflation, is also provided to lend a more complete understanding
of the investment's real worth.
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Bond Fund
- ---------------------------------------
[Photo of Thomas G. Sorell, C.F.A. Co-Portfolio Manager]
[Photo of Howard W. Chin, Co-Portfolio Manager]
Q. How did the Fund perform during 1997?
A. The Fund had a total return of 8.99%(1) for the year ended December 31, 1997,
outperforming the average fund in our Lipper Intermediate Investment Grade peer
group,(2) which returned 8.46% for the year. This group consists of other
variable annuity subaccounts that invest primarily in investment grade debt with
average maturities of 5-10 years. Another commonly used benchmark, the Lehman
Aggregate Bond Index, which is not available for direct investment and does not
reflect deductions for fund expenses, returned 9.65% in 1997.(3)
Q. What factors affected the Fund's performance?
A. During the first quarter of 1997, the market feared that the Federal Reserve
would tighten monetary policy if the economy did not slow sufficiently to reduce
the risk of future increases in inflation.
As the prospect for Fed tightening became more apparent, interest rates
rose and bonds performed poorly in the first quarter. The Federal Reserve did in
fact decide to increase the Fed Funds rate by 25 basis points on March 25th.
Ironically, March 1997 represented the peak in interest rates for the
year, and the surprise was that even with a strong economy, there was little if
any evidence of incipient inflation. The Fed, by moving only once and exhibiting
extreme patience while the economy continued to advance, appeared to change its
modus operandi from taking preemptive policy action to a more complacent
perspective that considered the possibility of some new inflation paradigm.
As the market observed continued Fed inaction, interest rates began to
decline during the second and third quarters, and dropped decidedly further
during the October equity "correction" and the subsequent financial crisis in
Asia. As the year closed, 10 and 30 year Treasury rates had fallen by almost 120
basis points from the March 1997 high. Consequently, bonds performed very well
in 1997, returning 9.65%, as measured by the Lehman Aggregate Index.
As reported in our semiannual report to shareholders, the Fund
outperformed our benchmark, the Lehman Aggregate Bond Index, during the first
half of 1997, principally due to the Fund's relative overweight in corporate,
mortgage-backed and asset-backed securities (spread sectors).
During the second quarter, as yield spreads narrowed and valuations became
expensive in many sectors of the fixed-income markets, the Fund became more
defensive and started reducing its exposure to spread sectors early in the third
quarter. However, we were still over weighted in spread products in October when
the U.S. equity market declined and the Asian financial crisis adversely
affected the performance of corporate bonds. In addition, yield spreads for
mortgage-backed and asset-backed products widened in
- --------------------------------------------------------------------------------
1 Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
2 Lipper Analytical Services, Inc. is an independent mutual fund monitoring
and rating service and its database of performance information is based on
historical total returns, which assume the reinvestment of dividends and
distributions, and the deduction of all fund expenses. Lipper returns do
not reflect the deduction of sales loads, and performance would be
different if sales loads were deducted.
3 The Lehman Aggregate Bond Index is an unmanaged index that is generally
considered to be representative of U.S. bond market activity.
4 Duration-adjusted, expressed in percentage terms, represents the excess
return over the weighted average return of a group of similar duration
Treasuries.
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
sympathy with corporate bonds, and although the portfolio's reallocation into
Treasuries was already underway, the Fund's remaining holdings in these three
areas negatively affected the Fund's performance during this period.
In October, corporate bonds had their worst performance in more than a
decade, underperforming Treasuries by 80 basis points on a duration-adjusted
basis.(4) Although the Fund returned 90 basis points in October, we
underperformed relative to our benchmark due to our still-significant exposure
to corporate and asset-backed securities. Even after October, we remained
concerned about widening corporate spreads and, with the decline in interest
rates, became increasingly concerned that mortgage prepayments would adversely
impact mortgage-backed returns. We continued to reduce our corporate and
mortgage-backed holdings in the fourth quarter, which served us well through the
balance of the year.
On an absolute basis, corporate bonds as measured by the Lehman Aggregate
Index returned 10.23% for 1997, largely due to the rally in the Treasury market.
However, on a duration-adjusted basis, the investment grade corporate bond
sector underperformed Treasuries by 29 basis points. The Fund did benefit from
its holdings in higher yielding triple-B media/cable and tobacco securities that
performed exceptionally well during 1997, providing 95 and 158 basis points,
respectively, in excess return over comparable Treasuries. Overall however, the
benefit of owning corporate bonds during the first half of 1997 was eliminated
in the second half, and adversely affected our relative performance.
In contrast, the mortgage-backed sector as measured by the Lehman
Aggregate Index had a return of 9.49% for 1997, less on a nominal basis than
corporates, but significantly better when measured on a duration-adjusted basis,
outperforming Treasuries by 121 basis points. Much of the outperformance was due
to the strong dollar roll market and the market's expectation of low prepayment
risk and interest rate volatility. The mortgage-backed sector earned a 7.41%
nominal return in 1997, but as a result of widening corporate spreads and new
issue supply, underperformed Treasuries on a duration-adjusted basis by 12 basis
points.
Therefore, for the entire year our mortgage and Treasury investments
increased our overall performance while our corporate and asset-backed
positions, on average, reduced our returns relative to similar duration Treasury
securities.
Q. What strategies did you use to manage the Fund?
A. The Fund's overall strategy was to maximize the total return of a diversified
fixed-income portfolio of investment grade corporate, mortgage-backed,
asset-backed, and U.S. Government securities. Specifically, we sought to
identify attractive asset allocation weightings based on relative valuation
analysis and then invest in securities that had superior risk/return profiles
while not engaging in interest rate or market timing strategies. At year-end,
the Fund remains cautious on the relative value of mortgage-backed and corporate
securities, and will maintain an underweight relative to our benchmark until
these sectors become more attractive on a risk/return basis. At that time, we
would expect to increase our allocation to these asset classes and reduce our
holdings in U.S. Government securities.
- --------------------------------------------------------------------------------
The Guardian Bond Fund Profile
as of December 31, 1997 (1)
- ---------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
FOR PERIODS ENDED 12/31/97 (1)
- --------------------------------------------------------------------------------
1 Year....................................... 8.99%
5 Years...................................... 6.94%
10 Years..................................... 8.93%
Since Inception (5/1/83)..................... 9.36%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment
[The following table was depicted as a line graph in the printed material]
- --------------------------------------------------------------------------------
GBF Lehman
--- ------
4/29/83 10000 10000
83 9925 10204
84 11219 11750
85 13728 14347
86 15766 16537
87 15816 16992
88 17351 18332
89 19758 20996
90 21254 22877
91 24695 26538
92 26597 28502
93 29218 31281
94 28209 30369
95 33170 35979
96 34124 37286
12/31/97 37191 40885
- --------------------------------------------------------------------------------
To give you a comparison, the chart above shows the performance of a $10,000
investment made in The Guardian Bond Fund and in the Lehman Aggreate Bond Index.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- ---------------------------------------
[Photo of Mario J. Gabelli, C.F.A. Portfolio Manager]
Q. How did the Fund perform for the year ended December 31, 1997?
A. The Fund was up 42.6% for 1997.(1) The S&P 500(2) and Russell 2000(3) rose
33.4% and 22.4%, respectively, over the same twelve-month period. Since
inception on May 1, 1995 through December 31, 1997, the Fund has a total return
of 71.5%, which equates to an average annual return of 22.4%.
Q. What factors affected the Fund's performance in 1997?
A. Year-ends are always time for reflection. We look back over the last twelve
months and assess what went right and what went wrong. To borrow from Joseph
Heller's classic novel Catch 22, we tally the "feathers in our cap" and "black
eyes." In 1997, the former vastly outnumber the latter. Heading our "feathers in
the cap" list is deals. During the year, the Fund bid a cheerful farewell to a
fair sample of portfolio holdings which found new homes under other corporate
roofs. Also prominent on our list are cable television stocks, which came into
favor over the course of the year, thanks to better than generally expected cash
flow growth and Bill Gates' decision that coaxial cable will be the most
effective digital highway into the home. Cable network stocks also soared as
investors acknowledged the escalating value of these entrenched distribution
channels.
Our positions in niche industrial companies also contributed to returns.
In the past, we have often discussed the new competitive strengths of American
industry, the prospects for improving earnings and the likelihood that smaller
niche players would be targeted by larger competitors. All three factors
combined to help boost our industrial holdings in 1997. Our "black eyes" list
was dominated by auto parts stocks despite, in our opinion, offering excellent
fundamental value.
Q. What strategies do you use to manage the Fund and what is your outlook for
1998?
A. Despite a roller coaster ride featuring some breathtaking ascents and
declines, equity investors enjoyed themselves in 1997. Will 1998 be equally
thrilling? We expect to continue to experience considerable market volatility as
investors react to economic and market developments overseas and attempt to
assess the impact on the U.S. economy and corporate earnings.
Looking ahead, many of the favorable economic factors that propelled
stocks in recent years will likely remain intact. Asian currency devaluation
will probably diminish inflationary pressure on the U.S. economy and delay, if
not eliminate, the need for a Federal Reserve interest rate hike. Long interest
rates should remain low and perhaps trend lower. Deals, restructurings and share
repurchase programs should continue to buoy stocks.
The wild cards are corporate earnings and investor psychology. In general,
we believe corporate earnings growth will be relatively strong--in the 8% to 9%
range. However, we are likely to see earnings disappointments for companies
doing significant business in Asia and for those competing against lower priced
Asian exports. With earnings expectations high across the board, we suspect we
will see more earnings disappointments in the year ahead.
- --------------------------------------------------------------------------------
1 Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
2 The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 Index is not available for direct investment and its
returns do not reflect expenses, which have been deducted from the Fund's
return.
3 The Russell 2000 Index is an unmanged index of 2,000 small cap U.S. stocks
that are generally considered to be representative of small-capitalization
issues in the U.S. stock market. The Russell 2000 Index is not available
for direct investment and its returns do not reflect the fees and expenses
that have been deducted from the Fund.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
How will investors react if any or all of our concerns prove justified? We
will just have to wait and see. Investors have become conditioned to buying on
market dips. That's understandable because it's worked quite well since this
bull market began in 1982. Indeed, we saw the market rebound strongly from the
sharp correction we experienced in late October. However, if the problems in
Asia continue to escalate and we see more widespread earnings disappointments
from U.S. companies, investors may be somewhat more reluctant to view each
market dip as a buying opportunity. Bear in mind, liquidity itself does not
drive markets higher. It is liquidity combined with favorable investor
psychology that fuels a rising market. In other words, if greed turns to fear,
we could see a more substantial and prolonged market slump than we have become
accustomed to.
Our conclusion after all this conjecture is that in 1998, we believe that
the market will be up 5% to down 15%. We hope the market surprises on the
upside. However, we believe in the Boy Scout motto: "Be prepared." Although
value stocks will not likely be immune to a substantial market correction, we
believe they will perform significantly better than the more fully valued market
darlings. Consequently, we are carefully monitoring the Fund portfolio, trimming
or eliminating holdings that have become more fully priced in this market
advance and adding to positions that offer better fundamental value. We are also
being more patient in redeploying cash reserves. We doubt the Fund will be able
to duplicate its terrific 1997 returns in what should be a much more challenging
market. However, we believe we can achieve our 10% real rate of return objective
in the year ahead.
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund Profile
as of December 31, 1997 (1)
- ---------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
FOR PERIODS ENDED 12/31/97 (1)
- --------------------------------------------------------------------------------
1 Year....................................... 42.59%
Since Inception (5/1/95)..................... 22.36%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment(1)
[The following table was depicted as a line graph in the printed material]
- --------------------------------------------------------------------------------
S&P Cap
--- ---
5/1/95 10000 10000
12/95 12178 10840
12/96 14974 12034
12/97 19969 17159
- --------------------------------------------------------------------------------
To give you a comparison, the chart above shows the performance of a $10,000
investment made in the Gabelli Capital Asset Fund and in the S&P 500 Index.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top Ten Holdings
1. Cablevision Systems Corporation
2. LIN Television Corporation
3. Tele-Communications Inc./Liberty Media Group
4. Viacom Inc.
5. Tejas Gas Corporation
6. TriMas Corporation
7. HSN Inc.
8. Sequa Corporation
9. BET Holdings Inc.
10. United Television Inc.
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
Baillie Gifford International Fund
- ---------------------------------------
[Photo of R. Robin Menzies, Portfolio Manager]
Q. How did the Fund perform during 1997?
A. The fund performed well in 1997, with a total return of 11.93%(1) compared to
an increase of 2.1% in the Morgan Stanley Capital International (MSCI) Europe,
Australia, and Far East (EAFE) Index.(2) There were marked divergences in the
performance of individual international markets during the year, with European
markets generally strong, and Asian ones weak.
Q. What factors affected the Fund's performance during the year?
A. The Fund's good performance relative to the MSCI EAFE Index was due in part
to the Fund's underweighted investment in Japan as compared to the Index. The
Fund generally had some 10% less invested in Japan than did the Index over the
course of the year. At the end of the year, the Index weighting in Japan was
25.2%, compared to the Fund's 14.8%. In addition, the Japanese stocks held by
the Fund, in aggregate, performed significantly better that the Japanese
component of MSCI EAFE, as the Fund's exposure to Japanese banks, one of the
weakest areas of the Tokyo market, was negligible.
To put events in Asia into a European context, the first point to note is
that the region, including Japan, only accounts for around 10% of Europe's
exports. This leads us to believe that the direct impact of the Asian crisis on
European economic growth will be modest in the short term. Growth in the German
economy has exceeded expectations in 1997 -- a year ago we thought that it was
optimistic to forecast growth of 2% for 1997, but the consensus is now up to
2.5% -- but continued strength in net exports has been entirely responsible for
this improvement. Growth in the French economy remains almost as polarised, with
Gross Domestic Product growth heavily dependent upon net trade.
Q. What strategies did you use to manage the Fund and what are your expectations
for the future?
A. Guardian Baillie Gifford Limited continued to employ its strategy of managing
a diversified portfolio of international equities, paying particular attention
to the fundamental attractions of individual companies in terms of their
profitability, strength of balance sheet, and earnings growth prospects.
Overall, the Japanese economy seems unlikely to grow this year, and may
only rise 1% or so next year. With the risk of further collapses in the
financial sector still present, a low Japanese weighting concentrated on
successful exporters still seems appropriate for the Fund. With so much
uncertainty in the general background, it is difficult to be too categorical
about the prospects for 1998. We expect that the interest rate background will
continue to be favorable, but that there will be many nasty surprises on the
profits front, as the consequences of the Asian upheavals show themselves in
various unexpected places. We think it will be necessary to be flexible as to
policy and alert to problems developing in individual companies.
- --------------------------------------------------------------------------------
1 Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
2 The MSCI EAFE Index is an unmanaged index that is generally considered to
be representative of international stock market activity. The MSCI EAFE
Index is not available for direct investment and its returns do not
reflect the fees and expenses that have been deducted from the Fund's
return.
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
Baillie Gifford International Fund Profile
as of December 31, 1997(1)
- ------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
FOR PERIODS ENDED 12/31/97 (1)
- --------------------------------------------------------------------------------
1 Year......................................... 11.93%
3 Years........................................ 12.83%
5 Years........................................ 14.24%
Since Inception (2/8/91)....................... 12.28%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment(1)
[The following table was depicted as a line graph in the printed material]
- --------------------------------------------------------------------------------
Index Fund
----- ----
2/8/91 10000 10000
91 10226 9383
92 9014 8548
93 11984 11458
94 12950 11557
95 14446 12855
96 15365 14836
12/31/97 15681 16606
- --------------------------------------------------------------------------------
To give you a comparison, the chart above shows the performance of a $10,000
investment made in Baillie Gifford International Fund and the MSCI/EFAE Index.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Composition by Geographical Location
[The following is represented by a pie chart in the printed material.]
U.K. -- 23.7%
Cash -- 1.8%
Latin America -- 4.5%
Asia -- 6.1%
Europe -- 49.1%
Japan -- 14.8%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top 10 Holdings
Company Nature of Company Country
1. Novartis AG Pharmaceuticals Switzerland
2. Glaxo Wellcome Pharmaceuticals UK
3. ABN Amro Hldgs. NV Banking Netherlands
4. Zurich Insurance Insurance Switzerland
5. Banco Santander S.A. Banking Spain
6. Bayerische Vbank Banking Germany
7. Mannesmann AG Telecommunications Germany
8. BMW Car Manufacturer Germany
9. Adidas AG Sports Apparel Germany
10. Abbey National Banking UK
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund
- ---------------------------------------
[Photo of Edward H. Hocknell, Portfolio Manager]
Q. How did the Fund perform during 1997?
A. The emerging markets have lived up to their reputation for volatility. For
the year ended December 31, 1997, the most commonly used benchmark for
reflecting the movements of the emerging markets as a whole, the MSCI Emerging
Markets (Free) Index, declined by a little over 13.4% in U.S. Dollar terms.(1)
Over the same period the Fund returned 1.97%.(2)
Q. What factors affected the Fund's performance?
A. The performance of the Fund was generally affected by the declines in
emerging markets worldwide in the fourth quarter. The declines in the Latin
American markets were relatively modest (-11.1%), considering how strong the
markets had been in the preceeding months. Mexico was actually up by 51.6% in
1997 as a whole, despite the weakness at the end of the year, and Latin America
as a whole was up 28.3% in the year. The real problems have been in Asia, where
the largest emerging market, Malaysia, fell by over 38% in the fourth quarter of
1997, to a level 68.8% lower than it had been a year earlier. Similarly
precipitous declines were experienced in Thailand, the Philippines and
Indonesia. Within Europe, Hungary has performed well, as has Portugal, but
Poland and the Czech Republic have mirrored the declines experienced elsewhere.
The origins of the markets' nervousness lie in Asia. We had become
concerned for quite some time that not only were the growth rates in some of the
Asian emerging economies unsustainably high, but also that the region's
new-found prosperity had encouraged an irresponsible, almost insouciant attitude
to lending on the part of the banks. The evidence for this lay in the statistics
on credit and office vacancies, the number of cranes littering the skylines of
Kuala Lumpur and Bangkok, and the increases in industrial capacity (especially
in Korea), which defied commercial logic.
One of the main supports for this extravagance was the link between these
countries' currencies and the U.S. Dollar. This link emboldened them to borrow
at low American rates of interest in order to earn higher rates at home. It
eventually became apparent that their borrowings were such that their own
currencies were vulnerable. As local currencies fell, banks' and companies'
liabilities, which were often denominated in foreign currencies, appreciated,
undermining investors' confidence in their earnings, which in turn led to a
decline in share prices.
The final piece in this sombre jigsaw puzzle was the effect that these
events had on international investors' confidence. They made sales where they
could, and this spread the problems, so that countries which had not borrowed
excessively or invested unwisely were also involved in the declines.
Q. What strategies did you use to manage the Fund and what is your outlook for
1998?
A. We were able to avoid the worst effects of the crisis in 1997 because we had
anticipated the mounting financial problems of Asia. For example, we reduced the
Fund's Asian exposure from 31.9% to 23.6% during the fourth quarter of 1997. But
we were not able to avoid the Asian effect completely because several major
markets whose fundamental prospects remain sound, such as Argentina, Mexico and
some Eastern European markets, also suffered.
- --------------------------------------------------------------------------------
1 The Morgan Stanley Capital International (MSCI) Emerging Markets Free
(EMF) Index is an unmanaged index that is generally considered to be
representative of the stock market activity of emerging markets. The Index
is a market capitalization weighted index composed of companies
representative of the market structure of 22 emerging market countries in
Europe, Latin America, and the Pacific Basin. The MSCI EMF Index excludes
closed markets and those shares in otherwise free markets which may not be
purchased by foreigners. The MSCI EMF Index is not available for direct
investment and the returns do not reflect the expenses that have been
deducted from the Fund's return.
2 Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Our view now is that the declines in these markets are likely to be reversed in
the months to come as their underlying qualities reassert themselves.
It is difficult to predict how long it will take for the financial storms
in the emerging markets to blow over; the situation is still very fluid. The
crisis has been indiscriminate; most markets that can be labelled "emerging"
have been hit, whether or not they share Asia's problems. We believe that many
emerging markets are now good value as a result, and that they will perform well
as investors' confidence returns, rather as the unaffected markets recovered in
the wake of Mexico's problems in 1993. We believe that the Fund is
well-positioned to take advantage of such a recovery, and we are confident that
the companies and countries in which we have invested have good long-term
prospects and stand at reasonable valuations.
The Fund's current investment strategy is to retain a heavy weighting in
Latin America; to be overweight compared to the MSCI EMF Index in Eastern
Europe, and to have a strong presence in Hong Kong. As 1998 begins, we have
little or nothing in the struggling markets of Southeast Asia -- their
difficulties are likely to persist for some time -- and we have a low exposure
to South Africa, where growth is faltering and share valuations are high.
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund Profile
as of December 31, 1997
- ---------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
FOR PERIODS ENDED 12/31/97(1)
- --------------------------------------------------------------------------------
1 Year....................................... 1.97%
3 Years...................................... 8.09%
Since Inception (10/17/94)................... 3.36%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Composition by Geographical Location
[The following is represented by a pie chart in the printed material.]
South Africa 2.6%
Cash 7.0%
Asia 25.1%
Europe 14.1%
Latin America 51.2%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment(1)
[The following table was depicted as a line graph in the printed material]
- --------------------------------------------------------------------------------
BGEM MSCI
---- ----
Oct 17, 94 10000 10000
Dec 31, 94 8803 8552
Dec 31, 95 8750 8106
Dec 31, 96 10902 8595
12/31/97 11117 7599
- --------------------------------------------------------------------------------
To give you a comparison, the chart above shows the performance of a $10,000
investment made in Baillie Gifford Emerging Markets Fund and the Morgan Stanley
Capital International (MSCI) and Emerging Markets Free (EMF) Index.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top Ten Holdings
Nature
Company of Company Country
1. Telebras ADR Telephone Utility Brazil
2. Petrobras Energy Brazil
3. Telmex ADR Telephone Utility Mexico
4. Hub Power Energy Pakistan
5. Banorte B Banking Mexico
6. Telebras On Telephone Utility Brazil
7. Gedeon Richter Pharmaceuticals Hungary
8. Asustek Computer Computer Services Taiwan
9. CIE B Event Management Mexico
10. New World
Developments Property Developer Hong Kong
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
19
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
- ---------------------------------------
[Photo of Charles E. Albers, C.F.A Co-Portfolio Manager]
[Photo of Larry Luxenberg, C.F.A. Co-Portfolio Manager]
Q. 1997 was a volatile year for the stock market. How did the Fund do in its
first year?
A. The Fund had an outstanding first year, both in absolute and relative terms.
From July 16, 1997, the date the Fund commenced operations, through year-end,
the Fund had a total return of 14.69%.(1) That result bettered the 28.20% total
return of the Russell 2000 Index,(2) a leading benchmark of small-cap
performance. In addition, the Fund's 1997 return exceeded the return over the
same period of the average fund in our Lipper peer group of Small Cap Funds
offered through variable insurance products, which was 27.04%.(3)
Q. What factors affected the Fund's performance during the year?
A. Two factors that contributed to the Fund's performance in 1997 were our
quantitative stock selection models and our sector selection. Our time-tested
quantitative models have proven successful with The Guardian Stock Fund and we
have adapted those same techniques for use in selecting small-cap stocks. This
disciplined and systematic approach proved particularly helpful during a
tumultuous year like the past one.
Throughout the year, our largest sector concentration was in financial
stocks, and we remained overweighted relative to the Russell 2000 throughout the
year. Financial stocks performed well, benefiting from a decline in interest
rates, the best asset quality in a generation, industry consolidation and more
efficient use of capital.
Q. What strategies did you use to manage the Fund in 1997?
A. Our basic approach during 1997 and into 1998 is to combine our quantitative
methodologies with fundamental judgments from our portfolio managers and
analysts. Particularly when dealing with smaller companies, many of which have
shorter operating histories, more variable operations and less research
coverage, our knowledge of the companies and their industries is a useful
adjunct to our quantitative approach.
Q. What do you anticipate for 1998?
A. Entering the new year, there is much to be optimistic about. The U.S. economy
by many measures is the best in 30 years. Inflation and interest rates are low,
while employment and corporate profits are high. But after three strong years
for the market, valuations are high by historic standards and overseas economies
are in turmoil. With this in mind we are approaching the market cautiously,
looking for companies that will benefit from low interest rates and are less
affected by the turbulence abroad.
- --------------------------------------------------------------------------------
1 Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
2 The Russell 2000 Index is generally considered to be representative of
small-capitalization issues in the U.S. stock market. The returns for the
Russell 2000 do not reflect expenses, which are deducted from the Fund's
return.
3 Lipper Analytical Services, Inc. is an independent mutual fund monitoring
and rating service. Its database of performance information is based on
historical total returns, which assume the reinvestment of dividends and
distributions, and the deduction of all fund expenses. Lipper returns do
not reflect the deduction of sales loads, and performance would be
different if sales loads were deductible.
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund Profile
as of December 31, 1997
- -----------------------------------------
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment
[The following table was depicted as a line graph in the printed material]
- --------------------------------------------------------------------------------
Fund S&P
---- ---
7/97 10373 10204
8/97 10688 10438
9/97 11750 11202
10/97 11402 10710
11/97 11344 10640
12/97 11470 10826
- --------------------------------------------------------------------------------
To give you a comparison, the chart above shows the performance of a $10,000
investment made in Small Cap Stock Fund and in the Russell 2000 Index.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
Top 10 Holdings as of 12/31/97
1. Fidelity National Financial Corp. 2.81%
2. AFC Cable System Inc. 2.49%
3. Ethan Allen Interiors Inc. 2.02%
4. U.S. Freightways Corp. 1.46%
5. Robbins & Myers Inc. 1.26%
6. Mail-Well Inc. 1.15%
7. Walter Marine Group 1.14%
8. Brylane Inc. 1.07%
9. Earthgrains Company 1.06%
10. Delta Timber Corp. 1.05%
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS(1)
- --------------------------------------------------------------------------------
Since Inception (7/16/97).................... 14.69%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Sector Weightings of Common Stocks
[The following is represented by a pie chart in the printed material.]
Utilities -- 0.88%
Credit Cyclicals -- 2.94%
Consumer Cyclicals -- 16.07%
Transportation -- 8.50%
Consumer Services -- 6.81%
Consumer Staples -- 5.76%
Basic Industry -- 7.27%
Financial -- 22.35%
Capital Goods -- 8.39%
Capital Goods/Technology -- 12.77%
Energy -- 8.24%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
21
<PAGE>
- --------------------------------------------------------------------------------
Value Line Centurion Fund
- ---------------------------------------
Q. For the 12 months ended December 31, 1997, how did the Value Line Centurion
Fund perform?
A. For the 12 months ended December 31, 1997, the Centurion Fund produced a
total return of 21.4%,(1) compared with total returns of 33.4% for the S&P
500(2) and 24.9% for the Dow Jones Industrial Average.(3)
The Centurion Fund enjoyed a competitive ten-plus months in 1997, besting
the market by 100 basis points at 34.0% in mid-October and staying even with the
S&P 500 at about 29.0% during early November. But the extraordinary confluence
of global events in Southeast Asia, Latin America, and the Middle East took a
decidedly negative toll on the Centurion Fund's equity investments over the last
eight weeks of the year, resulting in disappointing full-year performance.
Q. What factors affected Fund performance?
A. The Centurion Fund's strong performance during most of the year was largely
attributable to profitable investments in technology, financial services, energy
(with an emphasis on oil service and equipment), and consumer nondurables (with
a health care focus). But the political, economic and currency woes in Southeast
Asia, combined with the banking crisis in Latin America and the international
diplomatic stalemate among the United Nations, Iraq and the United States,
simultaneously impacted the very sectors of the market and the individual stocks
which screened as the most attractive to us in the Value Line Ranking System.
Q. What factors influenced your strategies for the Fund in 1997? What are your
expectations for 1998?
A. We had expected over the course of 1997 that the strong U.S. dollar (which
makes our exports more expensive) and the unwinding of inventory stockpiles
would combine to slow Gross Domestic Product (GDP) as we progressed through the
year and into 1998. Moreover, as the Southeast Asian crisis began to unfold in
earnest during October, we further expected that weakened Asian economies would
additionally curtail our GDP growth. We are now expecting GDP growth of about
2.0-2.5% during 1998, down from what we had believed to be an unsustainably high
level during 1997.
We continue to believe that inflationary pressures will remain benign,
coming off 10-year lows in both wholesale and retail inflation during 1997, with
core levels expected to approximate perhaps 2.0% or less in 1998.
We do not expect the economy to slip into recession, nor do we have a
deflationary economic forecast, primarily because of our belief that Federal
Reserve Chairman Alan Greenspan will remain ever vigilant regarding changes in
global economic conditions. Chairman Greenspan takes his responsibility as the
world's most important global banker very seriously, and we do not believe that
the Fed wishes to potentially exacerbate a global economic crisis by raising
interest rates. As a result, we do not expect any change in Chairman Greenspan's
neutral monetary policy stance for at least the next few Federal Open Market
Committee (FOMC) meetings, unless global conditions should weaken materially. In
such a case, we expect that the Fed's bias would shift toward a modest easing.
- --------------------------------------------------------------------------------
1 Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
2 The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 Index is not available for direct investment and its
returns do not reflect the fees and expenses that have been deducted from
the Fund.
3 The Dow Jones Industrial Average (DJIA) is an unmanaged average of 30
industrial stocks listed on the New York Stock Exchange that, like the S&P
500 Index, is generally considered to be representative of U.S. stock
market performance. The DJIA is not available for direct investment and
its returns do not reflect the fees and expenses that have been deducted
from the Fund.
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
In a dramatic flight to quality, investors have shifted into 30-year
Treasuries as a safe haven, and yields have plunged from a peak of 7.17% in
April 1997 to a recent record low of about 5.70%. While long rates could
temporarily back up to about 6.00% near-term due to profit taking, we now
believe that the economic problems in Asia and their impact on the U.S. could
drive yields down to the 5.25-5.50% level at their 1998 lows. Commensurate with
this diminution in economic growth, we expect corporate profit growth of about
7-8% in 1998, about half the level achieved last year.
In the wake of the Asian crisis, the Dow Jones Industrial Average (DJIA)
plunged 16% from record levels just below 8,300 in August to just under 7,000 in
October. The market has been stuck in a volatile trading mode ever since, as
investors, who are cautiously waiting for more definitive news regarding U.S.
corporate earnings, are contemplating whether or not to scale this global wall
of worry.
Given our muted forecast for corporate earnings growth for the broad
market in 1998, we believe that industry focus and bottom-up stock selection
from among the #1 and #2 ranked stocks in The Value Line Ranking System are
critical, with an emphasis on those areas that can produce well-above-trendline
revenue and profit growth.
- --------------------------------------------------------------------------------
Value Line Centurion Fund Profile
as of December 31, 1997
- ---------------------------------------
- --------------------------------------------------------------------------------
Portfolio Composition by Economic Sector
Consumer Goods
(Non-Durables) -- 20.05%
Capital Goods -- 3.67%
Energy -- 13.26%
Consumer Growth -- 3.02%
Financial -- 25.36%
Technology -- 25.20%
Cash -- 9.44%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
FOR PERIODS ENDED 12/31/97(1)
- --------------------------------------------------------------------------------
1 Year....................................... 21.39%
5 Years...................................... 16.33%
10 Years..................................... 17.76%
Since Inception (11/15/83) .................. 14.13%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top 10 Holdings
1. Gillette Company
2. Citicorp
3. Mellon Bank Corp.
4. Transocean Offshore Inc.
5. Cisco Systems Inc.
6. General Electric Company
7. American International Group Inc.
8. Sun America Inc.
9. Procter & Gamble Company
10. Medtronic Inc.
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment(1)
[The following table was depicted as a line graph in the printed material]
- --------------------------------------------------------------------------------
Fund S&P
---- ---
11/15/83 10000 10000
83 9180 10038
84 8420 10650
85 11108 14012
86 12982 16613
87 12611 17461
88 13568 20312
89 17841 26684
90 18833 25827
91 28662 33660
92 30361 36217
93 33156 39841
94 32422 40347
95 45416 55417
96 53291 68042
12/31/97 64689 92025
- --------------------------------------------------------------------------------
To give you a comparison, the chart above shows the performance of a $10,000
investment made in Value Line Centurion Fund and in the S&P 500 Index.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
23
<PAGE>
- --------------------------------------------------------------------------------
Value Line Strategic Asset Management Trust
- -------------------------------------------
Q. How did the SAM Trust perform in 1997?
A. The Trust earned a total return of 15.66% in 1997.(1) This compared with a
total return of 33.36% for the unmanaged Standard & Poor's 500 Index(2) and a
total return of 9.76% for the unmanaged Lehman Government/Corporate Bond
Index.(3)
Since inception just over ten years ago, the Trust's long-term
performance has stayed within shouting distance of the S&P 500, with an
annualized total return of 14.37% versus the S&P's 14.68%. That's a feat to be
pleased with, considering that SAM's holdings of bonds and cash have translated
into significantly reduced risk exposure by comparison with an all-stock
portfolio. Over the same period, the Lehman Government/Corporate Bond Index
returned 9.52% annually.
Q. What factors affected performance of the Trust during the year?
A. SAM's performance was limited in 1997 by its underweighting in stocks, which
made up only 40%-50% of total assets during the year. SAM was correspondingly
overweighted in cash, which generated low returns relative to stocks and bonds
in the period. The Trust held roughly an average weighting in bonds at around
30% of total assets, in a year of above-average returns for bonds.
Looking at just the stock portion of the portfolio, performance lagged a
bit behind the S&P 500. That can be attributed to the Trust's holdings of mid-
and small-capitalization equities, which made up about 40% of total
stockholdings. Indices of mid- and small-cap stocks in 1997 lagged the S&P 500,
which is an index that represents the large-cap stocks.
Q. How does the Trust determine asset allocation?
A. SAM uses Value Line's proprietary stock and bond market models to determine
the suggested optimal asset allocation at any given time. The 1995-97 rise in
stock prices, combined with relatively flat interest rates, were the main
factors that led the stock market model to underweight stocks last year. Near
the end of 1997, however, the model returned to the Fund's neutral position of
55% in stocks due to a drop in long-term interest rates, a rise in free reserves
in the banking system, and a pause in the stock market's steep climb.
Q. What strategies were used in stock and bond selection?
A. For stock selection, we rely primarily on the Value Line Timeliness Ranking
System, which favors stocks with strong earnings and price momentum. To reduce
risk, we maintain a diversified portfolio that doesn't stray too far from the
industry weightings of the S&P 500; this can mean investment in some stocks
ranked only neutral by our System. For bond selection, we stay with high-quality
issues. In recent years, we have invested in U.S. Treasuries only. Late in 1997,
however, we swapped some Treasuries into bonds issued by U.S. agencies as yield
spreads became more attractive.
- --------------------------------------------------------------------------------
1 Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies which provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
2 The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 is not available for direct investment and its
returns do not reflect the fees and expenses that have been deducted from
the Fund's return.
3 The Lehman Government/Corporate Bond Index is an unmanaged index that is
generally considered to be representative of U.S. government and corporate
bond market activity. The Lehman Government/Corporate Bond Index is not
available for direct investment and the returns do not reflect the fees
and expenses that have been deducted from the Fund.
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
Value Line Strategic Asset Management Trust
Profile as of December 31, 1997
- -------------------------------------------
- --------------------------------------------------------------------------------
Top Ten Stock Holdings
1. Coca-Cola Enterprises Inc.
2. Safeway Inc.
3. Omnicom Group Inc.
4. Tyco International Ltd.
5. Symbol Technologies
6. U.S. Bancorp
7. Conseco Inc.
8. General Electric Co.
9. Compuware Corp.
10. Pfizer Inc.
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
FOR PERIODS ENDED 12/31/97(1)
- --------------------------------------------------------------------------------
1 Year....................................... 15.66%
5 Years...................................... 12.88%
10 Years..................................... 15.38%
Since Inception (10/1/87).................... 14.37%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment(1)
[The following table was depicted as a line graph in the printed material]
- --------------------------------------------------------------------------------
Date SAM Trust L G/C Index S&P 500
---- --------- ----------- -------
10/1/87 10000 10000 10000
87 9476 10583 7745
88 10453 11385 9010
89 13124 13006 11836
90 13104 14083 11456
91 18784 16355 14931
92 21611 17594 16065
93 24174 19535 17673
94 22994 18849 17897
95 29556 22476 24582
96 34246 23128 30182
12/31/97 39608 25388 39844
- --------------------------------------------------------------------------------
To give you a comparison, the chart above shows the performance of a $10,000
investment made in the Value Line SAM Trust, the S&P 500 Index and in the Lehman
Government/Corporate Bond Index.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Composition by Asset Class
[The following is represented by two pie charts in the printed material.]
December 31, 1996 December 31, 1997
Cash 22.2% Cash 15.7%
Stocks 48.0% Stocks 56.9%
Bonds 29.8% Bonds 27.4%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
25
<PAGE>
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
[PHOTO OMITTED] [PHOTO OMITTED]
John D. Laupheimer, Jr. Kevin R. Parke
Co-Portfolio Manager Co-Portfolio Manager
Q. For the year ended December 31, 1997, how did the Series perform?
A. For the year ended December 31, 1997, the Series provided a total return of
29.78% (including the reinvestment of any distributions).(1) This compares to a
33.36% return for the Standard & Poor's 500 Composite Index (the S&P 500), a
popular, unmanaged index of common stock total return performance.(2)
Q. What factors affected the Series' performance during this period?
A. The Series' slight underperformance versus the S&P 500 can be attributed to
underperformance in some of the Series' industrial goods and services stocks, a
sector in which we were slightly overweighted. While a number of these
companies, such as Cooper Industries, United Technologies, and Lockheed Martin,
underperformed, we believe the long-term outlook for these companies is
favorable and continue to hold large positions in them. On the positive side,
the Series benefited from a major overweighting in financial services, which was
one of the best-performing sectors of the market. In the S&P 500, this sector
returned 50%, while the Series' financial services stocks returned 57%. Some of
our major holdings in this sector performed very well, including Norwest Bank,
US Bancorp, Progressive Corp., Allstate, and State Street Bank. Although the
Series' technology weighting was less than 6% of the portfolio, compared with a
12% weighting for this sector in the S&P 500, our technology stocks gained over
40% for the year, while the S&P technology sector was up only 27%.
The Series' health care weighting was increased during the year because we
regard this industry as a good, steady growth part of the economy, particularly
the pharmaceutical companies, as opposed to the health-maintenance or
managed-care companies. The flow of products coming out of the pharmaceutical
business has accelerated, in part because of a renewed focus by drug companies
on product development. Also, there seems to be a greater understanding by
the Food and Drug Administration that the approval process for these drugs has
to be faster in order for them to benefit the public. The growth rates of these
companies have been quite strong. The Series' largest holding is Bristol-Myers
Squibb; we also have holdings in Pfizer, Johnson & Johnson, and Novartis, a
Swiss drug company.
The turmoil in emerging markets and, particularly in Asia has had no
direct effect on the Series because it had no holdings in those parts of the
world. However, we expect to see some effect on domestic companies with sales
in those regions. For example, the Series had a small holding in Oracle, a stock
that declined in December when the company announced that Japan was going to be
a difficult environment for
- --------------------------------------------------------------------------------
1 All results are historical and, therefore, are not an indication of future
results. The investment return and principal value of an investment in the
product will vary with changes in market conditions, and shares, when
redeemed, may be worth more or less than the original cost. Returns shown do
not reflect the deduction of the mortality and expense risk charges and
administration fees. Please refer to the annuity product's annual report for
performance that reflects the deduction of the fees and charges imposed by
insurance company separate accounts. All results reflect any applicable
expense subsidies and waivers, without which the performance results would
have been less favorable. Subsidies and waivers may be rescinded at any time.
2 The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that is
generally considered to be representative of U.S. stock market activity. The
S&P 500 Index is not available for direct investment and its returns do not
reflect expenses, which have been deducted from the Fund's return.
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
it. We have begun analyzing what companies have exposure in Asia and how much.
Q. What are your expectations for 1998?
A. We see a continuation of the lower-inflation environment for 1998. The
turmoil in emerging markets will probably have a positive effect on both
interest rates and inflation here in the United States. In 1998, we anticipate
that the risk will not be valuations, but earnings, and we're trying to be very
careful that the companies in the portfolio are capable of making their
earnings estimates.
- --------------------------------------------------------------------------------
MFS Growth with Income Series
Profile as of December 31, 1997
- -------------------------------
Growth of a Hypothetical $10,000 Investment
[The following table was depicted as a line graph in the printed material]
- --------------------------------------------------------------------------------
MFS S&P CPI
--- --- ---
11/1/95 10000 10000 10000
12/31/95 10771 10640 9980
6/30/96 11969 11714 10191
12/31/96 13406 13083 10319
6/30/97 15812 15779 10429
12/31/97 17399 17448 10540
- --------------------------------------------------------------------------------
To give you a comparison, the chart above shows the performance of a
$10,000 investment made in MFSGrowth with Income Series, the S&P 500 Composite
Index and the Consumer Price Index.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
FOR PERIODS ENDED 12/31/97 (1)
- --------------------------------------------------------------------------------
1 Year................................................................. 29.78
Since Inception (10/9/95).............................................. 27.61
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
27
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Cash Fund
- ----------------------
[PHOTO OMITTED]
Alexander M. Grant, Jr.,
Portfolio Manager
Q. How did the Guardian Cash Fund perform during 1997?
A. As of December 30, 1997, the effective 7-day annualized yield for The
Guardian Cash Fund was 5.38%.(1) The Fund produced a total return of 5.14% in
1997.2 In contrast, the effective 7-day annualized yield of the Fund's peer
group of Tier One money market funds, as measured by IBC Financial Data, was
5.20% and the average total return for 1997 for such funds was 5.04%. IBC
Financial Data is a research firm that tracks money market funds.
Q. What factors affected the Fund's performance?
A. Money market funds are directly affected by the actions of the Federal
Reserve Board. On March 25, the Federal Reserve raised the Fed Funds target rate
from 5.25% to 5.50%. This move followed several months of strong economic data
particularly with respect to housing data, consumer consumption and payroll
data. The Discount Rate was left unchanged at 5.00%. The Fed Funds target rate
is the rate at which banks can borrow from each other overnight. While the
Federal Reserve Board does not set this rate, it can establish a target rate
and, through open market operations, the Fed can move member banks in the
direction of that target rate. The Discount Rate is the rate at which banks can
borrow directly from the Federal Reserve.
Uncertainty with the direction of the stock market contributed to large
daily inflows and outflows of funds in the Cash Fund during late 1997. As the
stock market rallied, our investors transferred cash to equity funds. During
those times when the stock market stalled, we saw cash inflows. Another factor
affecting performance was the portfolio's average maturity -- 24 days as of
December 30, 1997. The average Tier One money market fund as measured by IBC
Financial Data had an average maturity of 60 days.
Q. What was your investment strategy during the year?
A. The Guardian Cash Fund is a place for our investors to put their money while
they decide their preferred long-term investment vehicle, be it stocks or bonds.
Also, some of our investors prefer the relative stability of the money markets.
To best accommodate all our investors, we will continue to try to provide a
strong 7-day yield, while offering safety and liquidity. Our investment strategy
was to create a diversified portfolio of money market instruments that presents
minimal credit risks according to our criteria. As always, we only purchased for
the Fund's Portfolio, securities from issuers that had received ratings in the
two highest credit quality categories established by nationally recognized
statistical ratings organizations like Moody's Investors Service Inc. and
Standard & Poor's Corporation. At year end, most of the portfolio (95.3%) was
invested in commercial paper; the balance (4.7%) was invested in repurchase
agreements.
- --------------------------------------------------------------------------------
INVESTMENTS IN THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. WHILE THE FUND SEEKS TO MAINTAIN A STABLE PRICE OF $10.00 PER SHARE,
THERE IS NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1 Yields are annualized historical figures. Effective yield assumes that income
is reinvested. Yields will vary as interest rates change. Past performance is
not a guarantee of future results.
2 Total return figures are historical and assume the reinvestment of dividends
and distributions and the deduction of all Fund expenses. The actual total
returns for owners of the variable annuity contracts or variable life
insurance policies that provide for investment in the Fund will be lower to
reflect separate account and contract/policy charges. Investment return and
principal value will fluctuate so that the value of your investment, when
redeemed, may be worth more or less than the original cost.
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
This page intentionally left blank.
- --------------------------------------------------------------------------------
29
<PAGE>
- ----------
Separate
Account E
1
- ----------
- --------------------------------------------------------------------------------
The Guardian Separate Account E
- ----------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
Baillie
Gabelli Baillie Gifford
Guardian Guardian Guardian Guardian Capital Gifford Emerging
Stock Bond Cash Small Cap Asset International Markets
Combined Fund Fund Fund Stock Fund Fund Fund Fund
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FIFO Cost ...................... -- $24,374,217 $1,327,701 $4,951,636 $4,869,532 $1,466,721 $1,345,636 $686,567
=================================================================================================
Assets
Shares owned in underlying
fund--Note 1 ................. -- 494,302 107,446 495,164 352,979 93,645 72,007 65,524
Net asset value per share
(NAV) ........................ -- 46.05 12.11 10.00 13.63 15.31 18.27 10.17
Total Assets (Shares
x NAV) ...................... $45,109,617 22,762,626 1,301,169 4,951,636 4,811,097 1,433,704 1,315,569 666,380
----------- ----------- ---------- ---------- ---------- ---------- ---------- --------
Liabilities
Risk charges and other
liabilities .................. 64,054 30,649 1,705 6,095 8,200 2,361 1,891 980
----------- ----------- ---------- ---------- ---------- ---------- ---------- --------
Net Assets--Note 3 ........... $45,045,563 $22,731,977 $1,299,464 $4,945,541 $4,802,897 $1,431,343 $1,313,678 $665,400
=========== =========== ========== ========== ========== ========== ========== ========
</TABLE>
Value Line
Strategic
Value Line Asset MFS Growth
Centurion Management With Income
Fund Trust Series
-----------------------------------
FIFO Cost .................. $1,082,859 $4,658,930 $2,052,191
===================================
Assets
Shares owned in underlying
fund--Note 1 ............. 42,216 213,721 125,331
Net asset value per share
(NAV) .................... 25.52 22.13 16.44
Total Assets (Shares
x NAV) .................. 1,077,343 4,729,650 2,060,443
---------- ---------- ----------
Liabilities
Risk charges and other
liabilities .............. 1,535 7,492 3,146
Net Assets--Note 3 ....... $1,075,808 $4,722,158 $2,057,297
========== ========== ==========
- --------------------------------------------------------------------------------
The Guardian Separate Account E
- ----------------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Investment Income
Income:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reinvested dividends .... $ 211,602 $ 120,918 $ 37,116 $23,051 $ 8,591 $ 1,523 $ 11,931 $ 362 $ --
Expenses--Note 4:
Mortality and expense
risk charges ........... 64,874 31,095 1,705 6,149 8,200 2,361 1,891 980 1,535
----------- ----------- -------- ------- -------- -------- -------- -------- -------
Net investment
income/(expense) ........ 146,728 89,823 35,411 16,902 391 (838) 10,040 (618) (1,535)
----------- ----------- -------- ------- -------- -------- -------- -------- -------
Realized and Unrealized
Gain/(Loss) from
Investments
Realized gain/(loss)
from investments:
Net realized gain/(loss)
from sale of investments (6,879) 1,643 (9) -- 1,949 588 (7,561) (3,489) --
Reinvested realized gain
distributions .......... 2,123,356 1,882,674 -- -- 54,919 85,301 36,405 26,121 --
----------- ----------- -------- ------- -------- -------- -------- -------- -------
Net realized gain/(loss)
on investments ......... 2,116,477 1,884,317 (9) -- 56,868 85,889 28,844 22,632 --
----------- ----------- -------- ------- -------- -------- -------- -------- -------
Unrealized appreciation/
(depreciation) of
investments:
End of year ............. (1,706,373) (1,611,591) (26,532) -- (58,435) (33,017) (30,067) (20,187) (5,516)
Beginning of year ....... -- -- -- -- -- -- -- -- --
----------- ----------- -------- ------- -------- -------- -------- -------- -------
Change in unrealized
appreciation/
(depreciation) ......... (1,706,373) (1,611,591) (26,532) -- (58,435) (33,017) (30,067) (20,187) (5,516)
----------- ----------- -------- ------- -------- -------- -------- -------- -------
Net realized and
unrealized gain/(loss)
from investments ........ 410,104 272,726 (26,541) -- (1,567) 52,872 (1,223) 2,445 (5,516)
----------- ----------- -------- ------- -------- -------- -------- -------- -------
Net Increase/(Decrease)
in Net Assets Resulting
from Operations .......... $ 556,832 $ 362,549 $ 8,870 $16,902 $ (1,176) $ 52,034 $ 8,817 $ 1,827 $(7,051)
=========== =========== ======== ======= ======== ======== ======== ======== =======
</TABLE>
Investment Income
Income:
Reinvested dividends .... $ -- $ 8,110
Expenses-- Note 4:
Mortality and expense
risk charges ........... 7,743 3,215
-------- -------
Net investment
income/(expense) ........ (7,743) 4,895
-------- -------
Realized and Unrealized
Gain/(Loss) from
Investments
Realized gain/(loss)
from investments:
Net realized gain/(loss)
from sale of investments -- --
Reinvested realized gain
distributions .......... -- 37,936
-------- -------
Net realized gain/(loss)
on investments ......... -- 37,936
-------- -------
Unrealized appreciation/
(depreciation) of
investments:
End of year ............. 70,720 8,252
Beginning of year ....... -- --
-------- -------
Change in unrealized
appreciation/
(depreciation) ......... 70,720 8,252
-------- -------
Net realized and
unrealized gain/(loss)
from investments ........ 70,720 46,188
-------- -------
Net Increase/(Decrease)
in Net Assets Resulting
from Operations .......... $ 62,977 $51,083
======== =======
See notes to financial statements
30 & 31
<PAGE>
- ----------
Separate
Account E
1
- ----------
- --------------------------------------------------------------------------------
The Guardian Separate Account E
- ----------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Gabelli
Guardian Guardian Guardian Guardian Capital
Stock Bond Cash Small Cap Asset
Combined Fund Fund Fund Stock Fund Fund
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ------------------------
1997 Increase/(Decrease)
from Operations
- ------------------------
Net investment income/(expense) $ 146,728 $ 89,823 $ 35,411 $ 16,902 $ 391 $ (838)
Net realized gain/(loss) from
sale of investments ........... (6,879) 1,643 (9) -- 1,949 588
Reinvested realized gain
distributions ................. 2,123,356 1,882,674 -- -- 54,919 85,301
Change in unrealized
appreciation/(depreciation)
of investments ................ (1,706,373) (1,611,591) (26,532) -- (58,435) (33,017)
------------ ------------ ----------- ----------- ----------- -----------
Net increase/(decrease)
resulting from operations ..... 556,832 362,549 8,870 16,902 (1,176) 52,034
------------ ------------ ----------- ----------- ----------- -----------
- --------------------------
1997 Contract Transactions
- --------------------------
Net Contract Purchase Payments . 44,715,817 21,837,849 1,180,550 6,057,981 4,775,601 1,358,163
Transfer between/within separate
accounts ...................... -- 727,549 113,195 (1,129,195) 30,615 21,573
Administrative charges ......... 2,027 1,014 405 -- -- --
Annuity Benefits ............... (230,221) (197,853) (3,827) (66) (2,160) (50)
Transfers-- Other .............. 288 423 271 (135) 17 (377)
------------ ------------ ----------- ----------- ----------- -----------
Net increase/(decrease) from
contract transactions ......... 44,487,911 22,368,982 1,290,594 4,928,585 4,804,073 1,379,309
------------ ------------ ----------- ----------- ----------- -----------
Actuarial Increase/(Decrease)
in Reserves for Contracts in
Payment Period ................. 820 446 -- 54 -- --
------------ ------------ ----------- ----------- ----------- -----------
Total Increase/(Decrease) in Net
Assets ......................... 45,045,563 22,731,977 1,299,464 4,945,541 4,802,897 1,431,343
Net Assets at December 31, 1996 -- -- -- -- -- --
------------ ------------ ----------- ----------- ----------- -----------
Net Assets at December 31, 1997 $ 45,045,563 $ 22,731,977 $ 1,299,464 $ 4,945,541 $ 4,802,897 $ 1,431,343
============ ============ =========== =========== =========== ===========
<CAPTION>
Baillie Value Line
Baillie Gifford Strategic
Gifford Emerging Value Line Asset MFS Growth
International Markets Centurion Management With Income
Fund Fund Fund Trust Series
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------
1997 Increase/(Decrease)
from Operations
- ------------------------
Net investment income/(expense) $ 10,040 $ (618) $ (1,535) $ (7,743) $ 4,895
Net realized gain/(loss) from
sale of investments ........... (7,561) (3,489) -- -- --
Reinvested realized gain
distributions ................. 36,405 26,121 -- -- 37,936
Change in unrealized
appreciation/(depreciation)
of investments ................ (30,067) (20,187) (5,516) 70,720 8,252
----------- --------- ----------- ----------- -----------
Net increase/(decrease)
resulting from operations ..... 8,817 1,827 (7,051) 62,977 51,083
----------- --------- ----------- ----------- -----------
- --------------------------
1997 Contract Transactions
- --------------------------
Net Contract Purchase Payments . 1,532,585 659,376 1,024,163 4,366,176 1,923,373
Transfer between/within separate
accounts ...................... (227,246) 5,180 58,961 316,469 82,899
Administrative charges ......... -- -- -- -- 608
Annuity Benefits ............... (590) (428) (36) (24,258) (953)
Transfers-- Other .............. 112 (555) (229) 543 218
----------- --------- ----------- ----------- -----------
Net increase/(decrease) from
contract transactions ......... 1,304,861 663,573 1,082,859 4,658,930 2,006,145
----------- --------- ----------- ----------- -----------
Actuarial Increase/(Decrease)
in Reserves for Contracts in
Payment Period ................. -- -- -- 251 69
----------- --------- ----------- ----------- -----------
Total Increase/(Decrease) in Net
Assets ......................... 1,313,678 665,400 1,075,808 4,722,158 2,057,297
Net Assets at December 31, 1996 -- -- -- -- --
----------- --------- ----------- ----------- -----------
Net Assets at December 31, 1997 $ 1,313,678 $ 665,400 $ 1,075,808 $ 4,722,158 $ 2,057,297
=========== ========= =========== =========== ===========
</TABLE>
See notes to financial statements
32 & 33
<PAGE>
- ----------
Separate
Account E
1
- ----------
- --------------------------------------------------------------------------------
The Guardian Separate Account E
- ----------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
Note 1 -- Organization
The Guardian Separate Account E (the Account), a unit investment trust
registered under the Investment Company Act of 1940, as amended, was organized
by The Guardian Insurance & Annuity Company, Inc. (GIAC) on September 26, 1996
and commenced operations on September 15, 1997. GIAC is a wholly owned
subsidiary of The Guardian Life Insurance Company of America (Guardian Life).
GIAC issues the individual deferred variable annuity contracts offered through
the Account. GIAC provides for accumulations and benefits under the contracts by
crediting the net premium purchase payments to one or more investment divisions
established within the Account, or to the Fixed Rate Option (FRO), as selected
by the contractowner. Amounts allocated to the FRO are maintained by GIAC in its
general account. The contractowner may transfer his or her contract value among
the ten investment options within the Account, or the FRO. However, a
contractowner may only invest in up to six investment divisions, including the
FRO, at any time. The ten investment options of the Account correspond to the
following underlying mutual funds in which the investment option invests: The
Guardian Stock Fund, Inc. (GSF), The Guardian Bond Fund, Inc. (GBF), The
Guardian Cash Fund, Inc. (GCF), The Guardian Small Cap Stock Fund (GSCF),
Gabelli Capital Asset Fund (GCAF), Baillie Gifford International Fund (BGIF),
Baillie Gifford Emerging Markets Fund (BGEMF), Value Line Centurion Fund, Inc.,
Value Line Strategic Asset Management Trust and MFS Growth With Income Series
(collectively, the Funds and individually, a Fund).
GSF, GBF, GCF and GSCF each has an investment advisory agreement with
Guardian Investor Services Corporation (GISC), a wholly owned subsidiary of
GIAC. GCAF has a management agreement with GISC. BGIF and BGEMF each has an
investment advisory agreement with Guardian Baillie Gifford Ltd., a joint
venture company formed by GIAC and Baillie Gifford Overseas Ltd. Contractowners
who qualify may also purchase an optional Enhanced Death Benefit Rider which may
provide greater death benefits than the proceeds payable under the basic
contract.
Under applicable insurance law, the assets and liabilities of the Account
are clearly identified and distinguished from the other assets and liabilities
of GIAC. The assets of the Account will not be charged with any liabilities
arising out of any other business conducted by GIAC, but the obligations of the
Account, including the promise to make annuity payments, are obligations of
GIAC.
Note 2 -- Significant Accounting Policies
The following is a summary of significant accounting policies of the
Account.
Investments
(a) Net proceeds of payments made by contractowners to the Account are
invested by the Account's investment divisions in shares of the corresponding
Funds at net asset value. All distributions made by a Fund are reinvested in
shares of the same Fund.
(b) The market value of the investments in the Funds is based on the net
asset value of the respective Funds as of their close of business on the
valuation date.
(c) Investment transactions are accounted for on the trade date and income
is recorded on the ex-dividend date.
(d) The cost of investments sold is determined on a first in, first out
(FIFO) basis.
34
<PAGE>
----------
Separate
Account E
1
----------
Purchases and Sales
During the year ended December 31, 1997 purchases and sales of shares of
the Funds were as follows:
The Guardian Separate Account E Purchases Sales
December 31, December 31,
1997 1997
------------ ------------
The Guardian Stock Fund, Inc........................ $24,460,759 $ 88,186
The Guardian Bond Fund, Inc......................... 1,329,702 1,992
The Guardian Cash Fund, Inc......................... 5,881,389 929,753
The Guardian Small Cap Stock Fund................... 4,988,689 121,106
Gabelli Capital Asset Fund.......................... 1,482,580 16,446
Baillie Gifford International Fund.................. 1,630,104 276,906
Baillie Gifford Emerging Markets Fund............... 711,975 21,920
Value Line Centurion Fund, Inc...................... 1,082,859 --
Value Line Strategic Asset Management Trust......... 4,658,930 --
MFS Growth With Income Series....................... 2,052,192 --
----------- ----------
Total............................................. $48,279,179 $1,456,309
----------- ----------
Federal Income Taxes
The operations of the Account are part of the operations of GIAC and, as
such, are included in the combined tax return of GIAC. GIAC is taxed as a life
insurance company under the Internal Revenue Code of 1986, as amended. Under tax
law, no federal income taxes are payable by GIAC with respect to the operations
of the Account.
35
<PAGE>
- ----------
Separate
Account E
1
- ----------
- --------------------------------------------------------------------------------
The Guardian Separate Account E
- ----------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Note 3 -- Net Assets, December 31, 1997
<TABLE>
<CAPTION>
Accumulation Total
REGULAR CONTRACT Units Owned Unit Value Unit Value
----------- ------------ ----------
<S> <C> <C> <C>
Tax-Qualified Accounts:
The Guardian Stock Fund, Inc. 510,354 $10.436872 $ 5,326,497
The Guardian Bond Fund, Inc. 31,534 10.298674 324,762
The Guardian Cash Fund, Inc. 117,109 10.121184 1,185,278
The Guardian Small Cap Stock Fund 107,489 10.320078 1,109,295
Gabelli Capital Asset Fund 36,094 11.002284 397,115
Baillie Gifford International Fund 32,078 9.687628 310,762
Baillie Gifford Emerging Markets Fund 9,425 8.430653 79,455
Value Line Centurion Fund, Inc. 26,187 9.680080 253,493
Value Line Strategic Asset Management Trust 113,253 10.252672 1,161,148
MFS Growth With Income Series 54,050 10.559985 570,764
Non-Tax-Qualified Accounts:
The Guardian Stock Fund, Inc. 630,297 10.436872 6,578,331
The Guardian Bond Fund, Inc. 49,464 10.298674 509,411
The Guardian Cash Fund, Inc. 119,085 10.121184 1,205,284
The Guardian Small Cap Stock Fund 122,412 10.320078 1,263,306
Gabelli Capital Asset Fund 24,087 11.002284 265,013
Baillie Gifford International Fund 30,500 9.687628 295,471
Baillie Gifford Emerging Markets Fund 22,501 8.430653 189,699
Value Line Centurion Fund, Inc. 38,898 9.680080 376,539
Value Line Strategic Asset Management Trust 127,877 10.252672 1,311,083
MFS Growth With Income Series 62,952 10.559985 664,773
ENHANCED DEATH BENEFIT RIDER
Tax-Qualified Accounts:
The Guardian Stock Fund, Inc. 701,284 10.430349 7,314,642
The Guardian Bond Fund, Inc. 31,666 10.292235 325,918
The Guardian Cash Fund, Inc. 158,925 10.114859 1,607,505
The Guardian Small Cap Stock Fund 153,256 10.313630 1,580,629
Gabelli Capital Asset Fund 60,886 10.995415 669,465
Baillie Gifford International Fund 54,339 9.681566 526,088
Baillie Gifford Emerging Markets Fund 40,867 8.425380 344,319
Value Line Centurion Fund, Inc. 38,125 9.674029 368,819
Value Line Strategic Asset Management Trust 155,638 10.246260 1,594,706
MFS Growth With Income Series 23,702 10.553390 250,141
Non-Tax-Qualified Accounts:
The Guardian Stock Fund, Inc. 334,605 10.430349 3,490,043
The Guardian Bond Fund, Inc. 13,542 10.292235 139,372
The Guardian Cash Fund, Inc. 92,588 10.114859 936,514
The Guardian Small Cap Stock Fund 82,383 10.313630 849,667
Gabelli Capital Asset Fund 9,072 10.995415 99,750
Baillie Gifford International Fund 18,732 9.681566 181,357
Baillie Gifford Emerging Markets Fund 6,163 8.425380 51,927
Value Line Centurion Fund, Inc. 7,955 9.674029 76,958
Value Line Strategic Asset Management Trust 62,852 10.246260 644,003
MFS Growth With Income Series 53,104 10.553390 560,429
-----------
44,989,731
Contracts receiving annuity payments 55,832
-----------
Total Net Assets $45,045,563
===========
</TABLE>
NOTE: In some instances the calculation of total assets may not agree due to
rounding.
36
<PAGE>
Note 4 -- Administrative and Mortality and Expense Risk Charges
Contractual charges paid to GIAC include:
(1) a fixed annual contract fee of $35 is deducted on each contract
anniversary date before annuitization and upon surrender prior to annuitization
to cover GIAC's administrative expenses;
(2) a charge for mortality and expense risk is computed daily and is equal
to an annual rate of 1.05% of the average daily net assets applicable to
contractowners. There is an additional charge for the Enhanced Death Benefit
Rider equal to an annual rate of .20% of the daily net assets of the applicable
contracts;
(3) contingent deferred sales charges on certain partial or total
surrenders. These charges are assessed against redemptions and paid to GIAC
during the first seven contract years;
(4) a daily administrative expense charge against the net assets of each
investment option in the amount equal to .20% on an annual basis; and
(5) a charge for premium taxes deducted from either the contract payment
or upon annuitization, as determined in accordance with applicable state law.
Currently, GIAC makes no charge against the Account for GIAC's federal
income taxes. However, GIAC reserves the right to charge taxes attributable to
the Account in the future.
37
<PAGE>
- ----------
Separate
Account E
1
- ----------
- --------------------------------------------------------------------------------
The Guardian Separate Account E
- ----------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of The Guardian Insurance & Annuity Company, Inc. and
the Contractowners of The Guardian Separate Account E, "Guardian Investor
Retirement Asset Manager"
In our opinion, the accompanying statement of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of the investment divisions
relating to The Guardian Stock Fund, Inc., The Guardian Bond Fund, Inc., The
Guardian Cash Fund, Inc., The Guardian Small Cap Stock Fund, Gabelli Capital
Asset Fund, Baillie Gifford International Fund, Baillie Gifford Emerging Markets
Fund, Value Line Centurion Fund, Inc., Value Line Strategic Asset Management
Trust and MFS Growth With Income Series (constituting The Guardian Separate
Account E, "Guardian Investor Retirement Asset Manager") at December 31, 1997,
and the results of each of their operations and the changes in each of their net
assets for the period September 15, 1997 (commencement of operations) through
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the management of The
Guardian Insurance & Annuity Company, Inc.; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at December 31, 1997 by correspondence with the
transfer agents of the underlying funds, provides a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 13, 1998
38
<PAGE>
- --------------------------------------------------------------------------------
This page intentionally left blank.
- --------------------------------------------------------------------------------
39
<PAGE>
- ------------
The Guardian
Stock Fund,
Inc.
- ------------
2
- ------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, Inc.
- ---------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1997
- ----------------------
COMMON STOCKS -- 92.6%
- ----------------------
Shares Value
- ----------------------------------------------------------------
Aerospace and Defense -- 2.1%
24,000 Alliant Techsystems, Inc.* $ 1,338,000
32,600 General Dynamics Corp. 2,817,862
77,025 Lockheed Martin Corp. 7,586,962
170,290 Northrop Grumman Corp. 19,583,350
201,750 Precision Castparts Corp. 12,168,047
95,800 Rockwell Int'l. Corp. 5,005,550
25,000 Sundstrand Corp. 1,259,375
40,000 Thiokol Corp. 3,250,000
53,000 TRW, Inc. 2,828,875
168,100 United Technologies Corp. 12,239,781
-----------
68,077,802
-----------
Air Transportation -- 1.1%
63,000 Alaska Air Group, Inc.* 2,441,250
143,000 AMR Corp., DE* 18,375,500
43,000 Comair Hldgs., Inc.* 1,037,375
151,000 Continental Airlines, Inc.* 7,266,875
77,000 UAL Corp.* 7,122,500
-----------
36,243,500
-----------
Appliance and Furniture -- 0.6%
115,000 Ethan Allen Interiors, Inc. 4,434,687
174,000 Furniture Brands Int'l., Inc.* 3,567,000
50,000 Hon Industries, Inc. 2,950,000
50,000 Knoll Corp.* 1,606,250
30,000 Leggett & Platt, Inc. 1,256,250
100,000 Herman Miller, Inc. 5,456,250
-----------
19,270,437
-----------
Automotive Parts -- 0.9%
38,000 Arvin Industries, Inc. 1,265,875
19,437 Autoliv, Inc. 636,562
37,500 Borg-Warner Automotive, Inc. 1,950,000
131,000 Cooper Tire & Rubber Co.* 3,193,125
73,000 Cummins Engines, Inc. 4,311,562
84,000 Goodyear Tire & Rubber Co. 5,344,500
45,000 Kaydon Corp. 1,468,125
276,933 Meritor Automotive, Inc. 5,832,901
24,000 Modine Manufacturing Co.* 819,000
112,000 Timken Co. 3,850,000
17,000 Tower Automotive, Inc.* 715,062
-----------
29,386,712
-----------
Biotechnology -- 0.2%
93,600 Amgen, Inc. 5,066,100
-----------
Building Materials and Homebuilders -- 1.0%
58,000 AK Steel Hldg. Corp. 1,025,875
18,000 Armstrong World Industries, Inc. 1,345,500
33,000 Centex Construction Products, Inc. 994,125
65,000 Fleetwood Enterprises, Inc. 2,758,437
92,500 Lafarge Corp. 2,734,531
95,000 Lennar Corp. 2,048,437
9,400 Lone Star Industries, Inc. 499,375
79,650 Martin Marietta Materials, Inc. 2,912,203
120,000 McGrath Rentcorp 2,940,000
24,000 Medusa Corp. 1,003,500
68,200 Sherwin-Williams Co. 1,892,550
62,000 Southdown, Inc. 3,658,000
65,000 USG Corp.* 3,185,000
36,000 U.S. Home Corp.* 1,413,000
6,300 Valspar Corp. 200,812
45,700 Vulcan Materials Co. 4,667,112
-----------
33,278,457
-----------
Chemicals -- 3.6%
68,000 Albemarle Corp. 1,623,500
141,000 Cambrex Corp. 6,486,000
49,000 Carlisle Cos., Inc. 2,094,750
115,000 Crompton & Knowles Corp.* 3,047,500
51,000 Dexter Corp. 2,202,562
160,000 Dow Chemical Co. 16,240,000
798,000 E.I. Dupont de Nemours, Inc. 47,929,875
81,100 Lubrizol Corp. 2,990,562
150,000 Millennium Chemicals, Inc.* 3,534,375
113,500 Minnesota Mng. & Mfg. Co. 9,314,094
147,000 Morton Int'l., Inc. 5,053,125
102,000 PPG Industries, Inc. 5,826,750
40,000 Rohm & Haas Co. 3,830,000
150,900 Solutia, Inc.* 4,027,144
56,300 Union Carbide Corp.* 2,435,537
-----------
116,635,774
-----------
Computer Software -- 2.3%
134,400 Adobe Systems, Inc. 5,544,000
145,000 Autodesk, Inc.* 5,365,000
11,700 ChoicePoint, Inc.* 558,675
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
40
<PAGE>
------------
The Guardian
Stock Fund,
Inc.
------------
2
------------
- --------------------------------------------------------------------------------
Shares Value
- ----------------------------------------------------------------
27,000 DST Systems, Inc.* $ 1,152,562
9,900 J.D. Edwards* 292,050
404,100 Microsoft Corp.* 52,229,925
52,000 Sterling Software, Inc.* 2,132,000
138,800 SunGuard Data Systems, Inc.* 4,302,800
65,000 Symantec Corp.* 1,425,937
36,000 Wind River Systems, Inc.* 1,428,750
-----------
74,431,699
-----------
Computer Systems -- 6.4%
351,000 Compaq Computer Corp. 19,809,562
49,500 Diebold, Inc. 2,505,937
30,300 DII Group, Inc.* 825,675
57,500 Honeywell, Inc. 3,938,750
654,500 Int'l. Business Machines 68,436,156
478,200 Lexmark Int'l. Group, Inc.* 18,171,600
246,000 Oracle Systems Corp.* 5,488,875
115,000 Pitney Bowes, Inc. 10,342,812
160,600 Quantum Corp.* 3,222,037
30,700 Sanmina Corp.* 2,079,925
174,000 SCI Systems, Inc.* 7,579,875
72,000 Smart Modular Technologies, Inc.* 1,656,000
738,200 Storage Technology Corp.* 45,722,262
91,000 Stratus Computer, Inc.* 3,440,937
227,800 Sun Microsystems, Inc.* 9,083,525
247,800 Western Digital Corp.* 3,980,287
-----------
206,284,215
-----------
Conglomerates -- 1.3%
205,800 Allied Signal, Inc. 8,013,337
149,800 Loews Corp. 15,897,525
310,000 Textron, Inc. 19,375,000
-----------
43,285,862
-----------
Containers-Metals and Plastic -- 0.1%
37,000 Aptargroup, Inc. 2,053,500
-----------
Cosmetics and Toiletries -- 0.1%
21,600 Alberto-Culver Co. 583,200
60,800 Helen of Troy Ltd.* 980,400
43,000 Herbalife Int'l., Inc. 917,332
-----------
2,480,932
-----------
Drugs and Hospitals -- 5.4%
228,100 Abbott Laboratories 14,954,806
110,000 Acuson, Inc.* 1,821,875
99,660 Allegiance Corp. 3,531,701
31,300 C.R. Bard, Inc.* 980,081
44,200 Becton Dickinson & Co. 2,210,000
429,600 Bristol-Myers Squibb Corp. 40,650,900
44,200 Columbia Healthcare Corp.* 1,312,077
25,000 Health Care & Retirement Co.* 1,006,250
42,000 ICN Pharmaceuticals, Inc. 2,050,125
34,200 Integrated Health Svcs., Inc. 1,066,612
205,696 Eli Lilly & Co., Inc. 14,321,584
56,300 Lincare Hldgs., Inc.* 3,209,100
209,700 Merck & Co., Inc. 22,280,625
81,300 Mylan Labs, Inc. 1,702,219
18,000 Patterson Dental Co.* 814,500
142,800 Pfizer, Inc. 10,647,525
26,000 Safeskin Corp.* 1,475,500
413,400 Schering-Plough Corp. 25,682,475
12,000 Unitrin, Inc. 775,500
354,000 Universal Health Services, Inc.* 17,832,750
46,700 Warner-Lambert Co. 5,790,800
26,000 Wellpoint Health Networks, Inc.* 1,098,500
-----------
175,215,505
-----------
Electrical Equipment -- 3.9%
94,600 Emerson Electric Co. 5,338,987
1,541,200 General Electric Co. 113,085,550
12,800 W.W. Grainger, Inc. 1,244,000
25,000 Hubbel, Inc. 1,232,812
13,000 Jabil Circuit, Inc.* 516,750
90,000 Raychem Corp. 3,875,625
-----------
125,293,724
-----------
Electronics and Instruments -- 0.4%
64,400 Analogic Corp. 2,447,200
84,400 Dynatech Corp.* 3,956,250
75,000 Fluke Corp. 1,954,687
60,000 Tektronix, Inc. 2,381,250
39,900 Texas Instruments, Inc.* 1,792,859
-----------
12,532,246
-----------
Energy-Miscellaneous -- 0.4%
192,500 Giant Industries, Inc. 3,657,500
237,430 Holly Corp. 6,559,004
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
41
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Inc.
- ------------
2
- ------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, Inc.
- ---------------------------------------
SCHEDULE OF INVESTMENTS (continued)
December 31, 1997
Shares Value
- ----------------------------------------------------------------
84,000 Howell Corp. $ 1,454,250
-----------
11,670,754
-----------
Entertainment and Leisure-- 0.1%
16,500 Anchor Gaming* 919,875
34,000 Harley-Davidson, Inc. 930,750
-----------
1,850,625
-----------
Financial-Banks -- 12.1%
20,000 Associated Bank Corp. 1,102,500
720,000 BankAmerica Corp. 52,560,000
172,011 Bank of Boston Corp. 16,158,282
130,000 Bank of New York, Inc. 7,515,625
146,000 Barnett Banks, Inc. 10,493,750
13,000 CCB Financial Corp. 1,397,500
434,468 Chase Manhattan Corp. 47,574,246
417,484 Citicorp 52,785,632
81,000 City National Corp. 2,991,938
96,800 Comerica, Inc. 8,736,200
26,250 Commerce Bankshares, Inc. 1,778,437
30,000 Compass Bancshares, Inc. 1,312,500
20,000 Cullen Frost Bankers, Inc. 1,213,750
313,700 First Chicago NBD Corp. 26,193,950
19,900 First Empire State Corp. 9,253,500
60,000 First Merit Corp. 1,702,500
543,800 First Union Corp. 27,869,750
185,000 Fleet Financial Group, Inc. 13,863,437
81,922 Hubco, Inc. 3,205,197
43,000 Imperial Bancorp* 2,120,437
70,000 KeyCorp 4,956,875
197,000 Mellon Bank Corp. 11,943,125
87,796 National City Corp. 5,772,587
332,800 Nationsbank Corp. 20,238,400
270,120 Norwest Corp. 10,433,385
50,000 Premier Bancshares, Inc., GA 1,343,750
79,500 Provident Financial Group, Inc. 3,855,750
108,000 Star Banc Corp. 6,196,500
116,000 State Street Corp. 6,749,750
327,033 Summit Bancorp 17,414,507
49,500 Union BanCal Corp.* 5,321,250
23,000 U.S. Trust Corp. 1,440,375
21,500 Webster Financial Corp. 1,429,750
12,000 Westamerica Bancorp 1,227,000
72,000 Zions Bancorp 3,267,000
-----------
391,419,135
-----------
Financial-Other -- 7.3%
294,400 American Express Co. 26,275,200
75,000 Bear Stearns Cos., Inc.* 3,562,500
11,000 Community First Bankshares 585,750
102,000 Countrywide Credit Industries, Inc. 4,373,250
11,600 Donaldson Lufkin & Jenrette* 922,200
21,666 Duff & Phelps Credit Rating Co. 880,181
190,200 A.G. Edwards, Inc. 7,560,450
258,400 Federal Home Loan Mortgage Corp. 10,836,650
434,600 Federal National Mortgage Assn. 24,799,362
33,000 Fidelity National Financial, Inc.* 1,027,125
144,000 Franklin Resources, Inc. 12,519,000
125,000 H & R Block, Inc. 5,601,562
338,000 Jefferies Group, Inc. 13,836,875
43,667 Legg Mason, Inc. 2,442,604
109,500 Lehman Brothers Hldgs., Inc. 5,584,500
188,000 McDonald & Co. Investments, Inc. 5,334,500
257,200 Merrill Lynch & Co., Inc. 18,759,525
384,075 Morgan Keegan, Inc. 9,721,897
180,100 Morgan Stanley Dean Witter 10,648,412
22,000 ONBANCorp, Inc. 1,551,000
37,666 Pacific Crest Capital, Inc.* 687,405
175,000 Paine Webber Group, Inc.* 6,048,438
230,737 Raymond James Financial, Inc 9,157,375
50,000 SLM Hldg. Corp.* 6,956,250
846,000 Travelers Group, Inc. 45,578,250
-----------
235,250,261
-----------
Financial-Thrift -- 2.1%
67,200 Astoria Financial Corp. 3,746,400
325,000 Bank Atlantic Bancorp, Inc. 5,371,563
27,040 California Federal Bancorp, Inc.* 770,640
163,170 Charter One Financial, Inc. 10,300,106
73,500 CitFed Bancorp, Inc. 2,866,500
66,000 Coastal Bancorp, Inc. 2,301,750
20,000 Coast Savings Financial, Inc.* 1,371,250
155,925 Commercial Federal Corp. 5,545,083
101,000 Dime Bancorp, Inc.* 3,055,250
40,000 Golden State Bancorp, Inc.* 1,495,000
76,000 Greenpoint Financial Corp. 5,514,750
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
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2
------------
- --------------------------------------------------------------------------------
Shares Value
- ----------------------------------------------------------------
124,000 Long Island Bancorp, Inc. $ 6,153,500
29,452 MAF Bancorp, Inc. 1,041,865
123,543 Progressive Bank, Inc. 4,725,520
634,129 Sovereign Bancorp, Inc. 13,158,177
-----------
67,417,354
-----------
Food, Beverage and Tobacco -- 2.2%
204,000 Campbell Soup Co. 11,857,500
58,900 CKE Restaurants, Inc. 2,481,163
187,200 ConAgra, Inc. 6,142,500
71,000 Dean Foods Co. 4,224,500
53,744 Earthgrains Co. 2,525,968
86,000 Fortune Brands, Inc. 3,187,375
56,000 Hershey Foods Corp. 3,468,500
35,000 Hormel Foods Corp. 1,146,250
142,000 Interstate Bakeries Corp. 5,307,250
493,600 Philip Morris Cos., Inc. 22,366,250
18,100 Ralston-Purina Group 1,682,169
18,000 Schweitzer-Mauduit Int'l., Inc. 670,500
38,000 Smithfield Foods, Inc.* 1,254,000
74,300 Unilever NV 4,639,106
-----------
70,953,031
-----------
Footwear -- 0.3%
81,200 Footstar, Inc.* 2,182,250
49,000 Payless ShoeSource, Inc.* 3,289,125
147,700 Reebok Int'l. Ltd.* 4,255,606
64,000 Stride Rite Corp.* 768,000
-----------
10,494,981
-----------
Household Products -- 0.8%
105,000 Dial Corp. 2,185,313
249,800 Procter & Gamble Co. 19,937,163
200,000 Tupperware Corp. 5,575,000
-----------
27,697,476
-----------
Insurance -- 6.8%
37,500 Allied Group, Inc. 1,073,438
382,300 Allstate Corp. 34,741,513
76,000 AMBAC Financial Group, Inc. 3,496,000
198,000 Amer. Bankers Ins. Group, Inc. 9,095,625
30,000 W.R. Berkley Corp.* 1,316,250
46,000 Chubb Corp. 3,478,750
74,100 Cigna Corp. 12,823,931
60,000 CMAC Investment Corp. 3,622,500
18,000 Enhance Financial Svcs. Group, Inc. 1,071,000
130,000 Equitable Cos., Inc.* 6,467,500
98,000 Everest Reinsurance Hldgs. 4,042,500
66,700 Executive Risk, Inc. 4,656,494
42,000 Financial Sec. Assur. Hldgs. Ltd. 2,026,500
40,000 Fremont General Corp. 2,190,000
78,000 Frontier Insurance Group, Inc. 1,784,250
66,300 General RE Corp. 14,055,600
81,900 Hartford Financial Svcs. Group, Inc. 7,662,769
150,000 Horace Mann Educators Corp. 4,265,625
36,000 Jefferson Pilot Corp. 2,803,500
103,270 Liberty Financial Cos., Inc. 3,898,443
132,000 Lincoln National Corp., Inc. 10,312,500
181,400 Marsh & McLennan Cos., Inc. 13,525,638
50,600 MBIA, Inc. 3,380,713
30,000 Mercury General Corp. 1,657,500
315,000 MGIC Investment Corp. 20,947,500
21,000 NAC RE Corp. 1,025,063
40,000 Ohio Casualty Corp. 1,785,000
118,000 Old Republic Int'l. Corp. 4,388,125
33,000 Orion Capital Corp. 1,532,438
84,371 ReliaStar Financial Group 3,475,030
97,800 St. Paul Cos., Inc.* 8,025,713
108,000 State Auto Financial Corp. 3,483,000
162,000 SunAmerica, Inc. 6,925,500
88,000 Torchmark, Inc. 3,701,500
60,000 Travelers Ppty. Casualty Corp. 2,640,000
225,000 USF&G Corp.* 4,964,063
35,000 Vesta Insurance Group, Inc.* 2,078,125
-----------
218,419,596
-----------
Lodging -- 0.2%
238,000 Prime Hospitality Corp.* 4,849,250
17,000 Promus Hotel Corp.* 714,000
-----------
5,563,250
-----------
Machinery and Equipment -- 2.1%
68,000 AAR Corp. 2,635,000
25,000 Applied Power, Inc. 1,725,000
58,000 Case Corp. 3,505,375
297,600 Caterpillar, Inc. 14,452,200
91,400 Deere & Co. 5,329,763
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
43
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Stock Fund,
Inc.
- ------------
2
- ------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, Inc.
- ---------------------------------------
SCHEDULE OF INVESTMENTS (continued)
December 31, 1997
Shares Value
- ----------------------------------------------------------------
250,000 Dover Corp. $ 9,031,250
95,000 Eaton Corp. 8,478,750
79,900 Illinois Tool Works, Inc. 4,803,988
53,000 Kennametal, Inc. 2,746,063
99,100 Parker Hannifin Corp.* 4,546,213
50,000 Robbins & Myers, Inc. 1,981,250
25,000 SPX Corp.* 1,725,000
54,000 Texas Industries, Inc. 2,430,000
63,000 Universal Corp., VA 2,590,875
65,000 US Industries, Inc. 1,958,125
-----------
67,938,852
-----------
Merchandising-Department Stores -- 1.4%
110,000 Carson Pirie Scott & Co.* 5,513,750
61,000 Dayton Hudson Corp. 4,117,500
125,000 Federated Department Stores, Inc.* 5,382,813
215,000 Fred Meyer, Inc., DE* 7,820,625
38,000 MacFrugals Bargains Closeouts* 1,562,750
87,000 Shopko Stores, Inc.* 1,892,250
20,000 Stein Mart, Inc.* 535,000
138,400 TJX Cos., Inc. 4,757,500
321,000 Wal-Mart Stores, Inc. 12,659,438
-----------
44,241,626
-----------
Merchandising-Drugs -- 0.2%
50,250 Arbor Drugs, Inc. 929,625
50,000 Bergen Brunswig Corp. 2,106,250
37,000 General Nutrition Cos., Inc.* 1,258,000
110,000 Walgreen Co. 3,451,250
-----------
7,745,125
-----------
Merchandising-Food -- 0.6%
60,000 Fleming Cos., Inc.* 806,250
188,995 Safeway, Inc.* 11,953,934
20,000 Suiza Foods Corp.* 1,191,250
113,000 Supervalu, Inc. 4,731,875
-----------
18,683,309
-----------
Merchandising-Mass -- 0.1%
43,500 Brylane, Inc.* 2,142,375
20,000 Lands End, Inc.* 701,250
-----------
2,843,625
-----------
Merchandising-Special -- 1.5%
34,000 Barnes & Noble, Inc.* 1,134,750
69,000 BJ's Wholesale Club, Inc.* 2,164,875
107,400 Burlington Coat Factory* 1,765,388
70,000 Claire's Stores, Inc. 1,360,625
70,736 CVS Corp. 4,531,525
71,000 The Dress Barn* 2,014,625
360,000 GAP, Inc. 12,757,500
35,000 Homebase, Inc.* 275,625
137,160 Host Marriott Services Corp.* 2,040,255
135,000 Pier 1 Imports, Inc. 3,054,375
46,000 Proffitts, Inc.* 1,308,125
159,000 Ross Stores, Inc. 5,783,625
250,000 Tandy Corp. 9,640,625
42,500 Tiffany & Co., Inc. 1,532,656
-----------
49,364,574
-----------
Metals-Miscellaneous -- 0.2%
70,700 Alumax, Inc.* 2,403,800
24,800 Aluminum Co. of America* 1,746,506
54,000 Titanium Metals Corp.* 1,559,250
-----------
5,709,556
-----------
Miscellaneous-Capital Goods -- 0.3%
69,000 Aeroquip-Vickers, Inc.* 3,385,313
100,000 Tidewater, Inc. 5,512,500
-----------
8,897,813
-----------
Miscellaneous-Consumer Growth Staples -- 0.7%
70,000 American Greetings Corp. 2,738,750
93,100 Cognizant Corp. 4,148,769
86,500 Deluxe Corp.* 2,984,250
52,500 Interpublic Group Cos., Inc. 2,615,156
110,000 A.C. Nielsen Corp.* 2,681,250
190,000 Valassis Communications, Inc.* 7,030,000
-----------
22,198,175
-----------
Natural Gas-Diversified -- 0.2%
267,600 Mitchell Energy & Dev. Corp. 7,793,850
-----------
Oil and Gas Producing -- 3.6%
294,000 Apache Corp. 10,308,375
148,000 Barrett Resources Corp.* 4,477,000
205,000 Basin Exploration, Inc.* 3,638,750
280,400 Tom Brown, Inc.* 5,397,700
64,300 Callon Petroleum Co.* 1,046,884
304,000 Chieftain Int'l., Inc.* 6,460,000
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
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------------
2
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- --------------------------------------------------------------------------------
Shares Value
- ----------------------------------------------------------------
247,000 Devon Energy Corp. $ 9,509,500
163,600 Diamond Offshore Drilling, Inc. 7,873,250
238,288 EEX Corp.* 2,159,485
228,100 Enron Oil and Gas Co. 4,832,869
61,900 Forcenergy Gas Exploration, Inc.* 1,621,006
151,200 Meridian Resource Corp.* 1,445,850
750,900 Petromet Resources Ltd.* 1,642,594
45,900 Petsec Energy Ltd.* 631,125
137,600 Pogo Producing Co. 4,059,200
95,000 Pride Int'l., Inc.* 2,398,750
1,160,000 Ranger Oil Ltd. 7,975,000
650,700 Rigel Energy Corp.* 5,327,606
325,100 St. Mary Land & Exploration Co. 11,378,500
487,520 Seagull Energy Corp.* 10,055,100
60,700 Snyder Oil Corp. 1,107,775
100,000 USX Marathon Group 3,375,000
152,100 Vastar Resources, Inc.* 5,437,575
107,000 Vintage Petroleum, Inc. 2,033,000
451,300 Wainoco Oil Ltd.* 3,582,194
-----------
117,774,088
-----------
Oil and Gas Services -- 4.0%
75,000 BJ Services Co.* 5,395,313
86,090 Camco Int'l., Inc. 5,482,857
58,400 Cliffs Drilling Co.* 2,912,700
70,000 Cooper Cameron Corp.* 4,270,000
148,000 ENSCO Int'l., Inc. 4,958,000
190,400 Halliburton Co. 9,888,900
30,276 Halter Marine Group, Inc.* 874,220
376,800 Input/Output, Inc.* 11,186,250
55,000 Lone Star Technologies, Inc.* 1,560,625
521,000 Nabors Industries, Inc.* 16,378,938
360,000 Noble Drilling Corp.* 11,025,000
189,300 Offshore Logistics, Inc.* 4,046,288
339,400 Schlumberger Ltd. 27,321,700
125,000 Smith Int'l., Inc.* 7,671,875
52,000 Transocean Offshore, Inc. 2,505,750
235,400 Varco Int'l., Inc.* 5,046,388
30,000 Veritas DGC, Inc.* 1,185,000
118,000 Weatherford Enterra, Inc.* 5,162,500
100,000 Willbros Group, Inc.* 1,500,000
-----------
128,372,304
-----------
Oil-Integrated-Domestic -- 1.7%
247,600 Amoco Corp. 21,076,950
114,600 Atlantic Richfield Co. 9,182,325
185,000 Murphy Oil Corp. 10,024,688
142,000 Sun, Inc.* 5,972,875
460,500 Tesoro Petroleum, Inc.* 7,137,750
-----------
53,394,588
-----------
Oil-Integrated-International -- 6.0%
228,800 Chevron Corp. 17,617,600
1,539,800 Exxon Corp. 94,216,513
529,800 Mobil Corp. 38,244,938
578,500 Royal Dutch Petroleum Co. 31,347,469
226,800 Texaco, Inc. 12,332,250
-----------
193,758,770
-----------
Paper and Forest Products -- 0.8%
52,857 Deltic Timber Corp. 1,446,960
548,000 Rayonier, Inc. 23,324,250
-----------
24,771,210
-----------
Publishing-News -- 0.7%
35,100 Central Newspapers, Inc. 2,595,206
133,400 Gannett Co., Inc. 8,245,788
74,100 Harte-Hanks Communications 2,750,963
27,000 Houghton Mifflin Co. 1,036,125
80,000 New York Times Co. 5,290,000
6,700 Washington Post Co. 3,259,550
-----------
23,177,632
-----------
Railroads -- 0.7%
47,949 Burlington Northern Santa Fe 4,456,260
109,000 Kansas City Southern Inds., Inc. 3,460,750
216,600 Norfolk Southern Corp. 6,673,988
107,900 Union Pacific Corp. 6,737,006
-----------
21,328,004
-----------
Real Estate -- 0.1%
95,000 LNR Property Corp. 2,244,375
-----------
Semiconductor -- 0.3%
41,000 ADE Corp.* 717,500
80,000 Dallas Semiconductor Corp. 3,260,000
200,000 National Semiconductor Corp.* 5,187,500
42,000 Unitrode Corp.* 903,000
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
45
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Stock Fund,
Inc.
- ------------
2
- ------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, Inc.
- ---------------------------------------
SCHEDULE OF INVESTMENTS (continued)
December 31, 1997
Shares Value
- ----------------------------------------------------------------
43,000 VLSI Technology, Inc.* $ 1,015,875
-------------
11,083,875
-------------
Textile-Apparel and Production -- 0.8%
70,000 Burlington Industries, Inc.* 966,875
98,000 Jones Apparel Group, Inc.* 4,214,000
29,000 Kellwood Co.* 870,000
129,000 Liz Claiborne, Inc. 5,393,813
37,500 Nautica Enterprises, Inc.* 871,875
15,000 St. John Knits, Inc. 600,000
115,000 Unifi, Inc. 4,679,063
148,000 V.F. Corp. 6,798,750
29,200 Westpoint Stevens, Inc.* 1,379,700
-------------
25,774,076
-------------
Transportation-Miscellaneous -- 0.6%
96,000 Airborne Freight Corp. 5,964,000
33,000 Air Express Int'l. Corp.* 1,006,500
37,000 Alexander & Baldwin, Inc.* 1,010,563
22,000 Expeditors Int'l. Wash., Inc. 847,000
54,000 GATX Corp. 3,918,375
376,700 Maritrans, Inc. 3,672,825
58,000 Trinity Industries, Inc. 2,588,250
-------------
19,007,513
-------------
Truckers -- 0.3%
25,000 Arnold Industries, Inc. 431,250
32,100 FRP Pptys., Inc.* 1,007,138
25,000 Roadway Express, Inc. 553,125
33,000 Rollins Truck Leasing Corp. 589,875
25,000 Swift Transportation, Inc.* 809,375
60,000 U.S. Freightways Corp. 1,950,000
45,000 Werner Enterprises, Inc. 922,500
105,000 Yellow Corp.* 2,638,125
-------------
8,901,388
-------------
Utilities-Electric -- 0.9%
22,700 Central LA Electric Co.* 734,913
76,740 Duke Energy Co. 4,249,478
135,000 Florida Progress Corp.* 5,298,750
160,000 FPL Group, Inc. 9,470,000
56,500 IPALCO Enterprises 2,369,469
26,000 KU Energy Corp. 1,020,500
7,000 Minnesota Power & Light Co. * 304,938
40,000 New Century Energies, Inc. 1,917,500
29,000 NIPSCO Industries, Inc. 1,433,688
96,300 Texas Utilities Co. 4,002,469
-------------
30,801,705
-------------
Utilities-Gas and Pipeline -- 0.2%
5,100 Indiana Energy, Inc.* 167,981
45,000 KN Energy, Inc. 2,430,000
79,800 New York State E&G Corp.* 2,832,900
26,300 NICOR, Inc. 1,109,531
-------------
6,540,412
-------------
Utilities-Telecommunications -- 2.9%
29,000 Aliant Communications, Inc. 909,875
438,000 Ameritech Corp. 35,259,000
241,900 Bay Networks, Inc.* 6,183,569
82,204 Bell Atlantic Corp. 7,480,565
423,200 Bellsouth Corp. 23,831,450
29,000 Harris Corp., DE 1,330,375
191,000 SBC Communications, Inc. 13,990,750
150,000 WorldCom, Inc.* 4,550,150
-------------
93,535,734
-------------
TOTAL COMMON STOCKS
(Cost $2,043,457,680) 2,986,155,107
-------------
See notes to financial statements.
* Non-income producing security.
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- ----------------------------
REPURCHASE AGREEMENT -- 7.4%
- ----------------------------
Principal
Amount Value
- ----------------------------------------------------------------
$239,782,000 Goldman Sachs Group, LP
repurchase agreement,
dated 12/31/97, maturity
value $239,861,927
at 6.00%, due 1/2/98
(collateralized by
$244,695,000 U.S.
Treasury Notes,
6.125%, due 12/31/01) $ 239,782,000
--------------
TOTAL REPURCHASE AGREEMENT
(Cost $239,782,000) 239,782,000
--------------
TOTAL INVESTMENTS -- 100.0%
(Cost $2,283,239,680) 3,225,937,107
--------------
LIABILITIES IN EXCESS OF
CASH, RECEIVABLES
AND OTHER ASSETS-- (0.0%) (3,750,262)
--------------
NET ASSETS-- 100.00% $3,222,186,845
==============
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
47
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Stock Fund,Inc.
- ----------------
2
- ----------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, Inc.
- -----------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1997
ASSETS:
Investments, at identified cost* $2,283,239,680
==============
Investments, at market 2,986,155,107
Repurchase agreement 239,782,000
--------------
TOTAL INVESTMENTS 3,225,937,107
Cash 683
Receivable for securities sold 25,827,847
Dividends receivable 3,018,922
Receivable for fund shares sold 1,743,539
Interest receivable 40,004
--------------
TOTAL ASSETS 3,256,568,102
--------------
LIABILITIES:
Payable for securities purchased 26,459,564
Payable for fund shares redeemed 3,539,469
Accrued expenses 316,955
Due to affiliates 4,065,269
--------------
TOTAL LIABILITIES 34,381,257
--------------
NET ASSETS $3,222,186,845
==============
COMPONENTS OF NET ASSETS:
Capital stock, at par $ 6,996,855
Additional paid-in capital 2,178,293,026
Undistributed net investment income 298,413
Accumulated net realized gain on investments 93,901,124
Net unrealized appreciation of investments 942,697,427
--------------
NET ASSETS $3,222,186,845
==============
Shares Outstanding -- $0.10 par value 69,968,553
--------------
NET ASSET VALUE PER SHARE $ 46.05
==============
* Includes repurchase agreement.
STATEMENT OF OPERATIONS
Year Ended
December 31, 1997
Investment Income:
Dividends $ 38,097,129
Interest 8,826,326
Less: Foreign tax withheld (226,317)
--------------
Total Income 46,697,138
--------------
Expenses:
Investment advisory fees -- Note B 13,778,322
Custodian fees 327,608
Registration fees 112,000
Printing expense 66,200
Audit fees 17,500
Insurance expense 15,509
Directors' fees-- Note B 12,500
Legal fees 5,600
Transfer agent fees 3,300
Other 700
--------------
Total Expenses 14,339,239
--------------
Net Investment Income 32,357,899
--------------
Realized and Unrealized Gain/(Loss)
on Investments -- Note F
Net realized gain on investments 392,500,062
Net change in unrealized appreciation
of investments 391,861,332
--------------
Net Realized and Unrealized Gain
on Investments 784,361,394
--------------
Net Increase in Net Assets
from Operations $ 816,719,293
==============
See notes to financial statements.
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<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31,
1997 1996
-------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS
From Operations:
Net investment income $ 32,357,899 $ 27,147,649
Net realized gain on investments 392,500,062 222,958,266
Net change in unrealized appreciation of investments 391,861,332 203,188,926
--------------- ---------------
Net Increase in Net Assets from Operations 816,719,293 453,294,841
--------------- ---------------
Dividends and Distributions to Shareholders from:
Net investment income (32,059,486) (27,352,727)
Net realized gain on investments (344,492,912) (243,546,609)
--------------- ---------------
Total Dividends and Distributions to Shareholders (376,552,398) (270,899,336)
--------------- ---------------
From Capital Share Transactions:
Net increase in net assets from capital share
transactions -- Note G 555,292,020 429,061,626
--------------- ---------------
Net Increase in Net Assets 995,458,915 611,457,131
Net Assets:
Beginning of year 2,226,727,930 1,615,270,799
--------------- ---------------
End of year* $ 3,222,186,845 $ 2,226,727,930
=============== ===============
* Includes undistributed net investment income of: $ 298,413 $ --
</TABLE>
See notes to financial statements
- -------------------------------------------------------------------------------
49
<PAGE>
- ---------------
The Guardian
Stock Fund,Inc.
- ---------------
2
- ---------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, Inc.
- -----------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding
throughout the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year ......... $ 38.59 $ 34.72 $ 27.33 $ 29.00 $ 25.52 $ 23.28 $ 17.85 $ 21.39
---------- ---------- ---------- ---------- -------- -------- -------- --------
Income from investment
operations
Net investment
income .................. 0.52 0.53 0.44 0.40 0.58 0.48 0.63 0.69
Net realized and
unrealized gain/
(loss) on investments ... 12.97 8.62 9.01 (0.77) 4.47 3.97 5.74 (3.13)
---------- ---------- ---------- ---------- -------- -------- -------- --------
Net increase/
(decrease) from
investment operations ..... 13.49 9.15 9.45 (0.37) 5.05 4.45 6.37 (2.44)
---------- ---------- ---------- ---------- -------- -------- -------- --------
Dividends and Distributions
to Shareholders from:
Net investment income ..... (0.52) (0.54) (0.44) (0.40) (0.59) (0.48) (0.64) (0.71)
Net realized gain ......... (5.51) (4.74) (1.62) (0.90) (0.98) (1.73) (0.30) (0.39)
---------- ---------- ---------- ---------- -------- -------- -------- --------
Total dividends and
distributions ............. (6.03) (5.28) (2.06) (1.30) (1.57) (2.21) (0.94) (1.10)
---------- ---------- ---------- ---------- -------- -------- -------- --------
Net asset value, end of
year ...................... $ 46.05 $ 38.59 $ 34.72 $ 27.33 $ 29.00 $ 25.52 $ 23.28 $ 17.85
---------- ---------- ---------- ---------- -------- -------- -------- --------
Total return* ............... 35.58% 26.90% 34.65% (1.27) 19.96% 20.07% 35.96% (11.85)%
---------- ---------- ---------- ---------- -------- -------- -------- --------
Ratios/supplemental data:
Net assets, end of year
(000's omitted) ......... $3,222,187 $2,226,728 $1,615,271 $1,038,991 $869,114 $537,354 $380,962 $256,039
Ratio of expenses to
average net assets ...... 0.52% 0.53% 0.53% 0.53% 0.54% 0.55% 0.56% 0.57%
Ratio of net invest-
ment income to
average net assets ...... 1.17% 1.50% 1.39% 1.49% 2.20% 2.14% 3.07% 3.66%
Portfolio turnover
rate .................... 51% 66% 78% 53% 45% 62% 51% 54%
Average rate of
commissions paid(a) ..... $ 0.0457 $ 0.0469
</TABLE>
Year Ended December 31,
-----------------------
1989 1988
-----------------------
Net asset value,
beginning of year ......... $ 19.18 $ 16.35
-------- --------
Income from investment
operations
Net investment
income .................. 0.84 0.52
Net realized and
unrealized gain/
(loss) on investments ... 3.61 2.80
-------- --------
Net increase/
(decrease) from
investment operations ..... 4.45 3.32
-------- --------
Dividends and Distributions
to Shareholders from:
Net investment income ..... (0.90) (0.49)
Net realized gain ......... (1.34) --
-------- --------
Total dividends and
distributions ............. (2.24) (0.49)
-------- --------
Net asset value, end of
year ...................... $ 21.39 $ 19.18
-------- --------
Total return* ............... 23.55% 20.37%
-------- --------
Ratios/supplemental data:
Net assets, end of year
(000's omitted) ......... $269,950 $172,900
Ratio of expenses to
average net assets ...... 0.57% 0.61%
Ratio of net invest-
ment income to
average net assets ...... 4.13% 2.88%
Portfolio turnover
rate .................... 38% 71%
Average rate of
commissions paid(a) .....
* Total returns do not reflect the effects of charges deducted pursuant to
the terms of GIAC's variable contracts. Inclusion of such charges would
reduce the total returns for all periods shown.
(a) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
See notes to financial statements.
- --------------------------------------------------------------------------------
50
<PAGE>
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- --------------------------------------------------------------------------------
51
<PAGE>
- --------------
The Guardian
Bond Fund,Inc.
- --------------
3
- --------------
- --------------------------------------------------------------------------------
The Guardian Bond Fund, Inc.
- ----------------------------
SCHEDULE OF INVESTMENTS
December 31, 1997
- ---------------------
ASSET BACKED -- 12.6%
- ---------------------
Principal
Amount Value
- --------------------------------------------------------------
$ 2,700,000 Amresco 1997 -- 1 M1F
7.42% due 3/25/27 $ 2,744,280
4,000,000 Bear Asset Trust 1997-1 A
6.682% due 2/15/06 4,010,000
4,000,000 California Infrastructure
Dev. PG & E 97-1 A7
6.42% due 9/25/08 4,038,800
4,000,000 California Infrastructure
Dev. SCE 97-1 A6
6.38% due 9/25/08 4,027,600
3,500,000 Deutsche Financial 1997-1 A2
6.55% due 9/15/27 3,507,700
4,000,000 Federal Home Loan
Mtg. Corp. T-9 A4
6.78% due 3/25/17 4,002,800
5,160,000 Green Tree 1997-E HEM1
7.28% due 1/15/29 5,184,252
2,971,622 Green Tree Recreational 1997-B A1
6.55% due 7/15/28 3,063,485
3,900,000 Premier Auto Tr. 1997-2 B
6.53% due 12/6/03 3,921,918
6,250,000 UCFC Loan Tr. 1997-D A6
7.095% due 4/15/27 6,297,500
4,000,000 Vanderbilt Mtg. 1997-C 1A4
6.92% due 10/7/12 4,040,000
------------
TOTAL ASSET BACKED
(Cost $44,559,554) 44,838,335
------------
- -------------------------
CORPORATE BONDS -- 20.5%
- -------------------------
Energy-Miscellaneous -- 0.7%
$ 2,500,000 Consumers Energy Co.
7.50% due 6/1/02 $ 2,532,475
------------
Financial-Other -- 6.0%
2,000,000 Bear Stearns Cos., Inc.
6.625% due 10/1/04 2,006,480
9,500,000 Lehman Brothers, Inc.
6.92% due 10/4/99 9,597,850
3,500,000 Salomon, Inc.
6.65% due 7/15/01 3,529,540
6,000,000 Salomon, Inc.
6.625% due 11/30/00 6,055,980
------------
21,189,850
------------
Insurance -- 1.1%
3,500,000 Zurich Capital Tr.+
8.376% due 6/1/37 3,814,020
------------
Machinery and Construction -- 1.1%
4,000,000 McDermott Int'l., Inc.
6.57% due 4/20/98 4,000,520
------------
Merchandising-Mass -- 1.0%
3,400,000 Wal Mart Stores, Inc.
8.75% due 12/29/06 3,484,490
------------
Miscellaneous-Capital Goods -- 1.4%
5,000,000 Ikon Capital, Inc.
6.73% due 6/15/01 5,063,750
------------
Oil-Integrated-International -- 0.7%
3,500,000 LG Caltex Oil Corp.+
7.50% due 7/15/07 2,521,050
------------
Railroads -- 2.0%
3,100,000 Burlington Northern Santa Fe
6.875% due 12/1/27 3,111,191
3,500,000 Norfolk Southern Corp.
7.80% due 5/15/27 3,934,140
------------
7,045,331
------------
Telecommunications -- 3.3%
4,000,000 TCI Communications, Inc.
8.75% due 8/1/15 4,635,960
7,000,000 TCI Communications, Inc.
7.25% due 6/15/99 7,080,290
------------
11,716,250
------------
Tobacco -- 1.2%
4,000,000 Philip Morris Cos., Inc.
7.50% due 4/1/04 4,189,080
------------
See notes to financial statements.
+ Rule 144A restricted security.
- --------------------------------------------------------------------------------
52
<PAGE>
--------------
The Guardian
Bond Fund,Inc.
--------------
3
--------------
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------
Utilities-Gas and Pipeline -- 2.0%
$ 3,500,000 Tennessee Gas Pipeline Co.
7.50% due 4/1/17 $ 3,730,510
3,500,000 TransCanada Pipelines Ltd.
7.06% due 10/14/25 3,556,945
------------
7,287,455
------------
TOTAL CORPORATE BONDS
(Cost $72,314,479) 72,844,271
------------
- ------------------------------
MORTGAGE PASS-THROUGHS -- 7.8%
- ------------------------------
$22,050,000 FNMA TBA
7.00% due 1/1/28 (a) $ 22,213,170
1,805,510 FHLMC Pool #E54124
7.00% due 8/1/08 1,844,743
502,703 FNMA Pool #068106
8.50% due 8/1/09 525,510
877,341 FNMA Pool #068772
8.00% due 6/1/08 912,900
10,054 FNMA Pool #072923
8.25% due 1/1/09 10,469
2,100,000 GNMA TBA
7.00% due 1/1/28 2,117,934
4,855 GNMA Pool #000375
11.50% due 7/20/00 5,108
------------
TOTAL MORTGAGE PASS-THROUGHS
(Cost $27,341,069) 27,629,834
------------
- -----------------------
COLLATERALIZED MORTGAGE
OBLIGATIONS -- 4.2%
- -----------------------
$ 5,000,000 Federal Home Loan Mtg. Corp.
1998 EB 7.00% due 1/15/25 $ 5,019,000
4,000,000 Federal National Mortgage Assn.
1995-13C 6.50% due 10/25/08 3,980,000
5,887,372 GE Capital Mortgage Svcs., Inc.
1996-3A7 7.00% due 3/25/26 5,897,381
------------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS
(Cost $14,765,717) 14,896,381
------------
- ----------------------
US GOVERNMENT -- 50.3%
- ----------------------
$20,000,000 US Treasury Bonds
6.625% due 2/15/27 $ 21,712,400
7,150,000 US Treasury Bonds
6.375% due 8/15/27 7,541,034
4,500,000 US Treasury Notes
7.875% due 11/15/04 5,030,865
12,000,000 US Treasury Notes
7.75% due 2/15/01 12,688,080
3,000,000 US Treasury Notes
7.50% due 10/31/99 3,092,820
23,600,000 U.S. Treasury Notes
6.875% due 8/31/99 24,042,500
30,700,000 U.S. Treasury Notes
6.625% due 6/30/01 31,549,162
12,500,000 U.S. Treasury Notes
6.125% due 8/15/07 12,845,750
15,750,000 U.S. Treasury Notes
6.00% due 8/15/00 15,863,243
4,100,000 U.S. Treasury Notes
5.875% due 11/15/99 4,114,719
10,000,000 U.S. Treasury Notes
5.875% due 3/31/99 10,026,600
8,250,000 U.S. Treasury Notes
5.75% due 8/15/03 8,255,115
15,000,000 U.S. Treasury Notes
5.75% due 11/30/02 15,011,700
7,000,000 U.S. Treasury Notes
5.625% due 10/31/99 6,993,420
------------
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $176,848,279) 178,767,408
------------
- --------------------
YANKEE BONDS -- 2.1%
- --------------------
$ 4,000,000 Avon Energy Partners Hldgs.+
6.73% due 12/11/02 $ 4,027,600
3,500,000 People's Republic of China
7.375% due 7/3/01 3,462,550
------------
TOTAL YANKEE BONDS
(Cost $7,579,450) 7,490,150
------------
See notes to financial statements.
+ Rule 144A restricted security.
- --------------------------------------------------------------------------------
53
<PAGE>
- --------------
The Guardian
Bond Fund,Inc.
- --------------
3
- --------------
- --------------------------------------------------------------------------------
The Guardian Bond Fund, Inc.
- ----------------------------
SCHEDULE OF INVESTMENTS (Continued)
December 31, 1997
Principal
Amount Value
- --------------------------------------------------------------
- -----------------------------
COMMERCIAL PAPER (a) -- 21.0%
- -----------------------------
Chemicals -- 3.7%
$13,099,000 Dow Chem Co.
6.70% due 1/2/98 $ 13,096,562
------------
Conglomerates -- 7.6%
15,044,000 Koch Industries, Inc.
6.70% due 1/2/98 15,041,200
11,955,000 Sony Europe Fin. PLC
5.88% due 1/20/98 11,917,900
------------
26,959,100
------------
Electronics and Instruments -- 4.5%
16,000,000 Dominion Semiconductors
5.78% due 1/14/98 15,966,604
------------
Other Major Banks -- 4.0%
14,062,000 Barclays U.S. Funding Corp.
5.80% due 1/14/98 14,032,548
------------
Paper and Forest Products -- 0.6%
2,127,000 Union Camp Corp.
5.96% due 1/22/98 2,119,605
------------
Savings and Loan -- 0.6%
2,300,000 Standard Credit Card Master Tr.
6.02% due 1/14/98 2,295,000
------------
TOTAL COMMERCIAL PAPER
(Cost $74,469,419) 74,469,419
------------
- ----------------------------
REPURCHASE AGREEMENT -- 1.6%
- ----------------------------
5,824,000 State Street Bank & Trust Co.
repurchase agreement,
dated 12/31/97, maturity
value $5,825,893 at 5.85%
due 1/2/98 (collateralized by
$5,945,000 U.S. Treasury
Notes, 5.875% due 2/28/99) $ 5,824,000
------------
TOTAL REPURCHASE AGREEMENT
(Cost $5,824,000) 5,824,000
------------
TOTAL INVESTMENTS -- 120.1%
(Cost $423,701,967) 426,759,798
PAYABLES FOR REVERSE REPURCHASE
AGREEMENTS(a) -- (7.9%) (28,131,250)
PAYABLES FOR MORTGAGE
PASS-THROUGHS DELAYED
DELIVERY SECURITIES(a) -- (6.8%) (24,331,104)
OTHER LIABILITIES IN EXCESS OF
CASH, RECEIVABLES AND OTHER
ASSETS -- (5.4%) (18,885,533)
------------
NET ASSETS -- 100.0% $355,411,911
============
(a) Total commercial paper is segregated to cover delayed delivery securities
purchases and reverse repurchase agreements.
See notes to financial statements.
- --------------------------------------------------------------------------------
54
<PAGE>
--------------
The Guardian
Bond Fund,Inc.
--------------
3
--------------
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1997
ASSETS:
Investments, at identified cost* $ 423,701,967
=============
Investments, at market 420,935,798
Repurchase agreement 5,824,000
-------------
TOTAL INVESTMENTS 426,759,798
Cash 333
Receivable for securities sold 30,719,969
Interest receivable 4,576,914
Receivable for fund shares sold 126,974
-------------
TOTAL ASSETS 462,183,988
-------------
LIABILITIES:
Payable for securities purchased 53,511,187
Payable for reverse repurchase
agreements -- Note D 28,131,250
Payable for mortgage pass-through
delayed delivery securities -- Note E 24,331,104
Payable for fund shares redeemed 284,083
Accrued expenses 31,995
Due to affiliates 482,458
-------------
TOTAL LIABILITIES 106,772,077
-------------
NET ASSETS $ 355,411,911
=============
COMPONENTS OF NET ASSETS:
Capital stock, at par $ 2,934,910
Additional paid-in capital 351,115,236
Undistributed net investment income 598,263
Accumulated net realized loss on investments (2,294,329)
Net unrealized appreciation of investments 3,057,831
-------------
NET ASSETS $ 355,411,911
=============
Shares Outstanding -- $0.10 par value 29,349,095
-------------
NET ASSET VALUE PER SHARE $ 12.11
=============
STATEMENT OF OPERATIONS
Year Ended
December 31, 1997
Investment Income:
Interest $ 23,174,400
-------------
Expenses:
Investment advisory fees -- Note B 1,730,953
Custodian fees 116,476
Audit fees 17,500
Directors' fees -- Note B 12,500
Printing expense 8,500
Transfer agent fees 3,300
Legal fees 2,985
Registration fees 2,652
Insurance expense 2,467
Other 700
-------------
Total Expenses 1,898,033
-------------
Net Investment Income 21,276,367
-------------
Realized and Unrealized Gain/(Loss)
on Investments -- Note F
Net realized loss on investments (62,653)
Net change in unrealized depreciation
of investments 8,436,647
-------------
Net Realized and Unrealized Gain
on Investments 8,373,994
-------------
Net Increase in Net Assets
from Operations $ 29,650,361
=============
* Includes repurchase agreement
See notes to financial statements.
- --------------------------------------------------------------------------------
55
<PAGE>
- --------------
The Guardian
Bond Fund,Inc.
- --------------
3
- --------------
- --------------------------------------------------------------------------------
The Guardian Bond Fund, Inc.
- ----------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
------------- -------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 21,276,367 $ 22,010,719
Net realized gain/(loss) on investments (62,653) 2,193,816
Net change in unrealized appreciation/(depreciation)
of investments 8,436,647 (14,421,607)
------------- -------------
Net Increase in Net Assets from Operations 29,650,361 9,782,928
------------- -------------
Dividends to Shareholders from:
Net investment income (21,605,507) (22,033,188)
------------- -------------
From Capital Share Transactions:
Net decrease in net assets from capital share
transactions -- Note G (7,065,940) (7,778,324)
------------- -------------
Net Increase/(Decrease) in Net Assets 978,914 (20,028,584)
Net Assets:
Beginning of year 354,432,997 374,461,581
------------- -------------
End of year* $ 355,411,911 $ 354,432,997
============= =============
* Includes undistributed net investment income of: $ 598,263 $ 998,872
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
56
<PAGE>
--------------
The Guardian
Bond Fund,Inc.
--------------
3
--------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year ..... $ 11.83 $ 12.25 $ 11.08 $ 12.24 $ 12.26 $ 12.33 $ 11.56 $ 11.67 $ 11.16 $ 11.12
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment
income .............. 0.75 0.76 0.76 0.40 0.70 0.81 0.92 0.97 0.98 1.03
Net realized and
unrealized gain/
(loss) on invest-
ments ............... 0.29 (0.42) 1.17 (0.82) 0.50 0.13 0.91 (0.11) 0.55 0.02
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase/
(decrease) from
investment
operations .......... 1.04 0.34 1.93 (0.42) 1.20 0.94 1.83 0.86 1.53 1.05
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Dividends and Distributions
to Shareholders from:
Net investment income . (0.76) (0.76) (0.76) (0.68) (0.70) (0.81) (0.92) (0.97) (1.02) (1.01)
Net realized gain ..... -- -- -- (0.06) (0.52) (0.20) (0.14) -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions ....... (0.76) (0.76) (0.76) (0.74) (1.22) (1.01) (1.06) (0.97) (1.02) (1.01)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year .................. $ 12.11 $ 11.83 $ 12.25 $ 11.08 $ 12.24 $ 12.26 $ 12.33 $ 11.56 $ 11.67 $ 11.16
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total return* ........... 8.99% 2.88% 17.59% (3.45)% 9.85% 7.70% 16.19% 7.57% 13.88% 9.70%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Ratios/supplemental data:
Net assets, end of year
(000's omitted) ..... $355,412 $354,433 $374,462 $308,978 $340,269 $284,330 $222,299 $165,844 $147,753 $113,616
Ratio of expenses to
average net assets .. 0.55% 0.54% 0.54% 0.54% 0.55% 0.56% 0.57% 0.58% 0.60% 0.61%
Ratio of net invest-
ment income to
average net assets .. 6.15% 6.12% 6.43% 5.69% 5.56% 6.70% 7.81% 8.53% 8.78% 8.97%
Portfolio turnover
rate ................ 340% 188% 298% 311% 220% 57% 43% 39% 158% 24%
</TABLE>
* Total returns do not reflect the effects of charges deducted pursuant to
the terms of GIAC's variable contracts. Inclusion of such charges would
reduce the total returns for all periods shown.
See notes to financial statements.
- --------------------------------------------------------------------------------
57
<PAGE>
- --------------
The Guardian
Cash Fund,Inc.
- --------------
4
- --------------
- --------------------------------------------------------------------------------
The Guardian Cash Fund, Inc.
- ----------------------------
SCHEDULE OF INVESTMENTS
December 31, 1997
- -------------------------
COMMERCIAL PAPER -- 95.3%
- -------------------------
Principal
Amount Value
- --------------------------------------------------------------
FINANCIAL -- 30.4%
Bank Holding Companies -- 4.4%
$16,000,000 J.P. Morgan & Co., Inc.
5.60% due 1/6/98 $ 15,987,556
------------
Finance Companies -- 13.0%
16,000,000 Nat'l. Rural Utils. Coop. Fin. Corp.
5.54% due 1/8/98 15,982,764
16,000,000 Private Export Funding Corp.
5.70% due 2/4/98 15,913,867
16,000,000 USAA Capital Corp.
5.67% due 1/26/98 15,937,000
------------
47,833,631
------------
Other Major Banks -- 13.0%
16,000,000 Barclays U.S. Funding Corp.
5.68% due 1/21/98 15,949,511
16,000,000 Commerzbank U.S. Fin.
5.69% due 1/14/98 15,967,124
16,000,000 Deutsche Bank Fin., Inc.
5.69% due 1/16/98 15,962,067
------------
47,878,702
------------
Total Financial 111,699,889
------------
INDUSTRIAL -- 64.9%
Automotive -- 8.7%
16,000,000 Ford Motor Credit Co.
5.71% due 1/15/98 15,964,471
16,000,000 Toyota Motor Credit Co.
5.65% due 1/28/98 15,932,200
------------
31,896,671
------------
Conglomerates -- 4.3%
16,000,000 General Electric Cap. Corp.
5.60% due 1/20/98 15,952,711
------------
Containers-Metals and Plastics -- 4.3%
16,000,000 Sonoco Products Co.
5.82% due 1/13/98 15,968,960
------------
Electrical Equipment -- 4.3%
16,000,000 Emerson Electric
5.73% due 1/29/98 15,928,693
------------
Electronic Components -- 4.3%
16,000,000 Rockwell Int'l. Corp.
5.75% due 2/3/98 15,915,667
------------
Food and Beverage -- 13.0%
16,000,000 Cargill, Inc.
5.72% due 2/18/98 15,877,973
16,000,000 Coca Cola Co.
5.73% due 2/9/98 15,900,680
16,000,000 Kellogg Co.
5.70% due 2/13/98 15,891,066
------------
47,669,719
------------
Household Products -- 4.4%
16,000,000 Procter & Gamble Co.
5.57% due 1/9/98 15,980,196
------------
Publishing-News -- 4.3%
16,000,000 Gannett, Inc.
5.65% due 1/12/98 15,972,378
------------
Telecommunications -- 13.0%
16,000,000 American Telephone & Telegraph
Co. 5.53% due 1/5/98 15,990,169
16,000,000 British Telecommunications PLC
5.70% due 2/5/98 15,911,333
16,000,000 Lucent Technologies, Inc.
5.68% due 2/2/98 15,919,218
------------
47,820,720
------------
Utilities-Electric -- 4.3%
16,000,000 Carolina Power & Light Co.
5.82% due 1/30/98 15,924,987
------------
Total Industrial 239,030,702
------------
TOTAL COMMERCIAL PAPER
(Cost $350,730,591) 350,730,591
------------
See notes to financial statements.
- --------------------------------------------------------------------------------
58
<PAGE>
--------------
The Guardian
Cash Fund,Inc.
--------------
4
--------------
- --------------------------------------------------------------------------------
- ----------------------------
REPURCHASE AGREEMENT -- 4.7%
- ----------------------------
Principal
Amount Value
- --------------------------------------------------------------
$17,265,000 State Street Bank & Trust Co.
repurchase agreement, dated
12/31/97, maturity value
$17,270,611 at 5.85% due
1/2/98 (collateralized by
$17,615,000 U.S. Treasury
Notes, 5.875% due 2/28/99) $ 17,265,000
------------
TOTAL REPURCHASE AGREEMENT
(Cost $17,265,000) 17,265,000
------------
TOTAL INVESTMENTS -- 100.0%
(Cost $367,995,591) 367,995,591
CASH, RECEIVABLES AND OTHER
ASSETS LESS LIABILITIES -- 0.0% 126,858
------------
NET ASSETS -- 100.0% $368,122,449
============
See notes to financial statements.
- --------------------------------------------------------------------------------
59
<PAGE>
- --------------
The Guardian
Cash Fund,Inc.
- --------------
4
- --------------
- --------------------------------------------------------------------------------
The Guardian Cash Fund, Inc.
- ----------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1997
ASSETS:
Investments, at identified cost* $367,995,591
============
Investments, at market 350,730,591
Repurchase agreement 17,265,000
------------
TOTAL INVESTMENTS 367,995,591
Cash 113
Receivable for fund shares sold 928,773
Interest receivable 2,805
------------
TOTAL ASSETS 368,927,282
------------
LIABILITIES:
Payable for fund shares redeemed 242,066
Accrued expenses 57,515
Due to affiliates 505,252
------------
TOTAL LIABILITIES 804,833
------------
NET ASSETS $368,122,449
============
COMPONENTS OF NET ASSETS:
Capital stock, at par $ 3,681,225
Additional paid-in capital 364,441,224
------------
NET ASSETS $368,122,449
============
Shares Outstanding -- $0.10 par value 36,812,245
------------
NET ASSET VALUE PER SHARE $ 10.00
============
STATEMENT OF OPERATIONS
Year Ended
December 31, 1997
Investment Income:
Interest $ 21,731,247
------------
Expenses:
Investment advisory fees -- Note B 1,955,040
Custodian fees 81,651
Registration fees 18,321
Audit fees 17,000
Directors' fees -- Note B 12,500
Printing expense 9,600
Transfer agent fees 3,300
Legal fees 2,800
Insurance expense 2,635
Other 700
------------
Total Expenses 2,103,547
------------
Net Investment Income,
Representing Net Increase in
Net Assets from Operations $ 19,627,700
============
* Includes repurchase agreement.
See notes to financial statements.
- --------------------------------------------------------------------------------
60
<PAGE>
--------------
The Guardian
Cash Fund,Inc.
--------------
4
--------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31,
1997 1996
------------- -------------
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 19,627,700 $ 18,377,984
------------- -------------
Net Increase in Net Assets from Operations 19,627,700 18,377,984
------------- -------------
Dividends to Shareholders from:
Net investment income (19,627,700) (18,377,984)
------------- -------------
From Capital Share Transactions:
Net increase/(decrease) in net assets from
capital share transactions -- Note G (10,199,261) 21,501,621
------------- -------------
Net Increase/(Decrease) in Net Assets (10,199,261) 21,501,621
Net Assets:
Beginning of year 378,321,710 356,820,089
------------- -------------
End of year $ 368,122,449 $ 378,321,710
============= =============
See notes to financial statements.
- --------------------------------------------------------------------------------
61
<PAGE>
- --------------
The Guardian
Cash Fund,Inc.
- --------------
4
- --------------
- --------------------------------------------------------------------------------
The Guardian Cash Fund, Inc.
- ----------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year ..... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income . 0.50 0.49 0.54 0.38 0.26 0.35 0.54 0.77 0.87 0.72
Dividends to
Shareholders from:
Net investment income . (0.50) (0.49) (0.54) (0.38) (0.26) (0.35) (0.54) (0.77) (0.87) (0.72)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year .................. $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total return* ........... 5.14% 4.98% 5.52% 3.82% 2.64% 3.21% 5.59% 7.95% 8.70% 7.20%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Ratios/supplemental data:
Net assets, end of year
(000's omitted) ..... $368,122 $378,322 $356,820 $386,986 $310,798 $318,879 $331,677 $331,600 $262,865 $228,310
Ratio of expenses to
average net assets .. 0.54% 0.54% 0.54% 0.54% 0.54% 0.54% 0.55% 0.56% 0.56% 0.58%
Ratio of net invest-
ment income to
average net assets .. 5.02% 4.86% 5.39% 3.81% 2.61% 3.17% 5.44% 7.67% 8.67% 7.17%
</TABLE>
* Total returns do not reflect the effects of charges deducted pursuant to
the terms of GIAC's variable contracts. Inclusion of such charges would
reduce the total returns for all periods shown.
See notes to financial statements.
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
63
<PAGE>
--------------
The Guardian
Stock, Bond
& Cash
--------------
4
--------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, The Guardian Bond Fund,
The Guardian Cash Fund
- ------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ----------------------------------------------
Note A -- Organization and Accounting Policies
- ----------------------------------------------
The Guardian Stock Fund, Inc. (GSF), The Guardian Bond Fund, Inc. (GBF)
and The Guardian Cash Fund, Inc. (GCF) (collectively, the Funds and
individually, a Fund), are each incorporated in the state of Maryland and are
diversified open-end management investment companies registered under the
Investment Company Act of 1940, as amended (1940 Act). Shares of the Funds are
only sold to certain separate accounts of The Guardian Insurance & Annuity
Company, Inc. (GIAC). GIAC is a wholly owned subsidiary of The Guardian Life
Insurance Company of America (Guardian Life). The Funds are available for
investment only through the purchase of certain variable annuity and variable
life insurance contracts issued by GIAC. Significant accounting policies of the
Funds are as follows:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Investments
Investments in GSF and GBF are carried at value. Securities listed on
national securities exchanges are valued based upon closing prices on these
exchanges. Securities traded in the over-the-counter market and listed
securities for which there have been no trades for the day are valued at the
mean of the bid and asked prices.
Certain debt securities may be valued each business day by an independent
pricing service (Service) approved by the Board of Directors. Debt securities
for which quoted bid prices, in the judgment of the Service, are readily
available and representative of the bid side of the market, are valued at the
mean between the quoted bid prices (as obtained by the Service from dealers in
such securities) and asked prices (as calculated by the Service based upon its
evaluation of the market for such securities). Other debt securities that are
valued by the Service are carried at fair value as determined by the Service,
based on methods which include consideration of: yields or prices of securities
of comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions.
Securities for which market quotations are not readily available,
including certain mortgage-backed securities and restricted securities, are
valued by using methods that each Fund's Board of Directors, in good faith,
believes will accurately reflect their fair value.
The valuation of securities held by GCF is based upon their amortized cost
which approximates market value, in accordance with Rule 2a-7 under the 1940
Act. Amortized cost valuations do not take into account unrealized gains and
losses.
Investment securities transactions are recorded on the date of purchase or
sale. Repurchase agreements are carried at cost, which approximates value (see
Note C).
Net realized gain or loss on sales of investments is determined on the
identified cost basis. Interest income, including amortization of premium and
discount, is recorded when earned. Dividends are recorded on the ex-dividend
date.
Federal Income Taxes
Each Fund qualifies and intends to remain qualified to be taxed as a
"regulated investment company" under the provisions of the Internal Revenue Code
(Code), and as such will not be subject to federal income tax on investment
income (including any realized capital gains) which is distributed to its
shareholders in accordance with the applicable provisions of the Code.
Therefore, no federal income tax provision is required.
Reclassifications of Capital Accounts
The treatment for financial statement purposes of
- --------------------------------------------------------------------------------
64
<PAGE>
- --------------
The Guardian
Stock, Bond
& Cash
- --------------
4
- --------------
- --------------------------------------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
December 31, 1997 (continued)
distributions made during the year from net investment income and net realized
gains may differ from their ultimate treatment for federal income tax purposes.
These differences primarily are caused by differences in the timing of the
recognition of certain components of income or capital gain, and the
recharacterization of foreign exchange gains or losses to either ordinary income
or realized capital gains for federal income tax purposes. Where such
differences are permanent in nature, they are reclassified in the components of
net assets based on their ultimate characterization for federal income tax
purposes. Any such reclassifications will have no effect on net assets, results
of operations, or net asset value per share of the Fund.
During the year ended December 31, 1997, GBF reclassified amounts to paid-in
capital from undistributed/(overdistributed) net investment income and
accumulated net realized gain/(loss) on investments. Increase (decrease) to the
various capital accounts were as follows:
Undistributed/ Accumulated
(overdistributed) net realized
Paid-in net investment gain/(loss) on
capital income investments
------- ----------------- --------------
GBF -- $(71,469) $71,469
Dividend Distributions
GSF and GBF intend to distribute each year, as dividends or capital gain
distributions, substantially all net investment income and net capital gains
realized. All such dividends or distributions are credited in the form of
additional shares of the applicable Fund at net asset value on the ex-dividend
date. Such distributions are determined in conformity with federal income tax
regulations. Differences between the recognition of income on an income tax
basis and recognition of income based on generally accepted accounting
principles may cause temporary overdistributions of net realized gains and net
investment income. Currently, the policy of GSF and GBF is to distribute net
investment income approximately every six months and net capital gains annually.
This policy is, however, subject to change at any time by each Fund's Board of
Directors.
GCF earns interest on its investments daily and distributes all of its net
investment income, increased or decreased by realized gains or losses, each day
GCF is open for business. Earnings for Saturdays, Sundays and holidays are paid
as a dividend on the next business day.
All dividends and distributions are credited in the form of additional
shares of GCF at net asset value on the payable date.
- -----------------------------------------
Note B -- Investment Advisory Agreements
and Payments to Related Parties
- -----------------------------------------
Each Fund has an investment advisory agreement with Guardian Investor
Services Corporation (GISC), a wholly owned subsidiary of GIAC. GISC receives a
management fee from each Fund computed at the rate of .50% of the daily average
net assets during the fiscal year, payable quarterly. If total expenses of any
Fund (excluding taxes, interest and brokerage commissions, but including the
investment advisory fee) exceeds 1% per annum of the average daily net assets of
the Fund, GISC has agreed to assume any such expenses. None of the Funds
exceeded this limit during the year ended December 31, 1997.
No compensation is paid by any of the Funds to a director who is deemed to
be an "interested person" (as defined in the 1940 Act) of a Fund. Each director
not deemed an "interested person" is paid an annual fee of $500 by each Fund,
and $350 for attendance at each meeting of each Fund.
- -------------------------------
Note C -- Repurchase Agreements
- -------------------------------
Collateral underlying repurchase agreements takes the form of either cash
or fully negotiable U.S. government securities. Repurchase agreements are fully
collateralized (including the interest earned thereon) and such collateral is
marked to market daily while the
- --------------------------------------------------------------------------------
65
<PAGE>
- --------------
The Guardian
Stock, Bond
& Cash
- --------------
4
- --------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, The Guardian Bond Fund,
The Guardian Cash Fund
- ------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
December 31, 1997 (continued)
agreements remain in force. If the value of the underlying securities falls
below the value of the repurchase price plus accrued interest, the Funds will
require the seller to deposit additional collateral by the next business day. If
the request for additional collateral is not met, or the seller defaults, the
Funds maintain the right to sell the collateral and may claim any resulting loss
against the seller. Each Fund's Board of Directors has established standards to
evaluate the creditworthiness of broker-dealers and banks which engage in
repurchase agreements with each Fund.
- ---------------------------------------
Note D -- Reverse Repurchase Agreements
- ---------------------------------------
GBF may enter into reverse repurchase agreements with banks or third party
broker-dealers to borrow short term funds. Interest on the value of reverse
repurchase agreements issued and outstanding is based upon competitive market
rates at the time of issuance. At the time GBF enters into a reverse repurchase
agreement, it establishes and maintains cash, U.S. Government securities or
liquid, unencumbered securities that are marked to market daily in a segregated
account with the Fund's custodian. The value of such segregated assets must be
at least equal to the value of the repurchase obligation (principal plus accrued
interest), as applicable. Reverse repurchase agreements involve the risk that
the buyer of the securities sold by GBF may be unable to deliver the securities
when the Fund seeks to repurchase them. Interest paid on reverse repurchase
agreements for the year ended December 31, 1997 amounted to $128,421.
Information regarding transactions by The Guardian Bond Fund under reverse
repurchase agreements is as follows:
Face Market
Value Value
----- -----
$13,093,750 Reverse Repurchase Agreement with Lehman Brothers,
Inc., 6.125% dated 12/31/97, to be repurchased at
$13,097,715 on 1/2/98, collateralized by
$13,099,000 Dow Chem Co., 6.70% due 1/2/98 ......... $13,093,750
15,037,500 Reverse Repurchase Agreement with Goldman Sachs,
LP, 5.75% dated 12/31/97, to be repurchased at
$15,041,552 on 1/2/98, collateralized by
$15,044,000 Koch Industries, Inc., 6.70% due 1/2/98 15,037,500
-----------
$28,131,250
===========
Average amount outstanding during the year ......... $ 417,211
Average monthly shares outstanding during the year . 31,244,159
Average debt per share outstanding during the year . $ 0.01
Weighted average interest rate during the year ..... 4.86%
- --------------------------------------------------------------------------------
66
<PAGE>
--------------
The Guardian
Stock, Bond
& Cash
--------------
4
--------------
- --------------------------------------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
December 31, 1997 (continued)
- ----------------------------------
Note E -- Dollar Roll Transactions
- ----------------------------------
GBF may enter into dollar roll transactions with financial institutions to
take advantage of opportunities in the mortgage market. A dollar roll
transaction involves a sale by the Fund of securities that it holds with an
agreement by the Fund to repurchase similar securities at an agreed upon price
and date. The securities repurchased will bear the same interest as those sold,
but generally will be collateralized at time of delivery by different pools of
mortgages with different prepayment histories than those securities sold. During
the period between the sale and repurchase, the Fund will not be entitled to
receive interest and principal payments on the securities sold. Dollar roll
transactions involve the risk that the buyer of the securities sold by GBF may
be unable to deliver the securities when GBF seeks to repurchase them.
- ---------------------------------
Note F -- Investment Transactions
- ---------------------------------
Purchases and proceeds from sales of securities (excluding short-term
securities) for the year ended December 31, 1997 were as follows:
GSF GBF
--- ---
Purchases........................... $1,425,160,077 $1,154,534,542
Proceeds............................ $1,319,415,028 $1,145,649,039
The cost of investments owned at December 31, 1997 for federal income tax
purposes was the same as for financial reporting purposes. The gross unrealized
appreciation and depreciation of investments at December 31, 1997 for GSF and
GBF were as follows:
GSF GBF
--- ---
Gross Appreciation.................. $ 973,907,288 $ 4,232,080
Gross Depreciation.................. (31,209,861) (1,174,249)
-------------- --------------
Net Unrealized Appreciation....... $ 942,697,427 $ 3,057,831
============== =============
- --------------------------------------------------------------------------------
67
<PAGE>
- --------------
The Guardian
Stock, Bond
& Cash
- --------------
4
- --------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, The Guardian Bond Fund,
The Guardian Cash Fund
- ------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
December 31, 1997 (continued)
- ---------------------------------------
Note G -- Transactions in Capital Stock
- ---------------------------------------
There are 100,000,000 shares of $0.10 par value capital stock authorized
for each of the Funds. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------
Shares Amount
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
o The Guardian Stock Fund, Inc.
Shares sold 9,514,978 9,984,589 $ 429,926,820 $ 376,271,228
Shares issued in reinvestment of
dividends and distributions 8,346,801 7,056,955 376,552,398 270,899,336
Shares repurchased (5,599,554) (5,854,449) (251,187,198) (218,108,938)
- --------------------------------------------------------------------------------------------
Net increase 12,262,225 11,187,095 $ 555,292,020 $ 429,061,626
- --------------------------------------------------------------------------------------------
o The Guardian Bond Fund, Inc.
Shares sold 3,714,602 4,464,537 $ 45,183,038 $ 53,654,579
Shares issued in reinvestment of
dividends and distributions 1,799,751 1,871,161 21,605,507 22,033,188
Shares repurchased (6,115,919) (6,951,420) (73,854,485) (83,466,091)
- --------------------------------------------------------------------------------------------
Net decrease (601,566) (615,722) $ (7,065,940) $ (7,778,324)
- --------------------------------------------------------------------------------------------
o The Guardian Cash Fund, Inc.
Shares sold 30,190,330 33,287,898 $ 301,903,299 $ 332,878,981
Shares issued in reinvestment of
dividends and distributions 1,962,770 1,837,798 19,627,700 18,377,984
Shares repurchased (33,173,026) (32,975,534) (331,730,260) (329,755,344)
- --------------------------------------------------------------------------------------------
Net increase/(decrease) (1,019,926) 2,150,162 $ (10,199,261) $ 21,501,621
- --------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
Note H -- Line of Credit
- ------------------------
A $20,000,000 line of credit available to each Fund and the other Guardian
related Funds has been established with Morgan Guaranty Trust Company. The rate
of interest charged on any borrowings is based upon the prevailing Federal Funds
rate at the time of the loan plus .25% calculated on a 360 day basis per annum.
For the year ended December 31, 1997, none of the Funds borrowed against this
line of credit.
- --------------------------------------------------------------------------------
68
<PAGE>
--------------
The Guardian
Stock, Bond
& Cash
--------------
4
--------------
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors and Shareholders
The Guardian Stock Fund, Inc.
The Guardian Bond Fund, Inc.
The Guardian Cash Fund, Inc.
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of The Guardian Stock Fund, Inc., The
Guardian Bond Fund, Inc. and The Guardian Cash Fund, Inc. as of December 31,
1997, and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the ten years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1997, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
Guardian Stock Fund, Inc., The Guardian Bond Fund, Inc. and The Guardian Cash
Fund, Inc. at December 31, 1997, the results of their operations for the year
then ended, the changes in their net assets for each of the two years in the
period then ended, and the financial highlights for each of the ten years in the
period then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
February 9, 1998
- --------------------------------------------------------------------------------
69
<PAGE>
- ---------------
Gabelli Capital
Asset Fund
- ---------------
5
- ---------------
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
SCHEDULE OF INVESTMENTS
December 31, 1997
- ----------------------
COMMON STOCKS -- 86.9%
- ----------------------
Shares Value
- -------------------------------------------------------------------
Aerospace -- 1.5%
65,000 Fairchild Corp., Class A $ 1,616,875
-----------
Agriculture -- 0.6%
16,000 Monsanto Co. 672,000
-----------
Automotive: Parts and Accessories -- 5.2%
15,000 Echlin Inc. 542,812
40,000 GenCorp Inc. 1,000,000
30,000 Handy & Harman 1,035,000
40,000 Modine Manufacturing Co. 1,365,000
7,100 Ragan (Brad) Inc. 259,150
15,000 TransPro Inc. 135,000
37,000 Wynn's International Inc. 1,179,375
-----------
5,516,337
-----------
Aviation: Parts and Services -- 3.3%
11,000 AAR Corp. 426,250
35,000 Coltec Industries Inc. + 811,563
10,000 Curtiss-Wright Corp. 363,125
7,500 Hi-Shear Industries Inc. 15,469
31,000 Hudson General Corp. 1,488,000
10,000 Moog Inc., Class A + 349,375
-----------
3,453,782
-----------
Broadcasting -- 8.8%
68,000 Ackerley Communications Inc. 1,151,750
26,442 Chris-Craft Industries Inc. 1,383,247
4,000 Gray Communications Systems Inc. 105,000
50,000 Gray Communications
Systems Inc., Class B 1,287,500
24,000 Grupo Televisa SA, GDR + 928,500
50,000 LIN Television Corp.+ 2,725,000
16,000 United Television Inc. 1,662,000
-----------
9,242,997
-----------
Cable -- 9.4%
35,000 BET Holdings Inc., Class A + 1,911,875
45,000 Cablevision Systems Corp.,
Class A + 4,308,750
60,000 Tele-Communications Inc./
Liberty Media Group, Class A + 2,175,000
27,000 Tele-Communications
International Inc., Class A + 486,000
15,000 United International Holdings
Inc., Class A + 172,500
30,000 US WEST Media Group + 866,250
-----------
9,920,375
-----------
Consumer Products -- 3.2%
75,000 Carter-Wallace Inc. 1,265,625
5,000 Fortune Brands Inc. 185,313
20,000 Gallaher Group plc + 427,500
18,000 General Cigar Holdings Inc.,
Class B 389,250
35,000 General Housewares Corp. 367,500
18,000 National Presto Industries Inc. 712,125
-----------
3,347,313
-----------
Consumer Services -- 2.9%
40,000 HSN Inc.+ 2,060,000
50,000 Rollins Inc. 1,015,625
-----------
3,075,625
-----------
Diversified Industrial -- 6.3%
7,500 Crane Co. 325,312
16,000 GATX Corp. 1,161,000
18,000 Honeywell Inc. 1,233,000
10,000 ITT Industries Inc. 313,750
49,000 Katy Industries Inc. 998,375
15,000 Thomas Industries Inc. 296,250
60,000 TriMas Corp. 2,062,500
50,000 Tyler Corp.+ 275,000
-----------
6,665,187
-----------
Energy -- 5.3%
10,000 Eastern Enterprises 450,000
90,000 Kaneb Services Inc. + 466,875
20,000 Pennzoil Co. 1,336,250
35,000 Tejas Gas Corp. 2,143,750
60,000 USX-Delhi Group 1,230,000
-----------
5,626,875
-----------
Entertainment -- 6.9%
79,664 Ascent Entertainment Group Inc. + 826,514
42,000 Gaylord Entertainment Co., Class A 1,341,375
30,000 GC Companies Inc. + 1,421,250
25,000 Time Warner Inc. 1,550,000
53,000 Viacom Inc., Class A + 2,166,375
-----------
7,305,514
-----------
See notes to financial statements.
- --------------------------------------------------------------------------------
70
<PAGE>
---------------
Gabelli Capital
Asset Fund
---------------
5
---------------
- --------------------------------------------------------------------------------
Shares Value
- -------------------------------------------------------------------
Equipment and Supplies -- 8.2%
11,000 Aeroquip-Vickers Inc. $ 539,688
25,000 AMETEK Inc. 675,000
22,000 Ampco-Pittsburgh Corp. 430,375
6,000 CLARCOR Inc. 177,750
15,000 CTS Corp. 479,063
12,500 Franklin Electric Co. Inc. 803,125
35,000 Fedders Corp. 218,750
4,000 Ingersoll-Rand Co. 162,000
25,000 Navistar International Corp. + 620,312
14,200 Pittway Corp. 978,913
17,300 Portec Inc. 250,850
30,000 Sequa Corp., Class A + 1,951,875
24,000 SPS Technologies Inc. + 1,047,000
15,000 Sterling Electronics Corp. 313,125
------------
8,647,826
------------
Financial Services -- 1.9%
2,000 Block (H&R) Inc. 89,625
2,000 Mellon Bank Corp. 121,250
22,000 Midland Co. 1,386,000
15,000 Pioneer Group Inc. 421,875
------------
2,018,750
------------
Food and Beverage -- 6.3%
50,000 Celestial Seasonings Inc. + 1,575,000
2,000 CPC International Inc. 215,500
14,000 General Mills Inc. 1,002,750
5,000 Heinz (H.J.) Co. 254,062
22,000 Quaker Oats Co. 1,160,500
45,000 Seagram Co. Ltd. 1,454,063
10,786 Tootsie Roll Industries Inc. 674,125
10,000 Twinlab Corp. 247,500
------------
6,583,500
------------
Health Care -- 0.5%
75,000 IVAX Corp. + 506,250
------------
Hotels and Gaming -- 3.0%
45,000 Aztar Corp. + 281,250
11,000 Hilton Hotels Corp. 327,250
15,000 ITT Corp, New + 1,243,125
90,000 Jackpot Enterprises Inc. 1,018,125
38,000 Trump Hotels & Casino Resorts Inc.+ 254,125
------------
3,123,875
------------
Publishing -- 5.8%
5,000 Dow Jones & Co. Inc. 268,438
20,000 Golden Books Family Entertainment
Inc. + 206,250
15,000 Harcourt General Inc. 822,187
15,000 Lee Enterprises Inc. 443,438
10,000 McClatchy Newspapers Inc., Class A 271,875
35,000 Media General Inc., Class A 1,463,436
28,000 Meredith Corp. 999,250
10,000 Pulitzer Publishing Co. 628,125
15,000 Reader's Digest Association Inc.,
Class B 365,625
55,000 Thomas Nelson Inc. 635,937
------------
6,104,561
------------
Real Estate -- 1.0%
30,000 Griffin Land & Nurseries Inc. 465,000
30,000 Catellus Development Corp. 600,000
------------
1,065,000
------------
Retail -- 2.6%
70,000 Bruno's Inc., New + 144,375
35,000 Giant Food Inc., Class A 1,179,063
45,000 Neiman Marcus Group Inc. + 1,361,250
2,000 Scheib (Earl) Inc. 16,000
------------
2,700,688
------------
Specialty Chemical -- 0.4%
18,000 Ferro Corp. 437,625
------------
Telecommunications -- 1.8%
50,000 Citizens Utilities Co., Class B 481,250
28,000 Southern New England
Telecommunications Corp. 1,408,750
------------
1,890,000
------------
- --------------------------------------------------------------------------------
71
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Gabelli Capital
Asset Fund
- ---------------
5
- ---------------
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
SCHEDULE OF INVESTMENTS (continued)
December 31, 1997
Shares Value
- -------------------------------------------------------------------
Wireless Communications -- 2.0%
20,000 Centennial Cellular Corp., Class A + $ 410,000
32,000 COMSAT Corp. 776,000
20,000 Rogers Cantel Mobile
Communications Inc., Class B + 185,000
15,000 Telephone and Data Systems Inc. 698,437
------------
2,069,437
------------
TOTAL COMMON STOCKS
(Cost $70,799,877) $ 91,590,392
------------
- ----------------------------
U.S. TREASURY BILLS -- 13.0%
- ----------------------------
Principal
Amount Value
- -------------------------------------------------------------------
$ 13,716,000 5.010% to 5.278%++ due 01/08/98 --
02/26/98 $ 13,676,179
------------
TOTAL U.S. TREASURY BILLS
(Cost $13,676,179) 13,676,179
------------
TOTAL INVESTMENTS -- 99.9%
(Cost $84,476,056)(a) 105,266,571
------------
OTHER ASSETS AND LIABILITIES
(Net) -- 0.1% 83,694
------------
NET ASSETS -- 100.0% $105,350,265
============
(a) Aggregate cost for Federal tax purposes was $84,535,164. Net unrealized
appreciation for Federal tax purposes was $20,731,407 (gross unrealized
appreciation was $22,308,942 and gross unrealized depreciation was
$1,577,535).
+ Non-income producing security.
++ Represents annualized yield at date of purchase.
GDR -- Global Depositary Receipt
See notes to financial statements.
- --------------------------------------------------------------------------------
72
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Gabelli Capital
Asset Fund
---------------
5
---------------
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1997
Assets:
Investments, at value (cost $84,476,056) $ 105,266,571
Deferred organizational expenses 46,576
Dividends receivable 63,289
Receivable for investments sold 99,496
Receivable for Fund shares sold 1,060,546
-------------
Total Assets 106,536,478
-------------
Liabilities:
Payable for investments purchased 915,104
Payable for Fund shares redeemed 117,384
Payable for management fees 82,860
Accrued Directors' fees 6,600
Other accrued expenses 64,265
-------------
Total Liabilities 1,186,213
-------------
Net assets applicable to 6,881,175 shares
outstanding $ 105,350,265
=============
Net Asset Value, offering and redemption
price per share $ 15.31
=============
Net Assets consist of:
Shares of common stock at par value $ 6,881
Additional paid-in capital 84,603,284
Distribution in excess of net realized
gain on investments (50,415)
Net unrealized appreciation on investments 20,790,515
-------------
Total Net Assets $ 105,350,265
=============
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
Investment Income:
Dividends $ 594,615
Interest 343,370
-------------
Total Investment Income 937,985
-------------
Expenses:
Management fees 700,568
Legal and audit fees 32,144
Custodian fees 25,813
Directors' fees 24,288
Amortization of organizational expenses 20,000
Shareholder services fees 9,521
Miscellaneous 7,365
-------------
Total Expenses 819,699
-------------
Net Investment Income 118,286
-------------
Net Realized and Unrealized Gain on
Investments:
Net realized gain on investments 7,046,284
Net change in unrealized appreciation
on investments 17,681,316
-------------
Net realized and unrealized gain on investments 24,727,600
-------------
Net increase in net assets resulting from
operations $ 24,845,886
=============
See notes to financial statements.
- --------------------------------------------------------------------------------
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Gabelli Capital
Asset Fund
- ---------------
5
- ---------------
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Operations:
Net investment income $ 118,286 $ 92,133
Net realized gain on investments 7,046,284 1,411,324
Net change in unrealized appreciation on investments 17,681,316 2,258,045
------------- ------------
Net increase in net assets resulting from operations 24,845,886 3,761,502
Distributions to shareholders:
From net investment income (118,286) (95,723)
From excess of net investment income (8,067) --
From net realized gain on investments (7,046,284) (1,416,212)
In excess of net realized gain on investments (29,472) --
Share Transactions:
Net increase in net assets from fund share transactions 36,244,957 22,848,022
------------- ------------
Net increase in net assets 53,888,734 25,097,589
Net Assets:
Beginning of year 51,461,531 26,363,942
------------- ------------
End of year $ 105,350,265 $ 51,461,531
============= ============
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
74
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Gabelli Capital
Asset Fund
---------------
5
---------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------
1. -- Significant Accounting Policies
- -------------------------------------
Gabelli Capital Asset Fund (the "Fund"), a series of Gabelli Capital
Series Funds, Inc. (the "Company"), was organized on April 8, 1993 as a Maryland
corporation. The Company is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), whose primary objective is growth of capital. Shares of the Fund
are available to the public only through the purchase of certain variable
annuity and variable life insurance contracts issued by The Guardian Insurance &
Annuity Company, Inc. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements.
Security Valuation.
Portfolio securities listed or traded on a nationally recognized
securities exchange, quoted by the National Association of Securities Dealers
Automated Quotations, Inc. ("Nasdaq") or traded on foreign exchanges are valued
at the last sale price on that exchange (if there were no sales that day, the
security is valued at the average of the bid and asked prices). All other
portfolio securities for which over-the-counter market quotations are readily
available are valued at the latest average of the bid and asked prices. When
market quotations are not readily available, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Corporation's Directors. Short term debt
securities with remaining maturities of 60 days or less are valued at amortized
cost, unless the Directors determine such does not reflect the securities' fair
value, in which case these securities will be valued at their fair value as
determined by the Directors. Options are valued at the last sale price on the
exchange on which they are listed. If no sales of such options have taken place
that day, they will be valued at the mean between their closing bid and asked
prices.
Securities Transactions and Investment Income.
Securities transactions are accounted for on the trade date, with realized
gain or loss on the sale of investments determined by using the identified cost
method. Interest income (including amortization of premium and accretion of
discount) is recorded as earned. Dividend income is recorded on the ex-dividend
date.
Dividends and Distributions to Shareholders.
Dividends and distributions to shareholders are recorded on the
ex-dividend date. Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund.
Provisions for Income Taxes.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended. As a result, a Federal income tax provision is not required.
- --------------------------------------------------------------------------------
75
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Gabelli Capital
Asset Fund
- ---------------
5
- ---------------
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
Organizational Expenses.
A total of $100,000 was incurred in connection with the organization of
the Fund. These costs were advanced by the Guardian Insurance & Annuity Company
Inc. and will be reimbursed by the Fund. These organizational costs were
deferred and are being amortized on a straight-line basis over a period of 60
months from the date the Fund commenced investment operations.
- ----------------------------------------
2. -- Agreements with Affiliated Parties
- ----------------------------------------
Pursuant to a management agreement (the "Management Agreement"), the Fund
will pay Guardian Investor Services Corporation (the "Manager") a fee, computed
daily and paid monthly, at the annual rate of 1.00 percent of the value of the
Fund's average daily net assets. Pursuant to an Investment Advisory Agreement
among the Fund, the Manager and the Adviser, the Adviser, under the supervision
of the Company's Board of Directors and the Manager, manages the Fund's assets
in accordance with the Fund's investment objectives and policies, makes
investment decisions for the Fund, places purchase and sale orders on behalf of
the Fund, provides investment research and provides facilities and personnel
required for the Fund's administrative needs. The Adviser may delegate its
administrative role and currently has done so to First Data Investor Services
Group, Inc., the Fund's sub-administrator (the "Sub-Administrator"). The Adviser
will supervise the performance of administrative and professional services
provided by others and pays the compensation of the Sub-Administrator and all
officers and directors of the Fund who are its affiliates. As compensation for
its services and the related expenses borne by the Adviser, the Manager pays the
Adviser a fee, computed daily and paid monthly, at the annual rate of 0.75
percent of the value of the Fund's average daily net assets.
- --------------------------
3. -- Portfolio Securities
- --------------------------
Purchases and sales of securities for the year ended December 31, 1997,
other than U.S. government obligations and short term securities, aggregated
$56,210,307 and $42,191,156, respectively.
- ----------------------------------
4. -- Transactions with Affiliates
- ----------------------------------
During the year ended December 31, 1997, the Fund paid brokerage
commissions of $99,105 to Gabelli & Company, Inc. and its affiliates.
- ----------------------------
5. -- Shares of Common Stock
- ----------------------------
Transactions in shares of common stock were as follows:
Year Ended Year Ended
12/31/97 12/31/96
--------- --------
Shares Amount Shares Amount
------ ------ ------ ------
Shares sold 3,454,754 $ 50,227,654 2,913,475 $ 33,336,923
Shares issued upon re-
investment of dividends 478,228 7,202,109 131,244 1,511,935
Shares redeemed (1,507,694) (21,184,806) (1,052,170) (12,000,836)
---------- ------------ ---------- ------------
Net increase 2,425,288 $ 36,244,957 1,992,549 $ 22,848,022
========== ============ ========== ============
- --------------------------------------------------------------------------------
76
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---------------
Gabelli Capital
Asset Fund
---------------
5
---------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Per share amounts for a Fund share outstanding throughout each period.
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------------------
1997 1996 1995*
-------- ------- -------
<S> <C> <C> <C>
Operating performance:
Net asset value, beginning of period $ 11.55 $ 10.70 $ 10.00
-------- ------- -------
Net investment income 0.02 0.02 0.03(a)
Net realized and unrealized gain on investments 4.88 1.16 0.80
-------- ------- -------
Total from investment operations 4.90 1.18 0.83
-------- ------- -------
Distributions to shareholders:
From net investment income (0.02) (0.02) (0.03)
From net realized gains (1.12) (0.31) (0.09)
In excess of net realized gain on investments (0.00)(c) -- (0.01)
Total distributions (1.14) (0.33) (0.13)
-------- ------- -------
Net asset value, end of period $ 15.31 $ 11.55 $ 10.70
======== ======= =======
Total return** 42.6% 11.0% 8.4%
======== ======= =======
Ratios to average net assets and supplemental data:
Net assets, end of period (in 000's) $105,350 $51,462 $26,364
Ratio of net investment income to average
net assets 0.17% 0.21% 0.75%+
Ratio of operating expenses to average
net assets 1.17% 1.31% 1.78%+(b)
Portfolio turnover rate 65.5% 53.2% 81.4%
Average commission rate per share (d) $ 0.0447 $0.0496 N/A
</TABLE>
- ------------
* The Fund commenced operations on May 1, 1995.
** Total return represents aggregate total return of a hypothetical $1,000
investment at the beginning of the period and sold at the end of the period
including reinvestment of dividends. Total return for the period of less
than one year is not annualized. The performance of the fund does not
reflect expenses and charges of the applicable separate accounts and
variable products, all of which vary to a considerable extent and are
described in your product's prospectus.
+ Annualized.
(a) Net investment income before expenses assumed by the Manager and Adviser was
$0.03.
(b) Ratio of operating expenses to average net assets before expenses assumed by
the Manager and Adviser was 1.92%.
(c) Amount represents less than $0.01 per share.
(d) For fiscal years beginning after September 1, 1995, the SEC requires a fund
to disclose the average commission rate paid per share.
See notes to financial statements.
- --------------------------------------------------------------------------------
77
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Gabelli Capital
Asset Fund
- ---------------
5
- ---------------
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Gabelli Capital Asset Fund
(a series of Gabelli Capital Series Funds, Inc.)
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Gabelli Capital Asset Fund (the Fund)
(a series of Gabelli Capital Series Funds, Inc.) as of December 31, 1997, and
the related statement of operations for the year then ended, and the statement
of changes in net assets for the two years in the period then ended and the
financial highlights for the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of mate-rial misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1997 by correspondence with the custodian
and broker. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Gabelli Capital Asset Fund at December 31, 1997, and the results of its
operations for the year then ended, and the changes in its net assets for the
two years in the period then ended and the financial highlights for the periods
indicated therein, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
February 4, 1998
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
79
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Baillie Gifford
International
Fund
- ---------------
6
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford International Fund
- ----------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1997
- ----------------------
COMMON STOCKS -- 98.4%
- ----------------------
Shares Value
- --------------------------------------------------------------------------
ARGENTINA -- 0.8%
Banks -- 0.4%
76,000 Banco de Galicia Y
Buenos Aires S.A. ADR* $ 1,957,000
Oil and Gas -- 0.4%
315,055 Perez Companc S.A. 2,249,920
------------
4,206,920
------------
AUSTRALIA -- 2.1%
Banks -- 0.6%
496,000 Australia & NZ Bank Group 3,277,937
Beverage -- 0.5%
1,335,300 Fosters Brewing Group 2,541,222
Business Services -- 0.6%
175,700 Brambles Industries Ltd. 3,486,904
Real Estate -- 0.4%
101,632 Lend Lease Corp. 1,987,159
------------
11,293,222
------------
BRAZIL -- 2.2%
Food, Beverage and Tobacco -- 0.3%
110,000 Comp. Cerveja Ria Brahma ADR 1,560,625
Petroleum Services -- 0.3%
75,000 Petroleo Brasileiro S.A. ADR 1,725,000
Retail-Food -- 0.3%
64,000 Comp. Brasileira de Distribution GDR+ 1,240,000
Telecommunications -- 0.9%
43,553 Telecom. Brasileiras ADR 5,071,202
Utilities-Electric -- 0.4%
27,300 Comp. Energetica de Minas ADR 1,201,200
61,000 Comp. Pamanaense de Energia ADR 834,938
------------
11,632,965
------------
CHILE -- 0.2%
Retail-Food -- 0.2%
65,604 Distribucion Y Servicio S.A. ADR* 1,217,774
------------
CZECH REPUBLIC -- 0.2%
Banks -- 0.2%
75,866 Komercni Banka S.A. GDR 910,392
------------
FRANCE -- 4.0%
Electronics-Semiconductor -- 1.0%
86,200 SGS Thomson Microelectronics NV* 5,335,133
Oil-Integrated -- 1.9%
86,550 Elf Aquitaine 10,066,462
Retail Trade -- 1.1%
11,850 Comptoirs Modernes 6,064,302
------------
21,465,897
------------
GERMANY -- 13.4%
Automobile -- 2.3%
16,110 Bayerische Motoren Werke AG* 12,044,776
Banks -- 2.4%
199,700 Bayerische Vereinsbank AG* 13,065,783
Chemicals -- 0.7%
108,610 BASF AG 3,848,849
Drugs and Health Care -- 0.9%
99,440 GEHE AG 4,974,902
Footwear -- 2.2%
89,300 Adidas AG 11,744,840
Industrial Machineries -- 2.3%
24,180 Mannesmann AG 12,218,027
Insurance -- 0.7%
9,370 Munchener Ruckvers* 3,531,427
Software -- 1.9%
34,140 SAP AG 10,371,333
------------
71,799,937
------------
HONG KONG -- 3.0%
Conglomerates -- 1.2%
579,000 CITIC Pacific Ltd. 2,301,355
644,000 Hutchison Whampoa 4,039,024
Real Estate -- 1.8%
891,000 Henderson Land Development 4,196,864
1,088,220 Hong Kong Land Hldgs. 2,089,382
598,000 Hysan Development Co. 1,192,296
698,000 New World Development Co. 2,414,041
------------
16,232,962
------------
See notes to financial statements.
* Non-income producing security.
+ Rule 144A restricted security.
- --------------------------------------------------------------------------------
80
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Baillie Gifford
International
Fund
---------------
6
---------------
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------
HUNGARY -- 1.1%
Food and Beverage -- 0.4%
27,000 Pick Szeged RT $ 2,154,765
Pharmaceuticals -- 0.7%
31,700 Richter Gedeon VEG 3,599,998
------------
5,754,763
------------
IRELAND -- 1.9%
Banks -- 0.9%
512,000 Allied Irish Bank 4,955,358
Construction Materials -- 1.0%
444,600 CRH PLC 5,183,889
------------
10,139,247
------------
ITALY -- 5.4%
Oil-lntegrated -- 1.3%
1,214,200 Eni Spa 6,884,356
Telecommunications -- 4.1%
1,625,440 Telecom. Italia SPA 10,382,969
2,435,000 Telecom. Italia MOB 11,238,991
------------
28,506,316
------------
JAPAN -- 14.8%
Automobiles -- 1.2%
176,000 Honda Motor Co. 6,456,613
Chemicals -- 0.7%
200,000 Shin Etsu Chemical Co. 3,814,046
Computer Systems -- 1.1%
107 NTT Data Comm. Systems 5,760,971
Drugs and Health Care -- 0.6%
146,000 Sanyo Co. 3,298,613
Electronics -- 2.7%
75,000 Rohm Co. 7,639,580
77,400 Sony Corp. 6,876,311
Financial Services -- 3.0%
240,100 Credit Saison Co. 5,921,130
111,440 Promise Co. 6,179,257
12,800 Shohkoh Fund & Co.* 3,901,662
Industrial Machineries -- 0.9%
57,700 SMC Corp. 5,081,948
Leisure Products -- 0.4%
18,150 Toho Co. 1,932,182
Photography -- 1.9%
185,000 Canon, Inc. 4,307,268
153,000 Fuji Photo Film Co. 5,858,926
Real Estate -- 0.9%
426,000 Mitsubishi Estate 4,632,917
Retail Trade -- 0.3%
133,000 Jusco Co. 1,874,244
Telecommunications -- 1.1%
210,000 Matsushita Communications 5,596,997
------------
79,132,665
------------
MEXICO -- 1.0%
Conglomerates -- 0.2%
156,000 Alfa S.A. 1,057,332
Media and Entertainent -- 0.3%
83,000 TV Azteca S.A. de C.V. ADR* 1,872,687
Retail Trade -- 0.2%
290,000 Organiz. Soriana* 1,275,634
Telecommunications -- 0.3%
23,800 Telefonos de Mexico S.A. ADR 1,334,288
------------
5,539,941
------------
NETHERLANDS -- 5.6%
Banks -- 2.6%
700,250 ABN Amro Hldgs. NV 13,641,345
Broadcasting and Publishing -- 1.9%
360,000 Ver Ned Uitgevers 10,155,599
Semiconductor-Equipment -- 1.1%
90,150 ASM Lithography Hldgs.* 5,913,225
------------
29,710,169
------------
NEW ZEALAND -- 0.6%
Telecommunications -- 0.6%
679,000 Telecom. Corp. of New Zealand 3,292,082
------------
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
81
<PAGE>
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Baillie Gifford
International
Fund
- ---------------
6
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford International Fund
- ----------------------------------
SCHEDULE OF INVESTMENTS (continued)
December 31, 1997
Shares Value
- --------------------------------------------------------------------------
NORWAY -- 0.8%
Publishing -- 0.8%
261,800 Schibsted ASA* $ 4,483,969
------------
POLAND -- 0.5%
Electrical Equipment -- 0.5%
266,150 Elektrim 2,574,671
------------
SINGAPORE -- 0.3%
Publishing -- 0.3%
127,000 Singapore Press Hldgs. 1,589,855
------------
SPAIN -- 2.5%
Banks -- 2.5%
394,500 Banco Santander S.A. 13,180,209
------------
SWEDEN -- 4.2%
Conglomerates -- 1.2%
72,000 Incentive AB 6,501,845
Construction and Mining Equipment -- 1.2%
216,000 Atlas Copco AB 6,433,834
Telecommunications -- 1.8%
255,500 LM Ericsson* 9,605,505
------------
22,541,184
------------
SWITZERLAND -- 9.8%
Business Services -- 1.0%
18,309 Adecco S.A. 5,306,502
Industrial Machineries -- 0.4%
1,245 Bobst AG 1,831,885
Insurance -- 2.5%
28,080 Zurich Versicherungs-Gesellschaft* 13,375,089
Pharmaceuticals -- 5.9%
19,530 Novartis AG 31,676,773
------------
52,190,249
------------
UNITED KINGDOM -- 24.0%
Banks -- 6.1%
642,000 Abbey National 11,557,156
437,500 HSBC Hldgs. 10,793,278
550,000 Lloyds TSB Group PLC* 7,155,272
188,000 National Westminster Bank Co. PLC 3,124,955
Conglomerates -- 2.5%
1,675,000 Rentokil Initial PLC 7,412,522
1,077,000 Williams Hldgs. 5,979,127
Containers-Paper and Plastic -- 0.5%
600,000 Bunzl PLC 2,330,708
Distributors -- 0.2%
204,000 Litho Supplies 789,090
Drugs and Health Care -- 3.4%
583,000 Glaxo Wellcome 13,899,046
124,000 Zeneca Group 4,392,246
Electronics -- 0.7%
373,000 Eletrocomponents 2,775,316
139,000 Premier Farnell 999,987
Engineering -- 0.9%
243,000 Siebe 4,769,574
Food, Beverage and Tobacco -- 2.4%
350,000 Devro Int'l. 2,167,279
961,900 Imperial Tobacco 6,051,097
327,702 Whitbread 4,811,960
Insurance -- 0.6%
100,000 Britannic Assurance 1,798,538
420,000 Cox Insurance Hldgs. PLC 1,634,944
Leisure Products -- 0.7%
243,000 Granada Group 3,711,886
Mining -- 0.2%
239,672 Antofagasta Hldgs. 1,299,082
Newspapers -- 0.2%
164,000 Southnews PLC 1,225,633
Oil-lnternational -- 2.1%
847,872 British Petroleum 11,216,099
Retail Trade -- 1.5%
331,000 Argos PLC 2,987,453
475,087 Dixons Group 4,767,819
Telecommunications -- 1.6%
992,991 Cable & Wireless Co.* 4,305,808
585,000 Vodafone Group 4,227,795
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
82
<PAGE>
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Baillie Gifford
International
Fund
---------------
6
---------------
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------
Transportation -- 0.4%
288,000 BAA PLC $ 2,355,739
------------
128,539,409
------------
TOTAL COMMON STOCKS
(Cost $420,480,722) 525,934,798
------------
- ----------------------------
REPURCHASE AGREEMENT -- 0.6%
- ----------------------------
Principal
Amount Value
- --------------------------------------------------------------------------
$ 3,262,000 State Street Bank & Trust Co.
repurchase agreement, dated
12/31/97, maturity value
$3,262,906 at 5.00% due 1/2/98
(collateralized by $3,330,000
U.S. Treasury Notes, 5.625%
due 11/30/99) $ 3,262,000
------------
TOTAL REPURCHASE AGREEMENT
(Cost $3,262,000) 3,262,000
------------
TOTAL INVESTMENTS -- 99.0%
(Cost $423,742,722) 529,196,798
CASH, RECEIVABLES AND OTHER ASSETS
LESS LIABILITIES -- 1.0% 5,514,672
------------
NET ASSETS -- 100.0% $534,711,470
============
Glossary of terms:
ADR - American Depository Receipt.
GDR - Global Depository Receipt.
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
83
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Baillie Gifford
International
Fund
- ---------------
6
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford International Fund
- ----------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1997
ASSETS:
Investments, at identified cost* $ 423,742,722
=============
Investments, at market 525,934,798
Repurchase agreement 3,262,000
-------------
TOTAL INVESTMENTS 529,196,798
Cash 466
Foreign currency (cost $4,725,729) 4,538,813
Receivable for securities sold 2,554,830
Dividends receivable 724,862
Dividend reclaims receivable 277,112
Receivable for fund shares sold 117,808
Interest receivable 453
-------------
TOTAL ASSETS 537,411,142
-------------
LIABILITIES:
Payable for fund shares redeemed 1,166,441
Accrued expenses 170,941
Due to affiliates 1,362,290
-------------
TOTAL LIABILITIES 2,699,672
-------------
NET ASSETS $ 534,711,470
=============
COMPONENTS OF NET ASSETS:
Capital stock, at par $ 2,926,929
Additional paid-in capital 427,576,050
Distributions in excess of net investment income (4,371,711)
Accumulated net realized gain on investments
and foreign currency related transactions 3,341,529
Net unrealized appreciation of investments
and translation of other assets and liabilities
denominated in foreign currencies 105,238,673
-------------
NET ASSETS $ 534,711,470
=============
Shares Outstanding -- $0.10 par value 29,269,287
-------------
NET ASSET VALUE PER SHARE $ 18.27
=============
STATEMENT OF OPERATIONS
Year Ended
December 31, 1997
Investment Income:
Dividends $ 9,121,720
Interest 622,498
Less: Foreign tax withheld (968,229)
-------------
Total Income 8,775,989
-------------
Expenses:
Investment advisory fees -- Note B 4,111,020
Custodian fees 767,340
Registration fees 29,000
Audit fees 21,000
Directors' fees -- Note B 12,500
Printing expense 12,500
Transfer agent fees 3,300
Insurance expense 3,179
Legal fees 2,950
Other 700
-------------
Total Expenses 4,963,489
-------------
Net Investment Income 3,812,500
-------------
Realized and Unrealized Gain/(Loss) on
Investments and Foreign Currencies -- Note C
Net realized gain on investments -- Note A 24,244,922
Net realized loss on foreign currency
related transactions -- Note A (806,875)
Net change in unrealized appreciation of
investments -- Note C 27,413,628
Net change in unrealized depreciation from
translation of other assets and liabilities
denominated in foreign currencies -- Note C (161,464)
-------------
Net Realized and Unrealized Gain on
Investments and Foreign Currencies 50,690,211
-------------
Net Increase in Net Assets
from Operations $ 54,502,711
-------------
* Includes repurchase agreement.
See notes to financial statements.
- --------------------------------------------------------------------------------
84
<PAGE>
---------------
Baillie Gifford
International
Fund
---------------
6
---------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
------------- -------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 3,812,500 $ 3,598,533
Net realized gain on investments and foreign currency
related transactions 23,438,047 6,850,247
Net change in unrealized appreciation/(depreciation)
on investments and translation of other assets and
liabilities denominated in foreign currencies 27,252,164 45,984,301
------------- -------------
Net Increase in Net Assets from Operations 54,502,711 56,433,081
------------- -------------
Dividends and Distributions to Shareholders from:
Net investment income (3,812,500) (3,598,533)
Distributions in excess of net investment income (4,530,809) (2,499,964)
Net realized gain from investments (20,727,823) (5,631,085)
------------- -------------
Total Dividends and Distribution to Shareholders (29,071,132) (11,729,582)
------------- -------------
From Capital Share Transactions:
Net increase in net assets from capital share
transactions -- Note E 53,077,150 94,212,372
------------- -------------
Net Increase in Net Assets 78,508,729 138,915,871
Net Assets:
Beginning of year 456,202,741 317,286,870
------------- -------------
End of year* $ 534,711,470 $ 456,202,741
============= =============
* Includes overdistributed net investment income of: $ (4,371,711) $ (180,888)
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
85
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Baillie Gifford
International
Fund
- ---------------
6
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford International Fund
- ----------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
February 8,
Year Ended December 31, 1991* to
------------------------------------------------------------------ December 31,
1997 1996 1995 1994 1993 1992 1991
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ................ $ 17.26 $ 15.37 $ 14.69 $ 14.69 $ 11.16 $ 12.37 $ 10.00
-------- -------- -------- -------- -------- ------- -------
Income from Investment Operations
Net investment income ........... 0.15 0.15 0.16 0.15 0.23 0.09 0.04
Net realized and unrealized
gain/(loss) on investments and
translation of other assets and
liabilities denominated
in foreign currencies ......... 1.91 2.21 1.49 (0.02) 3.54 (1.20) 2.52
-------- -------- -------- -------- -------- ------- -------
Net increase/(decrease) from
investment operations ......... 2.06 2.36 1.65 0.13 3.77 (1.11) 2.56
-------- -------- -------- -------- -------- ------- -------
Dividends and Distributions to
Shareholders from:
Net investment income ........... (0.15) (0.14) (0.15) (0.13) (0.24) (0.10) (0.04)
Distributions in excess of
net investment income ......... (0.15) (0.10) (0.12) -- -- -- --
Net realized gain on investments
and foreign currency related
transactions .................. (0.75) (0.23) (0.70) -- -- -- (0.15)
-------- -------- -------- -------- -------- ------- -------
Total dividends and distributions (1.05) (0.47) (0.97) (0.13) (0.24) (0.10) (0.19)
-------- -------- -------- -------- -------- ------- -------
Net asset value, end of period ....... $ 18.27 $ 17.26 $ 15.37 $ 14.69 $ 14.69 $ 11.16 $ 12.37
======== ======== ======== ======== ======== ======= =======
Total return** ....................... 11.93% 15.41% 11.23% 0.87% 34.04% (8.90)% 8.56%
======== ======== ======== ======== ======== ======= =======
Ratios/supplemental data:
Net assets, end of period
(000's omitted) ............... $534,711 $456,203 $317,287 $303,050 $186,795 $55,175 $36,012
Ratio of expenses to average
net assets .................... 0.97% 0.98% 0.99% 1.03% 1.11% 1.26% 1.67%(a)
Ratio of net investment income to
average net assets ............ 0.74% 0.94% 0.97% 1.11% 1.75% 0.88% 0.61%(a)
Portfolio turnover
rate .......................... 51% 38% 52% 27% 18% 44% 14%
Average rate of commissions
paid(b) ....................... $ 0.0214 $ 0.0364
</TABLE>
* Commencement of operations.
** Total returns do not reflect the effects of charges deducted pursuant to
the terms of GIAC's variable contracts. Inclusion of such charges would
reduce the total returns for all periods shown.
(a) Annualized.
(b) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
See notes to financial statements.
- --------------------------------------------------------------------------------
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87
<PAGE>
- ---------------
Baillie Gifford
Emerging
Markets
- ---------------
7
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund
- -------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1997
- ----------------------
COMMON STOCKS -- 92.0%
- ----------------------
Shares Value
- ----------------------------------------------------------------------------
ARGENTINA -- 7.9%
Banks -- 1.6%
51,900 Banco Galicia Y Buenos Aires S.A. $ 1,336,425
Building Construction -- 0.6%
114,000 Dycasa Dragados S.A. 495,994
Oil and Gas -- 2.7%
185,200 Perez Companc S.A. 1,322,579
31,000 YPF Sociedad Anonima ADR 1,059,813
Real Estate -- 1.3%
29,732 IRSA Inversiones Y Represente 1,118,667
Retail-Food -- 1.2%
54,000 Imp. Y Exp. Patagonia 972,185
Telecommunications -- 0.5%
13,000 Telefonica de Argentina S.A. ADR 484,250
------------
6,789,913
------------
BRAZIL -- 20.2%
Banks -- 1.4%
2,221,000 Banco Itau S.A. 1,194,033
1,840,000 Encorpar* 1,977
Food, Beverage and Tobacco -- 1.1%
1,400,000 Comp. Cerv. Ria Brahma 940,818
Industrial Machineries -- 1.0%
69,000 Elevadores Atlas 834,640
Petroleum Services -- 2.4%
8,880,000 Petroleo Brasileiro S.A. 2,076,681
Real Estate -- 0.4%
18,100 Brazil Realty S.A. 373,005
Retail-Food -- 1.5%
67,000 Comp. Brasileiras de Dist. GDR 1,298,125
Telecommunications -- 7.4%
19,566,000 Ericsson Telecom. S.A.* 627,627
24,300 Telecom. Brasileiras S.A. ADR 2,829,431
16,000,000 Telecom. Brasileiras S.A. 1,627,167
5,776,274 Telecom. de Sao Paolo S.A.* 1,325,598
Textile-Apparel and Production -- 0.5%
151,600 Confeccoes Guararapes S.A. 487,132
Tobacco -- 0.5%
57,000 Comp. Souza Cruz 459,657
Utilities -- 0.5%
1,759,998 Comp. Saneam. Basico
Est. de Sao Paolo 417,901
Utilities-Electric -- 3.5%
1,180,000,000 Comp. de Elect. do Est. de
Rio de Janeiro* 761,256
10,000,000 Comp. Energetica de Minas 434,478
34,586,000 Comp. Paranaense de Energia 1,043,798
2,767,891 Light Particapacoes 830,826
------------
17,564,150
------------
CHILE -- 4.8%
Chemicals -- 0.8%
16,000 Sociedad Quimica Y Minera
De Chile S.A.* 704,000
Food and Beverage -- 0.2%
9,800 Embotelladora Andina S.A. ADR 190,488
Mining -- 1.0%
160,000 Antofagasta Hldgs. 867,240
Mutual Fund -- 1.2%
25,600 Genesis Chile Fund 985,600
Retail-Food -- 1.6%
12,498 Disco S.A.* 561,629
46,584 Distribucion Y Servicio ADR* 864,716
------------
4,173,673
------------
COLOMBIA -- 2.1%
Banks -- 0.4%
17,000 Banco Ganadero S.A. 408,000
Gas Distribution -- 0.6%
91,000 Promigas S.A. 480,739
Retail-Food -- 0.9%
227,000 Almacenes Exito S.A. 752,786
Tobacco -- 0.2%
76,018 Coltabaco 219,849
------------
1,861,374
------------
CZECH REPUBLIC -- 3.1%
Banks -- 1.1%
28,000 Komercni Banka* 554,964
35,000 Komercni Banka AS GDR 420,000
Financial Services -- 0.4%
56,000 IKS KB Plus* 310,877
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
88
<PAGE>
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Baillie Gifford
Emerging
Markets
---------------
7
---------------
- --------------------------------------------------------------------------------
Shares Value
- ----------------------------------------------------------------------------
Food and Beverages -- 0.9%
5,000 Plzensky Prazdroj $ 453,941
79,500 Prazske Pivovary 303,418
Telecommunications -- 0.7%
6,100 SPT Telecom AS* 642,876
------------
2,686,076
------------
HONG KONG -- 6.4%
Automobile -- 1.1%
86,000 TVS Suzuki Ltd.* 972,985
Conglomerates -- 1.6%
420,000 China Resources EN 937,669
110,000 CITIC Pacific Ltd. 437,218
Electronics -- 0.7%
2,300,000 Elec. & Eltek Int'l. Hldgs. Ltd. 569,880
Real Estate -- 3.0%
2,900,000 China Overseas Land 888,824
1,815,000 Hon Kwok Land Inv. Ltd. 327,913
409,000 New World Development Co. 1,414,531
------------
5,549,020
------------
HUNGARY -- 8.4%
Building Construction and Materials -- 1.0%
18,580 Zalakeramia 862,388
Consumer Goods -- 1.1%
18,500 Graboplast Textile 978,237
Food Beverage and Tobacco -- 1.1%
12,500 Pick Szeged RT 997,576
Lodging -- 1.0%
28,150 Danubius Hotel* 854,513
Pharmaceuticals -- 1.9%
14,700 Richter Gedeon VEG 1,625,583
Plastics -- 1.3%
21,260 Pannonplast 1,119,079
Transportations -- 1.0%
36,500 North American Bus* 893,535
------------
7,330,911
------------
INDIA -- 4.1%
Banks -- 0.4%
20,000 State Bank of India 357,600
Computer Software -- 1.8%
34,900 Aptech Ltd.* 485,217
34,800 Infosys Technology Ltd. 1,094,380
Mutual Fund -- 1.1%
113,500 Indian Opportunity Fund 956,238
Telecommunications -- 0.8%
50,000 Videsh Sanchar Nigam Ltd.* 701,250
------------
3,594,685
------------
INDONESIA -- 0.4%
Banks -- 0.0%
445,500 Bank Bira 26,325
Food and Beverage -- 0.3%
390,000 Davomas Abadi 70,909
520,000 Fiskar Agung Perkasa 70,909
264,000 London Sumatra 150,000
Household Products -- 0.1%
6,000 Unilever Indonesia 32,727
------------
350,870
------------
MALAYSIA -- 0.2%
Food, Beverage and Tobacco -- 0.2%
130,000 RJ Reynolds Berhad 212,238
------------
MEXICO -- 15.1%
Conglomerates -- 1.8%
85,000 Alfa S.A. 576,111
32,000 Grupo Carso S.A. de C.V.+ 214,113
55,000 Grupo Carso S.A. de C.V. ADR 721,875
Financial Services -- 2.4%
941,000 Grupo Financiero Banorte* 1,639,361
106,000 Grupo Financiero Inbursa S.A. 433,430
Food, Beverage and Tobacco -- 1.3%
150,000 Grupo Continental 533,424
19,200 Pan American Beverages, Inc. 626,400
Media and Entertainment -- 3.1%
184,380 Corp. Interamericana
Entretenimiento* 1,434,740
56,400 TV Azteca S.A. de C.V.* 1,272,525
Paper and Forest Products -- 1.1%
192,000 Kimberly-Clark de Mexico 939,719
See notes to financial statements.
* Non-income producing security.
+ Rule 144A restricted security.
- --------------------------------------------------------------------------------
89
<PAGE>
- ---------------
Baillie Gifford
Emerging
Markets
- ---------------
7
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund
- -------------------------------------
SCHEDULE OF INVESTMENTS (continued)
December 31, 1997
Shares Value
- ----------------------------------------------------------------------------
Real Estate -- 0.8%
120,000 Corp. Geo S.A.* $ 736,014
Retail Trade -- 2.3%
32,000 Grupo Elektra S.A. GDR* 1,126,000
200,000 Organiz Soriana 879,747
Telecommunications -- 2.3%
35,800 Telefonos de Mexico S.A. 2,007,038
------------
13,140,497
------------
PAKISTAN -- 4.0%
Banks -- 1.0%
1,556,000 Faysal Bank* 846,844
Chemicals -- 1.1%
500,000 Fauji Fertilizer 957,256
Utilities-Electric -- 1.9%
53,000 Hub Power Co. GDR* 1,649,625
------------
3,453,725
------------
PEOPLE'S REPUBLIC OF CHINA -- 2.0%
Household Products -- 1.2%
1,000,000 Guandong Kelon Elec. Hldgs.* 1,025,939
Utilities-Electric -- 0.8%
1,540,000 Beijing Datang Power Gen. Co.* 705,510
------------
1,731,449
------------
PERU -- 1.2%
Food and Beverages -- 0.6%
532,757 Cerv. Backus Johnston & Co. 488,768
Telecommunications -- 0.6%
245,000 Telefonica Del Peru 547,541
------------
1,036,309
------------
PHILIPPINES -- 0.5%
Business Services -- 0.1%
450,000 Int'l. Container Terminal Svcs.* 55,556
Conglomerates -- 0.4%
110,000 Benpres Hldgs. Corp.* 310,750
Food and Beverage -- 0.0%
385,368 RFM Corp. 62,800
Real Estate -- 0.0%
1,908,000 MRC Allied Industries* 47,111
------------
476,217
------------
POLAND -- 2.6%
Banks -- 1.8%
37,000 Bank Handlowy Warsaw* 472,340
53,000 Bank Roswoju Eksport 1,097,589
Electrical Equipment -- 0.8%
72,050 Elektrim 696,994
------------
2,266,923
------------
SINGAPORE -- 0.4%
Construction -- 0.1%
98,000 Clipsal Industries Ltd. 125,440
Publishing -- 0.3%
18,000 Singapore Press HD 225,334
------------
350,774
------------
SOUTH AFRICA -- 2.6%
Banks -- 1.0%
102,000 First National Bank 906,504
Conglomerates -- 1.1%
57,434 Barlow Ltd. 487,419
103,000 C.G. Smith 423,302
Oil-Domestic -- 0.5%
44,683 Sasol 468,269
------------
2,285,494
------------
SRI LANKA -- 1.1%
Banks -- 1.1%
264,800 National Development Bank* 985,228
------------
TAIWAN -- 4.9%
Banks -- 0.0%
84 ICBC 152
Computers and Business Equipment -- 1.7%
90,000 Asustek Computer, Inc. GDR* 1,496,250
Financial Services -- 1.2%
372,375 China Development 1,061,483
Industrial Machineries -- 1.1%
603,000 Yungtay Engineering Co. Ltd.* 933,379
Textile-Apparel and Production -- 0.9%
705,000 Far East Textile 764,966
------------
4,256,230
------------
TOTAL COMMON STOCKS
(Cost $76,011,839) 80,095,756
------------
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
90
<PAGE>
---------------
Baillie Gifford
Emerging
Markets
---------------
7
---------------
- --------------------------------------------------------------------------------
- -------------------------
CONVERTIBLE BONDS -- 1.1%
- -------------------------
Principal
Amount Value
- ----------------------------------------------------------------------------
$ 1,075,000 Metro Pacific Capital,
2.50% due 4/11/03 $ 745,512
200,000 RFM Capital,
2.75% due 5/30/06 189,667
-----------
TOTAL CONVERTIBLE BONDS
(Cost $1,437,944) 935,179
-----------
- ----------------------------
REPURCHASE AGREEMENT -- 4.0%
- ----------------------------
$ 3,470,000 State Street Bank & Trust Co.
repurchase agreement,
dated 12/31/97, maturity
value $3,470,964 at 5.00%
due 1/2/98 (collateralized
by $3,545,000 U.S.
Treasury Notes, 5.625%,
due 11/30/99) $ 3,470,000
-----------
TOTAL REPURCHASE AGREEMENT
(Cost $3,470,000) 3,470,000
-----------
TOTAL INVESTMENTS -- 97.1%
(Cost $80,919,783) 84,500,935
CASH, RECEIVABLES AND OTHER
ASSETS LESS LIABILITIES -- 2.9% 2,512,774
-----------
NET ASSETS-- 100.0% $87,013,709
===========
Glossary of terms:
ADR - American Depository Receipt.
GDR - Global Depository Receipt.
See notes to financial statements.
- --------------------------------------------------------------------------------
91
<PAGE>
- ---------------
Baillie Gifford
Emerging
Markets
- ---------------
7
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund
- -------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1997
ASSETS:
Investments, at identified cost* $ 80,919,783
============
Investments, at market 81,030,935
Repurchase agreement 3,470,000
------------
TOTAL INVESTMENTS 84,500,935
Foreign currency (Cost $2,774,793) 2,784,712
Dividends receivable 143,366
Receivable for fund shares sold 111,669
Interest receivable 23,146
Dividend reclaims receivable 2,898
Deferred organization expenses 908
------------
TOTAL ASSETS 87,567,634
------------
LIABILITIES:
Due to custodian 15,008
Payable for fund shares redeemed 153,029
Accrued expenses 21,653
Due to affiliates 364,235
------------
TOTAL LIABILITIES 553,925
NET ASSETS $ 87,013,709
============
COMPONENTS OF NET ASSETS:
Capital stock, at par $ 855,276
Additional paid-in capital 84,369,781
Distributions in excess of net investment income (562,888)
Distributions in excess of net realized gain on
investments and foreign currency
related transactions (1,239,215)
Net unrealized appreciation of investments
and translation of other assets and liabilities
denominated in foreign currencies 3,590,755
------------
NET ASSETS $ 87,013,709
============
Shares Outstanding -- $0.10 par value 8,552,762
------------
NET ASSET VALUE PER SHARE $ 10.17
============
STATEMENT OF OPERATIONS
Year Ended
December 31, 1997
Investment Income:
Dividends $ 2,073,436
Interest 261,782
Less: Foreign tax withheld (245,244)
------------
Total Income 2,089,974
------------
Expenses:
Investment advisory fees -- Note B 968,350
Custodian fees 337,819
Audit fees 21,000
Directors' fees -- Note B 12,500
Registration fees 7,800
Transfer agent fees 3,300
Printing expense 2,500
Legal fees 1,019
Deferred organization expense 507
Insurance expense 464
Other 700
------------
Total Expenses 1,355,959
------------
Net Investment Income 734,015
------------
Realized and Unrealized Gain/(Loss) on
Investments and Foreign Currencies -- Note C
Net realized gain on investments -- Note A 3,671,792
Net realized loss on foreign currency related
transactions -- Note A (1,030,266)
Net change in unrealized appreciation of
investments -- Note C (4,545,941)
Net change in unrealized depreciation from
translation of other assets and liabilities
denominated in foreign currencies -- Note C 11,568
------------
Net Realized and Unrealized Gain/(Loss) on
Investments and Foreign Currencies (1,892,847)
------------
Net Decrease in Net Assets
from Operations $ (1,158,832)
------------
* Includes repurchase agreement.
See notes to financial statements.
- --------------------------------------------------------------------------------
92
<PAGE>
---------------
Baillie Gifford
Emerging
Markets
---------------
7
---------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
------------ -----------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 734,015 $ 434,950
Net realized gain on investments and foreign
currency related transactions 2,641,526 1,463,090
Net change in unrealized appreciation/(depreciation)
on investments and translation of other assets
and liabilities denominated in foreign currencies (4,534,373) 8,859,289
------------ -----------
Net Increase/(Decrease) in Net Assets from Operations (1,158,832) 10,757,329
------------ -----------
Dividends and Distributions to Shareholders from:
Net investment income (470,207) --
Net realized gains on investments and foreign currency
related transactions (2,641,526) --
In excess of net realized gains on investments and
foreign currency related transactions (1,578,227) --
------------ -----------
Total Dividends and Distributions to Shareholders (4,689,960) --
------------ -----------
From Capital Share Transactions:
Increase in net assets from capital share transactions
-- Note E 25,800,397 22,086,308
------------ -----------
Net Increase in Net Assets 19,951,605 32,843,637
Net Assets:
Beginning of year 67,062,104 34,218,467
------------ -----------
End of year* $ 87,013,709 $67,062,104
============ ===========
* Includes undistributed/(distributions in excess of)
net investment income of: $ (562,888) $ 30,593
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
93
<PAGE>
- ---------------
Baillie Gifford
Emerging
Markets
- ---------------
7
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund
- -------------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated:
<TABLE>
<CAPTION>
October 17,
Year Ended December 31, 1994* to
------------------------------------------- December 31,
1997 1996 1995 1994
------------------------------------------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ...................... $ 10.54 $ 8.46 $ 8.68 $ 9.87
------------ ------------ ------------ ------------
Income from Investment Operations
Net investment income/(loss) ............................ 0.09 0.07 0.07 (0.01)
Net realized and unrealized gain/(loss) on
investments and translation of other assets
and liabilities denominated in foreign currency ......... 0.12 2.01 (0.12) (1.17)
------------ ------------ ------------ ------------
Net increase/(decrease) from investment operations ...... 0.21 2.08 (0.05) (1.18)
------------ ------------ ------------ ------------
Dividends and Distributions to Shareholders from:
Net investment income ................................... (0.06) -- (0.07) (0.01)
Dividends in excess of net investment income ............ -- -- (0.10) --
Net realized gain on investments and foreign currency
related transactions .................................... (0.33) -- -- --
In excess of net realized gain on investments ........... (0.19) -- -- --
------------ ------------ ------------ ------------
Total dividends and distributions ....................... (0.58) -- (0.17) (0.01)
------------ ------------ ------------ ------------
Net asset value, end of period ............................ $ 10.17 $ 10.54 $ 8.46 $ 8.68
============ ============ ============ ============
Total return** ............................................ 1.97% 24.59% (0.60)% (11.97)%
============ ============ ============ ============
Ratios/supplemental data:
Net assets, end of period (000's omitted) ............... $ 87,014 $ 67,062 $ 34,218 $ 24,069
Ratio of expenses to average net assets ................. 1.40% 1.53% 1.67% 2.28%(a)
Ratio of net investment income to average net assets .... 0.76% 0.85% 0.89% 0.94%(a)
Portfolio turnover rate ................................. 64% 46% 52% --
Average rate of commissions paid(b) ..................... $ 0.0003 $ 0.0313
</TABLE>
* Commencement of public offering of the Fund's shares.
** Total returns do not reflect the effects of charges deducted pursuant to
the terms of GIAC's variable contracts. Inclusion of such charges would
reduce the total returns for all periods shown.
(a) Annualized.
(b) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
See notes to financial statements.
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- ------------
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- ------------
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The Guardian Small Cap Stock Fund
- ---------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1997
- ----------------------
COMMON STOCKS -- 94.1%
- ----------------------
Shares Value
- ----------------------------------------------------------------------------
Aerospace and Defense -- 0.3%
4,900 Alliant Techsystems, Inc.* $ 273,175
-----------
Air Transportation -- 0.5%
12,000 Alaska Air Group, Inc.* 465,000
-----------
Appliance and Furniture -- 3.2%
45,900 Ethan Allen Interiors, Inc. 1,770,019
32,000 Furniture Brands Int'l., Inc.* 656,000
10,000 Libbey, Inc.* 378,750
-----------
2,804,769
-----------
Automotive Parts -- 2.8%
18,100 Arvin Industries, Inc. 602,956
26,500 Kaydon Corp. 864,562
10,500 SPX Corp.* 724,500
9,900 Varlen Corp. 242,705
-----------
2,434,723
-----------
Building Materials and Homebuilders -- 4.0%
17,100 Cameron Ashley Building Products* 286,425
22,000 Centex Construction Products, Inc. 662,750
10,000 Crossman Communities, Inc.* 276,250
77,000 FM Ppty., Inc.* 399,438
55,000 Griffon Corp.* 804,375
11,000 Lone Star Industries, Inc. 584,375
8,900 Southdown, Inc. 525,100
-----------
3,538,713
-----------
Capital Goods-Miscellaneous Technology -- 2.5%
73,500 AFC Cable Systems, Inc.* 2,186,625
-----------
Chemicals -- 2.6%
15,000 Cambrex Corp. 690,000
23,000 LeaRonal, Inc. 540,500
9,500 MacDermid, Inc. 806,313
10,000 McWhorter Technologies, Inc.* 257,500
-----------
2,294,313
-----------
Coal -- 0.3%
17,000 Zeigler Coal Hldg. Co. 277,312
-----------
Computer Software -- 1.4%
6,100 National Computer Systems, Inc. 215,025
6,800 Pervasive Software, Inc.* 49,300
6,000 Visio Corp.* 230,250
18,200 Wind River Systems, Inc.* 722,313
-----------
1,216,888
-----------
Computer Systems -- 3.1%
10,000 DII Group, Inc.* 272,500
53,000 EFTC Corp.* 861,250
2,300 Hadco Corp.* 104,075
18,500 Jack Henry & Associates, Inc.* 504,125
4,100 Sanmina Corp.* 277,775
19,000 Smart Modular Technologies, Inc.* 437,000
6,900 Stratus Computer, Inc.* 260,906
-----------
2,717,631
-----------
Containers-Metal and Plastic -- 0.6%
9,100 Aptargroup, Inc. 505,050
-----------
Drugs and Hospitals -- 2.7%
4,400 Boron LePore & Associates, Inc.* 121,000
42,000 DepoTech, Inc.* 149,625
5,700 Genesis Health Ventures, Inc.* 150,337
9,000 Integrated Health Sacs., Inc. 280,688
12,000 Jones Medical Industries, Inc. 459,000
15,500 Life Technologies, Inc. 515,375
20,000 Respironics, Inc.* 447,500
9,500 Total Renal Care Hldgs., Inc.* 261,250
-----------
2,384,775
-----------
Electrical Equipment -- 0.9%
8,700 Esterline Technologies Corp.* 313,200
18,000 Power One, Inc.* 247,500
6,000 Uniphase Corp.* 248,250
-----------
808,950
-----------
Electronics and Instruments -- 0.9%
3,200 ANADIGICS, Inc.* 96,400
41,000 FARO Technologies, Inc.* 476,625
6,750 National Instruments Corp.* 195,750
-----------
768,775
-----------
Entertainment and Leisure -- 1.6%
42,300 American Coin Merchandising* 745,538
11,200 Anchor Gaming* 624,400
-----------
1,369,938
-----------
Financial-Banks -- 3.4%
22,000 CFX Corp. 671,000
8,100 Cullen Frost Bankers, Inc. 491,569
3,500 Prime Bancshares, Inc. 73,062
6,800 Silicon Valley Bancshares* 382,500
See notes to financial statements.
* Non-income producing security.
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Small Cap
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------------
8
------------
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Shares Value
- ----------------------------------------------------------------------------
10,900 U.S. Bancorp, Inc. $ 795,700
5,500 Westamerica Bancorp 562,375
-----------
2,976,206
-----------
Financial-Other -- 1.2%
15,000 Bowne & Co., Inc. 598,125
6,100 Jefferies Group, Inc.* 249,719
5,000 McDonald & Co. Investments, Inc.* 141,875
3,800 Morgan Keegan, Inc.* 96,188
-----------
1,085,907
-----------
Financial-Thrift -- 2.6%
5,500 Astoria Financial Corp. 306,625
22,000 Bank Atlantic Bancorp, Inc. 358,875
18,000 CitFed Bancorp, Inc. 702,000
10,800 Coast Savings Financial, Inc.* 740,475
4,500 Commercial Federal Corp. 160,031
-----------
2,268,006
-----------
Food, Beverage and Tobacco -- 2.6%
19,800 Earthgrains Co. 930,600
50,000 Hain Food Group, Inc.* 459,375
11,000 Smithfield Foods, Inc.* 363,000
9,200 Tootsie Roll Industries, Inc. 575,000
-----------
2,327,975
-----------
Household Products -- 0.8%
31,600 Home Products Int'l., Inc.* 371,300
13,800 Oneida Ltd. 368,287
-----------
739,587
-----------
Insurance -- 10.3%
13,300 American Heritage Life Investments 478,800
12,750 W.R. Berkley Corp. 559,406
10,100 CMAC Investment Corp. 609,788
15,000 Enhance Financial Sacs. Group, Inc. 892,500
9,000 Executive Risk, Inc. 628,312
79,200 Fidelity National Financial, Inc.* 2,465,100
12,000 Financial Sec. Assur. Hldgs. Ltd. 579,000
18,000 Frontier Insurance Group, Inc. 411,750
4,800 Markel Corp.* 749,400
17,000 Penn America Group, Inc. 348,500
23,000 State Auto Financial Corp. 741,750
9,900 Vesta Insurance Group, Inc. 587,813
-----------
9,052,119
-----------
Lodging -- 1.0%
7,200 Fairfield Communities, Inc.* 317,700
25,500 Signature Resorts, Inc.* 557,812
-----------
875,512
-----------
Machinery and Equipment -- 4.3%
4,100 AAR Corp. 158,875
12,100 Applied Power, Inc. 834,900
24,000 Chart Industries, Inc. 547,500
7,300 Kennametal, Inc. 378,231
13,800 Manitowoc, Inc. 448,500
11,000 Northwest Pipe Co.* 264,000
27,800 Robbins & Myers, Inc. 1,101,575
-----------
3,733,581
-----------
Merchandising-Department Stores -- 1.8%
13,000 Carson Pirie Scott & Co.* 651,625
27,200 Shopko Stores, Inc.* 591,600
13,000 Stein Mart, Inc.* 347,750
-----------
1,590,975
-----------
Merchandising-Mass -- 1.5%
19,100 Brylane, Inc.* 940,675
10,000 Lands End, Inc.* 350,625
-----------
1,291,300
-----------
Merchandising-Special -- 4.6%
7,000 Best Buy Co., Inc. 258,125
37,400 Burlington Coat Factory* 614,763
21,000 Claire's Stores, Inc. 408,187
19,200 Daisytek Int'l. Corp.* 667,200
26,000 The Dress Barn* 737,750
50,000 The Good Guys, Inc.* 381,250
22,000 New England Business Sacs., Inc. 742,500
23,000 SED Int'l. Hldgs., Inc.* 258,750
-----------
4,068,525
-----------
Metals -- 1.4%
25,000 Quanex Corp. 703,125
17,500 Titanium Metals Corp.* 505,313
-----------
1,208,438
-----------
Miscellaneous-Consumer Growth Staples -- 3.0%
24,900 Mail-Well, Inc.* 1,008,450
41,000 Sotheby's Hldgs., Inc. 758,500
12,300 StaffMark, Inc.* 388,988
See notes to financial statements.
* Non-income producing security.
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Small Cap
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- ------------
8
- ------------
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The Guardian Small Cap Stock Fund
- ---------------------------------
SCHEDULE OF INVESTMENTS (continued)
December 31,1997
Shares Value
- ----------------------------------------------------------------------------
12,000 Valassis Communications, Inc.* $ 444,000
-----------
2,599,938
-----------
Oil and Gas Producing -- 5.4%
30,000 Basin Exploration, Inc.* 532,500
175,800 Beau Canada Exploration* 356,755
22,000 Bellwether Exploration Co.* 242,000
21,800 Callon Petroleum Co.* 354,931
242,800 Canadian 88 Energy Corp.* 722,088
37,000 Chieftain Int'l., Inc.* 786,250
9,600 Forcenergy Gas Exploration, Inc.* 251,400
50,000 Petromet Resources Ltd.* 109,375
16,000 Rigel Energy Corp.* 131,000
7,000 St. Mary Land & Exploration Co. 245,000
14,000 Snyder Oil Corp.* 255,500
95,000 Wainoco Oil Ltd.* 754,062
-----------
4,740,861
-----------
Oil and Gas Services -- 2.8%
4,500 Bayard Drilling Technology, Inc.* 73,125
3,000 Friede Goldman Int'l., Inc.* 89,625
34,500 Halter Marine Group, Inc.* 996,188
10,000 Lone Star Technologies, Inc.* 283,750
26,200 Varco Int'l., Inc.* 561,662
29,000 Willbros Group, Inc.* 435,000
-----------
2,439,350
-----------
Paper and Forest Products -- 1.1%
33,500 Deltic Timber Corp. 917,063
4,410 Wausau-Mosinee Paper Corp. 89,165
-----------
1,006,228
-----------
Pollution Control -- 0.4%
21,000 Imco Recycling, Inc. 337,312
-----------
Publishing-News -- 1.8%
2,500 CMP Media, Inc.* 43,125
15,000 Harte-Hanks Communications 556,875
21,100 McClatchy Newspapers, Inc. 573,656
6,200 Pulitzer Publishing, Inc. 389,438
-----------
1,563,094
-----------
Real Estate Investment Trust -- 4.2%
7,500 Ambassador Apartments, Inc. 154,219
16,000 American Gen. Hospitality Corp. 428,000
8,000 Arden Realty, Inc. 246,000
12,000 Brandywine Realty Trust 301,500
7,500 Camden Ppty. Trust 232,500
13,500 Commercial Net Lease Realty, Inc. 241,312
30,000 Innkeepers USA Trust 465,000
7,500 JDN Realty Corp.* 242,812
7,000 National Golf Ppty., Inc. 229,688
7,500 Charles E. Smith Residential Realty 266,250
40,000 Sunstone Hotel Investors, Inc.* 690,000
7,400 Tower Realty Trust, Inc. 182,225
-----------
3,679,506
-----------
Semiconductor -- 1.9%
14,500 ADE Corp.* 253,750
12,800 Dallas Semiconductor Corp. 521,600
13,000 SanDisk Corp.* 264,062
30,200 Unitrode Corp.* 649,300
-----------
1,688,712
-----------
Textile-Apparel and Production -- 0.9%
30,000 Big Dog Hldgs., Inc.* 168,750
7,600 Nautica Enterprises, Inc.* 176,700
20,625 Paxar Corp.* 305,508
3,700 St. John Knits, Inc. 148,000
-----------
798,958
-----------
Transportation-Miscellaneous -- 4.5%
13,400 Airborne Freight Corp. 832,475
11,200 Air Express Int'l. Corp. 341,600
16,500 Budget Group, Inc.* 570,281
37,500 Dollar Thrifty Automotive Group, Inc.* 768,750
12,900 Expeditors Int'l. Wash., Inc. 496,650
7,000 Hub Group, Inc.* 208,250
28,800 Maritrans, Inc. 280,800
13,200 Sea Containers Ltd.* 422,400
-----------
3,921,206
-----------
Truckers -- 4.5%
20,200 Arnold Industries, Inc. 348,450
34,000 Consolidated Freightways Corp.* 463,250
13,000 Roadway Express, Inc. 287,625
36,000 Rollins Truck Leasing Corp. 643,500
6,800 Swift Transportation, Inc.* 220,150
39,500 U.S. Freightways Corp. 1,283,750
19,800 Werner Enterprises, Inc. 405,900
13,000 Yellow Corp.* 326,625
-----------
3,979,250
-----------
See notes to financial statements.
* Non-income producing security.
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Small Cap
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8
------------
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Shares Value
- ----------------------------------------------------------------------------
Utilities-Electric -- 0.3%
5,700 Central LA Electric Co.* $ 184,537
1,500 Minnesota Power & Light Co.* 65,344
-----------
249,881
-----------
Utilities-Gas and Pipeline -- 0.1%
3,800 Indiana Energy, Inc.* 125,162
-----------
Utilities-Telecommunications -- 0.3%
10,000 Startec Global Communications Corp.* 223,750
-----------
TOTAL COMMON STOCKS
(Cost $75,411,931) 82,617,976
-----------
- ----------------------------
REPURCHASE AGREEMENT -- 6.8%
- ----------------------------
Principal
Amount Value
- ----------------------------------------------------------------------------
$5,985,000 State Street Bank & Trust Co.
repurchase agreement, dated
12/31/97, maturity value
$5,986,945 at 5.85%, due
1/2/98 (collateralized by
$6,110,000 U.S. Treasury
Notes, 5.875%, due 2/28/99) $ 5,985,000
-----------
TOTAL REPURCHASE AGREEMENT
(Cost $5,985,000) 5,985,000
-----------
TOTAL INVESTMENTS -- 100.9%
(Cost $81,396,931) 88,602,976
LIABILITIES IN EXCESS OF CASH,
RECEIVABLES AND OTHER
ASSETS -- (0.9%) (853,573)
-----------
NET ASSETS-- 100.0% $87,749,403
===========
See notes to financial statements.
* Non-income producing security.
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Small Cap
Stock Fund
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8
- ------------
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The Guardian Small Cap Stock Fund
- ---------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1997
ASSETS:
Investments, at identified cost* $81,396,931
===========
Investments, at market 82,617,976
Repurchase agreement 5,985,000
-----------
TOTAL INVESTMENTS 88,602,976
Cash 667
Receivable for securities sold 193,381
Receivable for fund shares sold 90,108
Dividends receivable 58,842
Interest receivable 973
Deferred organization expense 839
-----------
TOTAL ASSETS 88,947,786
-----------
LIABILITIES:
Payable for securities purchased 967,679
Payable for fund shares redeemed 36,094
Accrued expenses 14,441
Due to affiliates 180,169
-----------
TOTAL LIABILITIES 1,198,383
-----------
NET ASSETS $87,749,403
===========
COMPONENTS OF NET ASSETS:
Capital stock, at par $ 643,929
Additional paid-in capital 79,038,021
Accumulated net realized gain on investments 861,408
Net unrealized appreciation of investments 7,206,045
-----------
NET ASSETS $87,749,403
===========
Shares Outstanding -- $0.10 par value 6,439,285
-----------
NET ASSET VALUE PER SHARE $ 13.63
===========
* Includes repurchase agreement.
+ Commencement of operations.
STATEMENT OF OPERATIONS
Period from April 2, 1997+ to
December 31, 1997
Investment Income:
Dividends $ 294,391
Interest 202,294
-----------
Total Income 496,685
-----------
Expenses:
Investment advisory fees -- Note B 257,202
Custodian fees 39,421
Audit fees 17,500
Directors' fees 9,165
Printing expense 3,666
Transfer agent fees 2,475
Registration fees 606
Deferred organization expense 145
Other 700
-----------
Total Expenses 330,880
-----------
Net Investment Income 165,805
-----------
Realized and Unrealized Gain/(Loss)
on Investments -- Note C
Net realized gain on investments -- Note A 1,925,041
Net change in unrealized appreciation of
investments -- Note C 7,206,045
-----------
Net Realized and Unrealized Gain
on Investments 9,131,086
-----------
Net Increase in Net Assets
from Operations $ 9,296,891
===========
See notes to financial statements.
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Small Cap
Stock Fund
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8
------------
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STATEMENT OF CHANGES IN NET ASSETS
Period from
April 2, 1997+ to
December 31, 1997
-----------------
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 165,805
Net realized gain on investments 1,925,041
Net change in unrealized appreciation of investments 7,206,045
-----------
Net Increase in Net Assets from Operations 9,296,891
-----------
Dividends and Distributions to Shareholders from:
Net investment income (165,805)
Net realized gain on investments (1,063,633)
-----------
Total Dividends and Distributions to Shareholders (1,229,438)
-----------
From Capital Share Transactions:
Increase in net assets from capital share transactions -- Note E 79,681,950
-----------
Net Increase in Net Assets 87,749,403
Net Assets:
Beginning of period --
-----------
End of period* $87,749,403
===========
+ Commencement of operations.
See notes to financial statements.
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Small Cap
Stock Fund
- ------------
8
- ------------
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The Guardian Small Cap Stock Fund
- ---------------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the period
indicated:
April 2, 1997*
to December 31
1997
----------
Net asset value, beginning of period ......................... $ 10.00
-----------
Income from Investment Operations
Net investment income/(loss) .............................. 0.03
Net realized and unrealized gain/(loss) on investments .... 3.80
-----------
Net increase/(decrease) from investment operations ........ 3.83
-----------
Dividends and Distributions to Shareholders from:
Net investment income ..................................... (0.03)
Net realized gain ......................................... (0.17)
-----------
Total dividends and distributions ......................... (0.20)
-----------
Net asset value, end of period ............................... $ 13.63
-----------
Total return** ............................................ 38.32%
-----------
Ratios/supplemental data:
Net assets, end of period (000's omitted) ................. $ 87,749
Ratio of expenses to average net assets ................... 0.96%(a)
Ratio of net investment income to average net assets ...... 0.48%(a)
Portfolio turnover rate ................................... 22%
Average rate of commissions paid .......................... $ 0.0296
* Commencement of operations.
** Total returns do not reflect the effects of charges deducted pursuant to
the terms of GIAC's variable contracts. Inclusion of such charges would
reduce the total returns.
(a) Annualized.
See notes to financial statements.
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GIAC Funds, Inc.
- ----------------
8
- ----------------
- --------------------------------------------------------------------------------
GIAC Funds, Inc. (including: Baillie Gifford
International Fund, Baillie Gifford Emerging Markets
Fund and The Guardian Small Cap Stock Fund)
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ----------------------------------------------
Note A -- Organization and Accounting Policies
- ----------------------------------------------
GIAC Funds, Inc. (the Company) is a diversified open-end management
investment company registered under the Investment Company Act of 1940, as
amended (1940 Act), which was incorporated in Maryland on October 29, 1990. The
Company was known as Baillie Gifford International Fund, Inc. prior to October
11, 1994 and GBG Funds, Inc. prior to March 27, 1997. Shares of the Company are
offered in three series: Baillie Gifford International Fund (BGIF), Baillie
Gifford Emerging Markets Fund (BGEMF) and The Guardian Small Cap Stock Fund
(GSCSF). The series are collectively referred to herein as the "Funds." Shares
of the Funds are only sold to certain separate accounts of The Guardian
Insurance & Annuity Company, Inc. (GIAC). GIAC is a wholly owned subsidiary of
The Guardian Life Insurance Company of America. The Funds are available for
investment only through certain variable annuity and variable life insurance
contracts issued by GIAC. Upon commencing its operations on September 13, 1994
(BGEMF) and on April 2, 1997 (GSCSF) each fund sold 2,000,000 shares of its
capital stock to The Guardian Life Insurance Company of America for $20,000,000
per fund to facilitate the commencement of operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Valuation of Investments
Investments are carried at value. Securities listed on foreign exchanges
and for which market quotations are readily available are valued at the closing
price on the exchange on which the securities are traded at the close of the
appropriate exchange or, if there have been no sales during the day, at the mean
of the closing bid and asked prices. Securities traded in the over-the-counter
market are valued at the mean between the bid and asked prices. Securities
listed or traded on any domestic (U.S.) exchanges are valued at the last sale
price or, if there have been no sales during the day, at the mean of the closing
bid and asked prices. Securities for which market quotations are not readily
available, including restricted securities and illiquid assets, are valued at
fair value as determined in good faith by or under the direction of the
Company's Board of Directors. Investing outside of the U.S. may involve certain
considerations and risks not typically associated with domestic investments
including: the possibility of political and economic unrest and different levels
of governmental supervision and regulation of foreign securities markets.
Repurchase agreements are carried at cost which approximates market value
(See Note D).
Foreign Currency Translation
The books and records of the Funds are maintained in U.S. dollars as
follows:
(1) The foreign currency market value of investment securities and other
assets and liabilities stated in foreign currencies are translated into U.S.
dollars at the current rate of exchange.
(2) Purchases, sales, income and expenses are translated at the rate of
exchange prevailing on the respective dates of such transactions.
The resulting gains and losses are included in the Statement of Operations
as follows:
Realized foreign exchange gains and losses, which result from changes in
foreign exchange rates between the date on which the Funds earn dividends and
interest or pay foreign withholding taxes or other expenses and the date on
which U.S. dollar equivalent amounts are actually received or paid, are included
in
- --------------------------------------------------------------------------------
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<PAGE>
----------------
GIAC Funds, Inc.
----------------
8
----------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
net realized gain on foreign currency related transactions. Realized foreign
exchange gains and losses which result from changes in foreign exchange rates
between the trade and settlement dates on security and currency transactions are
also included in net realized gains or losses on foreign currency related
transactions. Net currency gains and losses from valuing investments and other
assets and liabilities denominated in foreign currency at the period end
exchange rate are reflected in net change in unrealized appreciation or
depreciation from translation of other assets and liabilities denominated in
foreign currencies.
Forward Foreign Currency Contracts
The Funds may enter into forward foreign currency contracts in connection
with planned purchases or sales of securities, or to hedge against changes in
currency exchange rates affecting the values of securities denominated in a
particular currency. A forward exchange currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. Fluctuations in the value of forward foreign currency exchange contracts
are recorded for book purposes as unrealized gains or losses on foreign currency
related transactions by the Funds. When forward contracts are closed, the Funds
record realized gains or losses equal to the differences between the values of
such forward contracts at the time each was opened and the value at the time
each was closed. Such amounts are recorded in net realized gain or loss on
foreign currency related transactions. None of the Funds will enter into a
forward foreign currency contract if such contract would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency.
Securities Transactions and Investment Income
Securities transactions are recorded on the trade date. Net realized gains
or losses on sales of investments are determined on the identified cost basis.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on an accrual basis. Dividends on foreign securities are recorded when
the Funds are informed of the dividend.
Taxes
Each Fund intends to continue to qualify to be taxed as a "regulated
investment company" under the provisions of the Internal Revenue Code (Code),
and as such will not be subject to federal income tax on income (including any
realized capital gains) which is distributed to its shareholders in accordance
with the provisions of the Code. Therefore, no federal income tax provision is
required. Losses on security transactions arising after October 31 are treated
as arising on the first day of the Funds' next fiscal year.
Investment income received from investments in foreign currencies may be
subject to foreign withholding tax. Whenever possible, the Funds will attempt to
operate so as to qualify for reduced tax rates or tax exemptions in those
countries with which the United States has a tax treaty.
Dividends and Distributions to Shareholders
The Funds intend to distribute each year, as dividends, substantially all
net investment income and net realized capital gains. All such dividends or
distributions are credited in the form of additional shares of the Funds at net
asset value on the ex-dividend date. Such distributions are determined in
conformity with federal income tax regulations. Differences between the
recognition of income on an income tax basis and recognition of income based on
generally accepted accounting principles may cause temporary overdistributions
of net realized gains and net investment income. Currently, the Funds' policy is
to distribute net investment income approximately every six months and net
capital gains once a year. This policy is, however, subject to change at any
time by the Company's Board of Directors.
- --------------------------------------------------------------------------------
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- ----------------
GIAC Funds, Inc.
- ----------------
8
- ----------------
- --------------------------------------------------------------------------------
GIAC Funds, Inc. (including: Baillie Gifford
International Fund, Baillie Gifford Emerging Markets
Fund and The Guardian Small Cap Stock Fund)
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
Reclassifications of Capital Accounts
The treatment for financial statement purposes of distributions made
during the year from net investment income and net realized gains may differ
from their ultimate treatment for federal income tax purposes. These differences
primarily are caused by differences in the timing of the recognition of certain
components of income or capital gain; and the recharacterization of foreign
exchange gains or losses to either ordinary income or realized capital gains for
federal income tax purposes. Where such differences are permanent in nature,
they are reclassified in the components of net assets based on their ulti mate
characterization for federal income tax purposes. Any such reclassifications
will have no effect on net assets, results of operations, or net asset value per
share of the Funds.
During the year ended December 31, 1997, BGIF and BGEMF reclassified
amounts to paid-in capital from undistributed/(overdistributed) net investment
income and accumulated net realized gain/(loss) on investment and foreign
currency related transactions. Increases (decreases) to various capital accounts
were as follows:
Undistributed/ Accumulated
(overdistributed) net realized
Paid-in net investment gain/(loss) on
capital income investments
------- -------------- ------------
BGIF -- $339,986 $(339,986)
BGEMF -- (857,289) 857,289
- ------------------------------------------
Note B -- Investment Management Agreements
and Payments to Related Parties
- ------------------------------------------
BGIF and BGEMF have an investment management agreement with Guardian
Baillie Gifford Ltd. (GBG), a Scottish corporation formed through a joint
venture between GIAC and Baillie Gifford Overseas Ltd. (BG Overseas). GBG is
responsible for the overall investment management of those Funds portfolios
subject to the supervision of the Company's Board of Directors. GBG has entered
into sub-investment management agreements with BG Overseas pursuant to which BG
Overseas is responsible for the day-to-day management of BGIF and BGEMF. GBG
continually monitors and evaluates the performance of BG Overseas.
As compensation for its services, GBG receives a management fee computed
at the rate of .80% of BGIF's average daily net assets and 1.00% of BGEMF's
average daily net assets. One-half of these fees (.40% relating to BGIF and .50%
relating to BGEMF) are payable by GBG to BG Overseas for its services. Payment
of the sub-investment management fees does not represent a separate or
additional expense to the Funds.
The GSCSF has an investment advisory agreement with the Guardian Investor
Services Corporation (GISC), a wholly owned subsidiary of GIAC. GISC receives a
management fee from GSCSF at an annual rate of .75% of its average daily net
assets.
No compensation is paid by the Company to a director who is deemed to be
an "interested person" (as defined in the 1940 Act) of the Company. Each
director not deemed an "interested person" is paid an annual fee of $500 and
$350 for attendance at each meeting of the Company.
- --------------------------------------------------------------------------------
106
<PAGE>
----------------
GIAC Funds, Inc.
----------------
8
----------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- ---------------------------------
Note C -- Investment Transactions
- ---------------------------------
Purchases and proceeds from sales of securities (excluding short-term
securities) for the year ended December 31, 1997 were as follows:
BGIF BGEMF GSCSF
---- ----- -----
Purchases ............... $285,465,465 $77,232,189 $83,844,585
Proceeds ................ $256,495,307 $57,039,373 $10,357,694
The cost of investments owned at December 31, 1997 for federal income tax
purposes for BGIF, BGEMF and GCSCF are the same as for financial reporting
purposes. The gross unrealized appreciation and (depreciation) of investments at
December 31, 1997 were as follows:
BGIF BGEMF GSCSF
---- ----- -----
Gross Appreciation ...... $124,312,393 $13,298,763 $11,905,467
Gross Depreciation ...... (18,858,317) (9,717,611) (4,699,422)
------------ ----------- -----------
Net Unrealized Appreciation $105,454,076 $ 3,581,152 $ 7,206,045
------------ ----------- -----------
Forward foreign currency contracts represent commitments to purchase or
sell a specified amount of foreign currency at a future date and at a future
price. Risks may arise from the potential inability of a counterparty to meet
the terms of a contract and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar.
There were no open forward foreign currency contracts at December 31,
1997.
- -------------------------------
Note D -- Repurchase Agreements
- -------------------------------
Collateral underlying repurchase agreements takes the form of either cash
or fully negotiable U.S. government securities. Repurchase agreements are fully
collateralized (including the interest earned thereon) and such collateral is
marked-to-market daily while the agreements remain in force. If the value of the
underlying securities falls below the value of the repurchase price plus accrued
interest, the Funds will require the seller to deposit additional collateral by
the next business day. If the request for additional collateral is not met, or
the seller defaults, the Funds maintain the right to sell the collateral and may
claim any resulting loss against the seller. The Company's Board of Directors
has established standards to evaluate the creditworthiness of broker-dealers and
banks which engage in repurchase agreements with the Funds. Repurchase
agreements of more than seven days duration (or investments in any other
securities which are deemed to be not readily marketable by the staff of the
Securities and Exchange Commission) are not permitted if more than 10% of the
applicable Fund's net assets would be so invested.
- --------------------------------------------------------------------------------
107
<PAGE>
- ----------------
GIAC Funds, Inc.
- ----------------
8
- ----------------
- --------------------------------------------------------------------------------
GIAC Funds, Inc. (including: Baillie Gifford
International Fund, Baillie Gifford Emerging Markets
Fund and The Guardian Small Cap Stock Fund)
- -----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- ---------------------------------------
Note E -- Transactions in Capital Stock
- ---------------------------------------
There are 1,000,000,000 shares of $0.10 par value capital stock authorized
for each of the Funds. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------
Shares Amount
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
o Baillie Gifford International Fund
Shares sold 5,510,606 8,699,658 $ 103,914,585 $ 141,728,936
Shares issued in reinvestment of
dividends and distributions 1,589,325 688,306 29,071,132 11,729,581
Shares repurchased (4,262,859) (3,603,378) (79,908,567) (59,246,145)
- -------------------------------------------------------------------------------------------------
Net increase 2,837,072 5,784,586 $ 53,077,150 $ 94,212,372
- -------------------------------------------------------------------------------------------------
o Baillie Gifford Emerging Markets Fund
Shares sold 4,436,117 4,246,440 $ 52,148,316 $ 40,664,774
Shares issued in reinvestment of
dividends and distributions 461,151 -- 4,689,960 --
Shares repurchased (2,709,884) (1,923,662) (31,037,879) (18,578,466)
- -------------------------------------------------------------------------------------------------
Net increase 2,187,384 2,322,778 $ 25,800,397 $ 22,086,308
- -------------------------------------------------------------------------------------------------
</TABLE>
Period from April 2, 1997+
to December 31, 1997
- --------------------------------------------------------------------------------
Shares Amount
- --------------------------------------------------------------------------------
o The Guardian Small Cap Stock Fund
Shares sold 6,957,498 $ 86,846,310
Shares issued in reinvestment of
dividends and distributions 92,788 1,229,438
Shares repurchased (611,001) (8,393,798)
- --------------------------------------------------------------------------------
Net increase 6,439,285 $ 79,681,950
- --------------------------------------------------------------------------------
- ------------------------
Note F -- Line of Credit
- ------------------------
A $20,000,000 line of credit available to each Fund and the other Guardian
related Funds has been established with Morgan Guaranty Trust Company. The rate
of interest charged on any borrowings is based upon the prevailing Federal Funds
rate at the time of the loan plus .25% calculated on a 360 day basis per annum.
For the year ended December 31, 1997, none of the Funds borrowed against this
line of credit.
+ Commencement of operations.
- --------------------------------------------------------------------------------
108
<PAGE>
----------------
GIAC Funds, Inc.
----------------
8
----------------
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors and Shareholders
GIAC Funds, Inc.
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of the GIAC Funds, Inc. (comprising,
respectively, the Baillie Gifford International Fund, Baillie Gifford Emerging
Markets Fund and The Guardian Small Cap Stock Fund), as of December 31, 1997,
and the related statements of operations, the statements of changes in net
assets and the financial highlights for each of the periods indicated therein.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1997, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective funds constituting the GIAC Funds, Inc. at December 31,
1997, the results of their operations, the changes in their net assets and the
financial highlights for each of the periods indicated therein, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
February 9, 1998
- --------------------------------------------------------------------------------
109
<PAGE>
- ---------------
Value Line
Centurion Fund,
Inc.
- ---------------
9
- ---------------
- --------------------------------------------------------------------------------
Value Line Centurion Fund, Inc.
- -------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1997
- ----------------------
COMMON STOCKS -- 90.7%
- ----------------------
Shares Value
- ---------------------------------------------------------------
Bank -- 9.2%
100,000 BankBoston Corporation $ 9,393,750
150,000 BankAmerica Corp. 10,950,000
150,000 Citicorp 18,965,625
300,000 Mellon Bank Corp. 18,187,500
150,000 State Street Corp. 8,728,125
-------------
66,225,000
-------------
Computer & Peripherals -- 10.2%
300,000 Bay Networks, Inc.* 7,668,750
300,000 Cisco Systems, Inc.* 16,725,000
250,000 Compaq Computer Corp. 14,109,375
100,000 Dell Computer Corp.* 8,400,000
375,000 EMC Corp.* 10,289,063
400,000 Quantum Corp.* 8,025,000
200,000 Sun Microsystems, Inc.* 7,975,000
-------------
73,192,188
-------------
Computer Software & Services -- 6.2%
200,000 BMC Software, Inc.* 13,125,000
200,000 Computer Associates International, Inc. 10,575,000
100,000 Microsoft Corp.* 12,925,000
150,000 Networks Associates, Inc.* 7,931,250
-------------
44,556,250
-------------
Drug -- 7.1%
260,000 Amgen Inc.* 14,072,500
140,000 Lilly (Eli) & Co. 9,747,500
120,000 Merck & Co., Inc. 12,750,000
100,000 Pfizer, Inc. 7,456,250
60,000 Warner-Lambert Co. 7,440,000
-------------
51,466,250
-------------
Electrical Equipment -- 2.3%
225,000 General Electric Co. 16,509,375
-------------
Financial Services -- 3.0%
300,000 Money Store Inc. (The) 6,300,000
285,000 Travelers Group, Inc. 15,354,375
-------------
21,654,375
-------------
Healthcare Information Systems -- 2.0%
300,000 HBO & Co. 14,400,000
-------------
Household Products -- 3.9%
165,000 Colgate-Palmolive Co. $ 12,127,500
200,000 Procter & Gamble Co. 15,962,500
-------------
28,090,000
-------------
Insurance-Diversified -- 2.3%
150,000 American International Group, Inc. 16,312,500
-------------
Insurance-Life -- 4.1%
300,000 Conseco, Inc. 13,631,250
375,000 SunAmerica Inc. 16,031,250
-------------
29,662,500
-------------
Manufactured Housing/
Recreational Vehicles -- 1.4%
300,000 Oakwood Homes Corp. 9,956,250
-------------
Medical Supplies -- 6.4%
200,000 Cardinal Health, Inc. 15,025,000
125,000 Guidant Corp. 7,781,250
120,000 Johnson & Johnson 7,905,000
300,000 Medtronic, Inc. 15,693,750
-------------
46,405,000
-------------
Oilfield Services/Equipment -- 13.3%
150,000 BJ Services Co.* 10,790,625
250,000 Baker Hughes Inc. 10,906,250
400,000 ENSCO International Inc. 13,400,000
300,000 Global Marine, Inc.* 7,350,000
200,000 Halliburton Co. 10,387,500
500,000 Parker Drilling Co.* 6,093,750
125,000 Schlumberger Ltd. 10,062,500
160,000 Smith International, Inc.* 9,820,000
350,000 Transocean Offshore, Inc. 16,865,625
-------------
95,676,250
-------------
Retail Store -- 0.9%
100,300 Dayton Hudson Corp. 6,770,250
-------------
Securities Brokerage -- 3.2%
200,000 Merrill Lynch & Co., Inc. 14,587,500
200,000 Schwab (Charles) Corp. 8,387,500
-------------
22,975,000
-------------
Semiconductor -- 2.0%
200,000 Intel Corp. 14,050,000
-------------
See notes to financial statements.
- --------------------------------------------------------------------------------
110
<PAGE>
---------------
Value Line
Centurion Fund,
Inc.
---------------
9
---------------
Shares Value
- ------------------------------------------------------------------
Telecommunications Equipment -- 4.9%
200,000 ADC Telecommunications Inc.* $ 8,350,000
800,000 PairGain Technologies, Inc.* 15,500,000
220,000 Tellabs, Inc.* 11,632,500
------------
35,482,500
------------
Thrift -- 3.6%
215,000 Federal Home Loan Mortgage Corp. 9,016,562
165,000 Federal National Mortgage Association 9,415,313
120,000 Washington Mutual, Inc. 7,657,500
------------
26,089,375
------------
Tobacco -- 1.9%
300,000 Philip Morris Companies, Inc. 13,593,750
------------
Toiletries/Cosmetics -- 2.8%
200,000 Gillette Co. 20,087,500
------------
TOTAL COMMON STOCKS AND
TOTAL INVESTMENT SECURITIES -- 90.7%
(Cost $482,410,175) 653,154,313
------------
- ------------------------------
SHORT-TERM INVESTMENTS -- 9.9%
- ------------------------------
Principal
Amount Value
- ------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
OBLIGATIONS -- 3.4%
$25,000,000 Federal National Mortagage
Association Discount Notes 5.69%,
due 1/21/98 $ 24,920,972
------------
REPURCHASE AGREEMENT -- 6.5%
(including accrued interest)
$46,600,00 Collateralized by $47,320,000
U.S. Treasury Notes 6%, due 6/30/99,
with a value of $47,556,600 (With
First Chicago Capital Markets, Inc.
5.85%, dated 12/31/97 due 1/2/98,
delivery value $46,615,145) 46,607,572
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $71,528,544) 71,528,544
EXCESS OF LIABILITIES OVER CASH AND
RECEIVABLES -- (-0.6%) (4,592,311)
------------
NET ASSETS -- 100.0% $720,090,546
============
NET ASSET VALUE PER
OUTSTANDING SHARE
($720,090,546 / 28,218,235
shares outstanding) $ 25.52
============
* Non-income producing
See notes to financial statements.
- --------------------------------------------------------------------------------
111
<PAGE>
- ---------------
Value Line
Centurion Fund,
Inc.
- ---------------
9
- ---------------
- --------------------------------------------------------------------------------
Value Line Centurion Fund, Inc.
- -------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1997
ASSETS:
Investment securities, at value
(cost $482,410,175) $653,154,313
Short-term investments (cost $71,528,544) 71,528,544
Cash 55,108
Receivable for securities sold 3,269,851
Dividends and interest receivable 346,937
Receivable for capital shares sold 83,122
------------
TOTAL ASSETS 728,437,875
------------
LIABILITIES:
Payable for securities purchased 6,762,728
Payable for capital shares repurchased 1,108,332
Accrued expenses:
Advisory fee 304,124
GIAC administrative service fee 115,000
Other 57,145
------------
TOTAL LIABILITIES 8,347,329
------------
NET ASSETS $720,090,546
============
NET ASSETS CONSIST OF:
Capital stock, at $1.00 par value
(authorized 50,000,000, outstanding
28,218,235 shares) $ 28,218,235
Additional paid-in capital 473,422,268
Undistributed investment income -- net 2,319,123
Undistributed net realized gain on investments 45,386,782
Unrealized net appreciation of investments 170,744,138
------------
NET ASSETS $720,090,546
============
NET ASSET VALUE PER
OUTSTANDING SHARE
($720,090,546 / 28,218,235
shares outstanding) $ 25.52
============
STATEMENT OF OPERATIONS
Year Ended
December 31, 1997
Investment Income:
Dividends $ 4,355,316
Interest 2,256,072
------------
Total Income 6,611,388
------------
Expenses:
Investment advisory fee 3,485,040
GIAC administrative service fee 498,103
Custodian fees 73,975
Insurance and dues 45,801
Auditing and legal fees 37,543
Postage 16,963
Directors' fees and expenses 15,010
Printing and stationery 8,275
Taxes and other 749
------------
Total Expenses Before Custody Credits 4,181,459
Less: Custody Credits (5,747)
------------
Net Expenses 4,175,712
------------
Investment Income -- Net 2,435,676
------------
Realized and Unrealized Gain on
Investments -- Net:
Realized gain -- net 45,610,251
Change in unrealized appreciation 83,192,727
------------
Net Realized Gain and Change in Unrealized
Appreciation on Investments 128,802,978
------------
Net Increase in Net Assets from Operations $131,238,654
============
See notes to financial statements.
- --------------------------------------------------------------------------------
112
<PAGE>
---------------
Value Line
Centurion Fund,
Inc.
---------------
9
---------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
for the Years Ended
December 31, 1997 and 1996
1997 1996
------------- -------------
Operations:
Investment income -- net $ 2,435,676 $ 2,135,403
Realized gain on
investments -- net 45,610,251 114,105,936
Change in unrealized
appreciation 83,192,727 (25,679,011)
------------- -------------
Net increase in net assets
from operations 131,238,654 90,562,328
------------- -------------
Distributions to Shareholders:
Investment income -- net (2,225,662) (2,617,548)
Realized gain from investment
transactions -- net (114,003,360) (67,401,766)
------------- -------------
Total distributions (116,229,022) (70,019,314)
------------- -------------
Capital Share Transactions:
Proceeds from sale of shares 80,062,970 134,593,465
Proceeds from reinvestment of
distributions to shareholders 116,229,022 70,019,314
Cost of shares repurchased (130,551,904) (111,263,942)
------------- -------------
Net increase from capital
share transactions 65,740,088 93,348,837
------------- -------------
Total Increase in Net Assets 80,749,720 113,891,851
Net Assets:
Beginning of year 639,340,826 525,448,975
------------- -------------
End of year $ 720,090,546 $ 639,340,826
============= =============
Undistributed Investment
Income -- Net at End of Year $ 2,319,123 $ 2,109,109
============= =============
See notes to financial statements.
- --------------------------------------------------------------------------------
113
<PAGE>
- ---------------
Value Line
Centurion Fund,
Inc.
- ---------------
9
- ---------------
- --------------------------------------------------------------------------------
Value Line Centurion Fund, Inc.
- -------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ------------------------------------
1 -- Significant Accounting Policies
- ------------------------------------
Value Line Centurion Fund, Inc. (the "Fund") is an open-end diversified
management investment company registered under the Investment Company Act of
1940, as amended, whose primary investment objective is long-term growth of
capital. The Fund's portfolio will usually consist of common stocks ranked 1 or
2 for year-ahead performance by The Value Line Investment Survey, one of the
nation's major investment advisory services.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements.
(A) Security Valuation
Securities listed on a securities exchange and over-the-counter securities
traded on the NASDAQ national market are valued at the closing sales price on
the date as of which the net asset value is being determined. In the absence of
closing sales prices for such securities and for securities traded in the
over-the-counter market, the security is valued at the midpoint between the
latest available and representative asked and bid prices. Short-term instruments
with maturities of 60 days or less are valued at amortized cost, which
approximates market value. Short-term instruments with maturities greater than
60 days at the date of purchase are valued at the midpoint between the latest
available and representative asked and bid prices and, commencing 60 days prior
to maturity, such securities are valued at amortized cost. Other assets and
securities for which market valuations are not readily available are valued at
fair value as the Board of Directors may determine in good faith.
(B) Repurchase Agreements
In connection with transactions in repurchase agreements, the Fund's
custodian takes possession of the underlying collateral securities, the value of
which exceeds the principal amount of the repurchase transaction, including
accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. In the event of default of the
obligation to repurchase, the Fund has the right to liquidate the collateral and
apply the proceeds in satisfaction of the obligation. Under certain
circumstances, in the event of default or bankruptcy by the other party to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
(C) Federal Income Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholder. Therefore, no federal income tax
provision is required.
(D) Dividends and Distributions
It is the Fund's policy to distribute to its shareholder, as dividends and
as capital gains distributions, all the net investment income for the year and
all net capital gains realized by the Fund, if any. Such distributions are
determined in accordance with income tax
- --------------------------------------------------------------------------------
114
<PAGE>
---------------
Value Line
Centurion Fund,
Inc.
---------------
9
---------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
regulations which may differ from generally accepted accounting principles. All
dividends or distributions will be payable in shares of the Fund at the net
asset value on the ex-dividend date. This policy is, however, subject to change
at any time by the Board of Directors.
(E) Amortization
Discounts on debt securities are amortized to interest income over the
life of the security with a corresponding increase to the security's cost basis;
premiums on debt securities are not amortized.
(F) Investments
Securities transactions are recorded on a trade date basis. Realized gains
and losses from securities transactions are recorded on the identified cost
basis. Interest income on investments adjusted for amortization of discount,
including original issue discount required for federal income tax purposes, is
earned from settlement date and recognized on the accrual basis. Dividend income
is recorded on the ex-dividend date.
- ----------------------------------------------
2 -- Capital Share Transactions, Dividends and
Distributions
- ----------------------------------------------
Shares of the Fund are available to the public only through the purchase
of certain contracts issued by The Guardian Insurance and Annuity Company, Inc.
(GIAC). Transactions in capital stock were as follows:
Year Ended Year Ended
December 31, December 31,
1997 1996
------------ ------------
Shares sold 3,037,284 5,349,533
Shares issued in reinvestment
of dividends and distributions 4,477,235 3,184,143
--------- ---------
7,514,519 8,533,676
Shares repurchased 5,048,869 4,453,198
--------- ---------
Net increase 2,465,650 4,080,478
========= =========
Dividends per share from net
investment income $ .09 $ .12
========= =========
Distributions per share from
net realized gains $ 4.61 $ 3.09
========= =========
- --------------------------------------
3 -- Purchases and Sales of Securities
- --------------------------------------
Purchases and sales of investment securities, excluding short-term
investments, were as follows:
Year Ended
December 31,
1997
----------------
PURCHASES:
Investment Securities $551,943,242
============
SALES:
Investment Securities $642,605,742
============
At December 31, 1997, the aggregate cost of investment securities and
short-term investments for federal income tax purposes is $553,938,719. The
aggregate appreciation and depreciation of invest-
- --------------------------------------------------------------------------------
115
<PAGE>
- ---------------
Value Line
Centurion Fund,
Inc.
- ---------------
9
- ---------------
- --------------------------------------------------------------------------------
Value Line Centurion Fund, Inc.
- -------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
ments for the year ended December 31, 1997, based on a comparison of investment
values and their costs for federal income tax purposes is $178,685,518 and
$7,941,380 respectively, resulting in a net appreciation of $170,744,138.
- ---------------------------------------------
4 -- Investment Advisory Contract, Management
Fees and Transactions with Affiliates
- ---------------------------------------------
An advisory fee of $3,485,040 was paid or payable to Value Line, Inc. (the
Adviser), the Fund's investment adviser, for the year ended December 31, 1997.
This was computed at an annual rate of 1/2 of 1% of the average daily net assets
of the Fund during the year and paid monthly. The Adviser provides research,
investment programs, supervision of the investment portfolio and pays costs of
administrative services, office space, equipment and compensation of
administrative, bookkeeping, and clerical personnel necessary for managing the
affairs of the Fund. The Adviser also provides persons, satisfactory to the
Fund's Board of Directors, to act as officers and employees of the Fund and pays
their salaries and wages. The Fund bears all other costs and expenses.
Certain officers and directors of the Adviser and Value Line Securities,
Inc., (the Fund's distributor and a registered broker/dealer) and of GIAC are
also officers and directors of the Fund. A former officer of GIAC who is also a
director of the Fund was paid a fee of $2,718 for the year ended December 31,
1997. During the year ended December 31, 1997, the Fund paid brokerage
commissions totalling $448,753 to Value Line Securities, Inc., a wholly owned
subsidiary of the Adviser, which clears its transactions through unaffiliated
brokers.
The Fund has an agreement with GIAC to reimburse GIAC for expenses
incurred in performing administrative and internal accounting functions in
connection with the establishment of contract-owner accounts and their ongoing
maintenance, printing and distribution of shareholder reports and providing
ongoing shareholder servicing functions. Such reimbursement is limited to an
amount no greater than $18.00 times the average number of accounts at the end of
each quarter during the year. During the year ended December 31, 1997, the Fund
incurred expenses of $498,103 in connection with such services rendered by GIAC.
- --------------------------------------------------------------------------------
116
<PAGE>
---------------
Value Line
Centurion Fund,
Inc.
---------------
9
---------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 24.83 $ 24.25 $ 17.83 $ 18.52 $ 20.04
-------- --------- -------- -------- --------
Income (loss) from investment operations:
Net investment income .09 .08 .12 .10 .12
Net gains or losses on securities (both
realized and unrealized) 5.30 3.71 6.96 (.51) 1.73
-------- --------- -------- -------- --------
Total from investment operations 5.39 3.79 7.08 (.41) 1.85
-------- --------- -------- -------- --------
Less distributions:
Dividends from net investment income (.09) (.12) (.10) (.01) (.12)
Distributions from capital gains (4.61) (3.09) (.56) (.27) (3.25)
-------- --------- -------- -------- --------
Total distributions (4.70) (3.21) (.66) (.28) (3.37)
-------- --------- -------- -------- --------
Net asset value, end of year $ 25.52 $ 24.83 $ 24.25 $ 17.83 $ 18.52
-------- --------- -------- -------- --------
Total return** 21.39% +17.34% +40.08% -2.21% +9.21%
======== ========= ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of year (in thousands) $720,091 $ 639,341 $525,449 $352,745 $373,910
Ratio of operating expenses to average
net assets .60%(1) .59%(1) .62% .61% .61%
Ratio of net investment income to average
net assets .35% .36% .60% .57% .57%
Portfolio turnover rate 85% 141% 114% 122% 118%
Average commissions paid per share of
common stock investments purchased/sold $ .0493 $ .049(2)
</TABLE>
(1) Before offset of custody credits.
(2) Disclosure effective for fiscal years beginning on or after 9/1/95.
** Total returns do not reflect the effects of charges deducted under the
terms of GIAC's variable contracts. Including such charges would reduce
the total returns for all periods shown.
See notes to financial statements.
- --------------------------------------------------------------------------------
117
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Value Line
Centurion Fund,
Inc.
- ---------------
9
- ---------------
- --------------------------------------------------------------------------------
Value Line Centurion Fund, Inc.
- -------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Value Line Centurion Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Value Line Centurion Fund, Inc.
(the "Fund") at December 31, 1997, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1997 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 13, 1998
- --------------------------------------------------------------------------------
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Inc.
---------------
9
---------------
- --------------------------------------------------------------------------------
- ----------------------------
Shareholders Meeting Results (unaudited)
- ----------------------------
A special meeting of shareholders of Value Line Centurion Fund, Inc. was
held on October 30, 1997. The matters voted upon by the shareholders and
the resulting votes for each matter are presented below.
1. The election of six Directors to serve until their successors are duly
elected and qualified.
Number of Votes:
---------------
Director For Withheld Broker Non-Votes*
-------- --- -------- -----------------
Jean Bernhard Buttner 28,633,179 233,545 0
John W. Chandler 28,610,654 256,070 0
Leo R. Futia 28,608,431 258,294 0
David H. Porter 28,622,697 244,027 0
Paul Craig Roberts 28,628,244 238,480 0
Nancy-Beth Sheerr 28,623,902 242,822 0
2. Ratification of the selection of Price Waterhouse LLP as independent
accountants for the fiscal year ending December 31, 1997.
Number of Votes:
---------------
For Against Abstain Broker Non-Votes*
--- ------- ------- ----------------
28,479,364 102,682 284,677 0
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
- --------------------------------------------------------------------------------
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Value Line Strategic Asset Management Trust
- -------------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1997
- ------------------------
COMMON STOCKS -- 56.9%
- ------------------------
Shares Value
- --------------------------------------------------------
Advertising -- 1.1%
306,000 Omnicom Group, Inc. $12,966,750
-----------
Aerospace/Defense -- 1.7%
115,000 BE Aerospace, Inc.* 3,076,250
35,000 General Dynamics Corp. 3,025,313
29,000 Northrop Grumman Corp. 3,335,000
81,700 Precision Castparts Corp. 4,927,531
53,000 Sundstrand Corp. 2,669,875
45,000 Thiokol Corp. 3,656,250
-----------
20,690,219
-----------
Air Transport -- 1.2%
96,000 Airborne Freight Corp. 5,964,000
87,700 Alaska Air Group, Inc.* 3,398,375
80,000 Comair Holdings, Inc. 1,930,000
55,000 U.S. Airways Group, Inc.* 3,437,500
-----------
14,729,875
-----------
Apparel -- 0.8%
60,000 Jones Apparel Group, Inc.* 2,580,000
63,200 Liz Claiborne, Inc. 2,642,550
36,000 Nautica Enterprises, Inc.* 837,000
66,000 V.F. Corp. 3,031,875
-----------
9,091,425
-----------
Auto & Truck -- 0.3%
130,000 Navistar International
Corp., Inc.* 3,225,625
-----------
Auto Parts-Original Equipment -- 0.7%
38,000 Eaton Corp. 3,391,500
112,000 Tower Automotive, Inc.* 4,711,000
-----------
8,102,500
-----------
Bank -- 0.8%
88,000 Mellon Bank Corp. 5,335,000
78,000 SouthTrust Corp. 4,948,125
-----------
10,283,125
-----------
Bank-Midwest -- 1.6%
12,300 National City Corp. 808,725
70,000 Northern Trust Corp. 4,882,500
98,000 Norwest Corp. 3,785,250
82,000 U.S. Bancorp 9,178,875
-----------
18,655,350
-----------
Beverage-Soft Drink -- 1.1%
376,000 Coca-Cola Enterprises Inc. 13,371,500
-----------
Building Materials -- 0.3%
80,000 Masco Corp. 4,070,000
-----------
Cable TV -- 0.3%
28,000 Comcast Corp. Class "A" 883,750
110,000 Tele-Communications, Inc.-
TCI Group Series "A"* 3,073,125
-----------
3,956,875
-----------
Cement & Aggregates -- 0.1%
18,000 Vulcan Materials Co. 1,838,250
-----------
Chemical-Specialty -- 0.2%
28,000 Rohm & Haas Co. 2,681,000
-----------
Coal/Alternate Energy -- 0.6%
159,000 AES Corp.* 7,413,375
-----------
Computer & Peripherals -- 1.9%
46,000 American Power Conversion
Corp.* 1,086,750
88,000 Bay Networks, Inc.* 2,249,500
128,000 EMC Corp.* 3,512,000
50,000 International Business Machines
Corp 5,228,125
52,000 MRV Communications, Inc.* 1,241,500
60,000 Storage Technology Corp.* 3,716,250
60,000 Tech Data Corp.* 2,332,500
218,000 Unisys Corp.* 3,024,750
-----------
22,391,375
-----------
Computer Software & Services -- 2.8%
30,000 Citrix Systems, Inc.* 2,280,000
63,000 Computer Associates International,
Inc 3,331,125
268,000 Compuware Corp.* 8,576,000
90,000 Fiserv, Inc.* 4,421,250
15,000 Hyperion Software Corp.* 536,250
20,000 National Data Corp. 722,500
116,000 PeopleSoft, Inc.* 4,524,000
140,000 Symantec Corp.* 3,071,250
63,000 Systems & Computer Technology
Corp.* 3,126,375
50,000 Veritas Software Corp.* 2,550,000
-----------
33,138,750
-----------
See notes to financial statements.
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Strategic Asset
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10
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- --------------------------------------------------------------------------------
Shares Value
- ------------------------------------------------------
Diversified Companies -- 1.6%
34,000 Danaher Corp. $ 2,146,250
17,000 GATX Corp. 1,233,562
50,000 Raychem Corp. 2,153,125
44,000 Textron, Inc. 2,750,000
240,000 Tyco International, Ltd. 10,815,000
-----------
19,097,937
-----------
Drug -- 2.1%
24,000 Dura Pharmaceuticals, Inc.* 1,101,000
76,000 ICN Pharmaceuticals, Inc. 3,709,750
73,000 MedImmune, Inc.* 3,129,875
35,000 Merck & Co., Inc. 3,718,750
108,000 Pfizer, Inc. 8,052,750
62,000 Schering-Plough Corp. 3,851,750
16,000 Sepracor, Inc.* 641,000
42,000 Vical, Inc.* 504,000
-----------
24,708,875
-----------
Drugstore -- 0.7%
90,000 CVS Corp. 5,765,625
54,000 Rite Aid Corp. 3,169,125
-----------
8,934,750
-----------
Electrical Utility-Central -- 0.4%
50,000 Cinergy Corp. 1,915,625
100,000 Houston Industries, Inc. 2,668,750
-----------
4,584,375
-----------
Electric Utility-East -- 1.1%
51,700 American Electric Power Co.,
Inc. 2,669,012
56,000 Consolidated Edison, Inc. 2,296,000
140,994 Duke Energy Corp. 7,807,543
-----------
12,772,555
-----------
Electric Utility-West -- 0.2%
100,000 Edison International 2,718,750
-----------
Electrical Equipment -- 0.7%
120,000 General Electric Co. 8,805,000
-----------
Electronics -- 1.2%
62,000 Lexmark International Group,
Inc. Class "A"* 2,356,000
144,400 Spectrian Corp.* 2,779,700
256,500 Symbol Technologies, Inc. 9,682,875
-----------
14,818,575
-----------
Entertainment -- 1.7%
132,000 CBS Corp. 3,885,750
47,000 Chancellor Media Corp.* 3,507,375
90,000 Clear Channel Communications,
Inc.* 7,149,375
68,000 King World Productions, Inc. 3,927,000
25,000 Time Warner Inc. 1,550,000
-----------
20,019,500
-----------
Environmental -- 0.6%
135,000 Allied Waste Industries,
Inc.* 3,147,188
98,000 USA Waste Services, Inc.* 3,846,500
25,000 U.S. Filter Corp.* 748,437
-----------
7,742,125
-----------
Financial Services -- 0.9%
11,800 Countrywide Credit Industries,
Inc. 505,925
58,000 Green Tree Financial Corp. 1,518,875
37,000 Loews Corp. 3,926,625
94,000 Money Store Inc. (The) 1,974,000
51,000 Travelers Group, Inc. 2,747,625
-----------
10,673,050
-----------
Food Processing -- 1.6%
40,000 ConAgra, Inc. 1,312,500
52,000 Dean Foods Co. 3,094,000
75,000 Interstate Bakeries Corp. 2,803,125
66,000 Quaker Oats Co. 3,481,500
68,000 Smithfield Foods, Inc.* 2,244,000
44,200 Suiza Foods Corp.* 2,632,663
62,000 Unilever N.V. (New York Shares) 3,871,125
-----------
19,438,913
-----------
Foreign Telecommunication -- 0.2%
60,000 Ericsson (L.M.) Telephone Co.-
Class "B"(ADR) 2,238,750
-----------
Grocery -- 1.9%
166,000 Kroger Co.* 6,131,625
205,400 Safeway, Inc.* 12,991,550
70,000 Whole Foods Market, Inc.* 3,578,750
-----------
22,701,925
-----------
Health Care Information System -- 0.4%
96,000 HBO & Co. 4,608,000
-----------
See notes to financial statements.
- --------------------------------------------------------------------------------
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Strategic Asset
Management
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10
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- --------------------------------------------------------------------------------
Value Line Strategic Asset Management Trust
- -------------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1997
Shares Value
- --------------------------------------------------------
Home Appliance -- 0.1%
22,000 Maytag Corp. $ 820,875
-----------
Hotel/Gaming -- 0.9%
60,000 Hilton Hotels Corp. 1,785,000
200,000 Prime Hospitality Corp.* 4,075,000
44,000 Promus Hotel Corp.* 1,848,000
157,000 Rio Hotel & Casino, Inc.* 3,297,000
-----------
11,005,000
-----------
Industrial Services -- 0.6%
82,000 Equifax, Inc. 2,905,875
52,000 Robert Half International, Inc.* 2,080,000
200,000 Superior Energy Sevices, Inc.* 2,025,000
-----------
7,010,875
-----------
Insurance-Diversified -- 0.8%
100,000 American Bankers
Insurance Group, Inc. 4,593,750
25,000 American International Group, Inc. 2,718,750
32,400 Lincoln National Corp. 2,531,250
-----------
9,843,750
-----------
Insurance-Life -- 1.4%
201,000 Conseco, Inc. 9,132,937
50,000 Equitable Companies, Inc. (The) 2,487,500
34,700 SunAmerica Inc. 1,483,425
80,000 Torchmark Corp. 3,365,000
-----------
16,468,862
-----------
Insurance-Property/Casualty -- 1.4%
15,500 ACE, Ltd. 1,495,750
70,000 Allstate Corp. (The) 6,361,250
44,000 Executive Risk Inc. 3,071,750
51,000 Progressive Corp. 6,113,625
-----------
17,042,375
-----------
Machinery -- 1.3%
20,000 Cummins Engine Company, Inc. 1,181,250
64,000 DT Industries, Inc. 2,176,000
116,000 Dover Corp. 4,190,500
45,000 Ingersoll -- Rand Co. 1,822,500
53,550 Parker -- Hannifin Corp. 2,456,606
100,000 Terex Corp.* 2,350,000
41,000 Zoltek Companies, Inc.* 1,142,875
-----------
15,319,731
-----------
Medical Services -- 1.0%
150,000 Health Management Associates, Inc.
Class "A"* 3,787,500
73,000 Lincare Holdings, Inc.* 4,161,000
70,000 Universal Health Services, Inc.
Class "B"* 3,526,250
-----------
11,474,750
-----------
Medical Supplies -- 1.4%
60,000 Guidant Corp. 3,735,000
55,154 Johnson & Johnson 3,633,270
44,000 McKesson Corp. 4,760,250
73,000 Safeskin Corp.* 4,142,750
18,000 Sofamor Danek Group, Inc.* 1,171,125
-----------
17,442,395
-----------
Metal Fabricating -- 0.1%
20,000 Trinity Industries, Inc. 892,500
-----------
Natural Gas-Distribution -- 0.2%
50,000 MCN Energy Group Inc. 2,018,750
-----------
Newspaper -- 0.4%
62,000 New York Times Co. (The) Class "A" 4,099,750
6,000 Tribune Co. 374,918
-----------
4,474,668
-----------
Office Equipment & Supplies -- 0.8%
160,000 Office Depot, Inc.* 3,830,000
195,625 Staples, Inc.* 5,428,594
-----------
9,258,594
-----------
Oilfield Services/Equipment -- 0.5%
160,000 Global Industries, Ltd.* 2,720,000
310,000 Grey Wolf, Inc.* 1,666,250
21,500 Pride International, Inc.* 542,875
50,000 Tuboscope Inc.* 1,203,125
-----------
6,132,250
-----------
Packaging & Container -- 0.3%
62,000 Sealed Air Corp.* 3,828,500
-----------
Petroleum-Integrated -- 2.4%
50,000 Amoco Corp. 4,256,250
60,000 Atlantic Richfield Co. 4,807,500
80,000 British Petroleum Co. PLC (ADR) 6,375,000
46,000 Mobil Corp. 3,320,625
See notes to financial statements.
- --------------------------------------------------------------------------------
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10
---------------
- --------------------------------------------------------------------------------
Shares Value
- ---------------------------------------------------------
Petroleum-Integrated -- 2.4% (continued)
125,000 Occidental Petroleum Corp. $ 3,664,062
180,000 USX-- Marathon Group 6,075,000
------------
28,498,437
------------
Petroleum-Producing -- 0.4%
50,000 Burlington Resources, Inc. 2,240,625
60,000 Noble Affiliates, Inc. 2,115,000
------------
4,355,625
------------
Precision Instrument -- 0.2%
30,000 Perkin-Elmer Corp. 2,131,875
------------
Publishing -- 0.3%
55,000 McGraw-Hill Companies, Inc. 4,070,000
------------
Recreation -- 0.5%
12,000 Carnival Corp. Class "A" 664,500
166,000 Harley-Davidson, Inc. 4,544,250
10,000 Royal Caribbean Cruises, Ltd. 533,125
------------
5,741,875
------------
Restaurant -- 0.5%
70,000 CKE Restaurants, Inc. 2,948,750
78,000 Rainforest Cafe, Inc.* 2,574,000
------------
5,522,750
------------
Retail-Special Lines -- 3.6%
38,000 Barnes & Noble, Inc.* 1,268,250
119,000 Best Buy Co., Inc.* 4,388,125
104,000 Borders Group, Inc.* 3,256,500
130,000 CompUSA, Inc.* 4,030,000
75,000 Gap, Inc. 2,657,813
58,000 General Nutrition Companies, Inc.* 1,972,000
107,000 Goody's Family Clothing, Inc.* 2,909,062
100,000 Michaels Stores, Inc.* 2,925,000
36,000 Payless ShoeSource, Inc.* 2,416,500
95,400 Pier 1 Imports, Inc. 2,158,425
146,000 Ross Stores Inc. 5,310,750
200,000 TJX Companies, Inc. 6,875,000
70,000 Tandy Corp. 2,699,375
------------
42,866,800
------------
Retail Building Supply -- 0.3%
68,000 Lowes Companies, Inc. 3,242,750
------------
Retail Store -- 3.5%
111,437 Consolidated Stores Corp.* 4,896,263
104,000 Costco Companies Inc.* 4,641,000
80,000 Dayton-Hudson Corp. 5,400,000
94,797 Dollar General Corp. 3,436,391
150,000 Family Dollar Stores, Inc. 4,396,875
60,000 Federated Department Stores, Inc.* 2,583,750
97,000 Kohl's Corp.* 6,608,125
168,000 Meyer (Fred), Inc.* 6,111,000
100,000 Proffitt's, Inc.* 2,843,750
55,000 Stein Mart, Inc.* 1,471,250
------------
42,388,404
------------
Securities Brokerage -- 0.2%
75,000 Schwab (Charles) Corp. 3,145,313
------------
Semiconductor -- 0.1%
16,000 Dallas Semiconductor Corp. 652,000
------------
Shoe -- 0.2%
119,250 Wolverine World Wide, Inc. 2,698,031
------------
Telecommunications Equipment -- 0.3%
46,000 Loral Space & Communications Ltd.* 986,125
32,000 PairGain Technologies, Inc.* 620,000
30,000 QUALCOMM Incorporated* 1,515,000
------------
3,121,125
------------
Telecommunications Services -- 1.7%
88,000 AirTouch Communications, Inc.* 3,657,500
42,000 Bell Atlantic Corp. 3,822,000
66,000 BellSouth Corp. 3,716,625
104,000 Cincinnati Bell, Inc. 3,224,000
145,000 Mobile Telecommunications
Technologies Corp. * 3,190,000
116,000 WinStar Communications, Inc.* 2,892,750
------------
20,502,875
------------
Tobacco -- 0.5%
129,000 Philip Morris Companies, Inc. 5,845,313
------------
Toiletries/Cosmetics -- 0.2%
40,000 Avon Products, Inc. 2,455,000
------------
TOTAL COMMON STOCKS
(Cost $506,870,546) 680,741,122
------------
See notes to financial statements.
- --------------------------------------------------------------------------------
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Value Line Strategic Asset Management Trust
- -------------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1997
----------------------------------
U.S. TREASURY OBLIGATIONS -- 23.3%
----------------------------------
Principal
Amount Value
- ----------------------------------------------------------------
$55,000,000 U.S. Treasury Notes 6 3/4%,
due 5/31/99 $ 55,807,400
50,000,000 U.S. Treasury Notes 6 3/8%,
due 5/15/00 50,744,500
16,000,000 U.S. Treasury Notes 7 3/4%,
due 2/15/01 16,914,400
50,000,000 U.S. Treasury Notes 6 1/2%,
due 5/31/02 51,448,500
31,000,000 U.S. Treasury Notes 5 7/8%,
due 11/15/05 31,161,820
20,000,000 U.S. Treasury Notes 6 1/8%,
due 8/15/07 20,548,800
45,000,000 U.S. Treasury Bonds 7 1/4%,
due 8/15/22 51,962,400
------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $268,841,843) 278,587,820
------------
------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 4.1%
------------------------------------------
6,740,000 Federal National Mortgage Association
6.85%, due 8/22/05 7,065,205
27,000,000 Federal Home Loan Mortgage Corp.
7.10%, due 4/10/07 29,017,710
13,000,000 Federal National Mortgage Association
6.50%, due 7/16/07 13,450,190
-------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS (Cost $48,992,347) 49,533,105
-------------
TOTAL INVESTMENT SECURITIES -- 84.3%
(Cost $824,704,736) 1,008,862,047
-------------
-------------------------------
SHORT-TERM INVESTMENTS -- 17.8%
-------------------------------
Principal
Amount Value
- ----------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 11.9%
$62,000,000 U.S. Treasury Notes 6.125%,
due 3/31/98 $ 62,115,320
60,000,000 U.S. Treasury Notes 6.25%,
due 6/30/98 60,238,800
20,000,000 U.S. Treasury Notes 6.125%,
due 8/31/98 20,066,800
--------------
142,420,920
--------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 5.0%
20,000,000 Federal Farm Credit Bank Notes
5.50% due 1/2/98 20,000,000
20,000,000 Federal Farm Credit Bank Notes
5.55% due 3/2/98 19,983,400
20,000,000 Federal Farm Credit Bank Notes
5.62% due 4/1/98 20,000,000
--------------
59,983,400
--------------
REPURCHASE AGREEMENT -- 0.9%
(includes accrued interest)
$10,700,000 Collateralized by $10,055,000
U.S. Treasury Notes 7 3/4%,
due 2/15/01, with a value
of $10,925,386 (with Morgan
Stanley & Co., 6.20%,
dated 12/31/97, due 1/2/98,
delivery value of $10,703,686) $ 10,701,843
--------------
TOTAL SHORT - TERM INVESTMENTS
(Cost $212,679,131) 213,106,163
--------------
EXCESS OF LIABILITIES OVER
CASH AND RECEIVABLES -- (-2.1%) (25,378,763)
--------------
NET ASSETS -- 100.0% $1,196,589,447
==============
NET ASSET VALUE PER
OUTSTANDING SHARE $ 22.13
($1,196,589,447 / 54,069,324 ==============
shares outstanding)
* Non-income producing.
See notes to financial statements.
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Strategic Asset
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- --------------------------------------------------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1997
ASSETS
Investment in securities,
at value (cost $824,704,736) $1,008,862,047
Short-term investments
(cost $212,679,131) 213,106,163
Cash 20,153
Receivable for securities sold 11,418,429
Interest and dividends receivable 6,606,779
Receivable for trust shares sold 156,143
--------------
TOTAL ASSETS 1,240,169,714
--------------
LIABILITIES
Payable for securities purchased 41,626,036
Payable for trust shares
repurchased 1,192,959
Accrued expenses:
Advisory fee 502,653
GIAC administrative service fee 175,000
Other 83,619
--------------
TOTAL LIABILITIES 43,580,267
--------------
NET ASSETS $1,196,589,447
==============
NET ASSETS CONSIST OF:
Capital stock, at $0.01 par value
(authorized unlimited,
outstanding 54,069,324 shares) $ 540,693
Additional paid-in capital 874,984,427
Undistributed net investment
income 35,048,059
Undistributed net realized gain
on investments 101,431,925
Unrealized net appreciation of
investments 184,584,343
--------------
NET ASSETS $1,196,589,447
==============
NET ASSET VALUE PER
OUTSTANDING SHARE
($1,196,589,447 / 54,069,324
shares outstanding) $ 22.13
==============
STATEMENT OF OPERATIONS
Year Ended
December 31, 1997
Investment Income:
Interest $ 36,864,264
Dividends (Net of foreign
withholding tax of $30,786) 5,046,573
--------------
Total Income 41,910,837
--------------
Expenses:
Investment advisory fee 5,718,843
GIAC administrative service fee 721,790
Custodian fees 115,214
Insurance and dues 78,989
Audit and legal fees 37,984
Postage 24,387
Trustees' fees and expenses 15,010
Printing and Stationary 11,917
Taxes and other 3,674
--------------
Total Expenses Before Custody
Credits 6,727,808
Less: Custody credits (3,696)
--------------
Net Expenses 6,724,112
--------------
Investment Income -- Net 35,186,725
--------------
Realized and Unrealized Gain on
Investments -- Net:
Realized gain -- net 101,703,718
Change in unrealized
appreciation of investments 30,109,960
--------------
Net Realized Gain and Change in
Unrealized Appreciation on
Investments 131,813,678
--------------
Net Increase in Net Assets from
Operations $ 167,000,403
==============
See notes to financial statements.
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Value Line Strategic Asset Management Trust
- -------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended
December 31, 1997 and 1996
1997 1996
Operations: -------------- --------------
Investment income -- net $ 35,186,725 $ 26,749,041
Realized gain on investments
-- net 101,703,718 122,797,850
Change in unrealized
appreciation 30,109,960 (6,850,866)
-------------- --------------
Net increase in net assets
from operations 167,000,403 142,696,025
-------------- --------------
Distributions to Shareholders:
Investment income -- net (26,826,322) (16,568,632)
Realized gain from investment
transactions -- net (122,913,330) (48,810,295)
-------------- --------------
Total distributions (149,739,652) (65,378,927)
-------------- --------------
Trust Share Transactions:
Proceeds from sale of shares 69,411,109 119,168,249
Proceeds from reinvestment of
distributions to shareholders 149,739,652 65,378,927
Cost of shares repurchased (112,606,824) (65,588,322)
-------------- --------------
Net increase from Trust share
transactions 106,543,937 118,958,854
-------------- --------------
Total Increase in Net Assets 123,804,688 196,275,952
Net Assets:
Beginning of year 1,072,784,759 876,508,807
-------------- --------------
End of year $1,196,589,447 $1,072,784,759
============== ==============
Undistributed Investment Income
-- Net at End of Year $ 35,048,059 $ 26,687,656
============== ==============
See notes to financial statements.
- --------------------------------------------------------------------------------
126
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Strategic Asset
Management
---------------
10
---------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ------------------------------------
1 -- Significant Accounting Policies
- ------------------------------------
Value Line Strategic Asset Management Trust (the "Trust") is an open-end,
diversified management investment company registered under the Investment
Company Act of 1940, as amended, which seeks to achieve a high total investment
return consistent with reasonable risk by investing primarily in a broad range
of common stocks, bonds and money market instruments. The Trust will attempt to
acheive its objective by following an asset allocation strategy based on data
derived from computer models for the stock and bond markets that shifts the
assets of the Trust among equity, debt and money market securities as the models
indicate and its investment adviser, Value Line, Inc. (the "Adviser"), deems
appropriate.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
by the Trust in the preparation of its financial statements.
(A) Security Valuation.
Securities listed on a securities exchange and over-the-counter securities
traded on the NASDAQ national market are valued at the closing sales price on
the date as of which the net asset value is being determined. In the absence of
closing sales prices for such securities traded in the over-the-counter market,
the security is valued at the midpoint between the latest available and
representative bid and asked prices.
The Board of Trustees has determined that the value of bonds and other
fixed-income securities be calculated on the valuation date by reference to
valuations obtained from an independent pricing service which determines
valuations for normal institutional-size trading units of debt securities,
without exclusive reliance upon quoted prices. This service takes into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data in determining valuations.
Short-term instruments with maturities of 60 days or less are valued at
amortized cost which approximates market value. Short-term instruments with
maturities greater than 60 days at the date of purchase are valued at the
midpoint between the latest available and representative asked and bid prices,
and commencing 60 days prior to maturity such securities are valued at amortized
cost. Other assets and securities for which market valuations are not readily
available are valued at fair value as the Board of Trustees may determine in
good faith.
(B) Repurchase Agreements.
In connection with transactions in repurchase agreements, the Trust's
custodian takes possession of the underlying collateral securities, the value of
which exceeds the principal amount of the repurchase transaction, including
accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. In the event of default of the
obligation to repurchase, the Trust has the right to liquidate the collateral
and apply the proceeds in satisfaction of the obligation. Under
- --------------------------------------------------------------------------------
127
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Value Line
Strategic Asset
Management
- ---------------
10
- ---------------
- --------------------------------------------------------------------------------
Value Line Strategic Asset Management Trust
- -------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
certain circumstances, in the event of default or bankruptcy by the other party
to the agreement, realization and/or retention of the collateral or proceeds may
be subject to legal proceedings.
(C) Federal Income Taxes.
It is the Trust's policy to qualify under, and comply with, the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholder.
Therefore, no federal income tax provision is required.
(D) Dividends and Distributions.
It is the Trust's policy to distribute to its shareholder, as dividends
and as capital gains distributions, all the net investment income for the year
and all the net capital gains realized by the Trust, if any. Such distributions
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. All dividends or distributions will be
payable in shares of the Trust at the net asset value on the ex-dividend date.
This policy is, however, subject to change at any time by the Board of Trustees.
(E) Amortization.
Discounts on debt securities are amortized to interest income over the
life of the security with a corresponding increase to the security's cost basis;
premiums on debt securities are not amortized.
(F) Investments.
Securities transactions are recorded on a trade date basis. Realized gains
and losses from securities transactions are recorded on the identified cost
basis. Interest income, adjusted for amortization of discount, including
original issue discount required for federal income tax purposes, is earned from
settlement date and recognized on the accrual basis. Dividend income is recorded
on the ex-dividend date.
- ----------------------------------------
2 -- Trust Share Transactions, Dividends
and Distributions
- ----------------------------------------
Shares of the Trust are available to the public only through the purchase
of certain contracts issued by The Guardian Insurance & Annuity Company, Inc.
(GIAC). Transactions in shares of beneficial interest in the Trust were as
follows:
Year Ended Year Ended
December 31, December 31,
1997 1996
------------ ------------
Shares sold 3,117,519 5,553,832
Shares issued to shareholder
in reinvestment of dividends
and distributions 7,049,889 3,244,612
---------- ---------
10,167,408 8,798,444
Shares repurchased 5,083,552 3,048,207
---------- ---------
Net increase 5,083,856 5,750,237
========== =========
Dividends per share from
net investment income $ .55 $ .37
========== =========
Distributions per share from
net realized gains $ 2.52 $ 1.09
========== =========
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128
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Strategic Asset
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10
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- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------
3 -- Purchases and Sales of Securities
- --------------------------------------
Purchases and sales of investment securities, excluding short-term
investments, were as follows:
Year Ended
December 31,
1997
------------
PURCHASES:
U.S. Treasury and Government
Agency Obligations $229,329,847
Other Investment Securities 492,963,637
------------
$722,293,484
============
SALES & MATURITIES:
U.S. Treasury and Government
Agency Obligations $ 88,974,609
Other Investment Securities 451,590,646
------------
$540,565,255
============
At December 31, 1997, the aggregate cost of investment securities and
short-term investments for federal income tax purposes is $1,037,692,219. The
aggregate appreciation and depreciation of investments at December 31, 1997,
based on a comparison of investment values and their costs for federal income
tax purposes is $198,824,897 and $14,548,906, respectively, resulting in a net
appreciation of $184,275,991.
- ---------------------------------------------
4 -- Investment Advisory Contract, Management
Fees and Transactions with Affiliates
- ---------------------------------------------
An advisory fee of $5,718,843 was paid or payable to the Adviser, for the
year ended December 31, 1997. This was computed at an annual rate of 1/2 of 1%
of the average daily net assets of the Trust during the year and paid monthly.
The Adviser provides research, investment programs, supervision of the
investment portfolio and pays costs of administrative services, office space,
equipment and compensation of administrative, bookkeeping and clerical personnel
necessary for managing the affairs of the Trust. The Adviser also provides
persons, satisfactory to the Trust's Board of Trustees, to act as officers and
employees of the Trust and pays their salaries and wages. The Trust bears all
other costs and expenses.
Certain officers and directors of the Adviser and Value Line Securities,
Inc. (the Trust's distributor and a registered broker/dealer), and of GIAC are
also officers and Trustees of the Trust. A former officer of GIAC who is also a
trustee of the Trust was paid a fee of $2,718 by the Trust for the year ended
December 31, 1997. During the year ended December 31, 1997, the Trust paid
brokerage commissions totalling $427,025 to Value Line Securities, Inc., a
wholly owned subsidiary of the Adviser, which clears its transactions through
unaffiliated brokers.
The Trust has an agreement with GIAC to reimburse GIAC for expenses
incurred in performing administrative and internal accounting functions in
connection with the establishment of contract-owner accounts and their ongoing
maintenance, printing and distribution of shareholder reports and providing
ongoing shareholder servicing functions. Such reimbursement is limited to an
amount no greater than $18.00 times the average number of accounts at the end of
each quarter during the year. During the year ended December 31, 1997, the Trust
incurred expenses of $721,790 in connection with such services rendered by GIAC.
- --------------------------------------------------------------------------------
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Strategic Asset
Management
- ---------------
10
- ---------------
- --------------------------------------------------------------------------------
Value Line Strategic Asset Management Trust
- -------------------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 21.90 $ 20.27 $ 16.13 $ 17.01 $ 15.94
---------- ---------- -------- -------- --------
Income (loss) from investment
operations:
Net investment income .65 .53 .39 .26 .27
Net gains or losses on
securities (both realized
and unrealized) 2.65 2.56 4.17 (1.09) 1.62
---------- ---------- -------- -------- --------
Total from investment operations 3.30 3.09 4.56 (.83) 1.89
---------- ---------- -------- -------- --------
Less distributions:
Dividends from net investment
income (.55) (.37) (.26) (.01) (.28)
Distributions from capital gains (2.52) (1.09) (.16) (.04) (.54)
---------- ---------- -------- -------- --------
Total distributions (3.07) (1.46) (.42) (.05) (.82)
---------- ---------- -------- -------- --------
Net asset value, end of year $ 22.13 $ 21.90 $ 20.27 $ 16.13 $ 17.01
========== ========== ======== ======== ========
Total return** 15.66% 15.87% 28.54% -4.88% 11.86%
========== ========== ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of period (in
thousands) $1,196,589 $1,072,785 $876,509 $662,721 $615,648
Ratio of operating expenses to
average net assets .59%(1) .58%(1) .60% .60% .61%
Ratio of net investment income to
average net assets 3.08% 2.70% 2.18% 1.65% 1.96%
Portfolio turnover rate 58% 71% 63% 100% 110%
Average commissions paid per share
of common stock purchased/sold $ .0492 $ .0490(2) -- -- --
</TABLE>
(1) Before offset of custody credits.
(2) Disclosure effective for fiscal years beginning on or after 9/1/95.
** Total returns do not reflect the effects of charges deducted under the terms
of GIAC's variable contracts. Including such charges would reduce the total
returns for all periods shown.
See notes to financial statements.
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130
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Strategic Asset
Management
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10
---------------
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of
Value Line Strategic Asset Management Trust
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Value Line Strategic Asset
Management Trust (the "Trust") at December 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1997 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 13, 1998
- --------------------------------------------------------------------------------
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Strategic Asset
Management
- ---------------
10
- ---------------
- --------------------------------------------------------------------------------
Value Line Strategic Asset Management Trust
- -------------------------------------------
- ----------------------------
Shareholders Meeting Results (unaudited)
- ----------------------------
A special meeting of shareholders of Value Line Strategic Asset Management
Trust was held on October 30, 1997. The matters voted upon by the shareholders
and the resulting votes for each matter are presented below.
1. The election of six Trustees to serve until their successors are duly elected
and qualified.
Number of Votes:
----------------
Trustee For Withheld Broker Non-Votes*
------- --- -------- -----------------
Jean Bernhard Buttner 53,878,977 1,133,303 0
John W. Chandler 53,878,977 1,133,303 0
Leo R. Futia 53,878,977 1,133,303 0
David H. Porter 53,878,977 1,133,303 0
Paul Craig Roberts 53,878,977 1,133,303 0
Nancy-Beth Sheerr 53,878,977 1,133,303 0
2. Ratification of the selection of Price Waterhouse LLP as independent
accountants for the fiscal year ending December 31, 1997.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
52,315,878 398,070 2,398,332 0
* Broker non-votes are proxies received by the Trust from brokers or
nominees when the broker or nominee neither has received instructions from
the beneficial owner or other persons entitled to vote nor has
discretionary power to vote on a particular matter.
- --------------------------------------------------------------------------------
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133
<PAGE>
- -----------
MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
SCHEDULE OF INVESTMENTS
December 31, 1997
- ----------------------
COMMON STOCKS -- 89.4%
- ----------------------
Shares Value
- -----------------------------------------------------------
U.S. Stocks -- 82.9%
Aerospace -- 3.9%
11,760 Allied Signal, Inc. $ 457,905
1,830 General Dynamics Corp. 158,180
7,692 Lockheed Martin Corp. 757,662
2,100 Raytheon Co. 106,050
11,100 United Technologies Corp. 808,219
---------
2,288,016
---------
Agricultural Products -- 0.5%
4,900 Case Corp. 296,144
---------
Apparel and Textiles -- 0.8%
1,600 Reebok International Ltd.* 46,100
8,600 VF Corp. 395,063
---------
441,163
---------
Automotive -- 0.3%
4,800 Goodrich (BF) Co. 198,900
---------
Banks and Credit Companies -- 9.0%
1,300 Bank of New York, Inc. 75,156
1,100 Chase Manhattan Corp. 120,450
5,900 Comerica, Inc. 532,475
8,300 Firstar Corp. 352,231
500 Fleet Financial Group, Inc. 37,469
6,500 National City Corp. 427,375
4,000 Northern Trust Co. 279,000
29,500 Norwest Corp. 1,139,437
9,800 State Street Corp. 570,237
4,500 SunTrust Banks, Inc. 321,188
9,783 US Bancorp 1,095,085
4,600 Washington Mutual, Inc. 293,538
---------
5,243,641
---------
Building -- 0.6%
900 American Standard Cos., Inc.* 34,481
11,600 Sherwin Williams Co. 321,900
---------
356,381
---------
Business Machines -- 1.2%
5,680 International Business Machines Corp. 593,915
2,400 Sun Microsystems, Inc.* 95,700
---------
689,615
---------
Business Services -- 2.0%
7,930 Cendant Corp.* 272,594
5,300 Computer Sciences Corp.* 442,550
3,600 DST Systems, Inc.* 153,675
10,000 First Data Corp. 292,500
---------
1,161,319
---------
Cellular Telephones -- 0.2%
2,100 AirTouch Communications, Inc.* 87,281
---------
Chemicals -- 3.0%
10,260 Air Products & Chemicals, Inc. 843,885
9,400 DuPont (E.I.) de Nemours & Co., Inc. 564,587
6,800 Praxair, Inc. 306,000
---------
1,714,472
---------
Computer Software-Personal Computers -- 1.3%
2,400 Compaq Computer Corp. 135,450
4,600 Microsoft Corp.* 594,550
---------
730,000
---------
Computer Software-Systems -- 1.6%
2,030 BMC Software, Inc.* 133,219
12,575 Computer Associates International, Inc. 664,903
6,450 Oracle Corp.* 143,915
---------
942,037
---------
Consumer Goods and Services -- 7.0%
1,200 Clorox Co. 94,875
9,500 Colgate-Palmolive Co. 698,250
8,450 Gillette Co. 848,697
21,500 Philip Morris Cos., Inc. 974,219
4,800 Procter & Gamble Co. 383,100
11,900 Service Corp. International 439,556
14,000 Tyco International Ltd. 630,875
---------
4,069,572
---------
Containers -- 0.1%
1,800 Corning, Inc. 66,825
---------
Defense Electronics -- 0.1%
2,100 Loral Space & Communications Corp.* 45,019
---------
Electrical Equipment -- 3.2%
11,600 Cooper Industries, Inc. 568,400
8,600 General Electric Co. 631,025
9,730 Honeywell, Inc. 666,505
---------
1,865,930
---------
Electronics -- 0.2%
1,500 Intel Corp. 105,375
---------
See notes to financial statements.
- --------------------------------------------------------------------------------
134
<PAGE>
-----------
MFS Growth
with Income
Series
-----------
11
-----------
- --------------------------------------------------------------------------------
Shares Value
- ----------------------------------------------------------
Entertainment -- 0.8%
3,200 Time Warner, Inc. $ 198,400
3,100 Viacom, Inc., "B"* 128,456
2,300 Houston Industries, Inc. 131,244
----------
458,100
----------
Financial Institutions -- 3.6%
2,300 American Express Co. 205,275
6,350 Beneficial Corp. 527,844
7,000 CIT Group, Inc., "A"* 225,750
8,100 Federal Home Loan Mortgage Corp. 339,694
4,300 Household International, Inc. 548,518
3,600 Merrill Lynch & Co., Inc. 262,575
----------
2,109,656
----------
Food and Beverage Products -- 3.5%
5,990 Archer-Daniels-Midland Co. 129,908
1,800 Coca-Cola Co. 119,925
3,000 CPC International, Inc. 323,250
1,900 General Mills, Inc. 136,088
1,500 Hershey Foods Corp. 92,906
3,100 Interstate Bakeries Corp. 115,863
3,180 McCormick & Co., Inc. 89,040
2,070 Nabisco Holdings Corp. 100,266
6,200 PepsiCo., Inc. 225,912
4,250 Ralston-Purina Co. 394,984
4,900 Tyson Foods, Inc., "A" 100,450
2,600 Wrigley (William) Junior Co. 206,862
----------
2,035,454
----------
Forest and Paper Products -- 1.4%
12,760 Kimberly-Clark Corp. 629,227
3,400 Weyerhaeuser Co. 166,813
----------
796,040
----------
Insurance -- 9.4%
4,100 AFLAC, Inc. 209,613
8,000 Allstate Corp. 727,000
8,100 Chubb Corp. 612,562
4,345 CIGNA Corp. 751,957
1,900 Conseco, Inc. 86,331
9,040 Hartford Financial Services
Group, Inc. 845,805
2,700 Lincoln National Corp. 210,937
2,540 MBIA, Inc. 169,704
5,700 Progressive Corp. Ohio 683,287
14,300 Torchmark Corp. 601,494
1,800 Transamerica Corp. 191,700
6,999 Travelers Group, Inc. 377,044
----------
5,467,434
----------
Machinery -- 0.7%
1,900 Deere & Co., Inc. 110,794
5,350 Ingersoll Rand Co. 216,675
2,700 York International Corp. 106,819
----------
434,288
----------
Medical and Health Products -- 6.6%
700 American Home Products Corp. 53,550
17,460 Bristol-Myers Squibb Co. 1,652,152
4,500 Eli Lilly & Co. 313,313
7,100 Johnson & Johnson 467,713
2,000 McKesson Corp. 216,375
1,700 Merck & Co., Inc. 180,625
7,300 Pfizer, Inc. 544,306
1,600 Pharmacia & Upjohn, Inc. 58,600
2,799 Warner-Lambert Co. 347,076
----------
3,833,710
----------
Medical and Health Technology and
Services -- 2.8%
1,300 Cardinal Health, Inc. 97,663
4,900 Columbia/HCA Healthcare Corp. 145,162
100 Fresenius National Medical Care, Inc.* 7
5,000 HEALTHSOUTH Corp.* 138,750
1,900 Medtronic, Inc. 99,394
3,600 St. Jude Medical, Inc.* 109,800
13,700 Tenet Healthcare Corp.* 453,812
11,180 United Healthcare Corp. 555,506
----------
1,600,094
----------
Metals and Minerals -- 0.2%
2,200 Phelps Dodge Corp. 136,950
----------
Oils -- 3.3%
3,900 Chevron Corp. 300,300
9,400 Exxon Corp. 575,162
7,450 Mobil Corp. 537,797
5,540 Texaco, Inc. 301,238
6,300 USX-Marathon Group 212,625
----------
1,927,122
----------
Pollution Control -- 1.1%
9,000 Browning Ferris Industries,
Inc 333,000
See notes to financial statements.
- --------------------------------------------------------------------------------
135
<PAGE>
- -----------
MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
SCHEDULE OF INVESTMENTS (continued)
December 31, 1997
Shares Value
- ---------------------------------------------------------
10,100 Waste Management, Inc. $ 277,750
-----------
610,750
-----------
Printing and Publishing -- 1.5%
6,100 Gannett Co., Inc. 377,056
8,200 Tribune Co. 510,450
-----------
887,506
-----------
Railroads -- 1.4%
7,000 Burlington Northern Santa Fe
Railway Co. 650,563
2,700 CSX Corp. 145,800
-----------
796,363
-----------
Stores -- 3.6%
3,700 CVS Corp. 237,031
6,500 Home Depot, Inc. 382,687
3,600 Liz Claiborne, Inc. 150,525
5,400 Office Depot, Inc.* 129,262
10,300 Penney (J.C.), Inc. 621,219
5,700 Rite Aid Corp. 334,519
5,300 Wal-Mart Stores, Inc. 209,019
-----------
2,064,262
-----------
Supermarkets -- 1.4%
5,960 Kroger Co.* 220,148
8,912 Safeway, Inc.* 563,684
-----------
783,832
-----------
Telecommunications -- 0.8%
5,600 AT&T Corp. 343,000
2,550 Cisco Systems, Inc.* 142,163
-----------
485,163
-----------
Utilities - Electric -- 2.3%
6,600 Cinergy Corp. 252,862
1,800 CMS Energy Corp. 79,313
1,900 DPL, Inc. 54,625
2,575 Duke Energy Corp. 142,591
2,800 Edison International 76,125
3,900 FPL Group, Inc. 230,831
1,800 New Century Energies, Inc. 86,287
13,400 Pacificorp 365,987
1,700 Pinnacle West Capital Corp. 72,038
-----------
1,360,659
-----------
Utilities - Gas -- 0.4%
1,150 Columbia Gas System, Inc. 90,347
1,300 KN Energy, Inc. 70,200
1,800 Pacific Enterprises 67,725
-----------
228,272
-----------
Utilities - Telephone -- 3.1%
4,300 BellSouth Corp. 242,144
3,950 GTE Corp. 206,388
12,100 MCI Communications Corp. 518,031
3,700 SBC Communications, Inc. 271,025
9,300 Sprint Corp. 545,212
-----------
1,782,800
-----------
Total U.S. Stocks $48,100,145
-----------
Foreign Stocks -- 6.5%
Canada -- 0.6%
7,900 Canadian National Railway Co.
(Railroads) 373,275
France -- 0.6%
1,400 Sanofi (Medical and Health Products) 155,917
7,100 Alcatel Alsthom, ADR
(Telecommunications) 179,719
-----------
335,636
-----------
Germany -- 0.3%
2,800 Henkel Kgaa (Chemicals) 176,850
-----------
Netherlands -- 1.0%
2,300 Akzo Nobel N.V. (Chemicals) 396,920
2,900 Royal Dutch Petroleum Co.,
ADR (Oils) 157,144
-----------
554,064
-----------
Sweden -- 0.7%
7,200 Skandia Forsakrings AB (Insurance) 340,025
3,800 Sparbanken Sverige AB, "A"
(Banks and Credit Cos.) 86,495
-----------
426,520
-----------
Switzerland -- 0.9%
330 Novartis AG (Pharmaceuticals) 536,383
United Kingdom -- 2.4%
11,369 British Petroleum PLC, ADR (Oils) 905,967
18,968 Lloyds TSB Group PLC (Banks and
Credit Cos.)* 247,141
See notes to financial statements
- --------------------------------------------------------------------------------
136
<PAGE>
-----------
MFS Growth
with Income
Series
-----------
11
-----------
Shares Value
- --------------------------------------------------------
17,979 PowerGen PLC (Utilities-Electric)* $ 234,238
-----------
1,387,346
-----------
Total Foreign Stocks $ 3,790,074
-----------
Total Stocks (Identified Cost, $46,634,340) $51,890,219
-----------
- -------------------------
Convertible Bond -- 0.1 %
- -------------------------
- --------------------------------------------------------
Principal
Amount
(000 Omitted)
- --------------------------------------------------------
$ 20 Sandoz Capital BVI Ltd.,
2s, 2002 (Chemicals)##,
(Identified Cost $27,400) $ 30,700
-----------
- -------------------------------------
Convertible Preferred Stocks -- 0.2 %
- -------------------------------------
Shares
- --------------------------------------------------------
U.S. Stocks -- 0.2%
Consumer Goods and Services -- 0.2%
2,700 Newell Financial Trust Co.,
(Industrial)##*, (Identified
Cost, $135,000) $ 140,738
-----------
- ---------------------------------
Short - Term Obligations -- 8.8 %
- ---------------------------------
Principal
Amount
(000 Omitted)
- --------------------------------------------------------
$ 5,100 Federal Home Loan Bank,
due 1/02/98, at Amortized
Cost $ 5,099,327
-----------
Total Investments (Identified
Cost, $51,896,067) $57,160,984
Other Assets Less Liabilities -- 1.5% 884,086
-----------
Net Assets -- 100.0% $58,045,070
===========
* Non-income producing security.
## SEC Rule 144A restriction.
See notes to financial statements
- --------------------------------------------------------------------------------
137
<PAGE>
- -----------
MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1997
ASSETS:
Investments, at value
(identified cost, $51,896,067) $ 57,160,984
Cash 82,844
Receivable for Series shares sold 918,417
Interest and dividends receivable 74,805
Deferred organization expenses 5,087
Other assets 81
------------
TOTAL ASSETS $ 58,242,218
------------
LIABILITIES:
Payable for Series shares reacquired $ 193,723
Payable to affiliate for management fee 1,175
Accrued expenses and other liabilities 2,250
------------
TOTAL LIABILITIES $ 197,148
------------
NET ASSETS $ 58,045,070
============
NET ASSETS CONSIST OF:
Paid-in capital $ 52,936,361
Unrealized appreciation on investments and
translation of assets and liabilities in
foreign currencies 5,264,852
Accumulated distributions in excess of net
realized gain on investments and foreign
currency transactions (156,143)
------------
TOTAL $ 58,045,070
============
SHARES OF BENEFICIAL
INTEREST OUTSTANDING 3,530,696
============
NET ASSET VALUE PER SHARE
(net assets of $58,045,070 / 3,530,696
shares of beneficial interest outstanding) $ 16.44
============
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
NET INVESTMENT INCOME:
Income:
Dividends $ 391,447
Interest 97,306
Foreign taxes withheld (3,093)
------------
Total Investment Income $ 485,660
------------
Expenses:
Management fee $ 188,365
Administrative fee 3,085
Trustees' compensation 2,033
Shareholder servicing agent fee 8,762
Printing 30,580
Auditing fee 28,561
Custodian fee 14,295
Amortization of organization expenses 1,837
Legal fee 1,482
------------
Total Expenses $ 279,000
Fees paid indirectly (925)
Reduction of expenses by investment adviser (26,920)
------------
Net Expenses $ 251,155
------------
Net Investment Income $ 234,505
------------
Realized and Unrealized Gain (Loss) on
Investments:
Realized gain (loss) (identified cost basis):
Investment transactions $ 963,780
Foreign currency transactions (982)
------------
Net Realized Gain on Investments and
Foreign Currency Transactions $ 962,798
------------
Change in unrealized appreciation
(depreciation):
Investments $ 4,430,109
Translation of assets and liabilities
in foreign currencies (71)
------------
Net Unrealized Gain on Investments and
Foreign Currency Translation $ 4,430,038
------------
Net Realized and Unrealized Gain on
Investments and Foreign Currency $ 5,392,836
------------
Increase in Net Assets from Operations $ 5,627,341
============
See notes to financial statements.
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138
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MFS Growth
with Income
Series
-----------
11
-----------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31,
1997 1996
----------- ----------
From Operations:
Net investment income $ 234,505 $ 61,789
Net realized gain on investments
and foreign currency transactions 962,798 85,828
Net unrealized gain on investments
and foreign currency translation 4,430,038 814,062
----------- ----------
Increase in net assets from operations $ 5,627,341 $ 961,679
----------- ----------
Distributions declared to Shareholders:
From net investment income $ (236,004) $ (60,288)
From net realized gain on investments
and foreign currency transactions (962,798) (85,828)
In excess of net investment income (501) --
In excess of net realized gain on
investments and foreign currency
transactions (143,538) (10,368)
----------- ----------
Total distributions declared to
shareholders $(1,342,841) $ (156,484)
----------- ----------
Net Increase in Net Assets from Series
Share Transactions $44,586,457 $8,004,095
----------- ----------
Total increase in net assets $48,870,957 $8,809,290
Net Assets:
At beginning of period 9,174,113 364,823
----------- ----------
At end of period (including
undistributed net investment income
of $0 and $1,499, respectively) $58,045,070 $9,174,113
=========== ==========
See notes to financial statements.
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139
<PAGE>
- -----------
MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ------------------------------
1 -- Business and Organization
- ------------------------------
MFS Growth with Income Series (the Series) is a diversified series of MFS
Variable Insurance Trust (the Trust) which is comprised of the following 12
series: MFS(R) Bond Series, MFS(R) Emerging Growth Series, MFS(R)/Foreign &
Colonial Emerging Markets Equity Series, MFS Growth with Income Series, MFS(R)
High Income Series, MFS(R) Limited Maturity Series, MFS(R) Money Market Series,
MFS(R) Research Series, MFS(R) Total Return Series, MFS(R) Utilities Series,
MFS(R) Value Series, and MFS(R) World Government Series. The Series is organized
as a Massachusetts business Trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end management investment company.
The shareholders of each Series of the Trust are separate accounts of
insurance companies which offer variable annuity and/or life insurance products.
As of December 31, 1997, there were 25 shareholders of the Series.
- ------------------------------------
2 -- Significant Accounting Policies
- ------------------------------------
General
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations
Equity securities listed on securities exchanges or reported through the
NASDAQ system reported at market value using last sale prices. Unlisted equity
securities or listed equity securities for which last sale prices are not
available are reported at market value using last quoted bid prices. Debt
securities (other than short-term obligations which mature in 60 days or less),
including listed issues and forward contracts, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics,
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Securities
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
Foreign Currency Translation
Investment valuations, other assets, and liabilities initially expressed
in foreign currencies are converted each business day into U.S. dollars based
upon current exchange rates. Purchases and sales of foreign investments, income,
and expenses are converted into U.S. dollars based upon currency exchange rates
prevailing on the respective dates of such transactions. Gains and losses
attributable to foreign currency exchange rates on sales of securities are
recorded for financial statement purposes as net realized gains and losses on
investments. Gains and losses attributable to foreign exchange rate movements on
income and expenses are
- --------------------------------------------------------------------------------
140
<PAGE>
-----------
MFS Growth
with Income
Series
-----------
11
-----------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
recorded for financial statement purposes as foreign currency transaction gains
and losses. That portion of both realized and unrealized gains and losses on
investments that result from fluctuations in foreign currency exchange rates is
not separately disclosed.
Deferred Organization Expenses
Costs incurred by the Series in connection with its organization have been
deferred and are being amortized on a straight-line basis over a five-year
period beginning on the date of commencement of Series operations.
Forward Foreign Currency Exchange Contracts
The Series may enter into forward foreign currency exchange contracts for
the purchase or sale of a specific foreign currency at a fixed price on a future
date. Risks may arise upon entering into these contracts from the potential
inability of counterparties to meet the terms of their contracts and from
unanticipated movements in the value of a foreign currency relative to the U.S.
dollar. The Series will enter into forward contracts for hedging purposes as
well as for nonhedging purposes. For hedging purposes, the Series may enter into
contracts to deliver or receive foreign currency it will receive from or require
for its normal investment activities. The Series may also use contracts in a
manner intended to protect foreign-currency-denominated securities from declines
in value due to unfavorable exchange rate movements. For nonhedging purposes,
the Series may enter into contracts with the intent of changing the relative
exposure of the Series' portfolio of securities to different currencies to take
advantage of anticipated changes. The forward foreign currency exchange
contracts are adjusted by the daily exchange rate of the underlying currency and
any gains or losses are recorded for financial statement purposes as unrealized
until the contract settlement date. On contract settlement date the gains or
losses are recorded as realized gains or losses on foreign currency
transactions.
Investment Transactions and Income
Investment transactions are recorded on the trade date. Interest income is
recorded on the accrual basis. All premium and original issue discount is
amortized or accreted for financial statement and tax reporting purposes as
required by federal income tax regulations. Dividends received in cash are
recorded on the ex-dividend date. Dividend and interest payments received in
additional securities are recorded on the ex-dividend or ex-interest date in an
amount equal to the value of the security on such date.
Fees Paid Indirectly
The Series' custody fee is calculated as a percentage of the Series'
average daily net assets. The fee is reduced according to an arrangement that
measures the value of cash deposited with the custodian by the Series. This
amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions
The Series' policy is to comply with the provisions of the Internal
Revenue Code (the Code) applicable to regulated investment companies and to
distribute to shareholders all of its taxable income, including any net realized
gain on investments. Accordingly, no provision for federal income or excise tax
is provided. The Series files a tax return annually using tax accounting methods
required under provisions of the Code which may differ from generally accepted
accounting principles, the basis on which these financial statements are
prepared. Accordingly, the amount
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141
<PAGE>
- -----------
MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
of net investment income and net realized gain reported on these financial
statements may differ from that reported on the Series' tax return.
Distributions to shareholders are recorded on the ex-dividend date. The
Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
overdistributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended December 31, 1997, accumulated distributions in
excess of net investment income was decreased by $501, accumulated distributions
in excess of net realized gain on investments was increased by $2,184, and paid
in capital was increased by $1,683 due to differences between book and tax
accounting for currency transactions. This change had no effect on the net
assets or net asset value per share. At December 31, 1997, accumulated net
realized gain on investments and foreign currency transactions under book
accounting were different from tax accounting due to temporary differences in
accounting for losses on wash sale transactions.
- ---------------------------------
3 -- Transactions with Affiliates
- ---------------------------------
Investment Adviser
The Series has an investment advisory agreement with Massachusetts
Financial Services Company (MFS) to provide overall investment advisory and
administrative services, and general office facilities. The management fee is
computed daily and paid monthly at an effective annual rate of 0.75% of average
daily net assets. The Series has a temporary expense reimbursement agreement
whereby MFS has voluntarily agreed to pay all of the Series' operating expenses,
exclusive of management fees. The Series in turn will pay MFS an expense
reimbursement fee not greater than 0.25% of average daily net assets. To the
extent that the expense reimbursement fee exceeds the Series' actual expenses,
the excess will be applied to amounts paid by MFS in prior years. At December
31, 1997, the aggregate unreimbursed expenses owed to MFS by the Series amounted
to $85,624.
Administrator
Effective March 1, 1997, the Series has an administrative services
agreement with MFS to provide the Series with certain financial, legal,
shareholder servicing, compliance, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Series pays
MFS an administrative fee at the following annual percentage of the Series'
average daily net assets, provided that the administrative fee is not assessed
on Series assets that exceed $3 billion.
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
The Series pays no compensation directly to its Trustees who are officers
of the investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC).
Shareholder Servicing Agent
MFSC, a wholly owned subsidiary of MFS, earns a
- --------------------------------------------------------------------------------
142
<PAGE>
-----------
MFS Growth
with Income
Series
-----------
11
-----------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the Series' average daily net assets at an effective annual rate
of 0.035%.
- -------------------------
4 -- Portfolio Securities
- -------------------------
Purchases and sales of investments, other than purchased option
transactions and short-term obligations, aggregated $48,687,816 and $9,921,926,
respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Series, as computed on a federal income tax basis, are
as follows:
Aggregate cost $52,030,294
-----------
Gross unrealized appreciation $ 6,084,282
Gross unrealized depreciation (953,592)
-----------
Net unrealized appreciation $ 5,130,690
-----------
- ----------------------------------
5 -- Shares of Beneficial Interest
- ----------------------------------
The Series' Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest (without
par value). Transactions in Series shares were as follows:
Year Ended Year Ended
12/31/97 12/31/96
-------- --------
Shares Amount Shares Amount
------ ------ ------ ------
Shares sold 3,352,466 $52,088,626 720,635 $8,604,219
Shares issued to
shareholders in
reinvestment of
distributions 83,407 1,342,851 11,899 156,483
Shares reacquired (611,729) (8,845,020) (60,384) (756,607)
--------- ----------- ------- ----------
Net increase 2,824,144 $44,586,457 672,150 $8,004,095
========= =========== ======= ==========
- -------------------
6 -- Line of Credit
- -------------------
The Series and other affiliated funds participate in a $400 million
unsecured line of credit provided by a syndication of banks under a line of
credit agreement. Borrowings may be made to temporarily finance the repurchase
of Series shares. Interest is charged to each fund, based on its borrowings, at
a rate equal to the bank's base rate. In addition, a commitment fee, based on
the average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated to
the Series for the year ended December 31, 1997, was $195.
- --------------------------------------------------------------------------------
143
<PAGE>
- -----------
MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
FINANCIAL HIGHLIGHTS
Per share data (for a share outstanding throughout each period):
Year Ended December 31,
----------------------- Period Ended
1997 1996 December 31 1995*
- --------------------------------------------------------------------------------
Net asset value, beginning of period $ 12.98 $ 10.61 $10.00
------- ------- ------
Income from investment operations#:
Net investment income ss. $ 0.16 $ 0.18 $ 0.05
Net realized and unrealized gain on
investments and foreign currency
transactions 3.70 2.42 0.61
------- ------- ------
Total from investment operations $ 3.86 $ 2.60 $ 0.66
------- ------- ------
Less distributions declared to
shareholders:
From net investment income $ (0.07) $ (0.09) $(0.05)
From net realized gain on investments
and foreign currency transactions (0.29) (0.13) --
In excess of net realized gain on
investments and foreign currency
transactions (0.04) (0.01) --
------- ------- ------
Total distributions declared to
shareholders $ (0.40) $ (0.23) $(0.05)
------- ------- ------
Net asset value, end of period $ 16.44 $ 12.98 $10.61
======= ======= ======
Total return 29.78% 24.46% 6.64%++
Ratios (to average net assets)/
Supplemental Data ss.:
Expenses 1.00% 1.00% 1.00%+
Net investment income 0.93% 1.52% 2.20%+
Portfolio turnover 42% 41% 2%
Average commission rate### $0.0455 $0.0351 $ --
Net assets at end of period (000 Omitted) $58,045 $ 9,174 $ 365
* For the period from the commencement of the Series' investment operations,
October 9, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series' expenses are calculated wihtout reduction for fees paid
indirectly.
### Average commission rate is calculated for Series with fiscal years
beginning on or after September 1, 1995.
ss. The Adviser voluntarily agreed to maintain the expenses of the Series at
not more than 1.00% of average daily net assets. To the extent actual
expenses were over these limitations, the net investment income (loss) per
share and the ratios would have been:
Net investment income (loss) $0.13 $0.05 $ (0.41)
Ratios (to average net assets):
Expenses## 1.10% 2.07% 21.44%+
Net investment income (loss) 0.82% 0.46% (18.24)%+
See notes to financial statements.
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144
<PAGE>
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MFS Growth
with Income
Series
-----------
11
-----------
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of MFS Variable Insurance Trust and Shareholders of MFS Growth
with Income Series:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Growth with Income Series (the Series) (one
of the series constituting the MFS Variable Insurance Trust) as of December 31,
1997, the related statement of operations for the year then ended, the
statements of changes in net assets for the two years then ended, and financial
highlights for the two years ended December 31, 1997, and the period from
October 9, 1995 (the commencement of investment operations) to December 31,
1995. These financial statements and financial highlights are the responsibility
of the Series' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
December 31, 1997 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Growth with
Income Series at December 31, 1997, the results of its operations, the changes
in its net assets, and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 6, 1998
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145
<PAGE>
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