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TABLE OF CONTENTS
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THE GUARDIAN PARK AVENUE FUND
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PORTFOLIO MANAGERS INTERVIEW 2
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FUND PROFILE 4
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THE GUARDIAN VARIABLE ACCOUNT 1 6
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THE GUARDIAN VARIABLE ACCOUNT 2 7
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COMBINED NOTES TO FINANCIAL STATEMENTS 8
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THE GUARDIAN PARK AVENUE FUND
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SCHEDULE OF INVESTMENTS 11
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FINANCIAL STATEMENTS 15
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NOTES TO FINANCIAL STATEMENTS 17
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FINANCIAL HIGHLIGHTS 21
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THE GUARDIAN PARK AVENUE FUND
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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: June 1, 1972
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NET ASSETS AT DECEMBER 31, 1998: $3,380,256,722
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"WE BELIEVE THAT THE BEST WAY TO ACHIEVE CONSISTENTLY OUTSTANDING RETURNS
IS TO COMBINE TRIED AND TESTED QUANTITATIVE TOOLS WITH GOOD INVESTMENT
JUDGMENTS."
--Larry Luxenberg, C.F.A.
Co-Portfolio Manager
--John B. Murphy, C.F.A.
Co-Portfolio Manager
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank or depository institution, nor are they federally insured
by the Federal Deposit Insurance Corporation, The Federal Reserve Board, or any
other agency. They involve investment risk, including possible loss of principal
amount invested.
<PAGE>
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THE GUARDIAN PARK AVENUE FUND
- --------------------------------
[PHOTO OMITTED] [PHOTO OMITTED]
Larry Luxenberg, C.F.A. John B. Murphy, C.F.A.
Co-Portfolio Manager Co-Portfolio Manager
Q. HOW DID THE FUND PERFORM IN 1998?
A. For an unprecedented fourth consecutive year, The Guardian Park Avenue Fund
had a return of more than 20%. The Fund earned a total return of 21.30%,(1) as
compared with a total return of 28.58% for the S&P 500 Index.(2) 1998 was a year
of political and economic turbulence, and investors were filled with optimism in
the beginning and at the end of the year. In between, there was also extreme
volatility and highly divergent returns among different types of stocks. In the
space of three months, most major market indices dropped close to 20% and then
rallied 20%. Those two moves were the quickest of that size in modern market
history.
The gains in the market occurred in an extremely narrow range of stocks.
According to a Salomon Smith Barney report,(3) only 12 stocks accounted for half
the gain in the S&P 500 Index, which is weighted by the market capitalization of
the companies included in the index. Similarly, while the S&P 500 returned
28.58%, the average stock in the index was up only 10.95%, according to a
Merrill Lynch research report.(4) Even more startling, in a year in which the
major averages set all time record highs, more than half of the New York Stock
Exchange and NASDAQ stocks ended the year down.
Q. WHAT FACTORS AFFECTED FUND PERFORMANCE IN 1998?
A. The Fund generated a good absolute return and also did well compared to other
funds in its peer group. According to Lipper Analytical Services,(5) the
performance for the average U.S. equity mutual fund was 14.52%. However, the
Fund did underperform the S&P 500 by seven percentage points. We attribute the
slippage largely to the extreme concentration of returns among a handful of
stocks in the S&P 500.
Over the twenty-six year history of the Fund, we have always attempted to
produce consistent as well as outstanding returns. To do that, we run a
diversified Fund, which at year-end had in excess of 270 stocks.
Helping performance during the year was our quantitative work on specific
stocks as well as our internal assessment that 1998 would be another good year
for large-cap stocks, generally. At year-end 1998, the Fund's overall
investments reflected a weighted market capitalization two-thirds as large as
that of the S&P 500. We gradually increased the weighting all year, reaching
near parity with the S&P 500 by the end of September and keeping at that level
through year-end.
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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. Total
return represents total return for Class A shares -- returns for Class B
shares would be lower to reflect higher operating expenses associated with
the B share class. Total return figures do not take into account the
current maximum sales charge except where noted. Returns represent past
performance and are not a guarantee of future results. Investment return
and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than the original cost. Prior to
August 25, 1988, shares of the Fund were offered at a higher sales charge,
so that actual returns would have been somewhat lower.
(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. Likewise, return figures for the S&P 500 Index do not reflect
any sales charges that an investor may have to pay when purchasing or
redeeming shares of the Fund.
(3) "Equity Strategy," John L. Manley, December 23, 1998.
(4) "Performance Monitor," Richard Bernstein, January 1999.
(5) 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 charges, and performance would be
different if sales charges were deducted.
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2
<PAGE>
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Finally, we also remained committed to growth stocks all year and
continually pared our holdings in sectors exposed to commodity prices (such as
energy and metals), many of which plunged to quarter century lows.
Q. WHAT STRATEGIES DO YOU USE TO MANAGE THE FUND?
A. There was no change in our strategic approach during the year. We rely on a
combination of quantitative techniques and our own fundamental judgments. We
believe that the best way to achieve consistently outstanding returns is to
combine tried and tested quantitative tools with good investment judgments.
Our quantitative work combines a cluster of approaches. We look at the
portfolio from a top-down view as well as from the bottom up. Finally, we are
continually refining our tools to deal with the increasing risk and volatility
in the capital markets. Our top-down approach involves a number of different
predictive models that we use to identify which portfolio styles are most likely
to do well. The bottom-up approach uses a multi-factor stock scoring system to
identify specific attractive stocks within our 2200-stock research universe.
Q. WHAT DO YOU ENVISION FOR THE STOCK MARKET IN 1999?
A. As the year begins, we see continued conflicting forces. The valuation of the
market is high, by many measures the highest in modern stock market history.
Inflation remains low with even modest doses of deflation possible. The U.S.
economy remains strong, although corporate profits are weakening. But around the
world, many economies are still under great stress. In combination, we expect
these forces to produce continued high volatility for the market but we plan to
stick to the approach and methodologies that have served the Fund well in the
past. We believe these methodologies will help us to achieve superior
performance.
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3
<PAGE>
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THE GUARDIAN PARK AVENUE FUND PROFILE
AS OF DECEMBER 31, 1998
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- ---------------------------------------
TOP 10 HOLDINGS AS OF 12/31/98
- ---------------------------------------
1. Microsoft Corp. 4.44%
- ---------------------------------------
2. Int'l. Business Machines 3.29%
- ---------------------------------------
3. Pfizer, Inc. 3.28%
- ---------------------------------------
4. General Electric Co. 3.01%
- ---------------------------------------
5. BellSouth Corp. 2.53%
- ---------------------------------------
6. Wal-Mart Stores, Inc. 2.41%
- ---------------------------------------
7. Bristol-Myers Squibb Corp. 2.39%
- ---------------------------------------
8. Ford Motor Co. 2.14%
- ---------------------------------------
9. MCI WorldCom, Inc. 1.92%
- ---------------------------------------
10. Merck & Co., Inc. 1.91%
- ---------------------------------------
For a complete list of portfolio
holdings, please see the Schedule of
Investments.
- ---------------------------------------
SECTOR WEIGHTINGS OF
COMMON STOCKS HELD
BY THE FUND ON DECEMBER 31, 1998
[The following table was depicted as a pie chart in the printed material.]
Basic Industries 0.55%
Credit Cyclicals 1.25%
Transportation 2.60%
Energy 3.37%
Capital Goods 4.00%
Capital Goods/Technology 24.23%
Consumer Services 6.38%
Utilities 14.44%
Consumer Staples 20.03%
Financial 10.32%
Consumer Cyclical 12.38%
Conglomerates 0.45%
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS(1) FOR PERIODS ENDED 12/31/98
- ---------------------------------------------------------------------------------------------
Inception Since
Date 1 Year 5 Years 10 Years Inception
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares (with sales charge) 6/1/72 15.84% 21.20% 18.71% 16.72%
At Net Asset Value (without sales charge) 21.30% 22.32% 19.26% 16.92%
- ---------------------------------------------------------------------------------------------
Class B Shares (with sales charge) 5/1/96 17.18% N/A N/A 26.31%
At Net Asset Value (without sales charge) 20.16% N/A N/A 26.82%
- ---------------------------------------------------------------------------------------------
S&P 500 Index 28.58% 23.96% 19.10% 13.56%
(6/1/72)
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. Total
return figures for Class A shares do not take into account the current
maximum sales charge of 4.5%, except where indicated. Prior to August 25,
1988, Class A shares of the Fund were offered at a higher sales charge, so
actual returns would have been somewhat lower. Total return figures for
Class B shares do not take into account the contingent deferred sales
charge applicable to such shares (maximum of 3%), except where noted.
Returns represent past performance and are not a guarantee of future
results. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than the
original cost.
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4
<PAGE>
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GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
[GRAPHICAL REPRESENTATION OF MOUNTAIN CHART]
The Guardian Lipper U.S.
Park Avenue Fund S&P 500 Equity Growth Cost of
(Class A) Index Fund Average Living
----------- ----------- ----------- -----------
6/1/72 1 9550 1 10000 1 10000 1 10000
2 9352 2 9791 2 9746 2 10072
3 9495 3 10173 3 9548 3 10169
1972 4 9919 4 10936 4 10002 4 10266
5 8954 5 10404 5 8773 5 10483
6 7758 6 9802 6 7699 6 10676
7 9104 7 10271 7 8788 7 10918
1973 8 8355 8 9320 8 7686 8 11184
9 8898 9 9061 9 7492 9 11546
10 8095 10 8376 10 6661 10 11836
11 6816 11 6276 11 5224 11 12222
1974 12 7016 12 6861 12 5701 12 12536
13 9052 13 8434 13 7001 13 12754
14 10222 14 9724 14 8176 14 12923
15 9524 15 8662 15 7174 15 13188
1975 16 10311 16 9410 16 7588 16 13430
17 12315 17 10819 17 8924 17 13527
18 12926 18 11077 18 9084 18 13696
19 13570 19 11281 19 9043 19 13913
1976 20 14713 20 11627 20 9483 20 14106
21 14576 21 10762 21 8951 21 14396
22 15548 22 11107 22 9480 22 14614
23 15170 23 10794 23 9340 23 14807
1977 24 15894 24 10765 24 9674 24 15048
25 16186 25 10235 25 9527 25 15314
26 17952 26 11100 26 10724 26 15700
27 19593 27 12062 27 11821 27 16063
1978 28 18195 28 11455 28 11002 28 16401
29 19967 29 12263 29 11945 29 16884
30 20459 30 12583 30 12544 30 17440
31 22475 31 13535 31 13793 31 17971
1979 32 23489 32 13539 32 14501 32 18575
33 22448 33 12987 33 13536 33 19348
34 24637 34 14722 34 15484 34 19928
35 27183 35 16363 35 18053 35 20266
1980 36 28544 36 17908 36 19852 36 20870
37 30553 37 18146 37 20432 37 21401
38 30553 38 17726 38 20347 38 21860
39 28041 39 15910 39 17993 39 22488
1981 40 30196 40 17010 40 19380 40 22729
41 28244 41 15773 41 18074 41 22874
42 28221 42 15682 42 18100 42 23430
43 32078 43 17473 43 20123 43 23599
1982 44 37863 44 20656 44 24326 44 23599
45 42172 45 22720 45 27061 45 23696
46 49604 46 25228 46 30611 46 24010
47 48521 47 25185 47 29869 47 24251
1983 48 48698 48 25281 48 29333 48 24493
49 46645 49 24675 49 27414 49 24855
50 47823 50 24028 50 26721 50 25048
51 53052 51 26344 51 28574 51 25290
1984 52 54864 52 26823 52 28930 52 25483
53 61530 53 29283 53 31492 53 25797
54 65012 54 31410 54 33601 54 25966
55 60468 55 30132 55 32193 55 26111
1985 56 72960 56 35290 56 37156 56 26449
57 87231 57 40238 57 42720 57 26353
58 93553 58 42592 58 44999 58 26425
59 82542 59 39627 59 41062 59 26570
1986 60 86371 60 41842 60 42571 60 26763
61 106898 61 50759 61 51317 61 27126
62 104621 62 53272 62 52563 62 27400
63 111995 63 56777 63 55749 63 27729
1987 64 88927 64 43977 64 44085 64 27947
65 100335 65 46480 65 47392 65 28164
66 107311 66 49515 66 50056 66 28502
67 105853 67 49563 67 49730 67 28913
1988 68 107404 68 51158 68 50482 68 19179
69 117426 69 54775 69 54123 69 29656
70 124277 70 59546 70 58562 70 29976
71 135522 71 65881 71 64497 71 30169
1989 72 133003 72 67206 72 63984 72 30531
73 131154 73 65183 73 62581 73 31087
74 131990 74 69211 74 67101 74 31401
75 111333 75 59736 75 56465 75 32029
1990 76 116611 76 65046 76 61087 76 32415
77 138452 77 74504 77 71872 77 32633
78 136860 78 74303 78 71176 78 32874
79 149259 79 78263 79 76341 79 33116
1991 80 157618 80 84775 80 83235 80 33382
81 162078 81 82672 81 82319 81 33647
82 159469 82 84210 82 80113 82 33889
83 167044 83 86846 83 82496 83 34106
1992 84 189879 84 91214 84 89848 84 34396
85 208278 85 95200 85 92144 85 34686
86 215651 86 95619 86 92749 86 34879
87 234327 87 98067 87 97203 87 35048
1993 88 228375 88 100342 88 99458 88 35338
89 221843 89 96569 89 96044 89 35556
90 219203 90 96936 90 93504 90 35773
91 227686 91 101657 91 98580 91 36087
1994 92 225091 92 101617 92 97271 92 36280
93 245506 93 111514 93 104431 93 36546
94 271285 94 122063 94 114202 94 36836
95 298576 95 131706 95 123909 95 37005
1995 96 302248 96 139569 96 126735 96 37126
97 317905 97 147050 97 133553 97 37585
98 334627 98 153579 98 139376 98 37850
99 348213 99 158217 99 143418 99 38019
1996 100 382268 100 171365 100 150775 100 38331
101 386091 101 176009 101 148815 101 38712
102 452576 102 206652 102 172283 102 39010
103 502902 103 222048 103 190631 103 39400
1997 104 515475 104 228376 104 188286 104 39873
105 570785 105 260189 105 212500 105 40271
106 586539 106 268697 106 216367 106 40497
1998 107 511638 107 241962 107 187201 107 40720
12/31/98 108 625222 108 293403 108 229378 108 40964
PERFORMANCE FOR CLASS B SHARES, WHICH WERE FIRST OFFERED ON MAY 1, 1996, WILL
VARY DUE TO DIFFERENCES IN SALES LOAD AND OTHER EXPENSES CHARGED TO SUCH SHARE
CLASS.
A hypothetical $10,000 investment in Class A shares made at the inception of The
Guardian Park Avenue Fund on June 1, 1972 has a starting point of $9,550, which
reflects the current maximum sales charge for Class A shares of 4.5%. This
investment would have grown to $625,222 on December 31, 1998. 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 $293,403. The Fund also fared well relative to
other U.S. growth funds. The average return of U.S. equity growth funds reported
by Lipper Analytical Services, Inc. measures the performance of other funds with
investment objectives and policies similar to those of The Guardian Park Avenue
Fund. The average of U.S. growth funds on the same $10,000 investment over the
same time period would have been $229,378. 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.
- --------------------------------------------------------------------------------
5
<PAGE>
THE GUARDIAN VARIABLE ACCOUNT 1
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Investment in The Guardian Park Avenue Fund (1,204,029 shares at net asset
value of $51.88 per share; FIFO Cost, $32,503,852) ........................... $62,465,000
LIABILITIES
Due to The Guardian Insurance & Annuity Company, Inc. ......................... 8,338
-----------
NET ASSETS -- NOTE 3 ........................................................... $62,456,662
===========
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME
Income:
Reinvested dividends ......................................................... $ 391,431
Expense:
Mortality and expense risk charges -- Note 4 ................................. 608,665
-----------
Net investment income/(expense) ............................................... (217,234)
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) FROM INVESTMENTS
Net realized gain/(loss) from sale of investments ............................. 5,713,603
Reinvested realized gain distributions ........................................ 4,174,062
Net change in unrealized appreciation/(depreciation) of investments ............ 1,039,262
-----------
Net realized and unrealized gain/(loss) from investments ...................... 10,926,927
-----------
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ................ $10,709,693
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
INCREASE/(DECREASE) FROM OPERATIONS
Net investment income/(expense) .................................. $ (217,234) $ (266,205)
Net realized gain/(loss) from sale of investments ................ 5,713,603 4,970,257
Reinvested realized gain distributions ........................... 4,174,062 5,922,200
Change in unrealized appreciation/(depreciation) of investments .. 1,039,262 4,162,357
----------- -----------
Net increase/(decrease) resulting from operations ................ 10,709,693 14,788,609
----------- -----------
CONTRACT TRANSACTIONS
Net contract purchase payments ................................... 258,460 207,486
Redemptions and annuity benefits ................................. (4,777,478) (6,061,274)
----------- -----------
Net increase/(decrease) from contract transactions ............... (4,519,018) (5,853,788)
----------- -----------
ACTUARIAL INCREASE IN RESERVES FOR CONTRACTS IN PAYMENT PERIOD .... 247,985 163,150
----------- -----------
TOTAL INCREASE/(DECREASE) IN NET ASSETS ........................... 6,438,660 9,097,971
NET ASSETS AT DECEMBER 31, 1997 ................................... 56,018,002 46,920,031
----------- -----------
NET ASSETS AT DECEMBER 31, 1998 -- NOTE 3 ......................... $62,456,662 $56,018,002
=========== ===========
</TABLE>
See notes to financial statements.
6
<PAGE>
THE GUARDIAN VARIABLE ACCOUNT 2
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Investment in The Guardian Park Avenue Fund (373,426 shares at net asset
value of $51.88 per share; FIFO Cost, $9,681,825) ............................................ $19,373,357
-----------
LIABILITIES
Annuitant Mortality Fluctuation Fund .......................................................... 18,832
Due to The Guardian Insurance & Annuity Company, Inc. ......................................... 90,743
-----------
Total Liabilities ............................................................................. 109,575
-----------
NET ASSETS -- NOTE 3 ........................................................................... $19,263,782
===========
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME
Income:
Reinvested dividends ......................................................................... $ 121,214
Expense:
Mortality and expense risk charges -- Note 4 ................................................. 203,441
-----------
Net investment income/(expense) ............................................................... (82,227)
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) FROM INVESTMENTS
Net realized gain/(loss) from sale of investments ............................................. 1,010,169
Reinvested realized gain distributions ........................................................ 1,295,274
Net change in unrealized appreciation/(depreciation) of investments ............................ 1,054,626
-----------
Net realized and unrealized gain/(loss) from investments ...................................... 3,360,069
-----------
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ................................ $ 3,277,842
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
INCREASE/(DECREASE) FROM OPERATIONS
Net investment income/(expense) ............................................ $ (82,227) $ (92,500)
Net realized gain/(loss) from sale of investments .......................... 1,010,169 1,507,893
Reinvested realized gain distributions ..................................... 1,295,274 1,877,236
Change in unrealized appreciation/(depreciation) of investments ............ 1,054,626 1,182,665
------------ ------------
Net increase/(decrease) resulting from operations .......................... 3,277,842 4,475,294
------------ ------------
CONTRACT TRANSACTIONS
Net contract purchase payments ............................................. 146,627 5,691
Redemptions and annuity benefits ........................................... (1,116,355) (1,968,584)
------------ ------------
Net increase/(decrease) from contract transactions ......................... (969,728) (1,962,893)
------------ ------------
ACTUARIAL INCREASE IN RESERVES FOR CONTRACTS IN PAYMENT PERIOD .............. 40,423 33,419
------------ ------------
TOTAL INCREASE/(DECREASE) IN NET ASSETS ..................................... 2,348,537 2,545,820
NET ASSETS AT DECEMBER 31, 1997 ............................................. 16,915,245 14,369,425
------------ ------------
NET ASSETS AT DECEMBER 31, 1998 -- NOTE 3 ................................... $ 19,263,782 $ 16,915,245
============ ============
</TABLE>
See notes to financial statements.
7
<PAGE>
THE GUARDIAN VARIABLE ACCOUNT 1
THE GUARDIAN VARIABLE ACCOUNT 2
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 -- ORGANIZATION
The Guardian Variable Account 1 (VA-1) and The Guardian Variable Account 2
(VA-2) are registered unit investment trusts under the Investment Company Act of
1940, as amended, established by The Guardian Insurance & Annuity Company, Inc.
(GIAC). GIAC is a wholly owned subsidiary of The Guardian Life Insurance Company
of America (Guardian). The mutual fund available under the contracts supported
by VA-1 and VA-2 is The Guardian Park Avenue Fund (the Fund). The Fund has an
investment advisory agreement with Guardian Investor Services Corporation, a
wholly owned subsidiary of GIAC. The VA-2 Separate Account has two divisions,
the VA-2 Division and the VA-19 Division. All VA-2 Separate Account contract
payments received subsequent to January 1, 1981 have been allocated to the VA-19
Division.
Under applicable insurance law, the assets and liabilities of VA-1 and
VA-2 are clearly identified and distinguished from the other assets and
liabilities of GIAC. The assets of VA-1 and VA-2 will not be charged with any
liabilities arising out of any other business conducted by GIAC, but the
obligations of VA-1 and VA-2, including the promise to make annuity payments,
are obligations of GIAC.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies of both
VA-1 and VA-2.
Investments
(a) Net proceeds from the sale of variable annuity contracts are invested
in shares of the Fund at the net asset value of the Fund's shares. All
distributions made by the Fund are reinvested in shares of the Fund. (b) The
market value of investments in the Fund is based on the net asset value at the
close of the period. (c) Investment transactions are accounted for on the trade
date and income is recorded on the ex-dividend date. (d) The cost of Fund shares
sold is determined on a first in, first out (FIFO) basis.
During the years ended December 31, 1998 and December 31, 1997, VA-1
purchases of shares of the Fund aggregated $6,548,522 and $6,179,259,
respectively, and VA-2 purchases aggregated $1,592,765 and $1,816,188,
respectively. Aggregate sales of shares of the Fund amounted to $7,212,046 and
$7,720,861 for VA-1 and $1,336,007 and $2,536,452 for VA-2 for the years ended
December 31, 1998 and December 31, 1997, respectively.
The Annuitant Mortality Fluctuation Fund
The Annuitant Mortality Fluctuation Fund is funded by GIAC and has been
established in response to various regulatory requirements and provides for any
possible adverse experience. The amount of this fund at December 31, 1998 was
$18,832 for VA-2.
8
<PAGE>
Federal Income Taxes
The operations of VA-1 and VA-2 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 the tax law, no federal income taxes are payable by GIAC with
respect to the operations of VA-1 and VA-2.
NOTE 3 -- NET ASSETS, DECEMBER 31, 1998
At December 31, 1998, net assets for the VA-1 and VA-2 Separate Accounts
are comprised as follows:
<TABLE>
<CAPTION>
UNITS ACCUMULATION TOTAL UNIT
OUTSTANDING UNIT VALUE VALUE
----------- ---------- -----
<S> <C> <C> <C>
VA-1 Separate Account:
VA-1 Division ............................. 110,846.555 $536.943448 $59,518,331
Contracts receiving annuity benefits ...... 2,938,331
-----------
$62,456,662
===========
VA-2 Separate Account:
VA-2 Division. ............................ 31,907.070 $485.800106 $15,500,458
VA-19 Division ............................ 5,395.084 472.846449 2,551,046
-----------
18,051,504
Contracts receiving annuity benefits ...... 1,212,278
-----------
$19,263,782
===========
</TABLE>
NOTE 4 -- MORTALITY AND EXPENSE RISK CHARGES
Charges for mortality and expense risk paid to GIAC are computed daily and
are equal to an annual rate of 1% of the average daily net assets. The total
annual charge for the twelve months ending December 31, 1998 was $608,665 for
VA-1 and $203,441 for VA-2.
Currently, GIAC makes no charge against VA-1 and VA-2 for GIAC's federal
income taxes. However, GIAC reserves the right to charge taxes attributable to
VA-1 and VA-2 in the future.
NOTE 5 -- ACCUMULATION UNIT VALUES FOR THE CURRENT PERIOD AND THE FOUR PRIOR
YEAR ENDS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
VA-1 Separate Account:
VA-1 Division .................. $536.943448 $447.042768 $334.789490 $267.313646 $201.042264
VA-2 Separate Account:
VA-2 Division .................. $458.800106 $404.462389 $302.901130 $241.852311 $181.893203
VA-19 Division ................. $472.846449 $393.677554 $294.824378 $235.403384 $177.043070
</TABLE>
NOTE: In some instances the calculation of total assets may not agree due to
rounding.
9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
THE GUARDIAN INSURANCE & ANNUITY COMPANY, INC.
AND THE CONTRACTOWNERS OF THE GUARDIAN VARIABLE
ACCOUNT 1 AND THE GUARDIAN VARIABLE ACCOUNT 2
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 Guardian Variable Account 1
and The Guardian Variable Account 2 at December 31, 1998, and the results of
each of their operations for the year then ended and the changes in each of
their net assets for each of the two years then ended, 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 audits. We conducted our audits 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 audits, which included confirmation of securities at
December 31, 1998 by correspondence with the transfer agents of the underlying
funds, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 25, 1999
10
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------
December 31, 1998
o The Guardian Park Avenue Fund
- --------------------------------------------------------------------------------
COMMON STOCKS -- 94.6%
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
AEROSPACE AND DEFENSE -- 1.0%
58,500 Alliant Techsystems, Inc.* $ 4,822,594
80,000 Cordant Technologies, Inc. 3,000,000
68,800 General Dynamics Corp. 4,033,400
138,950 Precision Castparts Corp. 6,148,537
50,000 Sundstrand Corp. 2,593,750
128,200 United Technologies Corp. 13,941,750
------------
34,540,031
- --------------------------------------------------------------------------------
AIR TRANSPORTATION -- 1.9%
93,000 Alaska Air Group, Inc.* 4,115,250
348,000 AMR Corp., DE* 20,662,500
43,000 Comair Hldgs., Inc. 1,451,250
100,000 Continental Airlines, Inc.* 3,350,000
400,000 Delta Airlines, Inc. 20,800,000
37,000 UAL Corp.* 2,208,438
225,000 US Airways Group, Inc.* 11,700,000
------------
64,287,438
- --------------------------------------------------------------------------------
APPLIANCE AND FURNITURE -- 0.5%
176,000 Ethan Allen Interiors, Inc. 7,216,000
141,000 Furniture Brands Int'l., Inc.* 3,842,250
180,000 Herman Miller, Inc. 4,837,500
60,000 Leggett & Platt, Inc. 1,320,000
------------
17,215,750
- --------------------------------------------------------------------------------
AUTOMOTIVE -- 2.4%
93,525 DaimlerChrysler AG 8,984,245
1,230,000 Ford Motor Co. 72,185,625
------------
81,169,870
- --------------------------------------------------------------------------------
AUTOMOTIVE PARTS -- 0.4%
38,000 Arvin Industries, Inc. 1,584,125
20,990 Danaher Corp. 1,140,019
104,500 Kaydon Corp. 4,186,531
282,933 Meritor Automotive, Inc. 5,994,643
------------
12,905,318
- --------------------------------------------------------------------------------
BIOTECHNOLOGY -- 1.1%
190,000 Amgen, Inc.* 19,866,875
118,500 Genentech, Inc.* 9,442,969
90,000 Sepracor, Inc.* 7,931,250
------------
37,241,094
- --------------------------------------------------------------------------------
BROADCASTING -- 2.3%
579,100 CBS Corp.* 18,965,525
155,000 Comcast Corp. 9,096,562
676,900 Infinity Broadcasting Corp.* 18,530,137
310,000 MediaOne Group, Inc.* 14,570,000
300,000 Tele-Communications, Inc.* 16,593,750
------------
77,755,974
- --------------------------------------------------------------------------------
BUILDING MATERIALS AND HOMEBUILDERS -- 1.1%
33,000 Centex Construction Products, Inc. 1,340,625
16,500 Crossman Communities, Inc.* 455,813
150,000 D.R. Horton, Inc. 3,450,000
182,500 Lafarge Corp. 7,391,250
163,000 Lennar Corp. 4,115,750
143,400 Lone Star Industries, Inc. 5,278,912
50,555 Martin Marietta Materials, Inc. 3,143,889
77,840 Southdown, Inc. 4,607,155
24,000 U.S. Home Corp.* 798,000
38,600 Vulcan Materials Co. 5,078,312
------------
35,659,706
- --------------------------------------------------------------------------------
CAPITAL GOODS-MISCELLANEOUS TECHNOLOGY -- 0.0%
40,000 AFC Cable Systems, Inc.* 1,345,000
- --------------------------------------------------------------------------------
CHEMICALS -- 0.2%
233,400 Cambrex Corp. 5,601,600
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE -- 6.2%
48,000 America Online, Inc.* 7,680,000
128,700 BMC Software, Inc.* 5,735,194
8,000 ChoicePoint, Inc.* 516,000
200,000 Computer Associates Int'l., Inc. 8,525,000
27,000 DST Systems, Inc.* 1,540,688
118,700 J.D. Edwards* 3,368,112
1,082,000 Microsoft Corp.* 150,059,875
318,400 Novell, Inc.* 5,771,000
455,000 Oracle Corp.* 19,621,875
74,000 Sterling Software, Inc.* 2,002,625
100,000 SunGuard Data Systems, Inc.* 3,968,750
36,000 Wind River Systems, Inc.* 1,692,000
------------
210,481,119
- --------------------------------------------------------------------------------
COMPUTER SYSTEMS -- 11.8%
405,200 Apple Computer, Inc.* 16,587,875
910,300 Compaq Computer Corp. 38,175,706
180,900 EMC Corp.* 15,376,500
340,000 Hewlett Packard Co. 23,226,250
77,200 Honeywell, Inc. 5,814,125
602,100 Int'l. Business Machines 111,237,975
459,600 Lexmark Int'l. Group, Inc.* 46,189,800
150,000 Pitney Bowes, Inc. 9,909,375
57,300 SCI Systems, Inc.* 3,309,075
208,200 Seagate Technology* 6,298,050
1,765,600 Storage Technology Corp.* 62,789,150
370,200 Sun Microsystems, Inc.* 31,698,375
235,000 Xerox Corp. 27,730,000
------------
398,342,256
- --------------------------------------------------------------------------------
CONGLOMERATES -- 0.4%
190,000 Textron, Inc. 14,428,125
- --------------------------------------------------------------------------------
COSMETICS AND TOILETRIES -- 0.0%
14,400 Alberto-Culver Co. 363,600
- --------------------------------------------------------------------------------
DRUGS AND HOSPITALS -- 12.8%
515,000 Abbott Laboratories 25,235,000
261,640 Allegiance Corp. 12,198,965
218,000 Arterial Vascular Engineering, Inc.* 11,445,000
242,600 Biomet, Inc. 9,764,650
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See notes to financial statements. * Non-income producing security.
11
<PAGE>
THE GUARDIAN PARK AVENUE FUND
Schedule of Investments (continued)
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
603,200 Bristol-Myers Squibb Corp. $ 80,715,700
354,000 Johnson & Johnson 29,691,750
345,000 Medtronic, Inc. 25,616,250
437,200 Merck & Co., Inc. 64,568,975
490,000 Mylan Laboratories, Inc. 15,435,000
27,000 Patterson Dental Co.* 1,174,500
884,900 Pfizer, Inc. 110,999,644
27,000 Safeskin Corp.* 651,375
586,500 Schering-Plough Corp. 32,404,125
170,100 Warner-Lambert Co. 12,789,394
------------
432,690,328
- --------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 3.0%
998,000 General Electric Co. 101,858,375
- --------------------------------------------------------------------------------
ELECTRONICS AND INSTRUMENTS-- 0.1%
46,000 Analogic Corp. 1,730,750
30,600 Dynatech Corp.* 84,150
------------
1,814,900
- --------------------------------------------------------------------------------
ENERGY-MISCELLANEOUS -- 0.1%
495,300 Frontier Oil Corp.* 2,445,544
114,100 Giant Industries, Inc. 1,069,688
------------
3,515,232
- --------------------------------------------------------------------------------
ENTERTAINMENT AND LEISURE -- 0.9%
400,000 Carnival Corp. 19,200,000
147,000 Viacom, Inc.* 10,878,000
------------
30,078,000
- --------------------------------------------------------------------------------
FINANCIAL-BANKS -- 3.2%
6 BankBoston Corp. 234
260,000 Bank of New York, Inc. 10,465,000
106,000 BB&T Corp. 4,273,125
26,000 CCB Financial Corp. 1,482,000
15,000 Centura Banks, Inc. 1,115,625
81,000 City National Corp. 3,371,625
94,050 Comerica, Inc. 6,413,034
71,269 Commerce Bankshares, Inc. 3,028,922
20,100 Cullen Frost Bankers, Inc. 1,102,988
67,500 Firstar Corp. 6,294,375
40,000 FirstMerit Corp. 1,075,000
470,000 Fleet Financial Group, Inc. 21,003,125
53,548 Hubco, Inc. 1,613,134
14,631 M & T Bank Corp. 7,592,575
187,600 Mellon Bank Corp. 12,897,500
61,965 National City Corp. 4,492,462
34,500 Premier Bancshares, Inc., GA 903,469
231,504 Premier National Bancorp, Inc. 4,297,293
114,000 Union Bancal Corp. 3,883,125
150,000 U.S. Bancorp, Inc. 5,325,000
15,000 U.S. Trust Corp. 1,140,000
52,000 Webster Financial Corp. 1,426,750
36,000 Westamerica Bancorp 1,323,000
49,600 Zions Bancorp 3,093,800
------------
107,613,161
- --------------------------------------------------------------------------------
FINANCIAL-OTHER -- 3.2%
124,800 A.G. Edwards, Inc. 4,648,800
302,400 American Express Co. 30,920,400
155,000 Countrywide Credit Industries, Inc. 7,779,062
40,000 Duff & Phelps Credit Rating Co. 2,192,500
154,800 Federal Home Loan Mortgage Corp. 9,974,925
396,500 Federal National Mortgage Assn. 29,341,000
200,000 Jefferies Group, Inc. 9,925,000
218,666 Legg Mason, Inc. 6,901,646
251,775 Morgan Keegan, Inc. 4,736,517
31,000 Ragen MacKenzie Group, Inc.* 370,063
18,525 Raymond James Financial, Inc. 391,341
------------
107,181,254
- --------------------------------------------------------------------------------
FINANCIAL-THRIFT -- 0.9%
126,600 Astoria Financial Corp. 5,791,950
110,000 BankAtlantic Bancorp, Inc. 783,750
198,593 BankAtlantic Bancorp, Inc. Class A 1,278,442
16,000 California Federal Bancorp, Inc.* 194,000
227,106 Charter One Financial, Inc. 6,302,191
70,500 Coastal Bancorp, Inc. 1,233,750
20,000 Coast Federal Litigation Trust* 132,500
46,350 Commercial Federal Corp. 1,074,741
220,000 Dime Bancorp, Inc. 5,816,250
46,400 Golden State Bancorp, Inc.* 771,400
46,400 Golden State Bancorp, Inc.* (warrants) 211,700
13,560 Pacific Crest Capital, Inc. 200,010
525,949 Sovereign Bancorp, Inc. 7,494,773
------------
31,285,457
- --------------------------------------------------------------------------------
FOOD, BEVERAGE AND TOBACCO -- 2.2%
170,000 Anheuser-Busch Cos., Inc. 11,156,250
72,842 CKE Restaurants, Inc. 2,144,286
96,512 Earthgrains Co. 2,985,840
125,000 Hershey Foods Corp. 7,773,437
53,200 Interstate Bakeries Corp. 1,406,475
885,000 Philip Morris Cos., Inc. 47,347,500
69,000 Tootsie Roll Industries, Inc. 2,699,625
------------
75,513,413
- --------------------------------------------------------------------------------
FOOTWEAR -- 0.1%
107,200 Footstar, Inc.* 2,680,000
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS -- 0.8%
336,700 Dial Corp. 9,722,212
173,600 Procter & Gamble Co. 15,851,850
------------
25,574,062
- --------------------------------------------------------------------------------
INSURANCE -- 3.0%
371,200 Allstate Corp. 14,337,600
50,000 Ambac Financial Group, Inc.* 3,009,375
148,000 American Bankers Insurance
Group, Inc. 7,159,500
7,770 Berkshire Hathaway, Inc.* 18,259,500
134,000 Chicago Title Corp. 6,289,625
99,000 Cigna Corp. 7,653,937
24,000 Enhance Financial Svcs. Group, Inc. 720,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Non-income producing security. See notes to financial statements.
12
<PAGE>
THE GUARDIAN PARK AVENUE FUND
Schedule of Investments (continued)
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
36,300 Fidelity National Financial, Inc. $ 1,107,150
37,000 Financial Sec. Assur. Hldgs. Ltd. 2,007,250
180,200 Hartford Financial Svcs. Group, Inc. 9,888,475
150,000 Horace Mann Educators Corp. 4,275,000
54,000 Jefferson Pilot Corp. 4,050,000
63,120 Liberty Financial Cos., Inc. 1,704,240
50,800 Lincoln National Corp., Inc. 4,156,075
50,600 MBIA, Inc. 3,317,462
229,500 Old Republic Int'l. Corp. 5,163,750
134,000 Penn America Group, Inc. 1,214,375
58,000 Reinsurance Group of America 3,523,500
184,500 State Auto Financial Corp. 2,283,188
10,100 Transamerica Corp. 1,166,550
30,000 W.R. Berkley Corp. 1,021,875
------------
102,308,427
- --------------------------------------------------------------------------------
LODGING -- 0.0%
135,000 Prime Hospitality Corp.* 1,425,938
- --------------------------------------------------------------------------------
MACHINERY AND EQUIPMENT -- 0.2%
100,500 AAR Corp. 2,399,438
100,000 Graco, Inc. 2,950,000
25,000 SPX Corp.* 1,675,000
------------
7,024,438
- --------------------------------------------------------------------------------
MERCHANDISING-DEPARTMENT STORES -- 3.6%
120,400 Dayton Hudson Corp. 6,531,700
125,000 Federated Department Stores, Inc.* 5,445,312
215,000 Fred Meyer, Inc., DE* 12,953,750
143,750 Saks, Inc.* 4,537,109
27,300 Shopko Stores, Inc.* 907,725
376,800 TJX Cos., Inc. 10,927,200
1,001,900 Wal-Mart Stores, Inc. 81,592,231
------------
122,895,027
- --------------------------------------------------------------------------------
MERCHANDISING-DRUGS -- 0.7%
84,150 Cardinal Health, Inc. 6,384,881
261,956 CVS Corp. 14,407,580
75,000 Walgreen Co. 4,392,187
------------
25,184,648
- --------------------------------------------------------------------------------
MERCHANDISING-FOOD -- 1.9%
240,000 Albertson's, Inc. 15,285,000
140,000 Kroger Co.* 8,470,000
428,050 Safeway, Inc.* 26,084,297
333,500 Supervalu, Inc. 9,338,000
200,000 Sysco Corp. 5,487,500
------------
64,664,797
- --------------------------------------------------------------------------------
MERCHANDISING-MASS -- 0.1%
191,400 K Mart Corp.* 2,930,813
- --------------------------------------------------------------------------------
MERCHANDISING-SPECIAL -- 3.9%
75,000 Abercrombie & Fitch Co.* 5,306,250
111,500 Best Buy, Inc.* 6,843,312
69,000 BJ's Wholesale Club, Inc.* 3,195,563
130,000 Costco Cos., Inc.* 9,384,375
540,000 GAP, Inc. 30,375,000
740,000 Home Depot, Inc. 45,278,750
261,600 Lowes Cos., Inc. 13,390,650
356,250 Pier 1 Imports, Inc. 3,451,172
159,000 Ross Stores, Inc. 6,260,625
250,000 Tandy Corp. 10,296,875
------------
133,782,572
- --------------------------------------------------------------------------------
MISCELLANEOUS-CONSUMER GROWTH CYCLICAL -- 0.1%
113,100 Avis Rent A Car, Inc.* 2,735,606
58,066 Nielsen Media Research, Inc. 1,045,188
------------
3,780,794
- --------------------------------------------------------------------------------
MISCELLANEOUS-CONSUMER GROWTH STAPLES -- 0.7%
90,000 A.C. Nielsen Corp.* 2,542,500
180,000 American Greetings Corp. 7,391,250
36,000 Interpublic Group Cos., Inc. 2,871,000
190,000 Valassis Communications, Inc.* 9,808,750
------------
22,613,500
- --------------------------------------------------------------------------------
OIL AND GAS PRODUCING -- 1.0%
280,000 Anadarko Petroleum Corp.* 8,645,000
238,900 Basin Exploration, Inc.* 3,001,181
64,300 Callon Petroleum Co.* 747,488
263,600 Chieftain Int'l., Inc.* 3,789,250
153,000 Devon Energy Corp. 4,695,187
100,300 Petromet Resources Ltd.* 181,794
196,500 Rigel Energy Corp.* 1,285,574
182,400 St. Mary Land & Exploration Co. 3,374,400
91,300 Snyder Oil Corp. 1,215,431
152,100 Vastar Resources, Inc. 6,568,819
------------
33,504,124
- --------------------------------------------------------------------------------
OIL AND GAS SERVICES -- 0.5%
260,000 Halliburton Co. 7,702,500
292,000 Transocean Offshore, Inc. 7,829,250
94,200 Willbros Group, Inc.* 523,988
------------
16,055,738
- --------------------------------------------------------------------------------
OIL-INTEGRATED-DOMESTIC -- 0.2%
110,000 Conoco, Inc.* 2,296,250
71,000 Sunoco, Inc. 2,560,438
284,000 Tesoro Petroleum, Inc.* 3,443,500
------------
8,300,188
- --------------------------------------------------------------------------------
OIL-INTEGRATED-INTERNATIONAL -- 1.4%
168,800 Chevron Corp. 13,999,850
443,700 Exxon Corp. 32,445,562
------------
46,445,412
- --------------------------------------------------------------------------------
PAPER AND FOREST PRODUCTS -- 0.3%
215,000 Kimberly Clark Corp. 11,717,500
- --------------------------------------------------------------------------------
PUBLISHING AND PRINT -- 1.3%
210,000 Dun & Bradstreet Corp. 6,628,125
584,000 Time Warner, Inc. 36,244,500
------------
42,872,625
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See notes to financial statements. * Non-income producing security.
13
<PAGE>
THE GUARDIAN PARK AVENUE FUND
Schedule of Investments (continued)
- -------------------------------------------------------------------------------
Shares Value
- -------------------------------------------------------------------------------
PUBLISHING-NEWS -- 1.2%
45,000 Central Newspapers, Inc. $ 3,214,688
86,400 Gannett Co., Inc. 5,572,800
191,400 Harte-Hanks Communications 5,454,900
160,000 Knight Ridder, Inc.* 8,180,000
304,000 New York Times Co. 10,545,000
50,000 Tribune Co. 3,300,000
5,700 Washington Post Co. 3,294,244
--------------
39,561,632
- -------------------------------------------------------------------------------
RAILROADS -- 0.3%
182,500 Kansas City Southern Inds., Inc. 8,976,719
- -------------------------------------------------------------------------------
SEMICONDUCTORS -- 1.7%
432,000 Advanced Micro Devices, Inc.* 12,501,000
230,800 Intel Corp. 27,364,225
281,100 Motorola, Inc. 17,164,669
--------------
57,029,894
- -------------------------------------------------------------------------------
TEXTILE-APPAREL AND PRODUCTION -- 0.2%
196,000 Jones Apparel Group, Inc.* 4,324,250
53,000 Westpoint Stevens, Inc.* 1,672,813
--------------
5,997,063
- -------------------------------------------------------------------------------
TRANSPORTATION-MISCELLANEOUS -- 0.3%
108,000 GATX Corp. 4,090,500
239,500 Maritrans, Inc. 1,571,719
120,000 Sea Containers Ltd. 3,592,500
--------------
9,254,719
- -------------------------------------------------------------------------------
TRUCKERS -- 0.0%
18,000 FRP Pptys., Inc.* 486,000
- -------------------------------------------------------------------------------
UTILITIES-ELECTRIC -- 3.1%
95,000 BEC Energy 3,912,813
95,000 Carolina Power and Light Co. 4,470,937
50,000 Cinergy Corp. 1,718,750
174,000 Consolidated Edison, Inc. 9,200,250
148,000 DQE 6,502,750
204,464 Duke Energy Co. 13,098,475
85,600 Energy East Corp. 4,836,400
185,000 Florida Progress Corp. 8,290,312
255,000 FPL Group, Inc. 15,714,375
152,100 IPALCO Enterprises 8,432,044
21,500 Minnesota Power & Light Co. 946,000
100,000 Montana Power Co.* 5,656,250
60,200 New Century Energies, Inc. 2,934,750
58,000 NIPSCO Industries, Inc. 1,765,375
155,000 Teco Energy, Inc. 4,369,062
160,000 Texas Utilities Co. 7,470,000
130,000 Utilicorp United, Inc.* 4,769,375
--------------
104,087,918
- -------------------------------------------------------------------------------
UTILITIES-TELECOMMUNICATIONS -- 12.3%
206,000 Airtouch Communications, Inc.* 14,857,750
680,700 Ameritech Corp. 43,139,362
666,200 AT & T Corp. 50,131,550
650,000 Bell Atlantic Corp. 34,450,000
1,716,200 BellSouth Corp. 85,595,475
120,000 Ciena Corp.* 1,755,000
440,000 GTE Corp. 28,600,000
225,000 Lucent Technologies, Inc. 24,750,000
905,120 MCI WorldCom, Inc.* 64,942,360
586,200 SBC Communications, Inc. 31,434,975
191,000 Sprint Corp. 16,067,875
95,500 Sprint PCS* 2,208,438
285,000 U.S. West, Inc. 18,418,125
--------------
416,350,910
- -------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $2,233,382,187) 3,198,392,459
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 5.9%
- -------------------------------------------------------------------------------
Principal
Amount Value
- -------------------------------------------------------------------------------
$199,706,000 State Street Bank & Trust Co. repurchase
agreement, dated 12/31/98, maturity value
$199,816,948 at 5.00%, due 1/4/99
(collateralized by $25,505,000 Federal Farm
Credit Bank Notes, 4.90%, due 11/16/00, by
$51,005,000 Federal Farm Credit Bank Notes,
5.32%, due 1/4/99, by $25,505,000 Federal
Home Loan Bank Notes, 5.01%, due 10/29/99,
by $25,505,000 Federal Home Loan Bank Notes,
5.60%, due 8/24/00, by $50,705,000 Federal
Home Loan Mortgage Corp. Notes, 5.02%, due
11/05/99, and by $25,505,000 Federal
National Mortgage Assn. Notes, 4.85%, due
11/20/00) $ 199,706,000
- -------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(COST $199,706,000) 199,706,000
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100.5%
(COST $2,433,088,187) 3,398,098,459
LIABILITIES IN EXCESS OF CASH, RECEIVABLES
AND OTHER ASSETS -- (0.5%) (17,841,737)
- -------------------------------------------------------------------------------
NET ASSETS -- 100.0% $3,380,256,722
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Non-income producing security. See notes to financial statements.
14
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------
o THE GUARDIAN PARK AVENUE FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments, at market (cost $2,433,088,187) $3,398,098,459
Cash 133,047
Receivable for securities sold 23,609,561
Receivable for fund shares sold 4,824,243
Dividends receivable 2,774,450
Interest receivable 27,762
- --------------------------------------------------------------------------------
TOTAL ASSETS 3,429,467,522
- --------------------------------------------------------------------------------
LIABILITIES
Payable for securities purchased 28,975,388
Payable for fund shares redeemed 13,189,863
Accrued expenses 605,036
Due to affiliates 6,440,513
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 49,210,800
- --------------------------------------------------------------------------------
NET ASSETS $3,380,256,722
================================================================================
COMPONENTS OF NET ASSETS
Shares of beneficial interest, at par $ 651,922
Additional paid-in capital 2,337,705,600
Undistributed net investment income 363,075
Accumulated net realized gain on
investments 76,525,853
Net unrealized appreciation of
investments 965,010,272
- --------------------------------------------------------------------------------
NET ASSETS $3,380,256,722
================================================================================
NET ASSETS:
Class A $2,990,767,483
Class B $ 389,489,239
- --------------------------------------------------------------------------------
SHARES OF BENEFICIAL INTEREST OUTSTANDING -- $0.01 PAR VALUE
Class A 57,642,930
Class B 7,549,254
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
Class A $51.88
Class B $51.59
- --------------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE
Class A Only (Net Asset Value x 104.71%)** $54.32
- --------------------------------------------------------------------------------
** Based on sale of less than $100,000. On sale of $100,000 or more, the
offering price is reduced.
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
Year Ended December 31, 1998
- -------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 34,442,506
Interest 10,278,149
Less: Foreign tax withheld (6,449)
- -------------------------------------------------------------------------------
Total Income 44,714,206
- -------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees-- Note 2 14,957,011
Administrative fees-- Class A-- Note 2 4,433,726
Administrative fees-- Class B--Note 2 770,635
12b-1 fees-- Note 3 2,311,906
Transfer agent fees 2,591,121
Custodian fees 410,253
Registration fees 292,560
Printing expense 290,500
Trustees' fees-- Note 2 24,000
Audit fees 20,500
Legal fees 12,500
Insurance expense 3,828
Other 700
- -------------------------------------------------------------------------------
Total Expenses 26,119,240
- -------------------------------------------------------------------------------
Net Investment Income 18,594,966
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS -- NOTE 5
Net realized gain on
investments -- Note 1 240,110,403
Net change in unrealized appreciation
of investments-- Note 5 321,166,359
- -------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS 561,276,762
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS $ 579,871,728
===============================================================================
- --------------------------------------------------------------------------------
See notes to financial statements.
15
<PAGE>
THE GUARDIAN PARK AVENUE FUND
(Continued)
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------
1998 1997
- -------------------------------------------------------------------------------
INCREASE/(DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 18,594,966 $ 17,523,581
Net realized gain on
investments 240,110,403 250,113,783
Net change in unrealized
appreciation of
investments 321,166,359 296,292,118
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS 579,871,728 563,929,482
- -------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income
Class A (18,598,388) (17,140,750)
Class B -- (15,027)
Net realized gain on
investments
Class A (199,305,595) (200,697,619)
Class B (25,414,666) (16,602,423)
- -------------------------------------------------------------------------------
TOTAL DIVIDENDS AND
DISTRIBUTIONS
TO SHAREHOLDERS (243,318,649) (234,455,819)
- -------------------------------------------------------------------------------
FROM CAPITAL SHARE TRANSACTIONS:
Net increase in net assets
from capital share
transactions -- Note 6 529,325,454 756,713,154
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS 865,878,533 1,086,186,817
NET ASSETS:
Beginning of year 2,514,378,189 1,428,191,372
- -------------------------------------------------------------------------------
End of year* $ 3,380,256,722 $ 2,514,378,189
===============================================================================
* Includes undistributed net
investment income of $ 363,075 $ 367,804
- --------------------------------------------------------------------------------
See notes to financial statements
16
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO
FINANCIAL STATEMENTS
- --------------------------------
December 31, 1998
o THE GUARDIAN PARK AVENUE FUND
NOTE 1. ACCOUNTING POLICIES
The Guardian Park Avenue Fund (the Fund or GPAF) is a series of The Park
Avenue Portfolio, which is a diversified open-end management investment company
registered under the Investment Company Act of 1940, as amended (the 1940 Act).
Significant accounting policies of the Fund are as follows:
The Fund offers three classes of shares. Class A shares are sold with an
initial sales load of up to 4.50% and an administrative fee of up to .25% on an
annual basis of the Fund's average daily net assets. Class B shares are sold
without an initial sales load but are subject to a 12b-1 fee of .75% and an
administrative fee of up to .25% on an annual basis of the Fund's average daily
net assets, and a contingent deferred sales load (CDSL) of up to 3% imposed on
certain redemptions. Institutional Class shares are offered at net asset value,
without an initial or contingent deferred sales load. All three classes of
shares represent interests in the same portfolio of investments, have the same
rights and are generally identical in all respects except that each class bears
its separate distribution and certain class expenses, and has exclusive voting
rights with respect to any matter to which a separate vote of any class is
required.
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
Equity and debt securities listed on domestic or foreign securities
exchanges are valued at the last sales price of such exchanges, or, if no sale
occurred, at the mean of the bid and asked prices. Securities traded in the
over-the-counter market are valued using the last sales price, when available.
Otherwise, over-the-counter securities are valued at the mean between the bid
and asked prices or yield equivalents as obtained from one or more dealers that
make a market in the securities.
Pursuant to valuation procedures approved by the Board of Trustees,
certain debt securities may be valued each business day by an independent
pricing service (Service). Debt securities for which quoted bid prices are
readily available and representative of the bid side of the market, in the
judgement of the Service, are valued at the bid price. 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
municipal securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions.
Other securities, including securities for which market quotations are not
readily available (such as mortgage- backed securities and restricted
securities) are valued at fair value as determined in good faith by or under the
direction of the Fund's Board of Trustees. Repurchase agreements are carried at
cost which approximates market value (see Note 4). Investment transactions are
recorded on the date of purchase or sale.
Security gains or losses are determined on the identified cost basis.
Interest income, including amortization of premium and discount, is accrued
daily. Dividend income is recorded on the ex-dividend date.
All income, expenses (other than class-specific expenses) and realized and
unrealized gains or losses are allocated daily to each class of shares based
upon the relative value of shares of each class. Class specific expenses, which
include distribution and service fees and any other items that are specifically
attributed to a particular class, are charged directly to such class. For the
year ended December 31, 1998, distribution, administrative and transfer agent
fees were the only class-specific expenses.
Foreign Currency Translation
GPAF is permitted to buy international securities that are not U.S.
dollar-denominated. GPAF's books and records 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.
17
<PAGE>
The resulting gains and losses are included in the Statement of
Operations.
Realized foreign exchange gains and losses, which result from changes in
foreign exchange rates between the date on which a Fund earns dividends and
interest or pays foreign withholding taxes or other expenses and the date on
which U.S. dollar equivalent amounts are actually received or paid, are included
in net realized gain or loss on foreign currencies. 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 gain on foreign currencies. Net currency gains and
losses from valuing investments and other assets and liabilities denominated in
foreign currency as of December 31, 1998 are reflected in net change in
unrealized appreciation or depreciation from translation of assets and
liabilities in foreign currencies based on the applicable exchange rate in
effect at the end of period.
Forward Foreign Currency Contracts
GPAF 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 its investments that are
denominated in a particular currency. A forward foreign currency contract is a
commitment to purchase or sell a foreign currency at a future date at a
negotiated forward exchange rate. 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.
Fluctuations in the value of forward foreign currency contracts are recorded for
book purposes as unrealized gains or losses from translation of other assets and
liabilities denominated in foreign currencies by GPAF. When a forward contract
is closed, GPAF will record a realized gain or loss equal to the difference
between the value of the forward contract at the time it was opened and the
value at the time it was closed. Such amount is recorded in net realized gain or
loss on foreign currencies. GPAF will not enter into a forward foreign currency
contract if such contract would obligate it to deliver an amount of foreign
currency in excess of the value of its portfolio securities or other assets
denominated in that currency.
Dividends and Distributions to Shareholders
GPAF distributes each year as dividends or capital gains distributions
substantially all realized earnings by the Fund, if any.
All dividends or distributions to the shareholders are recorded on the
ex-dividend date. Such distributions are determined in accordance with income
tax regulations, which may differ from generally accepted accounting principles
(GAAP). Differences between the recognition of income on an income tax basis and
a GAAP basis may cause temporary overdistributions of net realized gains and net
investment income.
Federal Income Taxes
The Fund qualified 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 taxable income
(including any realized capital gains) which is distributed in accordance with
the provisions of the Code. Therefore, no federal income tax provision is
required.
Reclassification 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 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, 1998, GPAF reclassified amounts to
paid-in capital from undistributed net investment income and accumulated net
realized gain on investments.
Increase (decrease) to the various capital accounts were as follows:
ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT GAIN ON
INCOME INVESTMENTS
-------------- ------------
GPAF $ (1,307) $ 1,307
18
<PAGE>
NOTE 2. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES
The Fund has an investment advisory agreement with Guardian Investor
Services Corporation (GISC), an indirect wholly-owned subsidiary of The Guardian
Life Insurance Company of America. The investment advisory agreement provides,
among other things, for the quarterly payment by the Fund of a fee calculated at
an annual rate of .50% of the average daily net assets of the Fund.
Trustees who are not deemed to be "interested persons" (as defined in the
1940 Act) are paid $500 for each meeting of the Board of Trustees. An annual fee
of $1,000 was also paid to each such Trustee during such period. GISC pays
compensation to the Trustees who are interested persons. Certain officers and
Trustees of the Fund are affiliated with GISC.
Administrative Services Agreement
Pursuant to the Administrative Services Agreement adopted by the Fund on
behalf of the Class A and Class B shares, the Fund pays GISC an administrative
service fee at an annual rate of .25% of the average daily net assets for which
a "dealer of record" has been designated. For the year ended December 31, 1998,
GPAF Class A shares paid an annualized rate of .17% of its average daily net
assets under the Administrative Services Agreement.
NOTE 3. UNDERWRITING AGREEMENT AND DISTRIBUTION PLAN
The Fund has entered into an Underwriting Agreement with GISC pursuant to
which GISC serves as the principal underwriter for shares of the Fund. As
compensation for its services, GISC received aggregate sales commissions of
$6,911,800 for the year ended December 31, 1998.
Under a Distribution Plan adopted by the Fund pursuant to Rule 12b-1 under
the 1940 Act (the "12b-1 Plan"), the Fund is authorized to pay a monthly 12b-1
fee at an annual rate of up to .75% of average daily net assets of the Fund's
Class B shares as compensation for distribution-related services provided to the
Class B shares of the Fund.
GISC is entitled to retain any CDSL imposed on certain redemptions on
Class B shares. For the year ended December 31, 1998, such charges were
$683,670.
NOTE 4. REPURCHASE AGREEMENTS
Collateral under 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 marked-to-market
daily while the agreements remain in force. If the value of the collateral falls
below the value of the repurchase price plus accrued interest, the Fund 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
Fund maintains the right to sell the collateral and may claim any resulting loss
against the seller. The Board of Trustees has established standards to evaluate
the creditworthiness of broker-dealers and banks which engage in repurchase
agreements with the Fund.
NOTE 5. INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities (excluding short-term
securities) amounted to $1,804,252,390 and $1,526,575,824, respectively, during
the year ended December 31, 1998.
The cost of investments owned at December 31, 1998 for federal income tax
purposes was substantially the same as the cost for financial reporting
purposes.
Gross unrealized appreciation and depreciation of investments aggregated
$999,654,014 and $34,643,742, respectively, resulting in net unrealized
appreciation of $965,010,272.
19
<PAGE>
NOTE 6. SHARES OF BENEFICIAL INTEREST
There is an unlimited number of $0.01 par value shares of beneficial
interest authorized, divided into three classes, designated as Class A, Class B
and Institutional Class shares. Through December 31, 1998, no Institutional
Class shares of the Fund were sold. Transactions in shares of beneficial
interest were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------
Shares Amount
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold 18,152,958 17,883,364 $885,038,761 $799,066,805
Shares issued in reinvestment of
dividends and distributions 4,072,601 4,641,797 209,800,362 208,919,318
Shares repurchased (14,727,389) (9,104,998) (721,647,093) (403,755,099)
- --------------------------------------------------------------------------------------------------------------
NET INCREASE 7,498,170 13,420,163 $373,192,030 $604,231,024
==============================================================================================================
CLASS B
Shares sold 3,603,391 3,236,995 $176,030,617 $143,714,212
Shares issued in reinvestment
of distributions 474,635 359,417 24,340,017 16,167,277
Shares repurchased (912,470) (162,809) (44,237,210) (7,399,359)
- --------------------------------------------------------------------------------------------------------------
NET INCREASE 3,165,556 3,433,603 $156,133,424 $152,482,130
==============================================================================================================
</TABLE>
20
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------
o THE GUARDIAN PARK AVENUE FUND
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE
PERIODS INDICATED:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------
CLASS A
----------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $46.12 $37.91 $33.97 $26.89 $28.63
- ----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.35 0.40 0.42 0.33 0.31
Net realized and unrealized gain/
(loss) on investments 9.38 12.61 8.41 8.87 (0.72)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from
investment operations 9.73 13.01 8.83 9.20 (0.41)
- ----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income (0.34) (0.39) (0.42) (0.33) (0.31)
Distributions in excess
of net investment income -- -- (0.01) -- --
Net realized gain on investments (3.63) (4.41) (4.46) (1.79) (1.02)
- ----------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (3.97) (4.80) (4.89) (2.12) (1.33)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $51.88 $46.12 $37.91 $33.97 $26.89
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN* 21.30% 34.85% 26.49% 34.28% (1.44)%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's omitted) $2,990,767 $2,312,632 $1,392,186 $972,275 $640,917
Ratio of expenses
to average net assets 0.78% 0.79% 0.79% 0.81% 0.84%
Ratio of net investment income to
average net assets 0.72% 0.95% 1.19% 1.07% 1.15%
Portfolio turnover rate 55% 50% 81% 78% 54%
============================================================================================================================
</TABLE>
* Excludes effect of sales load.
21
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------
o THE GUARDIAN PARK AVENUE FUND
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE
PERIODS INDICATED:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
----------------------------------------------
CLASS B
----------------------------------------------
Year Ended Year Ended May 1, 1996+
December 31, December 31, to December 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $46.02 $37.90 $36.26
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income/(loss) (0.08) 0.00 0.05
Net realized and unrealized gain
on investments 9.28 12.54 6.10
- -----------------------------------------------------------------------------------------
Net increase from investment
operations 9.20 12.54 6.15
- -----------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income -- (0.01) (0.05)
Net realized gain/(loss)
on investments (3.63) (4.41) (4.46)
- -----------------------------------------------------------------------------------------
Total dividends and distributions (3.63) (4.42) (4.51)
- -----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $51.59 $46.02 $37.90
- -----------------------------------------------------------------------------------------
TOTAL RETURN* 20.16% 33.53% 17.35%
=========================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's omitted) $389,489 $201,746 $36,006
Ratio of expenses
to average net assets 1.70% 1.73% 1.77%(a)
Ratio of net investment income/(loss)
to average net assets (0.21)% 0.00% 0.04%(a)
Portfolio turnover rate 55% 50% 81%
=========================================================================================
</TABLE>
+ Commencement of operations.
* Excludes effect of sales load.
(a) Annualized.
22
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
- ----------------------------------
BOARD OF TRUSTEES AND SHAREHOLDERS
THE GUARDIAN PARK AVENUE FUND
(ONE OF THE FUNDS CONSTITUTING THE
PARK AVENUE PORTFOLIO)
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments of The Guardian Park Avenue Fund (one of
the funds constituting the Park Avenue Portfolio), as of December 31, 1998, and
the related statement of operations for the year then ended, the statement of
changes in 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.
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, 1998, 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 Park Avenue Fund at December 31, 1998, 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.
/s/ ERNST & YOUNG LLP
New York, New York
February 10, 1999
23
<PAGE>
[LOGO]
GUARDIAN(SM)
Annual Report
to Contractowners
THE GUARDIAN
VARIABLE ACCOUNT 1
THE GUARDIAN
VARIABLE ACCOUNT 2
THE GUARDIAN
INSURANCE & ANNUITY
COMPANY, INC.
A WHOLLY OWNED SUBSIDIARY OF
THE GUARDIAN LIFE INSURANCE
COMPANY OF AMERICA
Executive Offices
201 Park Avenue South
New York, NY 10003
Customer Service Office
P.O. Box 26210
Lehigh Valley, PA 18002-6210
1-800-221-3253
DECEMBER 31, 1998
[LOGO]
GUARDIAN(SM)
The Guardian Insurance & Annuity Company, Inc.
201 Park Avenue South
New York, NY 10003
FIRST CLASS MAIL
U.S. POSTAGE PAID
PERMIT NO. 1104
CLIFTON, NJ
